Dell reported a 16% drop in revenue
in its most recent quarterly earnings
announcement. In the release management acknowledged the difficult
tech environment as companies defer IT spending. Even in the once-mighty BRIC countries sales we down 23% from the
prior year! Throughout the earnings release and conference call the
company focused the attention on their cost cutting efforts to keep attention
away from declining revenue across the business.
“We said last March that we would reduce costs by $3
billion annually by the end of fiscal 2011,” said Brian Gladden, Dell’s chief
financial officer. “The cost actions we took this past year made us more
competitive and delivered value to customers in a challenging economic
environment.
“In fact, we now have a clear view to additional
opportunities, and are raising our cost-reduction target to $4 billion.”
Dell did cut the average COGS by
5% but that only served to mask top-line revenue troubles as margins still
contracted by 160 basis points. Sounds
like pricing trouble. Here is what CFO
Gladden said about margins:
I think more broadly when you think about demand and the
mix environment that we see today, this cost reduction activity we’ve been
through on the COGS line has given us some flexibility and a bit of a buffer to
effectively manage our top line and how we play in certain markets.
In other words the company will
sacrifice on sales price to maintain market share.
The company’s balance sheet is strong with $9.5B in cash versus $1.9B in debt and $2.2B in customer financing receivables. At these prices Dell’s stock hangs just off the 52 week low of $7.84, closing at $8.21. Even with a focus on cost cutting and cash flow Dell is likely to underachieve on its revenue and margins. Prices continue to weaken due to increased competition for market share growth. The results achieved in the fourth quarter and the weak outlook makes me cautious about being long the stock until the major indices move off their lows.
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