Dell Sees Positives Despite Losses Ahead Of Buyout

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Dell posts another poor set of financials, but points to encouraging rises in its networking and server sales

Dell’s latest financials highlight the ongoing problems caused by the contracting PC market.

However the company is beginning to show gains in its efforts to become more of an enterprise solutions provider. Dell executives hope this transformation will accelerate with their $24.4 billion (£15.8bn) plan to take the company private.

Some Positives

The world’s third-largest PC maker saw revenues fall 11 percent in the company’s fiscal fourth quarter – to $14.1 billion (£9.1bn) over the same period in 2011. Profits during the three months also declined 31 percent, to $530 million (£343m).

However, the revenues numbers still exceeded analyst estimates, and while some business units showed expected decline – desktop PC revenues fell 14 percent, mobility revenues, including notebooks, declined 25 percent, and the consumer business saw revenues drop by 24 percent – there were notable gains in areas that Dell is actively courting.

In particular, Dell’s server and networking sales ramped up 18 percent over the same period in 2011, hitting $2.62 billion (£1.7bn), the company said 19 February. Revenues connected to Dell’s Force10 Network business – the company bought Force10 in 2011 – grew 100 percent, according to Brian Gladden, Dell’s senior vice president and chief financial officer.

Individually, server revenue grew 5 percent, and the company’s 12th-generation PowerEdge servers now account for 80 percent of all PowerEdge systems being sold. Gladden said the company is seeing particular strength in hyperscale data centre environments. Dell’s networking business saw sales rise 42 percent, and the company’s Quest software unit exceeded its revenue target of $180 million ($116m) to $200 million (£129.5m).

All of this is encomichael-delluraging news for executives at Dell – including founder and CEO Michael Dell – who have invested more than $12 billion (£7.8bn) in buying almost 20 companies in their effort to reduce transform the company into an end-to-end enterprise IT solutions provider, spanning servers, storage, networking, software and services.

Company Transformation

Dell has been pushing the transformation since Michael Dell returned to the CEO seat in 2007. With the PC market continue to slump, Dell and other tech vendors with tight ties to that space – including Intel, Advanced Micro Devices and Hewlett-Packard – are looking for ways to expand into growth areas and reduce their dependency on PCs.

For Dell, the new focus on enterprise IT solutions will enable it to sell products with much higher margins, and the company will be able to leverage PCs as an avenue into enterprises, where it can grow its solutions revenues. However, it also puts them in even tighter competition with the likes of HP, IBM and Cisco Systems, off of which also have greater data centre aspirations, and many – like IBM – have a significant head start.

“The PC is adopting supporting role for Dell but remains the cornerstone of the company’s relationships with its channel and customers,” Krista Macomber, an analyst with Technology Business Research, said in a 19 February research note. “Dell needs to continue to deliver PCs to its partners and customers, building on these relationships to grow its solutions business, but does not need to grow its PC business faster than the market. The company can and will tolerate negative growth in PCs as long as it is preserving its position in SMB and enterprise workspaces.”

Shareholder Rebellion

Dell executives are hoping that taking the company private will enable them to accelerate their efforts to remake the company, allowing them to make strategic moves away from the glare of Wall Street and the pressure of having to hit quarterly financial numbers.

The company 5 February announced a $24.4 billion (£15.8bn) leveraged buyout plan that would have Michael Dell and equity firm Silver Lake Partners – with help from other parties, including Microsoft – buying the company in a leveraged buyout. The deal would pay investors $13.65 (£8.84) per share, a 25 percent premium over the share price a month ago.

However, Dell is getting some pushback from large investors, including Southeastern Management and T. Rowe Price, the top two holders of Dell’s outstanding stock. Officials with both companies – as well as some with smaller investors – say the price tag for the company is too low, and that they will vote against the deal unless price-per-share is increased. Southeastern Management officials have gone so far as to say they would consider a staging a proxy fight to keep the deal from going through.

Despite the decline in revenues and net income for the last quarter, those numbers could give shareholders more ammunition for their demands. If such special charges, such as those related to acquisitions, are taken out of the equation, Dell reportedly made $702 million (£454m) during the quarter, more than analysts had expected.

During the 30-minute conference call with analysts and journalists to discuss the quarterly numbers, Gladden didn’t talk much about the proposed buyout, and Michael Dell was not on the call, as he usually is. During a question-and-answer period, analysts kept away from the subject, but it was a focus of many of them afterward.

“Privatisation will enable Dell to align all of its assets around its end-to-end solutions strategy, as it will allow Dell to act strategically on a longer time horizon than the current quarter without the scrutiny of Wall Street,” Technology Business Research’s Macomber wrote. “As a relative newcomer to the enterprise and in delivering end-to-end solutions, Dell faces more work in its journey.

“Dell’s continued evolution into a provider of end-to-end IT infrastructure is a long-term endeavour that requires heavy investment in R&D and acquisitions, calculated alterations to its go-to-market approach, and corporate revenue pressures in the form of declining PC scale – as demonstrated by the company’s 4Q12 financial performance and impending privatisation.”

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Originally published on eWeek.

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