), which is going private, reported an 8% y-o-y drop in net
revenues for FY13 at $56.9 billion. For the fourth quarter, Dell
reported revenue of $14.3 billion, down 11% y-o-y, but 4% higher
sequentially. It posted net income of $702 million, a 23% drop
y-o-y, and reported non-GAAP earning per share of $0.40. The
desktop PC and mobility businesses, saddled with weak
macro-economic conditions and increasing competition,
continued to drag on Dell revenues.
Dell's enterprise solutions and services revenue rose 4% y-o-y
to $9.4 billion while its server and networking revenue rose 18%
y-o-y to $2.6 billion. Storage products revenue dropped 13% y-o-y
to $434 million and software and peripherals revenue fell 11% y-o-y
to $2.27 billion. The company continued
to experience competitive pricing environment and
budgetary issues with customers for its desktop and mobility
deals, resulting in a 20% decline in revenues y-o-y. Dell declined
to provide a forecast citing a definitive merger agreement to take
Dell private. The company's decision to steer clear of low-end PCs
has resulted in improvement in gross margins.
See our full analysis on Dell
Spree And Changing Business Model Augur well for
Dell has invested $5 billion in new
capabilities and intellectual property in key assets
such as Quest, SonicWall, Wyse and Appsure.
These acquisitions led to a 40 basis points increase in
selling, general and administrative expenses. R&D also grew
primarily due to the acquisition of Quest in the quarter.
These acquisitions have helped growth, particularly in the
server and networking business that grew 18% q-o-q.
Some of the business model changes are already paying off with
the servers and networking business doing well in the
quarter. Dell's server revenue rose 5% on the
back of strong growth in the company's hyper-scale data center
solutions business and migration to the company's 12
-generation servers. The 12G-server line, which commands premium in
pricing and margins over previous generation servers, represents
almost 80% of Dell PowerEdge server revenue.
Changes To Our Model
Our valuation is contingent of its performance in the services
business and is based on the long term potential of its high margin
businesses. We detailed our previous analysis
, but based on the current quarter filings, we update some revenue
and cost drivers below.
1) Updated PC Market Share
According to the
Dell's historical PC share report
, its market share in the desktop PC space has fallen from 14% to
12% currently and the portable PC market share has stayed flat at
10%. We have updated our analysis to reflect these numbers. We
expect the PC market share to remain at these lower levels as the
company will not go after low-margin, high volume PCs and will
continue to concentrate on mid and high-end PCs. We expect the long
term market share to fall to 5.5% for the desktop and notebook
2) Downside From Previous Estimate Driven by Increasing
Dell has entered into a whole slew of businesses via
acquisitions. Dell is targeting key areas such as network security,
cloud storage, systems management, business analytics,
virtualization and thin client systems. The company expects
security and systems management to be a billion dollar business in
the next few years. SG&A expenses have increased nearly 40 bps
on a y-o-y basis, and we currently estimate it to be around 14.2%
of revenues. This is the most significant change for Dell's cost
drivers and is primarily responsible for the lowered valuation.
3) Dell Services Business Growing Slower Than
The services business is a high margin business with margins nearly
twice that of the product business. We estimate that the services
business margin of about 34% and is potentially a high growth
business. The business remained flat in FY2013, and this has led to
lowered growth estimates in the short term.
4) Lower PC, Desktop and Server Gross Margins
We estimate that the gross margins will drop to around 15-16% by
the end of the forecast period from its current level of 18% due to
increasing commoditization of the hardware business.
We currently have a $12.44 Trefis price estimate for Dell.
How a Company's Products Impact its Stock Price at