DELL - Dell Inc.

[stahleyp]

are you 100% BAC now, gangsta?  8)

 

Indeed, I am.

 

I know, I know.  I had that talk with Fidelity yesterday -- they reminded me of how they offer some premium services to me and could give me some help assessing the risk of my portfolio.  To this I said, "I'm not going to carry an automatic weapon into a police station and ask if it's allowed".

 

Eric, you are epically manly. Just sayin' ;)

[txlaw]

I have a small position in Dell and am not convinced they won't pull this off.  Longleaf certainly sounds as if they were 100% wrong on this company to be honest though.  They initially wanted it because it was a dominant business, they must have been referring to the PC business because the ES&S business they are not a dominant player in...  Now that Michael Dell is changing directions they seem to be willing to wait it out with him...

 

On second thought, you might be right about Longleaf.  If indeed their rationale for initially buying DELL was because it was dominant in the business, then I agree they were wrong.

[txlaw]

Dell has not been overpaying

It paid a ridiculously high multiple for Compellent (200+), which used to be publicly traded.  Wikipedia has a list of Dell's acquisitions.

http://en.wikipedia.org/wiki/Dell#Recent_plans_and_acquisitions

 

I've read Michael Dell's book (which has no information on Dell's current strategy) and I'm going through Louis Gerstner's (IBM).  I still don't get Dell.

In Michael Dell's book, I get the sense that he has listened to his CFO and got an understanding of return on capital and why it's important to turn over your inventory quickly.  I'm sure he understands dividends versus buybacks.  And I think he understands selling stock when it's expensive via secondary offerings.  So I don't understand what Dell is currently doing.

 

Whether the price paid for Compellent was too high is debatable. 

 

IMO, it's not appropriate to solely look at backwards looking earnings multiples for any DELL acquisitions.  The idea is that DELL is buying product lines when they acquire these small companies that sell X units, and that the revenue multiples that result from selling the product through DELL's distribution network (multiples of X) will make the price paid worth it.  Further, the acquisition strategy has been to fill in the pieces of DELL's portfolio so that it has a complete ES&S offering.

 

The reason that the above paragraph is important is because DELL knew a while back that the EUC business could easily turn for it and, indeed, that it was destined for commoditization, given that DELL was not the OS provider.  The DELL business model inherently means huge operating leverage, which means bad results when sales are going the opposite way they are supposed to.

 

DELL saw this coming and has acted accordingly.  Bottom line, DELL sees value in its fixed cost distribution network, as that is what gives it some advantage over other players.  If it did not see that value, then it should have simply let the EUC business run its course, slowly lay off its sales force over time, and distribute all cash to shareholders.  That would have been the wrong move, though, IMO.

 

I agree with you, though, about the dividend.  I just don't get it.

[ItsAValueTrap]

the revenue multiples that result from selling the product through DELL's distribution network (multiples of X) will make the price paid worth it.  Further, the acquisition strategy has been to fill in the pieces of DELL's portfolio so that it has a complete ES&S offering.

I'm not sure that the synergies are so strong that those multiples can be justified.

 

When it comes to complicated IT systems for businesses, the industry has been moving towards fragmentation and specialization in specific niches.  IBM rarely sells complete mainframes systems with 100% IBM hardware and software.  This suggests to me that synergies from having a complete offering are very weak.

 

Usually there are companies that are extremely good at their niche (e.g. Intel at making CPUs).  The benefits of going with open systems usually outweigh that of a closed, proprietary system (e.g. IBM's old mainframe model where IBM made the CPU, storage, memory, etc.).  A customer of IBM may not be that impressed when the salesperson is pushing IBM CPUs when some other company's CPU would be a better choice.

However, IBM's reputation in one thing can sometimes help it sell other things where a manufacturer's reputation is important.  Customers need solutions that work (which is challenging when a lot of the tech stuff is complicated and marketing materials virtually useless) and will sometimes stick with established companies that are more likely to delivery and to stand behind their product.  I think that Dell would face similar issues and challenges.

 

What IBM has been doing is moving towards areas with high rates of return- mainly IT services and software.  I think that Dell is having trouble executing a similar strategy as paying ridiculous multiples for a company will likely lead to low rates of return.

 

IBM invented the PC.  And then it sold its PC division.

"When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

Dell has its work cut out for it.

[txlaw]

the revenue multiples that result from selling the product through DELL's distribution network (multiples of X) will make the price paid worth it.  Further, the acquisition strategy has been to fill in the pieces of DELL's portfolio so that it has a complete ES&S offering.

I'm not sure that the synergies are so strong that those multiples can be justified.

