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Dell’s (NASDAQ:DELL) fiscal third quarter isn’t expected to be pretty. The only real question is where Dell’s quarter falls on the ugly scale.

The company’s first shot at an outlook for the quarter unraveled just a few weeks later amid weak PC demand. And when Dell reports earnings on Thursday the company is expected to deliver earnings of 31 cents a share on revenue on revenue of $16.3 billion, down from the July quarter mark of $16.4 billion, according to Thomson Reuters. Estimates, however, have been shifting around of late.

Meanwhile, HP (NYSE:HPQ) is on record saying business is solid amid the economic downturn. Luckily for Michael Dell & Co. analysts aren’t expecting much at all courtesy of Intel’s fourth quarter warning.

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UBS analyst Maynard Um sums up the general view:

We believe 3Q09 results will highlight the continued signs of a worrisome IT spending environment & expect end-demand softness and lumpiness to last at least a couple of more quarters, with Dell’s 3Q09 results portraying just the beginning of things to come.

Translation: Lumpiness is a code word for saying Dell may miss its targets.

BMO Capital Markets analyst Keith Bachman notes that Dell’s October quarter is just a preview of what’s to come: More disappointments. Dell’s biggest problem: It is too reliant on PC sales. And aside from so-called netbooks there’s not a lot of growth.

In fact, Merrill Lynch cut its 2009 PC unit growth forecast to negative 2 percent from growth of 12 percent. Jeff Fidacaro, an analyst at Merrill Lynch, sums up the PC outlook:

Our outlook incorporates deteriorating global business conditions, tighter IT budgets (pushed out PC replacement/upgrade cycles), weakening consumer spending, and recent production cuts from the ODMs in Taiwan. Our forecasts also reflect a weakening demand environment in the US and Europe now spreading to Asia Pacific and the emerging markets, slightly offset by expectations of incremental growth (net of cannibalization) from Netbooks.

With all that optimism you wonder whether Michael Dell will even show up. The good news is that everyone expects that worst. Anything less than Armageddon may actually be positive. Or not.

In any case, there are a few looming questions for Dell. Here’s a look at the issues:

  • Does Dell have this channel thing down? Dell has aggressively pushed into the channel just in time for retailers to get slapped by weak consumer spending. Watch Dell’s inventory levels and margins closely.
  • How’s the enterprise business holding up? Dell’s plan has been to sell hardware and then upsell to software and services. Will that model stick?
  • Where’s the holiday lineup? Last quarter, Dell said it would introduce 24 new consumer products and only 7 are out as of that last conference call. Where’s the next installment?
  • How are netbook sales and are they cannibalizing Dell’s notebook business? What do netbooks do to Dell’s margins?
  • Is there another restructuring move on deck? Dell said last quarter it was well on its way to finishing a restructuring effort that dates back to May 2007. The market eroded since then. What will Dell cut next?
Source: Dell Earnings: Hoping for Anything Less Than Armageddon

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