Hold on to Dell
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The world’s third largest PC manufacturer, Dell (NASDAQ: DELL), came out with its fiscal 2013 second quarter earnings very recently and the results again fell short of the expectations. The PC maker reported a disappointing double digit drop in the bottom line and even the top line growth was in the red. The company is facing intense competition from all angles and is attempting to manage them through restructuring and repositioning itself. Let’s take a quick look at what Dell is up to.
Performance this quarter: The cause and the effect
In this second quarter, the PC giant delivered a top line of $14.5 billion, reflecting a 8% decline from the prior year period, lower by $200 million than what the analysts had been expecting. However, the figure was up sequentially from the $14.4 billion in the first quarter of fiscal 2013. While the top line suffered a single digit fall, on a GAAP basis the bottom line plunged 18% year on year to $732 million. But, on a non-GAAP basis, the decline in net income was comparatively lower at 13%.
In consistency with Dell’s strategy, the company saw impressive growth of 14% in its services and networking business, making it the show stealer this quarter. The Enterprise solution and services segment also displayed decent growth as the figure surged 6% and went ahead to contribute 34% to the top line. On a negative note, the consumer revenue for Dell fell by almost 22% mainly driven down by the 26% fall in laptop sales and 9% decline in desktop sales, while the Public revenue was down 6% and the Large Enterprise revenue was down 3%.
Lower than expected sales as a result of demand softness coupled with a dim economic outlook and pricing pressure in emerging markets and Western Europe were responsible for the relatively disappointing performance of Dell in the second quarter. For quite some time now the PC business of Dell has been suffering from declining sales numbers and in this quarter that was aggravated by the announcement of the launch of Windows 8 platform from Microsoft (NASDAQ: MSFT). In anticipation of the new platform, consumers are holding out from making new purchases. Even Microsoft’s Windows 8 Upgrade offer failed to make the consumers think otherwise.
But again, it’s not just the choice of Windows that kept the consumers away from buying new PCs. The demand for personal computers are actually shrinking with each passing day as more and more users are actively shifting to tablets from manufacturers such as Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), Samsung, Amazon and now even Microsoft’s own Surface will be posing as a threat to traditional PCs. Dell has also been battling with Apple, HP, Lenovo and Samsung for years now. In the laptop and the tablet space where Apple tasted ridiculous success, Dell was left way behind with its equally expensive range of laptops and not so popular Streak offerings.
So now, Dell has decided to pick up from where it started lagging and now will be working on the Microsoft based ARM devices along with Lenovo and Samsung as understood from a recent announcement by Microsoft. With time, tablets are becoming more and more like full blown computers and are eating into the market share of PCs. Samsung’s Android powered Galaxy Note 10.1 is just another example of the superior computing capabilities of today’s tablets. Initially, tablets were pure consumption devices unlike the PCs. But now, with Note 10.1, tablets have moved to the other side of the border line. With the 'S Pen' the Note tablet will also act as a creation device and the industry experts and analysts are considering this master-piece to be 'The' device for designers and students.
What else is going on?
The shrinking growth of the PC market has forced the Round Rock based IT giant to diversify. The company is looking beyond its traditional product offerings and now is focusing more on high-margin enterprise solutions. With a focus on developing its cloud-based solutions and security and software solutions, Dell is going about growing through acquisitions. Year till date, Dell has announced six acquisitions out of which five have already been closed. The company recently acquired Wyse Technology, a global leader in cloud computing and this move made Dell the leader in Thin Clients with more than 180 patents under its belt. In addition to this Dell also acquired SonicWALL, a leader in unified threat management and next-generation firewalls, but is yet to close the $2.4 billion deal with Quest Software which can be expected to materialize in the second half of the third quarter. The management is pretty excited about the Quest deal as they feel this will be a great addition to their software segment and they also expect it to generate almost $250 million in operating income by the year end.
Concluding thoughts
Dell’s management is on its toes to turn around the situation for the company. They are amidst a transformation effort which will take a long time to complete. The management is pretty optimistic about the long-term future of the business as the company diversifies and takes a more service-oriented structure with a vision to become an end-to-end IT provider. The strategy adopted by Dell looks to be a logical one and the recent success in the enterprise solution and service segment has resulted in increased faith and added motivation to the efforts being made at Dell Inc.
However, in the short term, this PC maker isn’t looking good. In the coming third quarter the management again expects to report a 2% to 5% sequential fall in the top line because of the grim economic outlook and dynamic nature of the highly competitive market space where it functions. Given time, maybe Dell will turn the wheel of fortune in its favor, but right now the situation is not looking very nice and the company is not going to be able to improve its health in the immediate future.
There are two forces which are influencing Dell's performance. The traditional product offerings of the company are pulling down the profits while the new business focus segments such as the enterprise solution and services segment is pushing up the bottom line. Dell needs time to counter the negative pull by strengthening the new business focus. So, the best option for a Dell investor is to forget immediate profits and hold on to dell over the long run and then he will have high chances to benefit from the stock and not regret his move.
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