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Dell Could Use a Mark Hurd

Posted on Friday, Feb 29th 2008

Yesterday, Dell posted its financial results for Q4 and fiscal year 2008 that ended February 1, 2008. Earlier coverage is available here and here. In my last post on Dell, I had said that its turnaround wasn’t going so badly, but that I would like to see a smartphone strategy. A smartphone isn’t on the horizon yet. Let us see how it fared this quarter.

Revenue for the quarter grew 10% y-o-y and 2.5% q-o-q to $16 billion while operating income slumped 6% y-o-y and 6.4% q-o-q to $776 million. EPS also declined 3% y-o-y and 9% q-o-q to $0.31 due to a number of charges including $83 million in expense, or $0.04 a share related to the acquisition of EqualLogic and Everdream and $54 million, or $0.02 a share for business realignment. Its shares slid on the news that it missed Street estimates of $0.36 EPS on revenue of $16.27 billion. On the brighter side, it was the first time in 3 years that Dell had a double-digit growth in a quarter. It also resumed its share repurchase program spending $4 billion in the quarter to repurchase 179 million shares of common stock.

For the full fiscal year 2008, Dell saw revenue grow 6% to $61.1 billion and operating income grow 12% to $3.4 billion. EPS grew 15% to $1.31 per share.

In the past 8 months, Dell has reduced headcount by 3200, by reducing non-front-line heads by 5300 and recruiting 2100 in sales, service, and support. It was supposed to shed 8,800 jobs, and Wall Street isn’t pleased.

Dell has, however, systematically diversified out of its once market-leading direct-to-consumer strategy. Apart from strategic partnerships with Best Buy in the U.S., Dell has also partnered with Tesco and Dixon’s Stores (DSGi) in the U.K. and Carrefour in France. Dell is now in over 10,000 retail stores worldwide and the retail business is on a $1 billion revenue run-rate with 1 million units sold worldwide. This is a good step forward.

In the quarter, it launched Inspiron 1525 which halved the concept-to-manufacturing cycle time while also saving $70 per unit. Other new products include Dell PowerEdge M-Series blade server solution with 28% better performance per-watt than competitive solutions; Dell EqualLogic PS5000 Series, an iSCSI SAN array to serve as the backbone for data center storage and virtualization; and the new XPS M1530 and Latitude XT, one of the thinnest and lightest 12.1-inch convertible tablets. For SMBs, it launched the Dell AX4-5, an entry-level storage area network (SAN) solution. Dell’s VMWare partnership also looks comprehensive.

Emerging Markets, assessed as a $64 Billion opportunity, is rightly a strong focus area. Dell expanded its direct model into the BRIC countries and revenues were up 36% on a 50% increase in units. These countries represent 8% of total revenues on a $5.1 billion run-rate.

Small Medium Businesses (SMB), pegged as a $100 Billion global opportunity, is also a strong focus area through 10,000 global channel partners, and generated $10 Billion in revenue.

In Q1 fiscal 2009, Dell expects to spend at least $1 billion to repurchase its shares. It also expects to continue to incur realignment costs. Conservative spending by its customers is also expected to affect its future results. It is currently trading around $20.5 after hitting a 52-week low of $18.87 on January 23. Its market cap is around $46 billion.

Turnarounds, as we know, are difficult business. Things get worse before they get better, as the company works through realigning its headcount, cost-structure, business processes, etc. to fit the contemporary market conditions. At the moment, things are in that “getting worse” phase.

One final question begs to be raised: Does Dell need a turnaround CEO a la Mark Hurd who has done a splendid job at HP?

Chart for Dell Inc. (DELL)

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