DELL Preview: Expecting a Miss

Dell (DELL - commentary - Cramer's Take) is scheduled to report its third-quarter results tonight after the close. Current Street consensus is for revenue to be $16.37 billion (up 5% year over year but flat quarter over quarter), with pro forma EPS of 32 cents.

In the prior quarter, revenue was $16.43 billion (up 11% year over year and 2% quarter over quarter), with EPS of 31 cents. The gross margin was 17.2%, down 280 basis points from last year and 120 basis points sequentially, due to what was characterized as a "strategic pricing action" in the Europe, Middle East and Africa (EMEA) region and a stronger retail mix shift. The operating margin was 5.0%, down 110 basis points year over year and 60 basis points from the first quarter.

Cash from operations recovered to a very solid $1.1 billion vs. only $140 million in the prior quarter. The cash and short-term equivalents account was up about $550 million, to about $9.0 billion, in the quarter. Accounts receivable increased about $450 million, and days sales outstanding were up one day, to 35 days. Inventory declined slightly (about $150 million), with days of inventory down two days, to seven days.

According to management, the company believes that it outpaced the industry in all geographies and all major product categories. Overall units increased 19% year over year, led by notebooks, up 44%, and servers, up 19%.

The big issue last time around was that of expectations. Rather than improve, margins actually deteriorated as the company took "strategic pricing action" ahead of cost reductions on notebooks in EMEA. Also concerning investors was the persistent hedging by management on the $3 billion in identified savings and just how much will fall to the bottom line.

Since that point, the outlook for the personal computer market has deteriorated significantly. Hewlett-Packard's (HPQ - commentary - Cramer's Take) pre-announcement aside, the Cisco Systems (CSCO - commentary - Cramer's Take), Intel (INTC - commentary - Cramer's Take) and Qualcomm (QCOM - commentary - Cramer's Take) numbers are the more important "tell" in the current market. Hewlett's results are also skewed by the closure of the EDS acquisition, which allows plenty for room for cost reductions.

---

At the time of publication, Faulkner had no positions in the stocks mentioned, but The Telecom Connection model portfolio was long Dell calls.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

Interested in more writings by Bob Faulkner? Check out his newsletter, TheStreet.com The Telecom Connection. For more information, click here.