Dell: Well poised For Long Term Growth
Friday, July 02, 2021 1:14 PM

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Dell is a leading integrated technology service provider in the IT industry. Dell offers broad range of products, including mobility products, desktop PCs, software and peripherals, servers and networking, and storage products. In fiscal 2010, overall net income decreased by 13.41% due to global economic slowdown. However from second half of fiscal 2010, IT industry started to see sign of economic recovery which resulted in increased unit shipment across all four operating segments. At present Dell share price is trading at $12.03 which near to its 52 week low of $11.84, however ongoing economy recovery coupled with strengthening demand in consumer segment and commercial segment should have a favorable impact on its share price in coming days.

In fiscal year 2010, Dell's total net revenue was $52.9B, 13.4% lower than prior fiscal year. Product revenue and unit shipment decreased YoY by 17% and 6% respectively. The lackluster performance was due to decrease in demand from commercial segment and lower average selling price in consumer segment. Service revenue increased YoY 5%, the increase in service revenue was due to acquisition of Perot system, which contributed $588M in service revenue during the fourth quarter of fiscal 2010.Service revenue is dependent upon the sale of hardware and if we exclude the contribution from Perot systems than service revenue decreased by 2%. Overall performance is as given below:

 
Dell Annual Performance (Source: Dell, Finance yahoo, Google)

Dell's operating cash flow declined over 50% in 2009 due to weak economic condition and low IT spending. In Fiscal year 2010, its total cash flow from operating activities was $3.9B which was over 100% more than last fiscal year's operating cash flow. The significant improvement shows that Dell is able to overcome slowdown and now on a steady path of growth and recovery. The overall liquid position has also improved, in fiscal year 2010, total liquid asset improved by 23%. The detailed breakdown is as given below:



2010

2009

2008

2007

Net cash provided by operating Activity

3906

1894

3949

3969

Liquid Asset

11789

9546

9532

12445

Dell quality of earnings (source: annual report)

In latest quarter, revenue was $14.9B, higher than 21% YoY and almost flat sequentially. Its operating income also grew 29% to $824M.In latest quarter, Dell generated $238M in cash flow from operation and $400M in free cash flow. Dell's all operating segment experienced good growth rate, Desktop and mobility grew 22% and 14% respectively. Dell's public business grew at 22% to $3.9B and server's sells were up by 17%. Overall quarterly performance is as given below:

 

Dell Quarterly performance (source: finance Google)

Positive Attributes

Increased global PC shipment: IDC has recently reported impressive 27.1% growth for Global PC shipment in first quarter of 2010 and expect overall 20% growth in 2010.PC shipment constitute 24.5% of total revenue and thus a 20% industry growth will have a solid impact on its revenue

Acquisition of Perot System: Acquisition of perot system has given $500M boost to its service revenue and should help it to expand customer base and cross selling opportunities

Entry in smart phone market: Dell plans to enter in attractive Smartphone market sometime next year. If dell is able to launch good Smartphone then this strategy should help in achieving superior revenue growth.

Solid Cash Position: Dell has total $10.88B of cash and a healthy current ratio 1.31.On an annual basis; Dell has generated $3.38B of operating cash flow in fiscal year 2010

Risk

Economic Recovery process should continue:  The revenue dipped by 13% in fiscal year 2010 due to weak global sentiments and off late the economic data points to a fragile recovery and perhaps some probability of recession. The revenue growth will suffer if those indicated economic data result in economic slowdown.

High level of Debt: Dell is carrying $4.66B debt on its book. This is a risk position especially in given fragile economic condition

Weak performance of Mobility product: The revenue from mobility product declined even though unit shipment increased over 7% over fiscal 2009. The management has take some steps to increase the demand but still it is not reflected in operating performance

Fiscal Year 2011 Expectation

Dell's Management is confident of fiscal 2011 revenue growth in the range of 14% to 9% from previous year. This growth will be achieved due to robust growth in consumer and corporate spending. It also expects its operating income to grow by 18%-23% from the year earlier period.

Overall, Dell is expected to grow well in fiscal year 2011. Improved consumer and corporate spending will help it achieve its stated revenue target. The current share price is attractive and investor may consider it for taking long position.

 

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