Dell's fourth quarter: Watch retail channel, enterprise and software plans
Dell reports it fiscal fourth quarter earnings on Thursday and analysts aren't expecting too much, but there should be a few key indicators of whether the company's new initiatives--courting enterprise buyers with a simplified IT message, using better designs and retail partnerships to win back consumers and a bevy of software investments--are taking hold.
According to Thomson Financial, Dell is expected to report fourth quarter earnings of 36 cents a share with revenue of $16.26 billion. Some analysts expect Dell to miss estimates with earnings of 35 cents a share. Dell recently hasn't provided guidance for future quarters, but Wall Street is expecting a slight decline in first quarter earnings to 35 cents a share on revenue of $15.8 billion.
Among the key themes to monitor:
Are retail partnerships with Wal-Mart, Staples and Best Buy going to deliver? Dell in recent quarters has launched a bevy of retail deals to secure shelf space to pitch its wares against the likes of HP. The big question here is what will these channel deals deliver in incremental revenue in fiscal 2009, which just started for Dell. Analysts have toned down expectations compared to what they expected from these retail partnerships. For instance, Bank of America analyst Scott Craig said in a research note that "a realistic revenue opportunity" for Dell's U.S. retail efforts is about $1 billion in calendar 2009. That assumes that Dell will garner 7 percent to 8 percent retail market share. International retail deals should chip in another $1.5 billion to $2 billion. Craig's previous estimate in August was additional revenue of about $5 billion, but international retail deals haven't developed as quickly as thought.
My take: Craig's U.S. retail market share projection could be low. According to NPD, Dell already had 5 percent market share in the U.S. retail market, up from 1 percent in November. Looking at NPD's figures it appears that Dell is gaining at the expense of Acer and Lenovo. That said Dell's retail efforts couldn't have come at a worse time so it's correct to lower expectations. First Dell stayed out of the channel as HP used it to take market share. Then just as Dell gets channel religion the U.S. consumer is worried about a slowing economy and pinched by high food and gas prices.
How's Dell doing in the enterprise? HP's quarter shined on almost every front imaginable, but the company's is much more diversified overseas relative to Dell. Dell is highly dependent on U.S. enterprise sales and the message here is mixed. Gartner is telling companies to prep their IT cost cutting plans. Cisco has flagged weaker-than-expected demand and there's a general consensus that enterprise sales aren't so hot. Firms such as Cross Research note that Dell's margins should be closely watched as the company may have discounted heavily to enterprise customers to gain server share.
My take: Dell's server revenue is expected to be down roughly 8 percent from a year ago with storage revenue up 10 percent, but I wouldn't count the company out on this one. Its simplify IT message--assuming Dell can execute--could resonate in the marketplace.
What's the software plan? Dell is in the middle of integrating a series of software acquisitions such as EverDream, MessageOne and ASAP software. Some clarity on how Dell is going to grow its software sales will be worth watching. In the short-term, Dell's expenses and margins will be volatile as it acquires these software firms and integrates them, according to J.P. Morgan analyst Bill Shope.
My take: Dell's outlook about its software plans should be a critical component to its earnings conference call. These software tuck-ins are likely to be the growth engine of Dell in a few years.