DELL - Dell Inc.

[txlaw]

I am suggesting that board members consider investing in DELL, which I believe is successfully transforming itself into a business like IBM that provides technology productivity solutions to enterprises across the world. 

 

DELL has been undergoing this transformation for a while now (successfully, in my opinion) and understanding this is key to the DELL thesis.  Don't be fooled by overemphasis by detractors on "Core Dell" -- the key element of which is end user computing (client devices) -- as this part of the biz will be optimized for cash flow and will complement the growth of "New Dell" -- which is focused on technology solutions for enterprise. 

 

Ultimately, Dell, which has always focused on its business customers despite having a great consumer business in the past, sells productivity to its enterprise customers.  In other words, like IBM, DELL's goal is to help solve business problems using technology.  I highly recommend reading the following articles/blogs that discuss the longevity and success of IBM, which is a model for DELL:

 

http://www.economist.com/node/18803123

http://www.ibm.com/smarterplanet/us/en/business_agility/article/transformation.html?lnk=ibmhpls2/smarterplanet/work/transformation

http://www.forbes.com/2010/07/07/ibm-transformation-lessons-leadership-managing-change.html

 

By far, the greatest competitive advantage DELL has is its customer relationships and distribution network.  DELL directly talks to business and government in order to understand their needs and it develops solutions, whether hardware-, software- or services-oriented, for these customers.  This distribution channel (which provides info on a two-way basis) is extremely valuable. 

 

The distribution channel allows DELL to buy companies like Compellent at what appear to be high prices, scale up the sourcing for these acquired product lines, and then dramatically increase units sold by selling through the distribution network.  All of a sudden, the price paid doesn't look so high.  It also allows DELL to sell both commodity hardware (e.g., servers, storage, and networking hardware) and high margin services to its customers.  Most importantly, it allows DELL to adapt to changes in technology, which is a must for any company that competes in the rapidly changing IT sector.

 

The strength of the distribution network is also increasing on a worldwide basis.  Dell is the number one PC-brand in India.  How quickly we in NA forget that PC penetration is nowhere near complete in emerging markets!  By dealing directly with Indian business, DELL strengthens its customer relationships and prepares for a future where they can sell other things to those Indian businesses (mobile devices, cloud hardware, consulting services, software solutions, etc.).  The same is true in Brazil and China.  One of my favorite examples of Dell’s success abroad is Tata's partnering with DELL to bring out an IaaS service in Singapore and India.  And just recently Tata and Dell announced that they would be servicing consumers through a bundled broadband offering.  (Side note: Michael Dell sits on the Indian School of Business in Hyderabad, the city where Prem Watsa grew up.)

 

Scale is also an advantage to DELL.  Being a big seller of commodity hardware means that it has created a supply chain with manufacturers all over the world that cannot be duplicated easily and that allows it to be a low-cost provider of hardware (though not necessarily the lowest-cost provider).  The low-cost/direct buy supplier advantage is still fruitful today in the enterprise segment (much less so in the consumer segment) and in the cloud infrastructure segments, which provide the guts for the productivity shift that is going on today with the move to the cloud.

 

This scale and supply chain has allowed DELL to deploy free cash into building a cloud hardware product line that as a long runway ahead of it even in the face of commoditization of hardware.  DELL is well aware of the commoditization of hardware and is adapting, as it should, to these changes.  Indeed, DELL recognizes that “productivity can no longer come out of hardware but must come from services and software.”

 

There is also know-how and innovation.  DELL hasn't been known to be innovative in the past, but is becoming more so, both by developing IP internally and by acquiring IP portfolios related to hardware, software, and services.

 

Perhaps most important is the management team and Michael Dell.  These guys have been doing a great job with the transformation, they are extremely shareholder friendly, and they work as a team.  They understand that they need to focus on business and understand what business needs.  They are all about disclosure to investors.  And contrary to popular belief, capital allocation has been great at DELL.  Even share buybacks were not done at irrational prices.

 

I think it's useful to break DELL up into its varying businesses, all of which do actually work synergistically to strengthen its customer relationship network.

 

Consumer PCs -- Declining competitive advantage here because the lowest-cost/direct buying edge that DELL used to have matters less and less, especially because of BYOD and the rise of the non-Windows players. But note that less than 10% of earnings come from this segment

 

Enterprise PCs and hardware -- Still has a competitive advantage due to customer relationship network and low-cost supply chain.  Margins continue to decrease though, and BYOD changes the game in many respects.  A switch to thin client hardware could also portend the decline of this biz, though DELL is thinking about this through acquiring companies like Wyse.  I expect there to be growth in unit sales over the long run in this segment.

 

Cloud infrastructure hardware -- Scale matters and there is a very long runway for growth here.  Buying up IP allows DELL to prepare for a high volume future where margins may be decent despite being in the hardware biz

 

Services, software, and consulting -- high margin and low penetration at the moment.  Will be much bigger profit center in the future, and much more revenue here will be recurring.

