Still No Smartphone Strategy From Dell

Computer manufacturer Dell (NASDAQ:DELL) recently reported a better-than-expected second quarter as IT spending levels showed signs of stabilizing. During the quarter, the company reclaimed its top spot from HP in the US PC market. However, Dell has not been making adequate progress on its smartphone strategy. Let’s take a closer look.

Dell recently unveiled a touchscreen-based cell phone that works on 2G networks in China. But its foray into the cell phone market has been disappointing, as I would have expected a convergence device rather than just a phone from the United States’s leading computer manufacturer. I have been arguing for a Palm-Dell union for quite some time, as I believe that such a move will improve Dell’s smartphone and convergence device strategy. Palm’s current market cap is $1.87 billion, and Dell could do an all-cash acquisition. Half-baked attempts are hardly convincing.

Dell says that it wants to focus on higher-margin enterprise products such as servers. The company holds the No.3 spot in the server market with an 11% market share, behind HP and IBM, each with a 29.3% share.

According to Gartner, after losing the No. 1 spot to HP in Q109, Dell again took the lead in the US PC market through aggressive pricing measures. HP is just 0.3% behind Dell in the US market.

On August 27 Dell with annual revenue of $61.1 billion, reported a better-than-expected second quarter for fiscal 2010. Q2 revenue was down 22% y-o-y and up 3.7% q-o-q to $12.8 billion on a 10% q-o-q increase in shipments as IT spending stabilized. Net income was $474 million or $0.31 per share compared to $616 million or $0.31 per share last year. Analysts expected earnings of $0.23 on revenue of $12.6 billion.

Gross margin continued to improve to reach 18.7% from 17.6% last quarter due to improvement in the cost of goods sold, disciplined pricing, and a better product mix. Dell reduced its operating expenses by 14% to 13.5% of revenue. Cash flow from operations was $1.1 billion, and Dell ended the quarter with $12.7 billion in cash and investments. Approximately 40% of Dell’s volume is via contract manufacturing; this figure is expected to grow as the company aims to save $4 billion per year.

By business unit, Large Enterprise revenue was down 32% y-o-y and 3% q-o-q to $3.3 billion. Public revenue was down 16% y-o-y and up 20% q-o-q to $3.8 billion driven by the education segment. Small and Medium Business revenue was down 29% to $2.8 billion. Consumer Business revenue was down 9% y-o-y and up 2% q-o-q to $2.9 billion with units up 17% y-o-y and the store count rising to 43,000.

By region, the Americas revenue was down 19%, EMEA was down 33% and APJ was down 21%. Revenue from BRIC countries was down 17%, with China and Brazil better sequentially. BRIC accounted for about 10% of total revenue and the US 55%.

By product, mobility units were down 1% and revenue was down 21%. Dell recently discontinued its 12-inch netbook, Mini. The Mini netbook is available in a 10-inch size for $199 including a $100 rebate in combination with a two-year contract with Qwest. While the Desktop market has been on a decline, netbooks are a sweet spot for growth. As per iSuppli, netbooks are expected to reach 17.8 million units in 2009 and 36.3 million units by 2012.

On the other hand, Dell’s Desktop revenue declined 33% on 23% decline in units. Server revenue was down 19% on a 23% decline in units. Storage revenue was down 20% but Equal Logic revenue was up 42%. Enhanced Services revenue declined 11% to $1.2 billion. Software and Peripherals revenue declined 15%.

Dell expects a strong replacement cycle over the course of 2010, dominated by a new powerful new product cycle led by the release of Microsoft’s Windows 7 and the Nehalem processor family from Intel.

The stock is currently trading around $15.83 with market cap of about $31 billion. It hit a 52-week high of $21.98 on September 2 of last year. AmTech Research recently upgraded the stock from Neutral to Buy.