Dell Should Do SmartPhone Acquisition
Dell Inc (Nasdaq: DELL), the No.2 PC vendor with annual revenue of $61 billion, reported its third quarter results yesterday. Though slowdown in IT spending and demand saw its revenue decline and miss estimates, Dell’s cost-cutting measures have boosted its earnings, beating expectations. Last quarter, Dell beat revenue estimates but missed earnings estimates. This quarter the focus has been on profitability rather than growth. Let’s take a closer look.
For the quarter, revenue was down 3% to $15.16 billion, versus analyst estimates of $16.22 billion. Net income was $727 million, or $0.37 per share, versus $766 million, or $0.34 per share, last year. Analysts had estimated earnings of $0.31 per share.
Cost-cutting measures led to a $200 million or 11% decline in operating expenses. Dell reduced its headcount by 2,200 in the quarter and by over 11,000 since Q2 of last year. Cash flow from operations was negative $86 million due to slowdown in global demand. Year to date, cash flow from operations was $1.2 billion and Dell ended the quarter with $8.9 billion in cash. In the quarter, it spent $400 million to buy back 21 million shares.
By product category, revenue from Desktop PCs was down 14% to $4.1 billion with the demand shifting towards laptops. Dell now outsources about 35% of its manufacturing to contractors. Mobility revenue was up 3% to $4.8 billion, Software grew 2% to $2.6 billion, Services grew 7% to $1.4 billion, Servers was down by 7% and Storage was flat at 0.6 billion.
By region, revenue from Americas Commercial was down 8% on a 14% decline in units, EMEA Commercial was down 5%, and APJ Commercial was up by 2% on 15% rise in units. Global Consumer unit revenue was up by 10% on a 32% increase in units. Revenue from outside the US accounted for 48% of total revenue. Revenue from Brazil, Russia, India and China (BRIC), accounting for 9% Dell’s global revenue, grew 20% and shipments to these countries grew 43%.
Dell expects global IT end-user demand to continue to be challenging. Analysts have estimated revenue of $15.92 billion for the next quarter.
Dell’s market share has now come down to 14.2% from 16.4% last quarter as per research firm IDC. HP now has 18.8% of the market versus 18.9% last quarter. In contrast to Dell, HP beat estimates in its preliminary results: it reported 19% growth in sales to $33.6 billion and EPS of $1.03. HP attributed this to its global reach, broad customer base and ongoing cost cuts. Apart from reducing costs, HP is also introducing innovative products like the touchscreen PC, tx2.
This may be a good time for Dell to do a SmartPhone acquisition.
Dell is currently trading around $10 with market cap about $19 billion. It hit a 52-week low of $8.85 on November 13.
I am sorry. Whaaaa??
Desktops, Laptops, Servers and Storage. That’s Dell’s business.
Now what is the logic behind this suggestion to acquire a smartphone company Sramana? The mobility unit’s revenue or the global consumer unit revenue increase or the revenues from the BRIC countries? Who do you have in mind as a good potential target?
Sorry.. You got me here…
I have written quite extensively about the fact that I believe the future of the computer business will need to include a convergence device strategy. You may want to read up on that.
Remember when Apple used to be a computer company? Dell needs to be both a computer company AND a phone company at this point, because a very large part of the mobility business in computers is going to be in the smartphone / convergence device segment.
Pradhip,
Check out Apple’s must recent quarterly earnings statement. The regular earnings are $1.26 per share. Beyond that Apple has an additional $1.43 in non-GAPP, but quite real earnings. These additional earnings are mostly from the iPhone. A very small portion of that adjusted earnings is also from AppleCare and AppleTV, but the majority of it (almost all of it) is from the iPhone. That sounds like Billions ($$) of good reasons why Sramana is quite right about the converged device being the future.
Plus, the cell phone market is so much larger than the PC market. The future of the cell phone market is smart phone/converged devices. If Dell doesn’t get in; that just leaves that much more for Apple, Nokia, RIM and anyone else who is successful in building a smartphone business. That may or may not include Dell.
Buying RIM or Palm gives Dell a better chance at getting into this lucrative market more quickly and possibly more successfully.
Sramana,
I see your convergence point…
But, Dell has never tried to be an innovator or even an early adopter. As of now there is a very clear customer segmentation between an iPod-iPhone-Mac owner and a Dell Laptop & Verizon cell phone owner.
Also, the converged product as you talk about is yet to be contrived, commercialized, dumbed out and made affordable for the good ol’ corn farmer from Nebraska’s heartland.
So, I think it may be one of those top hanging fruits that Dell might want to leave alone for sometime. It’s not in it’s DNA.
Regards,
Pradhip.S
PS: Realtosh, The potential sales numbers in the smart phone business even if I take the most optimistic forecast for the next five years is not anything that is going to interest DELL. Phones are not Dell’s competency and will not stir it unless it starts becoming the computing device of choice.
PS PS : No offense to Nebraska. I am from Nebraska and love this place. All that I am saying is to test your product just try selling one to my neighbour.