 

When it comes to complicated IT systems for businesses, the industry has been moving towards fragmentation and specialization in specific niches.  IBM rarely sells complete mainframes systems with 100% IBM hardware and software.  This suggests to me that synergies from having a complete offering are very weak.

 

Usually there are companies that are extremely good at their niche (e.g. Intel at making CPUs).  The benefits of going with open systems usually outweigh that of a closed, proprietary system (e.g. IBM's old mainframe model where IBM made the CPU, storage, memory, etc.).  A customer of IBM may not be that impressed when the salesperson is pushing IBM CPUs when some other company's CPU would be a better choice.

However, IBM's reputation in one thing can sometimes help it sell other things where a manufacturer's reputation is important.  Customers need solutions that work (which is challenging when a lot of the tech stuff is complicated and marketing materials virtually useless) and will sometimes stick with established companies that are more likely to delivery and to stand behind their product.  I think that Dell would face similar issues and challenges.

 

What IBM has been doing is moving towards areas with high rates of return- mainly IT services and software.  I think that Dell is having trouble executing a similar strategy as paying ridiculous multiples for a company will likely lead to low rates of return.

 

IBM invented the PC.  And then it sold its PC division.

"When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

Dell has its work cut out for it.

 

Regarding IBM, I think it's a bit misleading to compare IBM and DELL because of the target markets we're talking about (big business vs. mid-market and SMB).  It's one thing to sell to a large company that would have a need for a diverse set of technology solutions from multiple vendors.  It's another thing to sell to a smaller sized company or even a small biz, where they aren't necessarily going to want to piece together their IT system from multiple vendors, especially where they are going to be relying on vendor support. 

 

I also think that the ES&S viewpoint is a relatively new one that is a shift similar to the "it just works" shift for consumer devices that occurred when Apple began its rise.  Only the person saying "it just works" is the IT guy (or CIO for larger companies). 

 

Suffice it to say, I think that if you're a mid-market business (e.g., a healthcare provider), you'd be happy to have a complete solution by DELL installed, so long as it works and you get it at price where you feel the productivity gains were worth it.

 

As for proprietary systems, it's actually the other way around.  DELL is going the opposite way, giving customers choice.  They have Microsoft solutions, they have thin clients, they are testing Linux-based developer-focused computers, they have INTC servers, they're testing ARM servers.  They support OpenStack.  They have MDM software that supports more than just DELL hardware.  The point is that whatever solution the customer requires or prefers, DELL's promise to the customer is that in the end, it will all just work.

 

As to your last part, DELL isn't a PC company.  That's a fundamental point.  That's why it's not a value trap, and that's why Chanos will be wrong in the long term, IMO.

[VAL9000]

I'm not sure that the synergies are so strong that those multiples can be justified.

 

When it comes to complicated IT systems for businesses, the industry has been moving towards fragmentation and specialization in specific niches.  IBM rarely sells complete mainframes systems with 100% IBM hardware and software.  This suggests to me that synergies from having a complete offering are very weak.

I can't agree with you on this one.  Enterprise software is extremely murky territory where sales are based on relationships as frequently as they are based on value.  The points of differentiation are extremely difficult to compare, and often the software doesn't work without significant implementation services costs.  Those services often sell at 2-3 times the cost of the software license.  Where companies like Oracle and IBM have an advantage is that they have longstanding relationships at very large organizations, and can leverage those relationships to sell new solutions.  This is why building a complementary software portfolio makes sense.

 

What IBM has been doing is moving towards areas with high rates of return- mainly IT services and software.  I think that Dell is having trouble executing a similar strategy as paying ridiculous multiples for a company will likely lead to low rates of return.

IBM's price per dollar revenue hasn't exactly been stellar.  See the note on relationships above for why this works for them anyway.  Here's some numbers that I pulled up on IBM acquisitions:

- Worklight $70mm for $5-10mm revenue (7-14x revenue)

- DemandTec $440mm for $82mm revenue (5x revenue)

- Algorithmics $387mm for $163mm revenue (2.4x revenue)

- Netezza $200mm for $1,700mm revenue (8.5x revenue)

 

Versus Dell:

- Perot Systems $3.9bn for $2.8bn revenue (1.4x revenue)

- Compellent $960 for $125mm revenue (7.7x revenue)

- Quest $2.4bn for $860mm revenue (2.8x revenue)

 

As you can see, these are pretty comparable numbers for a fairly comparable business model.  Perot looks especially cheap but then it's services versus software so it's not a fair direct comparison.

 

IBM invented the PC.  And then it sold its PC division.