 

Put it all together and you see that Core Dell is what everyone focuses on while New Dell is the future.  I would begin with the presentation that DELL made for this year's analyst meeting to really begin to get an understanding of the DELL transformation.  See http://content.dell.com/us/en/corp/d/secure/2012-06-analyst-event.aspx

 

As for numbers, I leave that to each board member to figure that out for themselves.  I would recommend being very conservative with projections though, not backing out all net cash, and taking into account the necessity of M&A to the biz model.

[Packer16]

My primary concern about DELL and HP for that matter is the core enterprise hardware business is being disintermediated by Chinese suppliers.  There are 5-7 major makers of computer hardware in the Far East and some of the larger enterprise customers (like Netflix and Google) are going direct to these suppliers and leaving DELL and HP out of the equation.  This observation is from a market development person at a large supplier to enterprise OEMs. 

 

Another interesting angle is to purchase the HDD players (STX and WDC).  This maket by contrast has consolidated (is down to 2.5 players (STX, WDC and Toshiba)) and has no major Chinese competitors.  Many folks think SDD will replace HDD and this may happen in the future but both SDD and HDD have and will continue to improve performance and be around for the forseeable future.  With STX and WDC selling at 3.5 to 5.0x FCF there is large margin of error.

 

Packer

[Guest rimm_never_sleeps]

I don't think ibm gets enough credit for exiting printers, PCs, notebooks, disk drives. Really forward thinking capital management. Now IBM stock is $200. HP is $17. And Dell is $9. At the time IBM was shrinking, HP was expanding. And DELL was increasingly leveraging it's bet on it's own flawed business portfolio by buying stock back at high multiples.

[FCharlie]

36% of it's market cap is net cash

 

An 18% earnings yield

 

An active buyback authorization to repurchase over 30% of the existing shares.

 

 

I don't know anything about the business but looking at the financials it seems like DELL has been all but left for dead.

 

 

[tombgrt]

The distribution channel allows DELL to buy companies like Compellent at what appear to be high prices, scale up the sourcing for these acquired product lines, and then dramatically increase units sold by selling through the distribution network.  All of a sudden, the price paid doesn't look so high.  It also allows DELL to sell both commodity hardware (e.g., servers, storage, and networking hardware) and high margin services to its customers.  Most importantly, it allows DELL to adapt to changes in technology, which is a must for any company that competes in the rapidly changing IT sector.

 

---

 

As for numbers, I leave that to each board member to figure that out for themselves.

 

I'm sorry but I've read this claim various times but would like to see some in depth analysis about this synergy from some DELL experts with some actual numbers that prove this. It could very well simply be in the 10-k and 10-Q, but I haven't read those. I have noticed that they don't share lots of numbers by segment etc, so I wouldn't be surprised if one can't find growth numbers on past acquisitions.

 

I don't know how others feel about these discussions, but in general I feel that even the most basic of numbers should be adressed more, not less. For instance: Growth in India is nice, but what numbers are we talking about and compared to what other numbers elsewhere? Idk, maybe it's just me.

 

Aside from that, Dell's business is in the too hard pile for me at this point and I'm fairly clueless about the sector. For all I know, 75% of CF vanishes over the next few years and I probably wouldn't have a clue as to why. ;D It just seems like an incredibly hard business to be in.

 

I don't think ibm gets enough credit for exiting printers, PCs, notebooks, disk drives. Really forward thinking capital management. Now IBM stock is $200. HP is $17. And Dell is $9. At the time IBM was shrinking, HP was expanding. And DELL was increasingly leveraging it's bet on it's own flawed business portfolio by buying stock back at high multiples.

 

For example: $3 billion share buybacks in 2002 alone. And yes, M. Dell was CEO back then. Idk, maybe it actually made sense back then as it seemed that the business would thrive for a long time. What was the valuation back then?

[ERICOPOLY]

For example: $3 billion share buybacks in 2002 alone. And yes, M. Dell was CEO back then. Idk, maybe it actually made sense back then as it seemed that the business would thrive for a long time. What was the valuation back then?

 

Mid-$20s in 2002.

 

Regarding the buybacks, here is something that was written about them in 2005 (it seems some investors were enthusiastic when it traded between $30 and $40):

 

http://www.controlledgreed.com/2005/11/is_dell_a_barga.html

 

Mason Hawkins, Staley Cates and John Buford write in the fund's management discussion that Dell is an entrenched brandname, has dominant market share, and produces generous free cash flow. They say that Dell's management owns a substantial stake in the company (thereby aligning their interests with shareholders) and is growing value by aggressively buying back shares at depressed prices. (They also say the same about another new holding, Anheuser-Busch.)

 

[ERICOPOLY]

It looks like they initially bought dell for somewhere between $33 and $41 in Q3 2005.  Straight from the Longleaf Partners 2005 annual report:

 

In the third quarter we bought Dell, which we have wanted to own for a number

of years. The price declined after our initial purchase, hurting the Fund's fourth

quarter and full-year return. The bigger discount presents an opportunity to pay

fire sale prices for this entrenched brand that is growing revenues and profits at

double-digit rates. Dell is overweighted in the portfolio because the company is a

high quality business and has management with proven operational and capital

allocation prowess. Because of how aggressively Dell is repurchasing its stock, the

price weakness is causing value to grow even more rapidly.

