Morningstar | DELL Updated Forecasts and Estimates from 31 May 2019
No-moat Dell Technologies' 2.6% year-over-year revenue growth was below our expectations as the company suffered from headwinds in the server market. Dell Technologies sacrificed sales for profitability and positively surprised us with a 2.5% GAAP operating margin (10% non-GAAP) and GAAP EPS of $0.38 ($1.45 non-GAAP) in the quarter. The slowdown in servers was worse than Dell Technologies expected as it contended with fierce pricing competition in a few large-scale bids and in China. The company also posted declines in storage and consumer PCs, while commercial computer sales and VMware's contribution showcased positive results. While the top-line slowdown was alarming, favoring profits for sales is acceptable, and we see positive momentum coming from the push into more cloud-based ecosystems. We are maintaining our fair value estimate of $65 per share. Dell Technologies remains a 3-star name.Infrastructure group revenue declined by 5% year over year, with servers and networking shrinking by 9% and storage declining by 2% compared with the prior year. Slower industry demand weighed on the results for servers, and we expect headwinds to continue. While management commented that server average selling prices increased year over year, we attribute the favorable pricing to conceding deals due to competitor pricing tactics. We expect the decline in storage weakness to recover as the adoption on all-flash arrays and hyperconverged infrastructure products continue to ramp.
The client solutions group grew by 6% year over year as commercial sales increased by 13% and offset consumer revenue declines of 11%. Strength from small to medium-sized businesses and the Windows 10 refresh catalyzed demand for commercial notebooks, desktops, workstations, and peripherals. Dell proportioned its incoming chip supplies toward businesses and higher-end consumer computers, which benefited from favorable commodity component pricing in the quarter.
Management reaffirmed the fiscal 2020 guidance provided at the end of last quarter, which includes $92.7 billion-$95.7 billion in revenue for fiscal 2020, and commented to look above the midpoint of the $9.0 billion-$9.6 billion of non-GAAP operating income and above the midpoint of the non-GAAP EPS range of $6.05-$6.70. Although headwinds may persist in the server market, we believe Dell Technologies can achieve these targets through the Window 10 refresh providing a tailwind for computers, storage sales ramping, and broad-based VMware strength.
The company announced Dell Technologies Cloud in April, with the aim to be a centralized location for a customer's hybrid cloud strategy. Also announced was Dell Technologies Cloud Data Center-as-Service, which offers the public cloud model for on-premises and network edge. We like that Dell Technologies is using its powerful VMware and EMC brands to offer solutions that give customers a choice outside of the hyperscale cloud providers but is still offering the popular consumption model of the public clouds with the benefit of offloading the infrastructure setup, control, and management aspects to Dell Technologies. We expect Dell Technologies to continue expanding its presence outside of the traditional computers, servers, and storage markets as it provides more solutions for hybrid cloud infrastructures.
Dell Technologies is a holding company. Through its subsidiaries, the company designs, develops, manufactures, markets, sells, and supports a range of products and services. The company's reportable segments are: Infrastructure Solutions Group, which includes servers, networking, and storage, as well as services and third-party software and peripherals; Client Solutions Group, which includes desktops, thin client products, and notebooks, as well as services and third-party software and peripherals; and VMware, which provides compute, cloud management, networking and security, storage and availability, and other end-user computing offerings.
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