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What Happens to Dell Now?

Posted on Wednesday, Sep 5th 2012

A recent IDC report estimates that worldwide PC market will grow a mere 0.9% this year to 367 million units. This is the second consecutive year of poor growth, and it is attributed to the slowing down of emerging markets and volume declines in mature markets. IDC research suggests that consumers are waiting to evaluate the performance of Windows 8 and Ultrabook products and are thus delaying their PC purchases. Rising tablet sales are also hurting PC shipments. During the second quarter of this year, the number of tablets sold worldwide grew 66% over the year to 25 million units. IDC projects the PC market to grow at 7% annually over the period 2013-2016, compared with 8.4% projected earlier.

Dell’s Financials
Slow PC sales aren’t helping Dell (NASDAQ:Dell). The company’s stock has fallen nearly 30% so far this year, and last week it touched a three-year low. Management believes that performance will improve soon as Dell re-engineers itself from a personal computer and server manufacturer to a provider of a “full suite of software and services.”

Q2 revenues fell 8% over the year to $14.5 billion, missing the Street’s target of $14.6 billion. EPS of $0.50 was, however, better than the market’s projected earnings of $0.45.

By market segment, Dell saw revenue declines across all markets. Consumer revenues fell 22% over the year but remained the company’s largest business segment, bringing in revenues of $2.6 billion. Large enterprise revenues fell 3% over the year to $4.5 billion. Public segment revenues also fell 6% over the year to $4.1 billion, and SMB revenues fell 1% to $3.3 billion.

For the current quarter, Dell projects revenues of $14 billion, missing the Street’s targeted revenues of $15 billion. Dell expects to end the current year with EPS of $1.70, missing the market’s projections of $1.91.

Dell’s Product Launches
Dell is counting on product launches to help spur market growth. Last week it released a new XPS dockable Windows tablet and convertible ultrabook. XPS10 is a ten-inch tablet that operates on Windows RT and is powered by the ARM processor. It is priced lower than the company’s other XPS tablets that run on Windows 8. XPS 12 is an ultrabook with a screen-flipping design that enables it to become a touch screen–enabled tablet as well. The ultrabook boasts of high-end materials including an aluminum and carbon fiber chassis and a Corning Gorilla Glass 12.5-inch display.

Dell’s Acquisitions
As part of its focus on software, Dell recently acquired Quest Software for $2.67 billion. California-based Quest Software is a provider of enterprise software and has revenues of more than $855 million. The company’s software helps organizations manage databases and offers back-up solutions. Dell was particularly interested in Quest’s application monitoring software and the identity access software that lets users log in to multiple applications using a single log-in ID. Dell plans to leverage Quest’s portfolio to complement its offerings. For instance, the Quest One Identity and Access Management solution will integrate well with Dell’s security assets. Earlier this year, Dell had acquired Secureworks and SonicWALL to enhance its enterprise security solution offerings.

But these moves aren’t helping the stock. It is trading at close to three-year low levels of $10.56, with a market capitalization of $18.32 billion. It touched a 52-week high of $18.36 in February 2012.

Analysts believe that for Dell to return to its former glory, it may need to make some big acquisitions. Many are pointing to BlackBerry manufacturer Research in Motion, a move I had suggested a few years ago. RIM continues to deliver weak performances as it struggles to compete with the onslaught of Android-based smartphones and the iPhone. If Dell were to acquire RIM, it would be able to make inroads into the smartphone market and address the enterprise mobile device segment. Dell ended the last quarter with a cash balance of $14.6 billion and can afford the $3.45 billion market capitalization of RIM. However, the RIM business has also declined since I first recommended this acquisition. So today, there is possibly a strong case to be made to acquire RIM for its channel and market share, but within the next couple of years, move the business to either Windows or Android.

Whatever it is, something bold and dramatic needs to happen at Dell in short order.

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