 

http://www.longleafpartners.com/quarterly_reports/05q4.pdf

[ERICOPOLY]

I am thinking that 2013 could be a strong year for DELL's computer business.

 

Microsoft ends support for Windows XP on April 8th, 2014.  http://windows.microsoft.com/en-US/windows/help/end-support

 

The day that the last security update is potentially delivered should be the deadline by which you have migrated all of your corporate XP machines.

 

[ourkid8]

Great article providing background on the value of it's enterprise services and solutions business.  I spent a considerable amount of time reviewing Dell and will be making a substantial purchase on Monday.  This is unbelievably cheap with a huge runway for growth!

 

My one area of concern was around it's M&A strategy in regards to overpaying BUT how they are able to ramp up business after an acquisition. In fact, a lot of their deals actually might be accretive to earnings!!!!  If Dell turns into an IBM for small / mid market businesses, we may have a huge long-term winner!

 

http://www.dailyfinance.com/2012/05/29/note-to-world-dell-is-not-a-pc-company/

[txlaw]

Some good points made about share buybacks at high prices.  Probably was an overstatement for me to say that no buybacks have been made at irrational prices.

 

I still do not get why people were buying DELL at $30+.

 

As to more specifics re: growth in business lines bought, you have to do some reverse engineering and read CCs.  For example, you can see a bit of what I'm talking about in the Dell storage guy's recent presentation:

 

And that has been, the reason why you see Dell financial numbers in storage down is just because we're replacing literally more than a billion dollars of EMC revenue with two startups that were at $130 million a piece when we bought them.

 

Nobody is going to do the work for you.  It would be too cumbersome to break everything down, especially if your audience is just going to say, it's in the too hard pile and I haven't read the 10-K.

[compoundinglife]

Great article providing background on the value of it's enterprise services and solutions business.  I spent a considerable amount of time reviewing Dell and will be making a substantial purchase on Monday.  This is unbelievably cheap with a huge runway for growth!

 

My one area of concern was around it's M&A strategy in regards to overpaying BUT how they are able to ramp up business after an acquisition. In fact, a lot of their deals actually might be accretive to earnings!!!!  If Dell turns into an IBM for small / mid market businesses, we may have a huge long-term winner!

 

http://www.dailyfinance.com/2012/05/29/note-to-world-dell-is-not-a-pc-company/

 

This is one of the reasons I like Dell. I feel like this a yet another situation where people don't understand the company. For example with SHLD valuations, they often get compared apples to apples with other appliance retailers leaving out the asset value story all together, with Amazon they often get compared apples to apples with other retailers leaving out the Amazon Web Services portion which is around 1Billion business, which Besos expects to grow larger than  retail in the long term. With Dell I think there is just this tunnel vision around PC sales with no focus on the other aspects.

 

On slightly different note it would be nice if we could get scrap rate #s for PC's like you can for cars.

 

 

[Guest rimm_never_sleeps]

that actually seems like damage control. why did they lose the EMC revenue? frankly I hardly ever listen to CC or seek to understand what management is saying. most are salesman and are doing what they can to keep their job and perks.

[ERICOPOLY]

that actually seems like damage control. why did they lose the EMC revenue? frankly I hardly ever listen to CC or seek to understand what management is saying. most are salesman and are doing what they can to keep their job and perks.

 

Because they bought Compellent.

 

http://www.computerworld.com/s/article/9200660/If_Dell_buys_Compellent_it_loses_EMC_partnership

[Guest valueInv]

I am suggesting that board members consider investing in DELL, which I believe is successfully transforming itself into a business like IBM that provides technology productivity solutions to enterprises across the world. 

The jury is still out on the "successfully"

 

DELL has been undergoing this transformation for a while now (successfully, in my opinion) and understanding this is key to the DELL thesis.  Don't be fooled by overemphasis by detractors on "Core Dell" -- the key element of which is end user computing (client devices) -- as this part of the biz will be optimized for cash flow and will complement the growth of "New Dell" -- which is focused on technology solutions for enterprise. 

Today, the client devices segment drives about 54% of direct revenue. It is also drives software and peripherals revenue which is 17% (Dell is not going to be selling many LCD monitors if they are not selling many PCs) and a significant portion of services business - which is 13% (driven support for the end user devices that they sell to customers).

 

They may have started turn around 5 years ago but they are still a heavily PC dependent business.

 

Ultimately, Dell, which has always focused on its business customers despite having a great consumer business in the past, sells productivity to its enterprise customers.  In other words, like IBM, DELL's goal is to help solve business problems using technology. 

Like HP, Oracl, etc. Every enterprise focused company sells "productivity" to enterprise customers. What is your point?

