EUR 850.00 For Business Accounts Only

Morningstar | DELL Updated Forecasts and Estimates from 02 Apr 2019

In closing out its first quarter as a publicly traded company, no-moat Dell Technologies reported revenue of $23.8 billion (9% year-over-year growth), lower than our projected $24.3 billion due to weakness in the price-sensitive consumer computer business. However, improved operating margin results of 1.4% exceeded our expectation of 0.2%, and we believe efficiency gains can continue. Strong growth results in higher-margin areas, higher fiscal 2020 guidance than we expected, and a robust cross-selling story for IT environments lead us to expect a longer period of sustainable growth with operating margin expansion. We are raising our fair value estimate to $65 per share from $56.

For the fourth quarter, gross margin increased to 29.8% from 26.8% year over year due to the infrastructure solutions group and client solutions group selling higher-margin products and benefits from a lower commodity cost tailwind. Operating income of $331 million showcased a very nice improvement versus last year's $69 million loss, which can be attributed to higher-gross-margin sales. The ISG business was up 10% for the year, with servers and networking growing 13.6% and storage 7.1%. High-value products like VxRail HCI, all flash array storage, and cloud networking software are growing rapidly and helping supplant any potential headwinds in commoditized product environments. The CSG segment grew 4%, with commercial growing 8.7% and consumer shrinking 6.4% year over year. Strength in commercial notebooks and workstations offset the headwinds in the lower-end commercial segment as the company looks to high-end and gaming machines to help future consumer sales. VMware posted 17% year-over-year growth as its presence in networking and hybrid-cloud environments continues to gain strong traction. Dell Technologies' other business contributed $593 million with 5% year-over-year growth.

Fiscal 2020 guidance for revenue of $92.7 billion-$95.7 billion and operating income of $2.9 billion-$3.5 billion was higher than our operating margin expectation of close to 1% on a GAAP basis. With strong guidance from VMware and cross-selling opportunities with Dell Technologies' hardware and software platforms, we believe the guidance is obtainable. We also expect the more nascent brands like Pivotal and Secureworks to benefit from collaborative efforts with each other and VMware solutions. In our view, Dell Technologies' product leadership in areas like all-flash array storage and HCI are driving upselling opportunities for networking and cloud-based security and analytics. Although we expect a soft environment for consumer computers, we think the shift to enterprise IT solutions create a sustainable business model for Dell Technologies.

Dell Technologies ended fiscal 2019 with $54.2 billion in total debt. Of that debt, $7.5 billion is related to Dell Financial Services, $4.0 billion is VMware's indebtedness, and $3.4 billion is a margin loan. The company ended the quarter with $24.0 billion in deferred revenue, up from $20.8 billion at the end of fiscal 2018.