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Financial Analysis of Dell

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Financial Analysis of Dell - February 18th, 2011

Dell (NASDAQ: DELL) is a global vendor of personal computers and is one of the largest companies in America, employing over 78,900 people (with approximately 33% located in US and rest in other countries) and earning revenues of $59.9 billion in FY 2010. 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), Staples, Carrefour 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 24,000 retail locations worldwide.[3] Throughout 2008, international sales continued growing and accounted for approximately half of Dell's revenues.[4]

1 Company Overview
1.1 Business and Financial Metrics
2 Business Segments
2.1 PCs (60% of revenue)
2.2 Software, Peripherals, and Accessories (16% of revenue)
2.3 Servers and Storage (15% of revenue)
2.4 Technical Support and Services (9% of revenue)
3 Trends and Forces
3.1 Upgrade Cycles force companies to replace their computer systems
3.2 Dell is expanding its global presence through deals with various retailers
3.3 Developing countries boost computer sales
3.4 Dell has a variety of non-PC products with room for growth
3.5 Outsourcing to increase profit takes power from Dell
3.6 A suffering economy results in declining PC sales and a rise in Netbook sales
3.7 U.S. Government spending on digitizing health records may secure revenue for Dell
4 Competition
4.1 PCs
4.2 Notebooks
4.3 Servers
4.4 Tablet
5 References
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.

Company Overview

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.

Business and Financial Metrics
On July 27, Dell announced it would pay $100 million to settle with the SEC. Senior executives were accused by the SEC of using fradulent accounting methods to boost earnings. The SEC alleges that, from 2002 to 2006, Dell recieved payments from Intel for using Intel chips in in Dell computers. Dell did not disclose to investors that it was recieving these psayments, which were in the form of rebates which allowed Dell to reduce its cost of goods sold. Dell attributed the rising profit margin instead to "cost cutting measures" and "declining component cost."[5]

In 2009, revenue decreased 13% year-over-year to $52.9 billion, with net income falling 42% from $2.5 billion to $1.4 billion. Revenue grew across all regions: Asia Pacific-Japan (“APJ”) grew 15%; Europe, Middle East, and Africa (“EMEA”) increased 12%; and the Americas grew 3%.[6] 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.[7]

In the third quarter of 2011, Dell's revenue increased 19% to $15.4 billion. Business spending fueled Dell's growth, with the commercial business' revenue increasing 24% to$12.4 billion. Enterprise solutions and services increased 31%.Small and Medium Business revenue increased 24% to $3.7 billion. Consumer revenue only had a 4% increase to $3 billion. Dell's gross margins, a measure of profitability, increased from 17.3% to 20%. Dell has been using M&A to try to diversify its portfolio and is trying to move away from its low-margin PCs. Dell's net profit nearly doubled, from $449 million in 3Q10 to $875 million this quarter.[8]

Business Segments

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%.[9]

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.[10]

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.[11]

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.[12]

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.[14] Dell has also signed a deal with Gome Group, which is the largest electronics retailer in China.[15] Currently Dell has 24,000 retail stores around the world, with a much bigger reach thanks to its partnerships and collaborations.

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.[16] Furthermore, 85% of the world's population lives in developing markets.[17]

In 2010, Dell expects that revenues in China, which is its second largest market, to be $5 billion. Dell will spend $25 billion in deals with Chinese suppliers and partners. Dell supplies 60% of the servers used by China's internet companies. In 4Q10, Dell sales in China increased 81% due to government incentives to boost spending.[18]

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.[19] This acquisition is an attempt to enhance Dell's offering in data storage, which only accounted for 4% of sales in Fiscal 2008.[20] 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.[21] 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.[22]

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.[23] 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.[24] [25] 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.[26] 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.[27]

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.[28] 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; Perot services 1,000 hospitals and automates patient records for 200,000 doctors.[29] This will secure revenue for Dell which has had difficulty during the downturn.


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.

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.[30] 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 practices 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.

Worldwide PC Vendor Unit Shipments for 2009 and US PC Vendor Shipments for 4Q09[31]

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]

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.

In May 2010, Dell announced that it will be releasing a 5-inch touchscreen device known as the Streak in June. The Dell Streak uses a customized version of Google's Android mobile operating system. Dell's streak will compete with Apple's iPad.[36]

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