 

 

I highly recommend reading the following articles/blogs that discuss the longevity and success of IBM, which is a model for DELL:

 

http://www.economist.com/node/18803123

http://www.ibm.com/smarterplanet/us/en/business_agility/article/transformation.html?lnk=ibmhpls2/smarterplanet/work/transformation

http://www.forbes.com/2010/07/07/ibm-transformation-lessons-leadership-managing-change.html

 

This articles show the challenges Dell faces competing with IBM. It shows the risk of failure in taking IBM on in its home turf.

 

Show me who in Dell is doing this:

 

Third, IBM tries to ensure that the output of its 3,000-strong research division remains relevant to its business. Researchers are regularly embedded with teams from the services unit to give them on-the-ground experience. Sometimes they co-operate with customers, for example in creating a system that constantly monitors the vital signs of newborn babies to indicate when they acquire an infection. They are also prodded to look ahead, explains Robert Morris, who helps devise the firm's research strategy. Once a year, they must produce a “Global Technology Outlook”, an attempt to spot important trends early."

 

You think Dell is going to provide that level of service to customers anytime soon?

 

By far, the greatest competitive advantage DELL has is its customer relationships and distribution network. 

Let me tell you a story:

 

I used to work for a mobile company that sold mission critical software to operators all over the world. We had very strong relationships with about 80% of the big operators on the planet. Operators need to trust you, otherwise they are not going to implement software that can bring down their entire network. We sold the software to their networking groups, engineering types and had a monopoly over our market.

 

A few years ago the company decided to expand by selling new kinds of software to operators. Except now we were selling to the value added services(VAS) group instead of the network group. But, hey, we had the relationships and the channel into operators right? Wrong!

Our salespeople were used to selling to technical people and talking bits and bytes. Now they had to sell to product managers and marketers and talk about revenue streams and business stuff. As much as we trained them, the salespeople came from technical background, could not talk business credibly.  While they had relationships within the network groups, they were strangers to the VAS groups.

 

Three years later most of the VAS products were canned due to lack of sales.

 

Just because Dell has relationships doesn't mean that they can sell anything. A guy who sells servers does not know how to sell routers from Force10. He won't be able to answer questions on routing protocols.

 

Just because a Dell salesperson shows up selling a service doesn't mean customers are going to ditch IBM and switch. IBM and HP have deep and wide relationships too.

 

DELL directly talks to business and government in order to understand their needs and it develops solutions, whether hardware-, software- or services-oriented, for these customers.  This distribution channel (which provides info on a two-way basis) is extremely valuable. 

What do you think other companies do? Use an ouija board?

 

The distribution channel allows DELL to buy companies like Compellent at what appear to be high prices, scale up the sourcing for these acquired product lines, and then dramatically increase units sold by selling through the distribution network.  All of a sudden, the price paid doesn't look so high.  It also allows DELL to sell both commodity hardware (e.g., servers, storage, and networking hardware) and high margin services to its customers.  Most importantly, it allows DELL to adapt to changes in technology, which is a must for any company that competes in the rapidly changing IT sector.

It "allows" Dell to sell, doesn't mean that they will actually execute on it. Over the last 5 years, Dell's services revenue grew 7.9% in total (not annually) if you back out revenue from Perot systems. If you back out revenue from their other services revenue from their numerous acquisitions, the growth would be even less. So they are growing services at about 1% a year? That doesn't sound like "scaling up acquisitions" to me. This is a company transforming itself to a services company, right?

 

The strength of the distribution network is also increasing on a worldwide basis.  Dell is the number one PC-brand in India.  How quickly we in NA forget that PC penetration is nowhere near complete in emerging markets!

Have you considered the fact that it may be because the average person earns $3/day in India? Lets talk when Dell starts selling the $20 PC.

 

One of my favorite examples of Dell’s success abroad is Tata's partnering with DELL to bring out an IaaS service in Singapore and India.  And just recently Tata and Dell announced that they would be servicing consumers through a bundled broadband offering. 

 

TCS has partnerships with everyone:

 

http://www.tcs.com/about/corp_facts/alliances/strategic-partners/Pages/TCS-IBM-Alliance.aspx

http://devresource.hp.com/partner/directory/ww/tcs-apj.html

 

Whats your point?

 

Scale is also an advantage to DELL.  Being a big seller of commodity hardware means that it has created a supply chain with manufacturers all over the world that cannot be duplicated easily and that allows it to be a low-cost provider of hardware (though not necessarily the lowest-cost provider).  The low-cost/direct buy supplier advantage is still fruitful today in the enterprise segment (much less so in the consumer segment) and in the cloud infrastructure segments, which provide the guts for the productivity shift that is going on today with the move to the cloud.

Isn't Dell trying to transform itself into software/services and get out of the commodity hardware business? So, then the manufacturing scale advantages would be of no use?

 

Who do you think has scale advantages while trying to sell network switches to enterprises, Cisco or Dell? 

 

Even with the higher margin hardware products they are trying to get into - they sell in much fewer units than PC or servers. So Dell's scale in commodity PCs is irrelevant.

