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Mediocre 4Q for Dell

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Dell Inc. delivered fourth-quarter 2013 earnings of 40 cents per share, ahead of the Zacks Consensus Estimate by a penny.


The company reported revenues of $14.3 billion in the reported quarter, down 10.7% year over year. The decline in revenues was due to lower contributions from all the business segments and geographical regions.

Revenue by Segments

Large Enterprise posted revenue of $4.7 billion, down 7.0% year over year. Within the large enterprise, server and networking revenue moved up 25.0% and Enterprise Server & Storage business moved up 10%.

Public Revenue was $3.5 billion, down 9.0% year over year. The company continues to witness a slump in the U.S. Federal business. Moreover, a challenging spending environment in the U.S. federal business coupled with some uncertainty in the budgetary and IT spends affects this system.

Small and Medium Business revenue was down 5.0% to $3.4 billion. The SMB segment was mainly affected by the reduction in the order renewal rate.

Consumer Business revenue plummeted 24.0% to $2.8 billion.

Operating Results

Gross margin in the reported quarter was 21.7% up from 21.1% in the year-ago quarter.

Operating income for the quarter was $698.0 million or 4.9% of revenues in the reported quarter, down 25.0% year over year, hurt by lower rate of reduction in expenses than revenue.

GAAP earnings in the quarter were 30 cents per share compared with 43 cents a share in the year-ago quarter. Excluding special items like amortization of intangibles, severance and facility consolidation cost, acquisition-related costs, as well as income tax adjustments, earnings per share in the quarter came in at 40 cents versus 51 cents in the year-ago quarter.

Balance Sheet & Cash Flow

The company exited the quarter with cash and cash equivalents of $12.6 billion, up from $11.0 billion reported in the previous quarter. The company generated cash flow from operations of $1.4 billion, down from $1.8 billion reported in the previous quarter.


As the company is looking forward to a pending merger agreement / LBO, so the management has not provided an outlook for fiscal year 2014.

Dell to Go Private

Dell recently announced its decision to go private in a leveraged buyout agreement (LBO). Founder Michael Dell will acquire the company at a purchase consideration of roughly $24.4 billion, much higher than the market expectation of $23.0 billion. Dell’s shareholders will be rewarded with $13.65 per share in cash. The transaction is likely to be completed by the second quarter of fiscal 2014.

The idea behind the privatization is to stay away from public scrutiny and expectations and better focus on business growth and profitability. However, Dell’s dependence on the PC market remains the main problem.

In addition, Dell lacks a firm footing in the servers, storage and cloud computing space, which is unfavorable in comparison to IBM Corp. (IBM - Free Report) ,  and to some extent, Hewlett-Packard Co. (HPQ - Free Report) . Another competitor, Apple Inc. (AAPL - Free Report) is dominating the tablet space.

Our View

Dell reported modest fourth-quarter results with earnings per share exceeding the Zacks Consensus Estimate, but revenues and operating income taking a massive hit. Revenues across the entire business segment declined annually.

The major issue faced by the company is the cannibalization of the PC/notebook business. Moreover, the company is facing tough challenges due to cutthroat competition, low business growth in Europe and restricted spending environment. Some analysts also expect further declines in PC shipments.

Moreover, the competition faced by the company in the SMB and server segments as well as a downturn in the European economy is also a concern.

The stock carries a Zacks Rank #4 (Sell).

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