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Dell Inc. (NASDAQ:DELL) delivered earnings of 43 cents per share in the first quarter of 2013, missing the Zacks Consensus Estimate of 46 cents. Following the earnings release, the company’s share price plunged more than 12.0% in Tuesday’s after hour trade. The cannibalization of desktop PC market due to the growth of tablets and ultrabooks, as well as constrained IT spending by the U.S. and eurozone has led to the earnings miss.

See the Full DELL Earnings Call Transcript

Revenue

Dell reported total revenue of $14.42 billion in the reported quarter, down 4.0% from the year-ago quarter. Large Enterprise and Public reported revenue declined while the Small & Medium business segment improved marginally.

Revenue by Segments

Large Enterprise posted revenue of $4.4 billion, down 3.3% year over year. The decline in revenue was driven by lower business activity in the developed markets, resulting in a revenue decline of 6.0%. Although the pipeline of new orders is decent, customers are delaying their spending on new IT products. The company has started witnessing some improvements in U.S. federal spending, but was a little disappointed by the dismal performance of K-12 and the healthcare businesses.

Public Revenue was $3.46 billion, down 4.3% year over year. The downside in revenue can be attributed to the weakness in the U.S. This segment continues to see spending pressure, which resulted in the decline in revenue.

Small and Medium Business revenue rose 3.6% to $3.47 billion. Revenue growth in this segment was driven by enterprise service and solution growth. The company’s SMB segment continues to nurture strong relationships with its existing customers. Region wise, Asia-Pacific and Japan witnessed the highest growth in this segment, which was up 10%.

Consumer Business revenue declined by a whopping 11.9% to $3.04 billion, with notebook revenue down 15% as the company did not enter the entry-level notebook market given that it is a low-margin business mix. Moreover, the company has also expanded the number of channel partners in this segment.

Operating Results

Gross margin in the reported quarter declined to 21.3% from 22.9% in the year-ago quarter. Gross margin for the quarter was negatively impacted by the difficult pricing environment as far as client products are concerned.

Operating income for the quarter stood at $824.0 million or 5.7% of revenue in the reported quarter, down 32.0% year over year. The company was not able to control its expenses properly; moreover, lower revenue has also resulted in the decline in operating income.

GAAP earnings in the quarter were 36 cents per share compared with 49 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 was 43 cents versus 55 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Dell’s cash conversion cycle was negative 32 days versus negative 36 days in the previous quarter. The company used $138.0 million cash in operating activities, which is a significant deterioration from $465.0 million cash generated in the year-ago quarter. The company ended the quarter with $13.7 billion in cash and short-term investments versus $14.8 billion in the previous quarter.

Guidance

The company expects second-quarter revenue to grow 2%-4% from the previous quarter, maintaining the same historical and seasonal trend.

Conclusion

Dell reported disappointing first-quarter results, with both revenue and earnings per share (EPS) declining on a year-over-year basis. Moreover, EPS was also below the Zacks Consensus Estimate. Based on the current PC demand trend, level of consumer spending and the macro uncertainties, we think that the second quarter guidance is a bit aggressive. However, growth in the Servers and Services segments are encouraging.

Opportunities in the Electronic Medical Record sector, entry into the smartphone business, increased focus on cloud computing are positives for the company. However, new strategic moves from other players such as Hewlett-Packard Company (NYSE:HPQ), Apple Inc. (NASDAQ:AAPL) and Acer may pose some challenges to the company.

The company has a Zacks#3 Rank, which implies a short-term Hold rating.

Source: Disappointing Q1 From Dell