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"97-99: Stumble over an unseen, imaginary, deceased turtle. You are very confused. Stunned 3 rounds."
-- Classic fumble result from the Middle-earth role playing game, 1984
Computing giant Dell (Nasdaq: DELL ) must have rolled a "98" on that table when it reported first-quarter earnings last night.
Dell saw $0.43 of non-GAAP earnings per share on sales of $14.4 billion. Analysts wanted $0.46 per share and $14.9 billion, respectively. The Street's revenue target was strictly in line with management guidance, so the weak result was a shock to absolutely everybody.
Nobody saw this turtle before Dell stumbled on it. Shares tumbled 17.5% overnight on absolutely massive volume, reaching prices not seen since September 2010.
Dazed and confused?
Is Dell confused and stunned, as the fumble message would indicate? I don't think so -- the company is taking action against the terrible sales performance, and some of the lost sales really won't be missed anyhow.
CFO Brian Gladden pointed to poor sales execution and weak demand, with a side of tougher competition. To combat the feeble sales, Dell's sales force has been refocused on selling the integrated package of Dell servers, storage, networking, software, and support services. Hey, management has built an IBM (NYSE: IBM ) clone here through a series of acquisitions, so why not push the whole kit and kaboodle on enterprise customers? The Big Blue model is popular for a reason -- it works!
But don't expect a miraculous turnaround on a dime. Gladden's revenue guidance for the second quarter goes along with strictly seasonal patterns on top of the new normal that was set in this report. The full-year outlook was not changed, but not because management is confident in recovering lost ground at the back half of 2012. No, it's just "too early in the year" to make any changes to the guidance model. Expect new 2012 targets in three months, along with the second-quarter report.
The weakest performer this time was the consumer division and specifically consumer notebooks. The Apple (Nasdaq: AAPL ) iPad and various smartphones are stealing sales that would normally go to the notebook segment, and Dell just doesn't have an answer to that threat today. Dell is also walking away from whatever growth is available in that market, because the margins just aren't there.
Has Dell tabled the tablet market?
This company is all about the data center right now. I don't think tablets and smartphones will play any part in Dell's business model in 2012.
Most vendors in that space have to choose between reasonable margins and strong sales -- only Apple has figured out how to do both at the same time. A heavily discounted Dell tablet might sell millions of units but still not help the bottom line; weak sales of a strongly profitable model just wouldn't move the needle far enough to bother doing it.
Of course, Dell will launch a tablet or two to go along with the Windows 8 launch by Microsoft (Nasdaq: MSFT ) later this year, like everybody else in the PC space. But that'll be a me-too launch rather than a flagship product that Dell puts any serious marketing muscle behind. Just enough to reassure Mr. Softy that Dell still plays on that team, you know?
The last time you could buy Dell at these prices, the trailing net margin was an anemic 3.4%. Despite the iPad onslaught and an explosion of rivals in the enterprise sector, the trailing margin stands at 5.2% today. and even the first quarter's uninspiring profit take was 4.4%. Management is taking the bull by the horns, and the stock sells for just 6.6 times trailing earnings -- before backing out one-third of the market cap to account for the net cash on hand.
This would be a terrible time to panic and hit "sell" on Dell. My bullish CAPScall is shaken by this treacherous turtle of a quarter, but it ain't going nowhere. The smartest investors buy low so they can sell high. Our special free report will show you how you can invest like the smart money does. Grab your copy today.