Dell Technologies faces “hurdles” amid US$1.5B operating loss

Dell Technologies faces “hurdles” amid US$1.5B operating loss

​Analysts say the company still has some hurdles to overcome following its EMC acquisition

Michael Dell - Chairman and CEO, Dell Technologies

Michael Dell - Chairman and CEO, Dell Technologies

Analysts have flagged some “hurdles” for Dell Technologies, as the company reports a US$1.5 billion operating loss in its first 2017 quarter.

The company’s latest financial results for the three months ending 5 May, released on 8 June, revealed a 979 per cent drop in operating loss, to US$1.5 billion, while net loss from continuing operations declined by 226 per cent to US$1.38 billion.

At the same time, the company reported a 46 per cent increase in net revenue compared to the quarter ending 29 April the year prior, to US$17.8 billion.

It should be noted, however, that the company’s non-GAAP – or adjusted – earnings reflected a 122 per cent year-on-year increase in operating income to US$1.2 billion.

Taken in their entirety, the figures reflect both the growth and the impact of Dell’s acquisition of EMC, which closed late last year.

As such, the company’s operating expenses ballooned during the quarter – its first to report on under its new go-to-market strategy as Dell Technologies, the combined entity resulting from the EMC acquisition.

Selling, general and administrative costs grew 126 per cent year-on-year for the period, to US$4.7 billion, while research and development rose to US$1.1 billion.

At the same time, the company’s cost of net revenue from products surged by 30 per cent, year-on-year, to $11.5 billion, and net revenue from services expanded by 65 per cent to US$2 billion for the period.

The company’s Infrastructure Solutions Group generated US$6.9 billion of revenue in the first quarter, which includes US$3.2 billion in servers and networking and US$3.7 billion in storage, with an operating income of US$323 million.

Meanwhile, its VMware segment revenue for the first quarter was US$1.7 billion, with operating income of US$486 million, or 28 per cent of revenue.

The company ended the quarter with cash and investments of US$14.9 billion. Since closing the EMC transaction, Dell Technologies has paid down approximately US$7.1 billion in gross debt.

"We're pleased with overall results in the first quarter of our new go-to-market structure and the demand velocity we saw in a challenging component cost environment," Dell Technologies chief financial officer, Tom Sweet, said.

"I'm encouraged by these achievements and excited about the opportunities ahead as we continue to provide a broad portfolio of solutions for our customers' digital transformations."

Yet, according to Technology Business Research analyst, Stephanie Long, the latest financials indicate that, despite Sweet’s claims, the company still has some hurdles to overcome.

“Dell Technologies’ portfolio has undergone substantial changes in 2017, and a series of product announcements in May benefit the majority of its business units and bring the promise of revenue gains that will, to a degree, mitigate some industry-wide challenges, such as rising components costs during 2H17,” Long said.

“However, TBR believes Dell Technologies’ near-term strategy to address these market dynamics is unclear at this time, as the vendor searches for a balance between restructuring internally to minimise price increases while balancing raising prices with market share to maintain its growing customer base and profitability,” she said.

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