"When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

Dell has its work cut out for it.

The irony in this paragraph is that IBM only sold out of the PC business in 2005 for $1.75bn after Dell had successfully beat their face in for 20 years straight.  It was in part Dell's excellent management that helped make the economics so difficult.  But that's neither here nor there.  The important point is that Dell agrees that the economics suck and is leveraging its assets (relationships with customers) to pivot into a more profitable business (software and services).  It's not an easy thing to do, but then easy things don't tend to pay well.

 

[bennycx]

On another note, even Chou is accumulating Dell...

[txlaw]

the revenue multiples that result from selling the product through DELL's distribution network (multiples of X) will make the price paid worth it.  Further, the acquisition strategy has been to fill in the pieces of DELL's portfolio so that it has a complete ES&S offering.

I'm not sure that the synergies are so strong that those multiples can be justified.

 

When it comes to complicated IT systems for businesses, the industry has been moving towards fragmentation and specialization in specific niches.  IBM rarely sells complete mainframes systems with 100% IBM hardware and software.  This suggests to me that synergies from having a complete offering are very weak.

 

Usually there are companies that are extremely good at their niche (e.g. Intel at making CPUs).  The benefits of going with open systems usually outweigh that of a closed, proprietary system (e.g. IBM's old mainframe model where IBM made the CPU, storage, memory, etc.).  A customer of IBM may not be that impressed when the salesperson is pushing IBM CPUs when some other company's CPU would be a better choice.

However, IBM's reputation in one thing can sometimes help it sell other things where a manufacturer's reputation is important.  Customers need solutions that work (which is challenging when a lot of the tech stuff is complicated and marketing materials virtually useless) and will sometimes stick with established companies that are more likely to delivery and to stand behind their product.  I think that Dell would face similar issues and challenges.

 

What IBM has been doing is moving towards areas with high rates of return- mainly IT services and software.  I think that Dell is having trouble executing a similar strategy as paying ridiculous multiples for a company will likely lead to low rates of return.

 

IBM invented the PC.  And then it sold its PC division.

"When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

Dell has its work cut out for it.

 

Just to clarify, I said the above in my last post:

 

"Regarding IBM, I think it's a bit misleading to compare IBM and DELL because of the target markets we're talking about (big business vs. mid-market and SMB)."

 

I don't fault you for comparing IBM and DELL at all, but I do think that there are differences between the two that we must recognize in terms of approach to their market segments.

[MVP444300]

Wish Dell hadn't started paying the dividend; they could have used it to buy back more shares.

 

Anyone buying?

[boilermaker75]

Wish Dell hadn't started paying the dividend; they could have used it to buy back more shares.

 

Anyone buying?

 

I have recently, by having been put to at $11 and $10. However, I am thinking this one is too hard and maybe I should cut my losses?

[Parsad]

Wish Dell hadn't started paying the dividend; they could have used it to buy back more shares.

 

Anyone buying?

 

I have recently, by having been put to at $11 and $10. However, I am thinking this one is too hard and maybe I should cut my losses?

 

We bought a bunch more on Friday.  We will keep buying as it drops below our last purchase price.  Average in, average out! 

 

It's very cheap.  The business is a tough one, but the company is being treated as if it's a one-legged pony and going out of business.  This is where the metal hits the road...investors start to get scrambly.  Remember when BAC was going under at $5?  Today they cannot do wrong. 

 

You have a company that realistically can generate net profits of about $700M per quarter or close to $3B a year, and it trades for about 5 times their current market multiple.  The business has net working capital in excess of $6B.  It generates about $4B in operatiing cash flow and only about $500M in capital expenditures...it's a cash cow. 

 

What have the executives been guilty of?

 

1)  Not seeing changes in their industry fast enough

2)  Overpaying on acquisitions

3)  Debateable allocation of cash to shareholders...dividends/stock buybacks

 

3) is historical.  That can easily be modified by shareholder influence going forward, so that the company is better at not overpaying on buybacks and smart enough to suspend a dividend when they should be buying stock.

 

2) is also historical, but could be the future too since the same management is present.  Some of the acquisitions were necessary to change the nature of the business going forward...they were just guilty of overpaying, partly because they needed those businesses.  Again, if many of the businesses they acquired continue to grow organically, there is less likelihood of them paying for poor acquisitions and a greater chance that capital could be returned to shareholders.

 

1) is very important...but also very common.  Who didn't see the future incorrectly except for Steve Jobs and Jeff Bezos?  That's the nature of the technology business.  Question is:  Does the business and management have the capacity to resurrect itself by changing directions?  Microsoft is trying, and may be succeeding.  Overstock is trying, and may be succeeding. 