 

This scale and supply chain has allowed DELL to deploy free cash into building a cloud hardware product line that as a long runway ahead of it even in the face of commoditization of hardware.  DELL is well aware of the commoditization of hardware and is adapting, as it should, to these changes.  Indeed, DELL recognizes that “productivity can no longer come out of hardware but must come from services and software.”

"Long runway" is your assumption. The big cloud vendors - Google, Amazon, FB are not buying from Dell.

 

There is also know-how and innovation.  DELL hasn't been known to be innovative in the past, but is becoming more so, both by developing IP internally and by acquiring IP portfolios related to hardware, software, and services.

 

See your IBM articles to see how far behind Dell is. Dell's R&D spending last year was 1.5% of revenue. Have you ever heard of "Dell Labs"? No? How come?

 

Perhaps most important is the management team and Michael Dell.  These guys have been doing a great job with the transformation, they are extremely shareholder friendly, and they work as a team.  They understand that they need to focus on business and understand what business needs.  They are all about disclosure to investors.  And contrary to popular belief, capital allocation has been great at DELL.  Even share buybacks were not done at irrational prices.

Like the rest of your post, these are claims backed up with no substantiation. Why was the buyback price not irrational? If they are shareholder friendly, why did they restate earnings, get hit with lawsuits, etc.

 

 

Consumer PCs -- Declining competitive advantage here because the lowest-cost/direct buying edge that DELL used to have matters less and less, especially because of BYOD and the rise of the non-Windows players. But note that less than 10% of earnings come from this segment

BYOD does not apply to consumers.

 

Enterprise PCs and hardware -- Still has a competitive advantage due to customer relationship network and low-cost supply chain.  Margins continue to decrease though, and BYOD changes the game in many respects.  A switch to thin client hardware could also portend the decline of this biz, though DELL is thinking about this through acquiring companies like Wyse.  I expect there to be growth in unit sales over the long run in this segment.

Thin clients have been around for decades and have not made any big inroads into the enterprise since the start of the PC era.

 

Cloud infrastructure hardware -- Scale matters and there is a very long runway for growth here.  Buying up IP allows DELL to prepare for a high volume future where margins may be decent despite being in the hardware biz

The buyers for whom scale matters are custom building their own hardware

 

Put it all together and you see that Core Dell is what everyone focuses on while New Dell is the future.  I would begin with the presentation that DELL made for this year's analyst meeting to really begin to get an understanding of the DELL transformation.  See http://content.dell.com/us/en/corp/d/secure/2012-06-analyst-event.aspx

 

You post fails to address the core MOS thesis put forward on this board - that even if Dell's PC business, there is a stable non-pc business that you are getting for cheap. That rests on the assumption that non-pc business is stable. For it to be stable, the IT environment must be stable (it is not) and  the acquisitions must be integrated successfully and generate sufficient ROI ( the jury is still out on that).

 

I don't know the answers to the above two questions, but I can tell you that your post does little to address them.

 

When you invest in tech companies, you invest in companies that function in an environment of shifting sands. Trying to hang a MOS in this kind of environment is treacherous. Assets, customer relationships, etc disappear quickly. Thats why I think Warren Buffet is smart to keep away from tech.

[ERICOPOLY]

Great article providing background on the value of it's enterprise services and solutions business.

...

http://www.dailyfinance.com/2012/05/29/note-to-world-dell-is-not-a-pc-company/

 

Here is a quote from the article:

 

Just ask Dell's largest outside owner (at 7.5%), Southeastern Asset Management, manager of the Longleaf Partner family of funds. According to Longleaf's Staley Cates, who I heard live this month at the fund family's annual meeting: "We couldn't give a rip about [PC sales] because they're running off bad revenue and building good revenue."

 

Alright, is Cates ever going to admit that the reason why he bought DELL in 2005 for more than $30 is because of the PC sales biz?  The reason for the horrific results he's had from the DELL investment since then is because of the decline of the PC biz?  And to say he doesn't "give a rip" about it?

 

[tombgrt]

 

Nobody is going to do the work for you.  It would be too cumbersome to break everything down, especially if your audience is just going to say, it's in the too hard pile and I haven't read the 10-K.

 

I'm asking questions that others that HAVE read the financials completely sure are having as well. I only read 2 10-Q's a year ago or so, obviously I'm not up to date. I don't see why I can't ask questions that will benefit everyone reading this topic when answered.

 

Anyway, I'll stop bothering you. ValueInv seems to have some of the same remarks and I'll leave it to him as he is far more knowledgeable about the subject. His last post was very insightful imo and he gives some clear figures that put things into perspective, no promo-talk. I'll follow this thread closely, I appreciate the discussion.

[Guest valueInv]

 

Nobody is going to do the work for you.  It would be too cumbersome to break everything down, especially if your audience is just going to say, it's in the too hard pile and I haven't read the 10-K.

 

I'm asking questions that others that HAVE read the financials completely sure are having as well. I only read 2 10-Q's a year ago or so, obviously I'm not up to date. I don't see why I can't ask questions that will benefit everyone reading this topic when answered.

