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WIKI ANALYSIS
Dell (NASDAQ: DELL) is a global vendor of personal computers and is one of the largest companies in America, employing over 65,000 people and earning revenues of $61.1 billion in FY 2009. In addition to both desktop and notebook PCs, Dell sells peripherals, software, accessories, corporate servers and storage systems, and customer support services.[1]
Traditionally, Dell had been concentrated in the domestic PC market. However by FY09 48% of the revenue was from outside the U.S.. The international market (outside the U.S.) actually saw a growth of 4% in revenue growth while there was a 3% decline in revenue for the U.S.. The decline in the U.S. revenue has been attributed to the downturn in the global economy that affected their commercial business. [2]
Beginning in 2007, Dell began forming partnerships with large retailers across the U.S., Europe and Asia. Notable among these are Wal-Mart Stores, Best Buy (BBY), Costco Wholesale (COST), and Suning and Gome, China's largest electronics store. These partnerships represent a drastic departure from Dell's previous strategy which purposely excluded any relationships with retailers. As a result, in addition to its traditional mail order distribution system, Dell now has nearly 13,000 retail locations worldwide.[3] Throughout 2008, international sales continued growing and accounted for approximately half of Dell's revenues.[4]
As corporations upgrade their computer systems to meet the compatibility requirements of Microsoft’s Windows Vista operating system, Dell’s higher-margin commercial business stands to benefit from increased demand. Dell is also responding to somewhat unimpressive PC sales growth by expanding their offerings of non-PC electronics and increasing their presence in developing countries such as India and China.
Business Financials
Dell offers a variety of products and services. Among its offerings are a wide array of desktop and notebook computers, peripherals and software, technical support services, and corporate servers and storage systems. In addition, Dell’s subsidiary Alienware offers desktops, notebooks, and peripherals specialized for high-end video and audio editing and gaming.
- PCs (60% of revenue)
Dell produces several lines of consumer and commercial PC systems, including both desktop and notebook models. Overall, Dell holds about 14% of the worldwide PC market. Within the PC segment, desktops contributed 32% of Dell’s Fiscal 2008 revenue, and notebooks accounted for 28%.[5]
- Software, Peripherals, and Accessories (16% of revenue)
Dell sells various software programs with its PC systems, such as productivity software, security programs, and games. Dell also sells a number of computer-related peripherals, including LCD monitors, printers, input and storage devices, etc. Aside from PC-related items, Dell sells various accessories and electronic devices, such as LCD televisions, digital cameras, and MP3 players. These software and peripherals accounted for 16% of Dell’s Fiscal 2008 revenue.[6]
- Servers and Storage (15% of revenue)
For its corporate customers, Dell provides both servers and storage systems. Dell continues to aggressively pursue this market, bringing 9 new enterprise servers to corporate consumers in January of 2008. Dell also sells customized servers and enterprise systems designed to meet the specific needs of certain customers. Servers and storage accounted for 15% of Dell's Fiscal 2008 revenue.[7]
- Technical Support and Services (9% of revenue)
Dell also sells technical support services for its products, providing customers with assistance after they purchase their systems. Typically, services such as these provide high margins relative to Dell’s other business segments. Typically, services such as these provide high margins relative to Dell's other business segments. Though services accounted for only 9% of total sales, they contributed around 35% to Dell's 2006 gross profits Services accounted for 9% of total revenue for the Fiscal year 2008.[8]
In Fiscal 2008, revenue increased 6% year-over-year to $61.1 billion, with unit shipments up 5% year-over-year. Revenue grew across all regions: Asia Pacific-Japan (“APJ”) grew 15%; Europe, Middle East, and Africa (“EMEA”) increased 12%; and the Americas grew 3%.[10] Revenue outside the U.S. represented approximately 47% of Fiscal 2008 net revenue, compared to approximately 44% in the prior year. Outside the U.S., Dell produced 14% year-over-year revenue growth for Fiscal 2008, though unit growth was below the overall unit growth rate of the international PC market.[11]
Financials
Dell's net income dropped 48 percent for the fourth quarter as it also announced it is increasing its cost-cutting goal to US$4 billion by the end of fiscal 2011 as it tries to come to terms with the recession.
The company recorded net income of $351 million for the fourth quarter ended Jan. 30, a 48 percent drop from the $679 million it recorded in last year's fourth quarter. Net income per share was $0.18. Revenue fell to $13.4 billion, a 16 percent drop from a year ago, and short of analyst estimates of $14.2 billion.
