Dell Needs A Growth Market

As the global recession continues to affect the sales of computers, leading computer manufacturer Dell (Nasdaq: DELL) with annual revenue of $61.1 billion yesterday reported 63% dip in its first quarter profit with PC sales declining 34%. Let us take a closer look.

Q1 revenue was down 23% to $12.34 billion missing analyst estimate of $12.7 billion. Net income was down 63% to $290 million or $0.15 per share. Excluding charges, EPS was $0.24 beating analyst estimate of $0.23.

However, the bright side in its performance is its cost reduction efforts and improved gross margins. It has reduced its operating expenses by 15% and its gross margin has improved to 17.6%. It has reduced the average cost per unit by 10% and about 30% of its volume is now via contract manufacturers. It generated $761 million cash and ended the quarter with $10.7 billion in cash and investments.

By product, mobility units were down 5% and revenue was down 20% while Desktop revenue declined 34% on 26% decline in units. Server revenue was down 25% on a 28% decline in units. Storage revenue was down 17% but Equal Logic revenue was up 71%. Enhanced services revenue declined 8% to $1.2 billion. Software and peripherals revenue declined 18%.

By business unit, Large Enterprise revenue was down 31% to $3.4 billion. Public revenue was down 11% to $3.2 billion. Small and Medium Business revenue was $3.0 billion, down 30% with soft sales in Americas and EMEA. Dell has also started offering cloud-computing services for monitoring and managing IT networks to small and medium businesses in addition to enterprises.  The only bright spot is perhaps Consumer business revenue that was down 16% to $2.8 billion but with units up 12% as it has expanded the number of retail outlets to 30,000.

By region, Americas revenue was down 21%, EMEA was down 29% and APJ was down 20%. Revenue from BRIC countries was down 21%  with China showing very mild decline. BRIC accounted for about 9% of revenue while U.S. accounted for 52% of total revenue. Dell aims to become the top PC vendor in Asia within the next three years; it has about 7.6% market share behind Lenovo’s 14.6% and HP’s 14.1%. One way to do this would be by acquiring Acer which is also looking at expanding into smartphones. 

However, I would prefer Palm, which is expected to launch the much anticipated Pre in the first week of June. Dell is not as diversified as perhaps HP, IBM , or Apple and should look toward acquisitions to fill this gap. I had earlier suggested a union with Palm which would help it tap into the smartphone and convergence device trend. Dell is currently trading around $11 with market cap of about $22 billion. It hit a 52-week low of $7.84 on February 20. Palm (Nasdaq: PALM) is trading around $11 after hitting a 52-week high of $12.7 on May 18 and has a market cap of about $1.5 billion.

The Palm Pre is widely awaited in anticipation of its June 6 release, although Apple dominates the category with 40M devices sold in 2 years, and a very robust development platform with 40,000 applications and 1 billion downloads in 10 months. There is no question that smartphone is the growth market, and Dell needs to line up its ducks to get into that game. It’s current modus operandi is just not working. It’s not that Palm has all the answers, but to compete with Apple, HP, Lenovo, and others, it needs to enter a market that has inherent growth and margins. Palm may give them the beginning of that story. And Palm, on its own, is not equipped to take these players on either, so they need the umbrella of a larger partner like Dell.