At best, Dell's (Nasdaq: DELL ) fiscal 2013 second quarter is forgettable. At worst, it's downright depressing. Based on the drop in share price following Dell's Aug. 21 earnings announcement, investors are leaning toward the latter. But for long-term value seekers, the decline in stock price is ideal, for a number of reasons.
A quick recap
On a GAAP basis, Dell's quarterly net income of $732 million is an 18% decline compared with Q2 fiscal 2012. Earnings are down 13% from last year's $0.48 per share, and operating income is also heading south. The 8% drop in revenue because of slow PC demand is to blame.
GAAP numbers provide good, apples-to-apples comparisons for investors considering buy, hold, or sell strategies since all costs, including one-time items, are included. For Dell, as it prepares to close its sixth acquisition of the year designed to broaden its enterprise business lines, non-GAAP results are also worth a look. Even after removing acquisition and settlement costs -- something non-GAAP reporting allows for -- Dell hardly killed it in Q2, but it does help to put things into perspective.
Non-GAAP net income, earnings, and operating income are down vs. fiscal 2012, too. Hey, the PC market is what it is. But the 13%, 7%, and 15% declines (respectively) on a non-GAAP basis are a bit easier to swallow, and arguably a more accurate measure of Q2 results considering Dell's acquisition activity.
Time to move forward
If you follow the industry, you know Dell's Q2 isn't surprising. One of Dell's primary competitors, Hewlett-Packard (NYSE: HPQ ) , is having an even tougher go of it. HP's share price is down nearly 23% year to date (Dell is down 21%) as it struggles with declining PC sales. Like Dell, HP is trying to reinvent itself and is likely to get there. The difference is Dell's already showing signs the strategic shift is working.
In some respects, the model for Dell is IBM (NYSE: IBM ) . Dell's commitment to switch its focus from PCs to enterprise services is the right one. Of course, IBM has been playing in that sandbox for some time, and not coincidentally, IBM's share price is up 8% so far this year. The money and the margins are in servers, network solutions, and secure data storage, and that's where Dell is heading.
Signs of life
Even before the Aug. 21 announcement that former HP executive Marius Haas will take over Dell's enterprise solution and services (ESS) division, the business was leading Dell's reinvention. In Q2, ESS generated $4.9 billion of the $14.5 billion in total revenue. That's 6% higher than Q2 of 2012, and right in line with "The Plan." Other areas of revenue growth include server and networking, data storage and services.
The pattern is clear: Dell's strategic shift from the disappearing market and low margins of the PC business is taking hold.
Dell is still a cash-generating machine, regardless of what's happening with PC sales around the world. The $637 million in cash flow from operations in Q2 increases what was already a cushy reserve. Now with $14.6 billion on the balance sheet, Dell announced it will (finally) begin paying shareholders a dividend. Dell is changing, and the new dividend is yet another indication of that.
Managing expenses is always a good idea. Controlling overhead during a major corporate transition, not to mention a difficult global economic environment, is a necessity. Dell's objective to trim $2 billion in costs is the right one, and it's already making an impact by lowering the cost of revenue.
Changing Dell's focus from the disappearing PC market to enterprise solutions is an ambitious one, no doubt. While shareholders have every right to demand results now, reinventing a company takes time. Michael Dell himself says it best: "We're transforming our business, not for a quarter or a fiscal year, but to deliver differentiated customer value for the long term."
Where does all this change leave us? Dell stock is cheap relative to the industry and getting cheaper. The reinvention of Dell to an enterprise-solutions provider is already showing signs of life, and a dividend is on the way. For long-term value investors, it's time to buy in.
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