The company now aims to reduce costs by $4 billion by the end of fiscal 2011, through compensation reduction, staff cuts, restructuring its product design and distribution, and realigning its manufacturing strategy by shutting down factories.[14]
In its 2nd 2009 quarter, Dell’s revenue decreased 28.7% to $12.7 billion compared to its 2nd 2008 quarter results. This was primarily due to a fall in product sales. Net earnings also took a 30.5% hit, totaling to $472 million in 2009 compared to$616 million in 2008.[15]
Trends and Forces
Upgrade Cycles force companies to replace their computer systems
As technology evolves, companies often upgrade or replace their computer systems to take advantage of new technologies, an occurrence known as the upgrade cycle. Technological innovations can trigger the upgrade cycle and increase demand for Dell’s products, while a lack of new developments can discourage companies from upgrading their computer systems. This cycle occurs primarily in the commercial market, where companies tend to replace all their computers at once. This can significantly impact Dell’s revenues, as 49% of Dell's revenue is to business in the Americas (not including businesses in Europe and Asia).[13]
The release of a product like Microsoft’s Windows Seven operating system could trigger an upgrade cycle in Dell’s commercial segment. As seen with Vista, compatibility issues will occur, encouraging companies to upgrade their systems to take advantage of Seven's new features. This potentially increased demand in the higher-margin commercial segments could positively impact Dell’s total sales.
Dell is expanding its global presence through deals with various retailers
Established in 1984, Dell is a relative newcomer in the computer industry, especially when compared to long-established companies like IBM and HP. As such, Dell still has a lot of room for expansion in certain areas, especially the non-PC segment and international markets. These segments have been showing higher growth potential than the domestic PC market in which Dell has historically been concentrated.
On that note, Dell has shown a major interest in expanding their global exposure. Dell has signed a deal with WalMart Stores (WMT) to sell Dell desktops and notebooks in Brazil and Mexico.[16] Dell has also signed a deal with Gome Group, which is the largest electronics retailer in China.[17] Currently Dell has 24,000 retail stores around the world, with a much bigger reach thanks to its partnerships and collaborations. [18] Furthermore, 85% of the world's population lives in developing markets.[19]
Dell has a variety of non-PC products with room for growth
Within Dell’s portfolio of offerings, non-PC products and services are showing larger growth potential than the company’s PC segment, which currently accounts for 60% of sales. Dell is responding to this increased demand in the non-PC segment, expanding its line of servers, peripherals and accessories, and customer support services. These account for a smaller percentage of Dell’s revenue, leaving room for continued growth. In addition, margins on these goods and services are generally higher, especially for technical support services. The higher profitability and increased demand in the non-PC segment could bolster Dell’s earnings significantly if the company continues to improve its offerings in the segment.
Dell has agreed to acquire EqualLogic, a data networking systems company, for $1.4 billion.[20] This acquisition is an attempt to enhance Dell's offering in data storage, which only accounted for 4% of sales in Fiscal 2008.[21] The main customer demographic is expected to be medium sized companies that cannot afford the more expensive data storage systems.
Outsourcing to increase profit takes power from Dell
The PC market has become intensely competitive, especially in the United States. Dell must keep its prices competitive or risk losing business to competitors, putting pressure on Dell to cut production costs wherever possible. Following industry trends, Dell has begun outsourcing more components to third parties in order to lower its costs of production. Unlike other leading PC manufacturers, such as Hewlett-Packard Company (HPQ) or Apple (AAPL), Dell still assembles its own final products.[22] In order to try and close the resultant gap in production costs, especially for highly demanded notebooks, Dell announced plans in September 2008 to sell its factories worldwide to various contract producers.[23]
The purpose of this outsourcing is to minimize production costs, increasing profit margins and allowing the company to reduce prices. On the other hand, Dell’s increasing reliance on its technology partners can decrease its control over the supply chain as a whole. As more components are outsourced to third parties, Dell loses some of its control over both prices and the overall production process.
A suffering economy results in declining PC sales and a rise in Netbook sales
PC sales and prices are declining. As it stands, IDC already expects PC sales to be down 5.3 pct in 2009 as consumers search for cheaper units in a bad economy.[24] Netbooks are a new type of portable computer, that are cheap, light weight, and easy to use. In Q3 2008, shipments of netbooks grew 160%, overtaking iPhone sales by 900,000 units.[25] [26] Consequently, the sales of netbooks are driving notebook prices down. The average selling price for a portable computer is $1,106, and IDC predicts that this will drop 8% to $1,018 in 2008, and an additional 12% next year, partly because of netbooks.[27] A shift to netbooks would be detrimental to Dell, who only has a 2.8% market share in the shipments of netbooks, as compared to a 32% market share in the combined shipment of netbooks and notebooks.[28]
U.S. Government spending on digitizing health records may secure revenue for Dell
In an effort to counter the fall of personal computers and server sales, Dell will make a strategic acquisition that will allow it to obtain a piece of the U.S. government’s stimulus. As part of the U.S. stimulus, the government is spending $19 billion over the next five years into technology that will digitize medical records.[29] To get a piece of this, Dell will purchase Perot Systems, a provider of technology services with specialty in electronic health records, for $3.9 billion; Perrot services 1,000 hospitals and automates patient records for 200,000 doctors.[30] This will secure revenue for Dell which has had difficulty during the downturn.