 

Anyway, I'll stop bothering you. ValueInv seems to have some of the same remarks and I'll leave it to him as he is far more knowledgeable about the subject. His last post was very insightful imo and he gives some clear figures that put things into perspective, no promo-talk. I'll follow this thread closely, I appreciate the discussion.

 

I don't think you can have a meaningful discussion on Dell without the numbers. After all, this is a value investment board.

 

One more important point- Dell is not a turn around story. A turnaround looks to fix an existing business. Dell is not turning around its existing pc business. Instead, they're trying to build new services / software business. When you buy Dell based on the growth story, you are acting like a VC .

You're betting on Dell making right acquisitions, integrating them and competing successfully in new businesses in nascent markets.

 

That thesis is not a value investment.

[stylized_fact]

 

Nobody is going to do the work for you.  It would be too cumbersome to break everything down, especially if your audience is just going to say, it's in the too hard pile and I haven't read the 10-K.

 

I'm asking questions that others that HAVE read the financials completely sure are having as well. I only read 2 10-Q's a year ago or so, obviously I'm not up to date. I don't see why I can't ask questions that will benefit everyone reading this topic when answered.

 

Anyway, I'll stop bothering you. ValueInv seems to have some of the same remarks and I'll leave it to him as he is far more knowledgeable about the subject. His last post was very insightful imo and he gives some clear figures that put things into perspective, no promo-talk. I'll follow this thread closely, I appreciate the discussion.

 

I don't think you can have a meaningful discussion on Dell without the numbers. After all, this is a value investment board.

 

One more important point- Dell is not a turn around story. A turnaround looks to fix an existing business. Dell is not turning around its existing pc business. Instead, they're trying to build new services / software business. When you buy Dell based on the growth story, you are acting like a VC .

You're betting on Dell making right acquisitions, integrating them and competing successfully in new businesses in nascent markets.

 

That thesis is not a value investment.

 

Thanks for your remarks.  Having a closer inspection of IBM's business, I'm not sure that I'd invest in them either.  STX and WDC seem more compelling, but even there you also have the risk of their managements attempting to "pivot" into SSD.

[ERICOPOLY]

When you invest in tech companies, you invest in companies that function in an environment of shifting sands. Trying to hang a MOS in this kind of environment is treacherous. Assets, customer relationships, etc disappear quickly. Thats why I think Warren Buffet is smart to keep away from tech.

 

By "keep away from tech", do you mean to say that IBM isn't tech, but rather it's more of a solutions company or a "human platform" company?

 

The Economist article linked above finishes with the following comment:

 

The human platform has an important drawback: it is expensive to maintain and to extend, says Carl Claunch of Gartner, a market-research firm. That also means, however, that it is costly for others to replicate or invade. And given the complexity of the world and how much of it is still to be digitised, IBM's human platform looks unlikely to reach its limits soon. Perhaps not for another 100 years.

 

Do you similarly regard DELL's strategy one of building a human platform?  They are sort of similar.  Buffett went with the entrenched leader, so he gets a margin of safety in that "costly for others to replicate or invade" part.  Then he gets the "human platform unlikely to reach its limits soon" part mostly at low risk.

 

So, DELL could be discussed in terms of what added upside you get vs just buying IBM.  Clearly DELL has more potential to grow in terms of market share, both have same opportunity to ride along at the speed of the industry growth.  So in buying DELL you are betting on the company growing share and hoping that the PC business sticks around for a while given that it's a fountain of funds for as long as it lasts (even if the Longleaf guys claim not to care that it goes away, I think they obviously do care as it provides ammo to buy more pieces in the services platform).

[ERICOPOLY]

 

Nobody is going to do the work for you.  It would be too cumbersome to break everything down, especially if your audience is just going to say, it's in the too hard pile and I haven't read the 10-K.

 

I'm asking questions that others that HAVE read the financials completely sure are having as well. I only read 2 10-Q's a year ago or so, obviously I'm not up to date. I don't see why I can't ask questions that will benefit everyone reading this topic when answered.

 

Anyway, I'll stop bothering you. ValueInv seems to have some of the same remarks and I'll leave it to him as he is far more knowledgeable about the subject. His last post was very insightful imo and he gives some clear figures that put things into perspective, no promo-talk. I'll follow this thread closely, I appreciate the discussion.

 

I don't think you can have a meaningful discussion on Dell without the numbers. After all, this is a value investment board.

 

One more important point- Dell is not a turn around story. A turnaround looks to fix an existing business. Dell is not turning around its existing pc business. Instead, they're trying to build new services / software business. When you buy Dell based on the growth story, you are acting like a VC .

You're betting on Dell making right acquisitions, integrating them and competing successfully in new businesses in nascent markets.

 

That thesis is not a value investment.

 

I think if you invested in Compellent at the ground level, you might be a VC.  But to purchase Compellent and immediately push it into your channel, you are acting more like a reseller (only you now happen to own the product).

 

They had experience selling an EMC storage product, and now they sell a Compellent product instead.

