Dell Targets India

| About: Dell Inc. (DELL)

Dell (NASDAQ:DELL) and rival HP (NYSE:HPQ) continue to jockey over market share. As per the market intelligence firm IDC, Dell increased its market share from 15.5% last quarter to 16.4% versus HP’s 18.9%. It has grown 21.4% y-o-y compared with the industry growth rate of 15.3%. However, this growth has apparently come at the cost of profit: on Thursday, Dell reported a 17% drop in Q2 profit to $616 million or $0.31 per share. It also missed earnings estimates. However, the company did beat the analyst revenue estimate of $15.9 billion, with Q2 revenue up 11% to $16.4 billion driven by a 19% increase in worldwide product shipments. EPS excluding charges was $0.33, missing the analyst estimate of $0.36. Earnings beat analyst estimates last quarter. Shares plunged, as the miss was not taken well by the market.

Gross margin was 17.2% versus 19.9% last year; margin was adversely affected by price cuts ahead of cost improvements in EMEA. Operating expenses were 12.2% of revenue, 1.6 percentage points and the lowest in six quarters. Dell reduced its headcount by 1,500 in the quarter and by 8,500 from Q1 last year. It plans to reach its goal of 8,900 layoffs by next quarter.

Cash flow from operations was $1.1 billion and Dell ended the quarter with $9.5 billion in cash. It spent $1.4 billion to repurchase 60 million shares of stock.

By product category, revenue from Desktop PCs was down 2% y-o-y but up 5% q-o-q to $4.93 billion. Mobility revenue was up 26% to $4.87 billion on 44% growth in units, while Servers revenue was up 5% to $1.7 billion. Software grew 17% to $2.8 billion, Services grew 14% to $1.46 billion, and Storage grew 11% to $681 million.

Dell said it saw slow spending in the U.S. spread to Western Europe and some Asian countries. In Americas Commercial, revenue grew 5% to $8.1 billion and profitability improved q-o-q by almost 20% percent. In APJ (Asia Pacific and Japan) Commercial, revenue grew by 16% to over $2 billion and profitability increased 10%.

In EMEA Commercial, revenue grew 11% to $3.5 billion on 20% growth in units. Profitability was affected by strategic pricing actions, especially in Europe, as well as an increase in deferred revenue that will be recognized in subsequent periods.

In the Global Consumer business unit, worldwide shipments grew 53% and its share was up 1.6 points to 9.1%, with revenue up 28% to 2.8 billion driven by growth in laptops. However, profitability was roughly break-even as Dell expanded its retail presence and had a litigation expense of $18 million.

Dell is introducing a range of new products including Vostro, a new line of laptops targeting smaller companies in developing countries. According to IDC, about 75% of the U.S. population has a computer versus 5.1% in India and 9% in China. In the past two years, Dell has doubled its share of the Indian PC market to 7.6% versus 18.6% for HP. [Read my recent earnings coverage of HP.] It will be easier for Dell to build market share in India than in China, due to the presence of Lenovo in the latter market. India, on the other hand, is ripe for the picking, and I am glad to see Dell focusing there.

Dell is currently trading around $25 with a market cap of around $51 billion versus HP’s market cap of $116 billion.


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