Can Dell Turn It Around?

Michael Dell, CEO and founder of Dell, sold investors the promise of a "turnaround", but he hasn't delivered so far.

Dell recently announced their earnings for the first quarter of the fiscal year 2013 and the reaction from investors was almost universally negative.

Michael Dell, CEO of Dell, has attempted to orchestrate a transition that would transition the company away from consumer technology and into the enterprise-focused company, but clearly this is still a work in progress.

The most surprising facet of $DELL ‘s recent earnings report was the relatively stagnant growth on the top line.  Revenue for Q1 2013 totaled $14.4B, which is actually a 4% decline from the previous year.

Even though the consumer side of the business slowed down, the enterprise picture wasn’t much better.  Dell’s Enterprise and Solutions group, the crowned jewel and cornerstone to Dell’s turnaround efforts, only grew revenues by a paltry 4% year-over-year.

Dell's lack of top line growth caught investors by surprise and sent shares in a freefall.

When a company misses expectations by such a wide margin, investors usually head for the exits and this situation was no different.  Following their bad earnings report, Dell shares declined 13% as investors reacted to the poor earnings report.

When I look at Dell’s earnings report from an analyst perspective, I really don’t see an enterprise turnaround story at all.  If anything, I see an ultra-conservative company who is more focused on managing their stock buybacks and reacting to other competitors in the market.

A good example of $DELL ‘s ultra conservative approach is their failed execution in the mobile computing market.  The company has billions of dollars of cash and is supposedly focused on consumer technology trends, yet the company completely dropped the ball on the smartphone and tablet market.

When you’re a major consumer technology company and you miss the boat on one of the fastest-growing computing trends in history,  it’s certainly a tough pill to swallow.

Even Dell’s CFO admitted some missteps following their Q1 results:

“It was mixed in terms of our results. Revenue was clearly below what was expected, and there are areas where we’d like to see better execution on our side”

-Brian Gladden, CFO, Dell

Clearly Dell missed the mark on this quarter and did not execute, but the company’s biggest problem is their lack of risk taking.  Compared to a company like Apple who isn’t afraid to take risks and make big bets,  Dell is the complete opposite.

The company’s conservative-decision making process is what’s really bogging down the company.

Elite hockey players have to vision to skate where the puck is going, not where the puck is at – and right now $DELL is definitely following where the puck is at.

If Dell really wants to transform their company from a legacy PC player to a true enterprise powerhouse, bold and corrective actions need to take place.

Divest out of the PC Industry Completely

All products eventually reach a “mature” stage in their lifestyle when competition is heavy, demand stagnates, and margins get crushed as a result.  The PC sector used to be a high-margin industry with limited competition, but those days are now in the past.  An array of different manufacturers now offer a variety of high-value desktop and notebook models.

Dell’s “customize your PC” approach is no longer resonating with consumers as Apple now reigns supreme in that market.  So what is Dell left with?  A low-margin, high-revenue business that continues to stagnate in the face of tough competition.  Lets face it:  the PC is now fully commoditized.

Average selling prices for PCs continue to drop and growth is on the decline. Mobile trends, lower costs, and increased competition are resulting in lower average-selling prices for PCs.

It’s understandable that Dell doesn’t want to cut the cord on their PC business given their cozy (and lucrative) relationship with Microsoft and Intel, but you have to know when to cut the cord.

IBM ($IBM), one of the top companies in the technology world, was faced with a similar tough decision in 2005 and they did just that:  cut the cord.  Even though IBM’s PC division was generating over $9B in annual revenues in 2003, they sold the entire division to China-based Lenovo in 2004 for roughly $1.75B.

So how did the transaction work out for all parties involved?

In 2011  Lenovo generated revenues of $21.6B and $IBM stock is up 101.7% (excluding dividends) since divesting from the PC sector.

Is it time for Dell to consider a similar move?  Absolutely.  If they truly want to evolve and become enterprise focused company, they need to exit this low margin business entirely.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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