 

The difference in ownership is that you have more control over the engineers.  This should help you make customized solutions.  In theory anyway.

[giofranchi]

I don't think you can have a meaningful discussion on Dell without the numbers. After all, this is a value investment board.

 

One more important point- Dell is not a turn around story. A turnaround looks to fix an existing business. Dell is not turning around its existing pc business. Instead, they're trying to build new services / software business. When you buy Dell based on the growth story, you are acting like a VC .

You're betting on Dell making right acquisitions, integrating them and competing successfully in new businesses in nascent markets.

 

That thesis is not a value investment.

 

valueInv,

I understand your point, but I don’t fully agree. I was a Dell shareholder until a few months ago. It then ran up in price and I sold it for a tidy profit, just because I liked another investment opportunity better. I have followed Dell’s numbers very closely, but I have never invested in Dell for what the numbers told me. I invested in Dell, because I thought Mr. Michael Dell has a unique knowledge of technology, that gives him a true competitive advantage. I invested in Dell because I thought I was not overpaying for the chance to partner with Mr. Dell. Remember the late Mr. Singleton of Teledyne? Well, I thought of Mr. Dell as a modern Mr. Singleton… almost! Also Mr. Singleton introduced many new technologies in the Teledyne family of businesses. So what? It should follow that an investment in Teledyne would not have been a value investment? It surely created a lot of value! Maybe, Mr. Dell won’t prove to be such an outstanding capital allocator as Mr. Singleton has been, but the jury is still out!

 

giofranchi

[Packer16]

So what you have is a dying buisness with a work in progress to develop a systems/services business?  Now wonder the pricing is what it is.

 

Packer

[racemize]

One more important point- Dell is not a turn around story. A turnaround looks to fix an existing business. Dell is not turning around its existing pc business. Instead, they're trying to build new services / software business. When you buy Dell based on the growth story, you are acting like a VC .

You're betting on Dell making right acquisitions, integrating them and competing successfully in new businesses in nascent markets.

 

That thesis is not a value investment.

 

I'm not sure I agree such a narrow definition of value investing.  I tend to view value investing as simply getting more "value" than what you pay.  That value may come from growth (e.g., bulls for goog, aapl, dell, etc.), dividends or coupons (someday treasuries may make sense!), severe underpricing of static businesses or turnarounds, etc.

 

This is probably neither here nor there, but I tend to think of "value" very broadly.

[bathtime]

Software strategy:

 

http://www.theregister.co.uk/2012/07/19/dell_details_software_division/

 

http://www.theregister.co.uk/2012/09/25/dell_software_group_kace_appliance/

 

 

[txlaw]

Rather than respond directly to some of the more inflammatory and unhelpful posts/remarks, I will reply generally to the more legitimate questions and comments I am hearing about DELL.

 

Focus on the Qualitative, Not Quantitative

 

Keep in mind that I started this thread because I was asked to start an official DELL thread.  So I put an abbreviated (yet somehow long-winded) thesis up on the board and focused on what I thought was the heart of the matter. 

 

And the heart of the matter, IMO, is to understand the qualitative aspects of this investment rather than focus solely on numbers because past numbers and current numbers (or, at least, current rate of change in numbers) don’t necessarily give you a great idea of where DELL as a business is going.  Indeed, the nature of a company like DELL that is transforming itself is that if there is an inordinate focus on numbers – especially quarterly numbers – you will incorrectly assess whether the particular actions the company is taking to transform the business are being properly made.  It’s important to read articles about the company, listen/read CCs, research into technology trends, and pay close attention to the actual strategic decisions of the supposedly transforming company.  You can’t just understand this investment by reading quarterly filings.

 

I’ve tried my best to discuss these qualitative aspects not just on this new thread, but on threads across the board.

 

Dell M&A: Burning Cash or Buying Platforms?

 

Some have questioned whether or not the numbers bear out some of the claims made by DELL and have indicated that anyone who is long DELL cannot figure out whether or not the thesis is supported by the numbers because DELL doesn’t give that info out.  Well, take a look at the Dell Analyst Meeting presentation and transcript, both of which are up on the web.

 

Cash used to fund M&A since ‘08 = $10.3 B.  Revenue delivered by acquired companies = $9.3 B.  We have to ask ourselves: what does this translate into in terms of replacement revenues and therefore profits?  Is Dell successfully acquiring business lines and scaling them up?  Is the 15% IRR target of M&A all talk or legit? 

 

By all means, trust but verify.  I would take Dell Storage and try to reverse engineer that line of business, which has been put together inorganically (i.e., through M&A).  By reverse engineer, I don’t just mean look at the trajectory of Dell IP-Storage revenue and associated margins, as well as purchase price for the compainies (though you should certainly do that if you wish).  Also take a look at the technologies they are acquiring and see if it makes sense in the context of portfolio building and an end-to-end solutions model. 

 

Ultimately, we have to decide whether DELL is buying platforms or burning cash.  This is a hugely important question and is central to the DELL thesis.  I believe that platforms are being built.  Others believe that cash is being burned.  Time will out the truth.