Competition
Dell’s competition varies in its different segments. However, its largest competitors overall are Hewlett-Packard, International Business Machines, and Lenovo Group (LNVGY). Hewlett-Packard's recent acquisition of Electronic Data Systems (EDS) will create difficulties for Dell, as previously Dell had an agreement to sell its PCs and other hardware through EDS. Since HPQ will likely be unwilling to market Dell's products through its subsidiary this buyout will cause a loss of sales for Dell.
PCs
Dell is the second-largest vendor of PCs worldwide (barely ahead of Acer) with 8,789 PCs shipped (estimated) in the first quarter of 2009, coming second to Hewlett-Packard who commands an 19.8% market share and shipped 13,305 PCs.[31] Dell’s other significant competitors in the PC market include Lenovo Group (LNVGY), Acer, Toshiba, and Apple.
Dell and Acer finished within 0.1 % points of each other, this close finish is explained by the different business practises followed by the two companies. The weak world economy has hurt Dell's heavy reliance on the professional market for its sales while Acer has increased its numbers because of higher sales numbers for its low priced mobile PCs in Middle East and Africa (EMEA) and the U.S.. Below are the Preliminary Worldwide PC Vendor Unit Shipment Estimates for 1Q09 (Thousands of Units).[31]
| Company | 1Q09 Shipments (thousands of units) |
|---|---|
| HP | 13,305 |
| Dell | 8,789 |
| Acer | 8,758 |
| Lenovo Group (LNVGY) | 4,430 |
| Toshiba | 3,688 |
| Others | 28,239 |
Notebooks
In notebooks, the top nine companies hold about 85.5% of the global market, and the segment has shown strong growth, attributable to sales in developed countries and the proliferation of wireless access.[32] To compete with Apple's many small computing products, in August 2008 Dell began selling a series of Ultra-portable laptops that weigh about 2 pounds and have 19 hours of battery life.[33] Dell also has a major initiative to tackle the designer 13-inch notebook market, specifically through its Adamo notebook, which is an ultraportable and will be marketed as the "world's thinnest laptop" in order to compete with Apple's MacBook Air.[34]
Servers
Dell is a relative newcomer to the server market. In the server market, Dell is behind HP, IBM, and Sun Microsystems, accounting for just 12.3% of revenues in the server market in the first quarter of 2008.[35]Dell’s server offerings are aimed at the low-end market segment, which includes servers that cost less than $25,000. This segment has shown strong growth as quality in the segment increases, resulting in declining demand for high-end servers.
References
- ↑ DELL 2008 10-K pg. 20
- ↑ DELL 2008 10-K pg. 23
- ↑ Dell shares jump on upgrade (07-31-2008). Retrieved on 2009-06-05.
- ↑ Dell Sacrifices Profit for Market Share. Investopedia (09-02-2008). Retrieved on 2009-06-04.
- ↑ DELL Annual Report 2008 - Item 6 - Page 28
- ↑ DELL Annual Report 2008 - Item 6 - Page 28
- ↑ DELL Annual Report 2008 - Item 6 - Page 29
- ↑ DELL Annual Report 2008 - Item 6 - Page 29
- ↑ DELL 2008 10-K pg. 28
- ↑ DELL Annual Report 2008 – Item 7 – Page 23
- ↑ DELL Annual Report 2008 – Item 7 – Page 23
- ↑ DELL 2008 10-K pg. 38
- ↑ 13.0 13.1 DELL 2008 10-K pg. 25
- ↑ http://tech.yahoo.com/news/pcworld/20090226/tc_pcworld/dellrecords48percentdropinnetincome_1 Dell Records 48 Percent Drop in Net Income (PC World) February 26, 2009]
- ↑ DELL 2009 10-Q2 September 03, 2009
- ↑ Dell to Sell PCs in Brazil, Mexico Through Wal-Mart Stores (2007-09-28). Retrieved on 06-28-2009.
- ↑ GOME And Get Your Dell (2007-09-24). Retrieved on 06-28-2009.
