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Dell Outpaces Expectations on Revenue and Earnings in Q2
by Daniel Newman | August 27, 2020

The News: Dell Technologies posted better-than-expected profit for its fiscal second quarter ended July 31, with strong consumer and enterprise business offsetting weakness from small-business customers.

For the quarter, Dell (ticker: DELL) posted revenue of $22.7 billion, down 3% from a year earlier but slightly ahead of the Wall Street analyst consensus estimate of $22.5 billion. Product revenue was down 7% in the quarter, while services revenue rose 10%. Read the full news piece on MarketWatch.

Highlights from the Dell Release:

• Second quarter revenue of $22.7 billion, non-GAAP revenue of $22.8 billion
• Operating income up 119% to $1.1 billion, non-GAAP operating income of $2.6 billion
• Dell Technologies continues to effectively navigate COVID-19 environment, providing the essential work- and learn-from-home, cloud and storage solutions customers need

Analyst Take: Dell followed other large OEMs including Cisco and HPE and the pattern of outpacing the street’s expectations continued.

Dell’s revenue came in above expectations, but the company flexed its operational excellence muscles as it delivered operating income that was up 119% for this period YoY. This was a huge contributing factor to the significant EPS beat ($1.92 vs. $1.37 EST) for Dell this quarter.

While the overall numbers were promising, the business overall business did come in lower than the year before. Given the global pandemic and its impact on supply chain as well as on capital expenditures, this shouldn’t surprise anyone. However, with the declines being in the single digits, Dell has given its shareholders a strong effort and as shown the strong demand for technologies that support the enterprise, powering data and analytics as well as the remote work force.

ISG and Client Businesses Hold Strong, Yet Off YoY

When it comes to the big infrastructure investments for enterprise, I feel the need to stay consistent in saying that keeping revenue close to the year before in the current economic situation is solid. ISG was down 5% from this time last year delivering $8.2 Billion for the quarter versus $8.6 a year ago same period. This is a byproduct of the economic slow down. I believe we will see this continue to improve in the coming quarters and that this showed solid demand that likely faced significant headwinds due to Covid-19. 

Client is a bit different. Last quarter, Dell had very strong numbers for commercial client as corporations sought to put PCs in the hands of remote workers–this was especially true for notebooks. Consumer also saw a spike in demand, but this quarter that demand skyrocketed for Dell as the company saw an 18% jump. This demand is likely to be sustained for the next few quarters, but there will be speculation that it could slow thereafter. 

Year over year, the client segment is also down a total of 5%. I may have expected client to be up given the circumstances, but again, a steady hold on the market given the circumstances. 

Dell Tech on Demand and Recurring Revenue for Dell Picks Up Steam

One of the areas that I have been watching closely has been the companies overtures into consumption based IT. More OEMs, especially HPE and Lenovo have made significant investments into delivering IT on premises in a consumption model. Dell has also been showing strong growth in this area with its “On Demand” offerings reaching $1.3 Billion this quarter, which represents a solid growth from around $900 Million in the 4th quarter of its last fiscal year. 

VMware Solid as Always — Future Remains “Cloudy”

VMware continues to be the bright spot for dell, once again delivering a double digit growth number (10%) YOY. As companies are making sizable investments in public and hybrid cloud, VMware is a staple and this has been a driver of growth for this business unit. 

Of course, Dell filed a the 13D as it looks at possible divestitures or spin-offs of VMware. This has proven to be an exciting prospect for investors as VMware has performed admirably under Dell Technologies AND with Red Hat going for a hefty $34 Billion to IBM, VMware could see a number significantly larger. This will be a situation to pay close attention to. 

Overall Impressions on Dell Q2 Earnings 

This quarter was solid overall for Dell. With the circumstances that we are facing around the globe, I think YoY growth is ambitious for all but a select few “Born on Cloud” and staple goods companies. As we are now in the second full quarter since Covid-19, we are starting to see where the bottom was for business and there are clear signs of a recovery.

Broadly speaking, Dell’s strong operating income and revenue that kept pace (albeit a small decline) from the year before, shows a resilient business model. The continued generation of free cash flow keeps the company in a good position to move on opportunities and the significant debt ($3.5 Billion) in debt paid off this quarter is also a good sign.

I’ve been anxious to see growth in CapEx since the onset of the pandemic. A return to YoY growth should be achievable in the calendar year 2021 so long as there are no major setbacks in the fight against Covid-19 and that the economic re-opening continues.

Of course, Dell still has the lingering 13D filing regarding VMware, which analysts and shareholders will be watching closely. This has the makings of a big spinoff, but that won’t happen before the tax situation is optimal.

Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.

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Image: Dell

Daniel Newman