 

I've owned both of those businesses in the last year, and heard all of the same arguments that I'm hearing now about Dell, but Microsoft rose 50% from our average cost and then we got out, and Overstock rose 68% from our average cost and we sold a significant portion.  Dell will also rebound...maybe 50%, maybe 100%...and I think it will do it within two years.  Personally, I think it will be closer to the latter, as the multiple is significantly more compressed.  In the meantime, it pays me a dividend bigger than either MSFT or OSTK.  Incidentally, MSFT is getting a bit closer to where I'll look at it again.  Cheers!

[ourkid8]

I have also been buying Dell below $9.  It is a shame they are paying a dividend as idealy I would have loved for them to be repurchasing stock at this price.  Regardless, I have asked my broker to use the dividend to repurchase additional stock so it's 'similar' besides I need to pay the 15% withholding tax. 

 

S

 

Wish Dell hadn't started paying the dividend; they could have used it to buy back more shares.

 

Anyone buying?

 

I have recently, by having been put to at $11 and $10. However, I am thinking this one is too hard and maybe I should cut my losses?

 

We bought a bunch more on Friday.  We will keep buying as it drops below our last purchase price.  Average in, average out! 

 

It's very cheap.  The business is a tough one, but the company is being treated as if it's a one-legged pony and going out of business.  This is where the metal hits the road...investors start to get scrambly.  Remember when BAC was going under at $5?  Today they cannot do wrong. 

 

You have a company that realistically can generate net profits of about $700M per quarter or close to $3B a year, and it trades for about 5 times their current market multiple.  The business has net working capital in excess of $6B.  It generates about $4B in operatiing cash flow and only about $500M in capital expenditures...it's a cash cow. 

 

What have the executives been guilty of?

 

1)  Not seeing changes in their industry fast enough

2)  Overpaying on acquisitions

3)  Debateable allocation of cash to shareholders...dividends/stock buybacks

 

3) is historical.  That can easily be modified by shareholder influence going forward, so that the company is better at not overpaying on buybacks and smart enough to suspend a dividend when they should be buying stock.

 

2) is also historical, but could be the future too since the same management is present.  Some of the acquisitions were necessary to change the nature of the business going forward...they were just guilty of overpaying, partly because they needed those businesses.  Again, if many of the businesses they acquired continue to grow organically, there is less likelihood of them paying for poor acquisitions and a greater chance that capital could be returned to shareholders.

 

1) is very important...but also very common.  Who didn't see the future incorrectly except for Steve Jobs and Jeff Bezos?  That's the nature of the technology business.  Question is:  Does the business and management have the capacity to resurrect itself by changing directions?  Microsoft is trying, and may be succeeding.  Overstock is trying, and may be succeeding. 

 

I've owned both of those businesses in the last year, and heard all of the same arguments that I'm hearing now about Dell, but Microsoft rose 50% from our average cost and then we got out, and Overstock rose 68% from our average cost and we sold a significant portion.  Dell will also rebound...maybe 50%, maybe 100%...and I think it will do it within two years.  Personally, I think it will be closer to the latter, as the multiple is significantly more compressed.  In the meantime, it pays me a dividend bigger than either MSFT or OSTK.  Incidentally, MSFT is getting a bit closer to where I'll look at it again.  Cheers!

[alwaysinvert]

Wonder what changed since last week :)

[Parsad]

Wonder what changed since last week :)

 

Mr. Market's disposition!  ;D  Cheers!

[MVP444300]

Wonder what changed since last week :)

 

Mr. Market's disposition!  ;D  Cheers!

 

Damn, I was hoping it would stay under $9 for awhile so I could buy some more when funds became available. 

[compoundinglife]

Former Wipro co-ceo is now president of dell services:

 

http://www.financialexpress.com/news/dell-services-appoints-former-wipro-coceo-suresh-vaswani/1041425

[mcliu]

My issue is that you can never be certain of the sustainability of their acquisitions. How do we even know that those businesses are growing organically?

[ShahKhezri]

My issue is that you can never be certain of the sustainability of their acquisitions. How do we even know that those businesses are growing organically?

 

I passed on this for now for that same reason.  If 3-6 months from now I see some sustainability, I might look again and by that time it might be too late.  I will post my questions this weekend though, I made a list that is at home.  Good luck to all longs.

[T-bone1]

The guys from Longleaf said that the non-PC businesses are growing at "low single digits" organically.

 

I think that is actually great news in this environment.  If you look at their Server business, they are the only one growing, and they are doing it by taking market share from others.

