Dell 2Q12 Earnings Crib Notes

Key takes from Dell 2Q12 earnings call are highlighted below. The company saw weaker demand environment related to the consumer and federal segments slowing down mid-qtr. Enterprise demand still holding up across servers, storage, services and corporate PC refresh. Gross margins continue to improve on more disciplined selling (i.e. reduction in unprofitable consumer lines) as well as sales of more Dell-owned IP. In storage, the swap out of EMC revenues continues along at a good clip and margins are improving in tandem, +800 basis points in the last 12 months. Dell expects to return to absolute growth in the storage business by Jan ’12 quarter. Compellent was strong in the quarter, although Equallogic saw some weakness due to supply chain issues (now resolved) and pause ahead of a recent hardware and software refresh. From a strategic initiatives standpoint the most relevant announcements in the quarter were the Force10 acquisition, as well as the availability of Cloudera and OpenStack solutions. More detailed notes from the call are below, or you can view the presentation here.

  • On overall demand…demand environment weaker and more uncertain than what was in their previous view. Saw weakening in parts of market for 2H of qtr, have seen that continue in this qtr…highlighted consumer market and federal gov’t specifically, “clearly been a bit softer the last few weeks”. Continue to see strong demand for server, storage and services.
  • On Full Year Guidance… “Based on strategic decisions to redirect resources from lower to higher value solutions and a demand environment that has become more uncertain in light of macroeconomic news, we are revising our FY’12 revenue outlook to +1-5% Y/Y growth from +5-9% Y/Y growth”
  • On Gross Margins…GM 23.2% +600 bps y/y, driven by continued cost execution, disciplined pricing, and ongoing shift to higher value Dell technologies
  • On Fed buying…US Fed buying right now, seeing a lot of pushouts of opportunities while pipe looks pretty good, ability to close has slipped month to month thru the year
  • On SMB…SMB was strongest market across segments, revs +5% y/y, relatively stable margin environment
  • On Storage…
    • ~3% mix ($502m), +4% seq and -20% y/y
    • Dell-owned storage revenue of $393m, +15% y/y and +15% sequentially, including SMB segment +27% y/y
    • Storage gross margin +800 bps in the past 12 mos
    • EMC-related revenue of $109m, -62% y/y and -22% y/y
    • Compellent revenue +97% seq (off only half qtr contribution in 1Q)…sold into 47 countries vs 30 q/q, “seeing very promising results for compellent”
    • Equallogic…did see headwind from requal’ing 2nd tier supplier resulting in supply chain hiccup, also just announced next gen equallogic controller and new software, so saw some pause ahead of this release, supply chain issue completely rectified
  • On EMC business wind down…think by end of year (Jan ’12) will be growing again in storage on absolute basis, have to work thru the tail of EMC business wind down
  • On server business… server refresh cycle continues, 7th qtr of positive growth, ASPs continue to trend up y/y (5 or 6th period in a row), expect this to continue
  • On networking…will see 3rd party hw replaced by dell technology with significantly higher margins, although not as much revenue/margin replacement opportunity as with EMC, “clearly going to drive dell branded IP, Force10 is leading tech and extremely complimentary”
  • On corporate PC refresh…corporate demand (SMB and large enterprise) has continued to be pretty solid for PC refresh, not seeing significant disruption here, “demand has been pretty steady”, multi-qtr upgrade programs and haven’t seen significant changes

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