Sunday, February 10, 2013

Dell Looks At Its Consumer and Small Business Segment

To start, Southeastern Asset Management's letter concludes that a $13.65 per share buyout price for Dell values the bulk of its businesses, including Software and Peripherals, Client, and Services at $1.00 per share.  Without suggesting that this number is sacred, the founders and analysts at SAM don't throw around numbers without any foundation.

On January 8, 2013, Phil Bryant, who is VP and GM of Dell's North American Consumer and Small Business organizations gave an interview at the J.P. Morgan Tech Summit at the Consumer Electronics Show, probably the premier industry venue for these businesses.  To close the loop on a few posts, here are selected bullet points from Mr. Bryant's comments:

  • The Consumer and Small Business segments are focused on mid and high band systems, at $700-$800 price points. 
    • these price points are profitable segments where there is "still a lot of head room overall."
  • Dell's strengths in these businesses and opportunities to increase profits in next 12-18 months
    • to a basic sale, Dell gets high attachment rates for services, software and peripherals.
      • I would add that Dell's customer service organization has become very active monitoring consumer questions and concerns via social media.  Customer service reps identify themselves when they research and answer specific product spec and performance issues, even on their partner sites like Best Buy.  
  • In the small office and professional practice space Dell generates "really good ASPs," and it has a "strong desktop business" with "good share position" and "good profitability," which he will continue to drive. 
  • The tablet business is still evolving, but they have two offerings in the market place.  They are working on additional convertible form factors.  As touch screens continue to penetrate the user bases, notebooks and tablets will converge.  
  • Enterprise solutions services and the software business comprise "well over a third of our revenue and over 50% of our gross margin," according to David Mehok, VP of Investor Relations.  It is something that "a lot of people don't realize."  (Without knowing his definition of terms exactly, it's hard to recreate his number.  However, using the revenue by product charts at the end of the SAM letter, it appears his revenue comment is in the ball park.) The gross margin comment is interesting.
    • These businesses have gained "significant share over the last few quarters."
  • Comments about "Bring Your Own Device," or 'consumerization' of IT.
    • As this trend continues, security is the key concern for enterprise IT executives.  Dell's security acquisitions are playing a key role in their solutions offering.
      • Quest for identity and access management.
      • SonicWall for firewall and Virtual Private Networks.  
      • Credant, acquired about a month before, is already being incorporated into Latitude product lines for endpoint security.  
  • Server Business
    • Great penetration from 12th generation servers. 
    • Networking business grew 40% y-o-y in the last quarter.
    • Strong services businesses despite some margin pressure on the hardware side. 
  • Lots of opportunity to reduce general and administrative expenses.
  • Some will be reinvested in raising research and development above the current 2% of revenues.
  • About the relevance of the PC/Computing Device business from David Mehok: "you always lead a corporate sale with PCs."  He is a sixteen year veteran of Dell.  
Do all these businesses taken together, with these trends, sound like a portfolio worth $1.00 per share?  Does being public preclude investing in research and cutting expenses?  I don't think so. 

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