Dell Earnings Watch: Focus Is on Performance, Not Sales

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Dell (NASDAQ: DELL) announces fourth-quarter results after the close of trading on Thursday, though investors’ interest is likely to be more focused on the No. 3 PC maker’s operating expenses and management than on its revenues and earnings.

For some time, Dell has been focused on removing operational costs from its structure, and as of its last earnings call has saved about $4 billion as a result. But a company can only cut so much away to profitability before it needs to start selling products again.

A consensus survey of Wall St. analysts puts Dell’s fiscal fourth quarter of 2010, which concluded at the end of January, at $13.85 billion in revenue and earnings per share (EPS) of $0.27. That would translate to 3.1 percent year-over-year sales growth and slight decline in EPS from $0.29 in 2009.

UBS Investment Researchrecently issued a research note stating it expects market share loss for Dell, which has been losing ground to Acer on the consumer side and HP on the business side, might be offset somewhat by a stronger-than-anticipated market. UBS analyst Maynard Um puts revenue at $13.7 billion and EPS at $0.28.

More unclear is the impact of Perot Systems, which will be reported as part of Dell earnings for the first time in this quarter. Dell acquired IT services player Perot Systemsfor $3.9 billion in September 2009. Perot should add to Dell’s gross margin, always helpful for a hardware company since they typically operate on thin margins. But how much Perot will contribute remains an unknown for now.

Um said Dell’s gross margin — how much is left after it pays for the parts in its systems, basically — may have taken a hit due to an increase in the price of components. Perot Systems may offset that, since services typically have much higher margins.

Another challenge facing Dell is continued erosion of its market share. Even in the fourth quarter of last year, when every other vendor saw major double-digit increases, Dell’s share rose only 5 percent. It has already been surpassed by Acer as the No. 2 PC maker in the world, in part because Dell focuses on the business side of things instead of consumer, and the business side has been much slower to begin making purchases again.

However, Dell is counting on a “refresh cycle” in 2010, in which businesses finally retire old, worn-out Windows XP machines and replace them with new Windows 7 systems.

“For the balance of 2010, similar to commentary from other IT hardware vendors, we expect Dell to be optimistic about an enterprise PC refresh cycle and expect the company to reiterate expectations for a gradual improvement in enterprise spending as we move through the year,” Um wrote.

“In our opinion, keys for Dell will be if the enterprise PC refresh and cost-cutting initiatives can offset challenges including PC market share losses, greater competition, further investments in growth channels (retail and indirect), warranty accrual reversal risk, and M&A,” he added.

Um also believes Dell might accelerate its acquisitive streak to keep up with its competition. “We believe investors have some concern that Dell may acquire out of need, resulting in higher multiples paid (à la Perot). We continue to believe Dell will likely continue to look for companies to round out its portfolio and maintain our view that services, storage, and software are likely areas of interest,” he wrote.

So far, Um’s been right on the money in this regard: In the days following his research note, Dell acquired systems management vendor KACEto enhance its compliance and management offerings for midsized customers.

Um also expects Dell to strike a small international services deal to raise its international profile, and that most of its coming acquisitions would be “bolt-on acquisitions,” easily integrated companies that complement existing products, given Dell’s near-term need to focus on integrating Perot Systems.

For fiscal 2011, UBS projects revenue of $57.9, an improvement over this year’s $51.7 billion, which was a considerable drop when compared to fiscal 2009’s $61.1 billion. UBS estimates EPS of $1.18 for the year, a reflection of higher operating expenses and Dell’s need to expand sales and marketing to find new markets.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.