- ↑
Developing countries boost computer sales
Dell continues to pursue international sales through a variety of means. In addition to distribution agreements with large retailers, Dell has developed a number of products specifically targeted at emerging markets. The best example of this is the Dell 500 notebook, a low cost laptop designed to be affordable for a large phase of the population of developing countries. Such initiatives have proven successful for Dell; unit sales for emerging markets grew 62% during the first quarter of 2008. With revenue in India and China growing 52% and 30%, respectively, for the same period. Despite this stellar performance there is still much room for growth, since only 5.1% of Indians and 9% of Chinese have computers, compared to 75% of Americans.<ref>[http://seekingalpha.com/article/93357-dell-targets-india?source=feed Seekingalpha: Dell Targets India]</li> <li id="_note-13">[[#_ref-13|↑]] [http://www.sec.gov/Archives/edgar/data/826083/000095013408005718/d55156e10vk.htm DELL Annual Report 2008 - Item 6 - Page 23]</li> <li id="_note-14">[[#_ref-14|↑]] [http://www.techcrunch.com/2007/11/05/dell-acquires-equallogic-for-14-billion/ Dell Acquires EqualLogic For $1.4 Billion November 5, 2007]</li> <li id="_note-15">[[#_ref-15|↑]] [http://www.sec.gov/Archives/edgar/data/826083/000095013408005718/d55156e10vk.htm DELL Annual Report 2008 - Item 7 - Page 27]</li> <li id="_note-16">[[#_ref-16|↑]] [http://online.wsj.com/article/SB122058183649202581.html WSJ: Dell Plans to Sell Factories in Effort to Cut Costs]</li> <li id="_note-17">[[#_ref-17|↑]] [http://online.wsj.com/article/SB122058183649202581.html WSJ: Dell Plans to Sell Factories in Effort to Cut Costs]</li> <li id="_note-18">[[#_ref-18|↑]] [http://www.forbes.com/reuters/feeds/reuters/2008/12/03/2008-12-03T152808Z_01_N03340276_RTRIDST_0_PC-SALES-UPDATE-1.html PC sales seen down 5.3 pct in 2009 – December 3, 2008]</li> <li id="_note-19">[[#_ref-19|↑]] [http://netbookboards.com/netbooks/netbook-sales-overtake-iphone-sales/ Netbook Sales Overtake iPhone Sales December 10, 2008]</li> <li id="_note-20">[[#_ref-20|↑]] [http://www.guardian.co.uk/technology/blog/2008/dec/10/acer-asus-netbooks Acer leads netbook market while Apple loses market share - December, 2008]</li> <li id="_note-21">[[#_ref-21|↑]] [http://www.businessweek.com/magazine/content/08_49/b4111064905299.htm?campaign_id=rss_null Netbook Sales May Be Cutting Demand For Laptop PCs - November 26, 2008]</li> <li id="_note-22">[[#_ref-22|↑]] [http://www.guardian.co.uk/technology/blog/2008/dec/10/acer-asus-netbooks Acer leads netbook market while Apple loses market share - December, 2008]</li> <li id="_note-23">[[#_ref-23|↑]] {{cite web| title=New York Times| url=http://www.nytimes.com/2009/09/22/technology/companies/22dell.html?ref=business| author=David Jolly and Ashlee Vance}}</li> <li id="_note-24">[[#_ref-24|↑]] {{cite web| title=New York Times| url=http://www.nytimes.com/2009/09/22/technology/companies/22dell.html?ref=business| author=David Jolly and Ashlee Vance}}</li> <li id="_note-Gartner_Stats09">↑ <sup>[[#_ref-Gartner_Stats09_0|31.0]]</sup> <sup>[[#_ref-Gartner_Stats09_1|31.1]]</sup> {{cite web|url=http://www.gartner.com/it/page.jsp?id=939015| title=Gartner Says Worldwide PC Shipments Declined 6.5 Percent in First Quarter of 2009 |date=2009-04-15|accessdate=06-16-2009}}</li> <li id="_note-25">[[#_ref-25|↑]] [http://community.winsupersite.com/blogs/paul/archive/2008/06/14/notebook-computer-market-share-q1-2008.aspx Notebook computer market share 1Q08]</li> <li id="_note-26">[[#_ref-26|↑]] [http://www.marketwatch.com/news/story/story.aspx?guid=%7B7D0C5A2F%2D954B%2D4E39%2D96F3%2DDCA5AD9B16EA%7D&siteid=rss Dell launches new ultra-portable laptops August 8, 2008]</li> <li id="_note-27">[[#_ref-27|↑]] [http://www.electronista.com/articles/08/12/19/dell.studio.xps.13.slips/ Dell Adamo "world's thinnest" notebook? - December 19, 2008]</li>
<li id="_note-28">[[#_ref-28|↑]] [http://www.idc.com/getdoc.jsp?containerId=prUS21255808 Worldwide Server Market Shows Resiliency with Solid First Quarter Results, According to IDC May 27, 2008]</li></ol></ref>
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