 

Transformation vs. Turnaround and Adaptation in the Tech Biz

 

DELL is undergoing a transformation, not a turnaround.  Transformation is everywhere in the tech world.  It’s not just DELL.  It’s INTC.  It’s CSCO.  It’s MSFT.  It’s CMCSK.  It’s FTR.  It’s T and VZ.  It’s AMZN.  It’s any number of companies that must pay attention to rapidly changing technologies and redeploy capital generated into R&D and new business lines so that they don't evaporate.  Only the paranoid survive. 

 

But transformation isn’t just relegated to the tech world.  Even so-called stalwarts transform themselves.  I pointed out the other day that KO once used to sell sugared soda water but now it has a portfolio of hydration products that it sells across the world.  The KO portfolio was not just created organically – M&A was involved.

 

Tech is more precarious though for sure.  I think that DELL is well positioned to be on top of changing technologies and changing business needs, and the actions that they are taking seem to bear some evidence that they are seeing further into the future than most and trying to capitalize on that foresight.

 

Again, I urge people to take a look at how DELL has built its storage platform.  Take a look at Equallogic, Compellent, Ocarina, Exanet, and RNA Networks.  Take a look at current parnerships, such as the one with Fusion i-o (a company in which Dell was an early investor).  Take a look at the venture capital arm that is focusing on storage startups.   

 

Ask yourself whether there really is a long runway for growth in the storage business in light of the data explosion, and whether the rise of public cloud providers portends the doom for players like DELL.  I don’t believe the rise of AMZN, GOOG, and others means that DELL’s storage business will die.  Instead, I see them continue to increase their absolute sales in a pie that is growing at a huge rate.  Saying well DELL is going to bump into GOOG or AMZN or FB is “like swimming around in Lake Michigan and asking did you bump into each other.” 

 

If you think Dell doesn't care about IP or R&D after looking at who they have acquired acquiring, well, I'm not sure what to say to you.  Most of the innovative tech companies today (GOOG, MSFT, AAPL, IBM) have acquired rather than built some of their most important IP, and DELL is no exception.

 

Avoiding Getting Crushed: Focus on SMB/Mid-Market and Important Verticals

 

It has been suggested that DELL will be crushed by the likes of the IBMs, HPs, Oracles, and Ciscos of the world. 

 

But one of the ways that DELL is mitigating this risk is by focusing on underserved markets: SMB and the Mid-market.  And not just in the developed world.  They’re laying the groundwork to be relevant to SMB and the mid-market across the world.  One of my favorite graphs is one that Intel put out showing how the PC penetration rate is directly correlated with shrinking months of income to buy a PC.  Well, if you’re optimistic about how income will grow over the long run in some of the markets that DELL is in, then you should like how they are preparing for that future.

 

I also like how they focus on certain verticals that I believe have lots of growth ahead of them and that are in need of the end-to-end solutions that Dell provides.  Dell does a great job in the healthcare vertical and they’re focusing in on the energy sector as well.

 

Optimizing Legacy Businesses and Redeploying the Cash Generated

 

DELL’s legacy business (Legacy Business == End User Computing) is being optimized for cash flow, while remaining a part of the end-to-end solutions portfolio.  (Incidentally, End User Computing has shrunk as percentage of revenue from FY’08 to FY’13.) 

 

Some of have suggested that DELL should have sold off the PC business.  Michael Dell disagrees.  In fact, Michael Dell famously criticized HP for Apotheker’s decision to spin off the Personal Systems Group, noting that the client business provides enormous scale and buying power, which would go away and make HP’s cloud hardware portfolio much higher cost.  After all, according to Dell, a huge percentage of disk drives, processors, and memory go into PCs, not cloud hardware.  Cisco apparently agreed with Dell and in an internal memo criticized HP’s decision, arguing that divesting the PSG group would create a number of problems that would affect HP’s own end-to-end solutions strategy, including weakening the relationship between HP and small and medium businesses, and public sector and education customers.  The Cisco memo even showed how IBM’s cloud hardware business deteriorated in operating metrics when it spun off its PC unit.

 

So instead, Dell is cheerfully optimizing its end user computing portfolio and using free cash generated to focus on buying and building services and software capabilities, so that it can truly be an end-to-end solutions provider.  And by keeping the distribution network from shrinking (e.g., by selling off the end user computing biz), Dell preserves the ability to get operating leverage to work for it in a future with a much higher revenue mix dedicated to services and software. 

 

I think that’s the right call.  Again, time will tell.

 

---------

 

There have been many good rejoinders to some of the other comments made within other threads.  Thoughts on BYOD, the future of hardware versus software/services, public versus private clouds, and more issues are spread across various threads on the board.  It’s worthwhile looking into these and paying attention to the many good comments that have come across the wire.

 

All the best to those who are long DELL.  I'm going to try to avoid getting into more p$!#ing contests with folks who disagree with me, so I will lay low on providing opinions and will instead just post news and updates if I see anything good.