Dell executives signal tighter times ahead

 ·26 Aug 2022

Dell Technologies Inc fell about 5% in late trading after executives’ pessimistic remarks about the business environment for the second half of the year outweighed solid quarterly results.

Company leadership suggested a greater sales challenge ahead for the maker of personal computers, servers and information technology. Co-chief operating officer Chuck Whitten said Dell “observed more cautious customer behavior as the quarter progressed.” Whitten’s co-COO Jeff Clarke said the company is operating “in an increasingly challenging environment.”

Revenue in the current quarter will be $23.8 billion to $25 billion – a sales decline of about 8% from a year ago at the midpoint of the estimate, chief financial officer Tom Sweet said during a conference call. Analysts, on average, projected $26.4 billion.

Still, Dell said its long-term financial models project annual revenue growth of 3% to 4% and an increase of more than 6% in earnings per share. For the full year, Sweet said revenue should range from flat to 2% growth.

Sales climbed 9% to $26.4 billion in the fiscal second quarter, which ended July 29, in line with estimates. Earnings, excluding some items, were $1.68 share, the Round Rock, Texas-based company said Thursday in a statement. Analysts, on average, projected $1.64, according to data compiled by Bloomberg.

While personal computer sales make up about 60% of Dell’s revenue, the company overcame a downturn in consumer spending with gains among its business clients. Commercial PC sales grew 15% to $12.1 billion while consumer sales dropped 9% to $3.3 billion.

Global PC shipments fell 13% in the three months from April to June – the worst quarter in more than nine years, according to Gartner Inc, an industry analyst. Much of the decline was due to the ongoing downturn in demand for Chromebooks and inflation-squeezed budgets delaying consumer purchases.

Fiscal second-quarter revenue from the Infrastructure Solutions Group, which includes most of Dell’s technology services, increased 12% to $9.5 billion from a year earlier. Server and networking sales climbed 16% to $5.2 billion, while storage revenue gained 6% to $4.2 billion.

Investors may have been expecting Dell’s infrastructure unit to beat estimates, and share gains heading into the results left little room for a rally, said Woo Jin Ho, an analyst at Bloomberg Intelligence.

To emphasize the continuing slump in the PC market, Sweet said current-quarter sales in Dell’s PC division are expected to decline by a “high teens” percentage from the period a year ago. Revenue will increase “in the low teens” in the infrastructure unit, where executives “see a more challenging” demand environment, he said.

Supply chain backlogs improved during the quarter for Dell, and backlog-clearing PC sales helped offset demand weakness, Clarke said. However, the backlog for its infrastructure unit, particularly for server components, remained elevated, and component cost inflation is expected in the third quarter, he said.

Gross margins decreased 2 percentage points from a year ago to 21.4%, mainly due to expense increases and currency value changes that haven’t yet been factored into product prices, Sweet said. The company slowed down external hiring as part of an effort to control costs, Sweet said.

Dell ended the quarter with remaining performance obligations of $41 billion, up 2% year-over-year. Recurring revenue was $5.2 billion, a gain of 8% from the period a year earlier. The company said annual recurring revenue for APEX, its cloud management service, is now more than $1 billion.

The shares fell to a low of $43.65 in extended trading after closing at $47.90 in New York. The stock has declined 15% this year.

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