Shares of Dell Technologies (NYSE: DELL) fell to their lowest level since 2018 earlier this week after the technology company reported solid Q2 results but warned of a significant slowdown in the second half of the year as raging inflation continues to weigh on consumers and businesses.
How Did Dell Perform in Q2?
The Austin, Texas-based company joined its industry rivals including Intel and Lenovo which issued similar warnings recently concerning the sharp decline in the PC market following strong two years during the coronavirus pandemic.
Even though Dell’s enterprise unit has in part offset the slowdown in the PC market, the company’s executives voiced their concerns about the unit that accounts for almost 50% of Dell’s revenue.
“There’s caution around future hiring, trade-offs within their IT budgets given the macroeconomic uncertainty, customers reducing the size of orders and buying for only immediate requirements,” said co-COO Chuck Whitten on a post-earnings call.
Dell reported second-quarter adjusted earnings per share (EPS) of $1.68, topping the consensus estimates of $1.63 per share, and compared to the year-ago period of $2.24 per share.
Revenue came in at $26.43 billion, up from $26.13 in the year-ago period and slightly below analyst expectations. Dell’s Q2 revenue growth was the slowest in over a year and a half as the company felt a significant impact from a strengthening dollar and coronavirus-induced constraints in China – Dell’s second-biggest market.
A stronger greenback has also weighed on the biggest companies in the world including Apple and Microsoft and is likely to continue applying pressure on companies as the U.S. central bank hikes interest rates.
Dell reported a 2% in gross margins to 21.4% from the year-ago period as higher costs and currency value changes haven’t yet been factored into the company’s product prices, said Sweet. To cut costs, the company also slowed external hiring.
Dell’s consumer revenue was down 9%, though it was partly offset by the 15% growth in the company’s commercial business. Dell’s infrastructure solutions group (ISG) unit grew 12% year-over-year to $9.5 billion.
“We’re somewhat surprised by (Dell’s) more-muted ISG view, given sturdier results from enterprise IT peers,” said analyst Woo Jin Ho. “Dell notes elongated purchasing decisions and smaller orders and could be a test case for broader weakness.”
Going forward, Dell expects Q3 revenue in the range of $23.8 billion to $25 billion, missing the consensus estimates of $26.34 billion, according to Refinitiv. The guidance marks a sales decline of around 8% from the year-ago period at the midpoint of the projection.
For the long run, Dell said it expects annual revenue growth of 3-4% and a 6% increase in EPS. The company expects revenue growth for the full fiscal year 2023 to be in the range of 0% to 2%.
But the positive long-range forecast was not enough to convince investors, with Dell’s shares losing 14% to $41.43 at Friday’s close, marking its biggest single-day drop ever. Dell’s stock is down more than 27% this year.
Research firm Gartner said global PC shipments fell as much as 13% in the three-month period through June, marking the worst quarter for the PC market in nine years. One of the primary factors behind the drop was poor demand for Chromebooks and 4-decade-high inflation that continues to weigh on consumers’ pockets. Gartner expects shipments to decline by 9.5% in 2022.
Furthermore, Sweet said sales in Dell’s PC unit in the current quarter are also expected to drop by a “high teens” percentage, relative to the same quarter last year. The company expects “low teens” growth in the infrastructure business, which is expected to “see a more challenging” demand environment, he said.
Summary
Dell shares fell last week after the PC maker offered soft guidance as it experiences weaker-than-expected demand.
