Dell Needs To Up The Ante On Its Tablet Strategy

HP this week reported weak sales in its consumer PC business. Rival Dell also saw consumer sales decline slightly. However, according to IDC, Dell had solid growth in emerging markets that helped it to grow at 4.2%, a rate slightly above the market, and regain the No. 2 position in total PC shipments. The consumer PC market has been affected by the iPad and the numerous tablets being launched by other PC vendors. Consumers are stalling in their decisions to buy new desktops or laptops as tablets compete for their attention. Let’s take a closer look.

Dell’s Financials
Dell (Nasdaq:DELL) last week reported delivered strong fourth-quarter results amid strong enterprise and SMB demand. Fourth-quarter revenue was $15.7 billion, up 5%. Net income was $927 million or $0.48 per share compared to $334 million or $0.17 per share last year. Dell ended the quarter with $15 billion in cash and investments. For the full year, revenue was up 16% to $61.5 billion and net income was up 84% to $2.63 billion or $1.35.

The company reported fourth-quarter earnings of $927 million, or 48 cents a share, on revenue of $15.7 billion. Non-GAAP earnings were 53 cents a share, well ahead of the 37 cents a share Wall Street expected.

Revenue increased in all regions: Asia Pacific/Japan grew 17%, the Americas 3%, EMEA 3%, and BRIC 21%. Revenue for enterprise solutions and services grew 7 % to $4.6 billion in the quarter. Storage revenue declined 4%. EqualLogic sales grew 49% and, combined with Dell PowerVault sales, accounted for almost two-thirds of the company’s storage revenue. Server revenue increased 16%.

Revenue for the combined Large Enterprise, Public and SMB businesses was up 9 % to $12.4 billion in the quarter, with revenue for commercial laptop and desktop computers growing 10%.

In the Consumer business, revenue was $3.3 billion and up 11% sequentially, driven by the holiday season, and down 8% versus the previous year after last year’s launch of Windows 7.

For its fiscal 2012, Dell expects revenue growth of 5% to 9% and non-GAAP operating income growth of 6% to 12%. In its first quarter of fiscal 2012, Dell expects normal seasonal declines in its consumer and public businesses and, as such, a slight sequential decline in revenue. The stock is trading around $15.05 with market cap of $29 billion. It hit a 52-week high of $17.52 on April 23 and a 52-week low of $11.34 on August 24.

Recent Acquisitions
Dell recently completed the acquisition of Compellent, a data storage company, for $960 million. It also acquired SecureWorks Inc., a provider of information security services; Boomi, which offers a Software-as-a-Service platform to ease data exchange between cloud-based and on-premise applications; and Insite One, a leader in cloud-based medical archiving solutions, for undislosed amounts.

Dell’s Tablet and Smartphone Strategy
There is no denying the fact that tablets, especially iPads, are affecting the sales of desktops and laptops. After releasing the 5-inch Streak based on Android last year, this year Dell has released a 7-inch tablet called Streak 7. It has also announced a 10-inch tablet based on Windows 7. This new touchscreen tablet will also be available on the Android Honeycomb OS.

Dell has also introduced two smartphones, Venue and Venue Pro, which are 4.1-inch products based on Android and Windows Mobile 7. Aero, released in August, was Dell’s first smartphone in the U.S. market, but it didn’t quite hit it off.

As the market is being flooded with tablets and smartphones based on Android OS, there is a need to differentiate. HP has now come up with WebOS and Nokia recently announced Windows 7 as its main OS, making it imperative that Dell consider having its own OS. I earlier suggested that it should acquire RIM and its BlackBerry OS. However, CEO Michael Dell on the earnings call said that the company is not considering any options apart from Android Honeycomb and Windows 7:

“For tablets, it’s just as I said, it’s Android Honeycomb and Windows, and we have customers who have a preference for either one. It’s very easy for us to create platforms that share great deal of hardware commonality that can run both [indiscernible] operating system. And we’re presently not considering any other options. [We d]on’t really see any other viable options that are worthy of consideration.”

Perhaps Dell’s differentiating factor could be creating products that can run on any OS. But I sense that the market is integrating vertically, and it would be difficult for Dell to compete with Motorola on Android phones and with Nokia on the Windows phone. Both have much greater knowledge and experience in the phone industry.

And this is why RIM would have been a good company for Dell to align with.