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Dell Stock Surges on Solid Q2 Results, Strong Outlook

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Aug. 30 2019, Published 3:15 p.m. ET

Yesterday, Dell Technologies (DELL) released its results for the second quarter of fiscal 2020. The company reported revenues of $23.45 billion, a year-over-year increase of 1.4%. These revenues also surpassed the consensus estimate by $183.98 million.

Excluding the Chinese market, the company reported a 4% YoY increase in core order revenues. Dell also reported non-GAAP EPS (earnings per share) of $2.15, higher than the consensus estimate by $0.65.

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The company also reported a 17% YoY rise in deferred revenues, which reached $25.3 billion in the second quarter. Deferred revenue represents orders received but not yet worked on, which is an indicator of the company’s future revenue trends. The company also earns 20%–25% of its quarterly revenues from recurring sources.

After this news, Dell stock rose 8.98% to $50.97 in the premarket trading session today. The 17 analysts tracking Dell Technologies have an average target price of $64.96 on its stock, indicating a potential upside of 38.89% in the next 12 months.

Dell guides robust financial numbers

In its second-quarter earnings, Dell guided for GAAP revenues of $92.7 billion–$94.2 billion and GAAP operating income of $2.9 billion–$3.3 billion for fiscal 2020. Plus, the company guided for GAAP diluted EPS of $5.45–$5.90 for fiscal 2020.

Dell guided for non-GAAP revenues of $93.0 billion–$94.5 billion and non-GAAP operating income of $9.8 billion–$10.2 billion for fiscal 2020. The company has also guided for non-GAAP diluted EPS of $6.95–$7.40 for fiscal 2020. The company has projected non-GAAP tax rate of 16% plus or minus 100 basis points. Dell also expects its average share count to be $750 million–$755 million in fiscal 2020.

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Dell’s long-term growth opportunity

According to the August 2019 IDC WW Black Book, global IT spending is expected to grow at a CAGR (compound average growth rate) of 4.3% from $2.7 trillion in 2018 to $3.3 trillion in 2023. This is almost twice as fast as the anticipated growth in global real GDP during the same period.

Based on its second-quarter earnings call, Dell can benefit from the multitude of growth opportunities offered by the increasingly data-oriented business environment. The company is optimistic about increasing its spending in the IT space, driven by ongoing digital transformation around the world. Dell expects to position itself as a partner to customers for implementing an end-to-end IT strategy.

Infrastructure Solutions Group’s performance

In the second quarter, Dell’s ISG (Infrastructure Solutions Group) reported revenues of $8.6 billion. This represented a YoY decline of 7%, but a sequential rise of 5%. ISG reports sales of traditional and next-generation data storage solutions and servers sold by Dell.

In the second quarter, the company’s Storage business reported revenues of $4.2 billion, which represented flat YoY performance. However, its Servers and Networking business proved to be a drag, as its revenues fell YoY by 12% to $4.4 billion.

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The company attributes this trend to the excessive capex investments made by customers in the server industry in fiscal 2019. However, Dell highlighted its shift toward higher-margin server sales as it became more selective while opting for lower-margin deals. The group’s second-quarter operating income of $1.1 billion reflected this trend. Its Q2 operating income was 4% higher YoY and 25% higher sequentially.

Client Solutions Group’s performance

In the second quarter, Dell’s CSG (Client Solutions Group) reported revenues of $11.7 billion, a YoY rise of 6% and a sequential rise of 8%. CSG reports sales of branded hardware and third-party software sold by Dell.

During its second-quarter earnings call, Dell has attributed CSG’s record revenue performance to robust commercialization, reduction in component costs, and migration to Windows 10. The company reported double-digit YoY growth in its sales of desktops, commercial notebooks, and workstations in the second quarter.

CSG also reported operating income of $982 million, a YoY rise of 131% and a sequential rise of 24%.

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VMware performance

Dell’s VMware group reported Q2 revenues of $2.5 billion, a YoY rise of 12% and a sequential rise of 8%. The segment also reported operating income of $762 million, which is a YoY rise of 4% and a sequential rise of 24%. To learn more about VMware, please refer to Is VMware Benefiting from Dell’s Ownership?

Balance sheet strength

Year-to-date, Dell has paid down its gross debt of $2.4 billion. The company reported a core debt balance of $36.4 billion at the end of the second quarter. The company also reported cash and investments of $10.0 billion at the end of the second quarter.

Since completing the acquisition of EMC, Dell has reduced its gross debt by $17.0 billion and its core debt by $12.4 billion. Dell has deployed $10.5 billion from FCF (free cash flows) and $6.5 billion from asset divestitures for gross debt paydowns. The company plans to repay total gross debt of $5.0 billion in fiscal 2020. To learn more about the Dell–EMC merger, please read Shareholders Approve Dell-EMC Merger.

According to its second-quarter earnings call, Dell is focused on optimizing its capital structure and smoothing its debt maturity profile through paydowns and refinancing. The company faces a debt liability of $2.3 billion that will be due in the next 18 months.

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