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.