 

In storage, they are taking market share from everyone but EMC.

 

Their service/warranty business has continued to grow this year, despite falling hardware sales.

 

Question for the board?  If you believed that the non-PC business could grow revenues and FCF at the rate of inflation without any further acquisitions, what multiple would you put on that business?

 

What if you thought the entire company could grow earnings and FCF at the rate of inflation without any further acquisitions?  What multiple of earnings or FCF would you put on Dell Inc?

[alwaysinvert]

The guys from Longleaf said that the non-PC businesses are growing at "low single digits" organically.

 

I think that is actually great news in this environment.  If you look at their Server business, they are the only one growing, and they are doing it by taking market share from others.

 

In storage, they are taking market share from everyone but EMC.

 

Their service/warranty business has continued to grow this year, despite falling hardware sales.

 

Question for the board?  If you believed that the non-PC business could grow revenues and FCF at the rate of inflation without any further acquisitions, what multiple would you put on that business?

 

What if you thought the entire company could grow earnings and FCF at the rate of inflation without any further acquisitions?  What multiple of earnings or FCF would you put on Dell Inc?

http://us2.campaign-archive.com/?u=3734d874e292a28b94fc7f1ef&id=ac625e7309&utm_source=twitterfeed&utm_medium=twitter#compan

 

Scroll down a bit for the Dell part.

 

That is the basic model I use, pretty much. Now, I might not agree that ESS is worth Just as much as 14x and that you can strip out all the cash but I'm not quite prepared to give EUC zero value so I guess it's a wash.

[bennycx]

I've seen somewhere in Tilson's notes where Buffett commented on the BRK shareholder meeting in 2002 about Dell and stock options. Anyone knows what he is talking about there? Given that Michael Dell was the CEO at that time, if they were issuing alot of stock options then, it might not be a good thing?

 

Oh. I think prior to 2007, stock options granted were not recorded as expenses at Dell. Maybe that was what he was referring to.

[txlaw]

http://www.informationweek.com/global-cio/interviews/michael-dell-bill-clinton-share-the-stag/240144375

 

Interesting to hear that DELL is now close to being number one in servers worldwide.

 

http://www.informationweek.com/hardware/desktop/michael-dell-our-transformation-is-compl/240144292

 

"You don't look around and say, 'What's for sale?' or 'What can we buy?'" he said. Instead, Dell attempts to craft "a clear business strategy" by focusing on customers. "I remember seeing customers and saying, 'Hey, here's a new server, and we've got gigabytes and petabytes and terabytes,'" Dell said. "Their reaction was very polite, but they said, 'I don't really care about all that. What do you know about my business? What do you know about the verticals I'm in? Can you help me solve my problems?'"

 

Dell Word website:

http://dellworld.com/

[alwaysinvert]

http://www.informationweek.com/global-cio/interviews/michael-dell-bill-clinton-share-the-stag/240144375

 

Interesting to hear that DELL is now close to being number one in servers worldwide.

 

http://www.informationweek.com/hardware/desktop/michael-dell-our-transformation-is-compl/240144292

 

"You don't look around and say, 'What's for sale?' or 'What can we buy?'" he said. Instead, Dell attempts to craft "a clear business strategy" by focusing on customers. "I remember seeing customers and saying, 'Hey, here's a new server, and we've got gigabytes and petabytes and terabytes,'" Dell said. "Their reaction was very polite, but they said, 'I don't really care about all that. What do you know about my business? What do you know about the verticals I'm in? Can you help me solve my problems?'"

 

Dell Word website:

http://dellworld.com/

Thanks, txlaw.

 

Can the "transformation complete" comment be interpreted as there will be significantly less M&A going forward?

[txlaw]

http://www.informationweek.com/global-cio/interviews/michael-dell-bill-clinton-share-the-stag/240144375

 

Interesting to hear that DELL is now close to being number one in servers worldwide.

 

http://www.informationweek.com/hardware/desktop/michael-dell-our-transformation-is-compl/240144292

 

"You don't look around and say, 'What's for sale?' or 'What can we buy?'" he said. Instead, Dell attempts to craft "a clear business strategy" by focusing on customers. "I remember seeing customers and saying, 'Hey, here's a new server, and we've got gigabytes and petabytes and terabytes,'" Dell said. "Their reaction was very polite, but they said, 'I don't really care about all that. What do you know about my business? What do you know about the verticals I'm in? Can you help me solve my problems?'"

 

Dell Word website:

http://dellworld.com/

Thanks, txlaw.

 

Can the "transformation complete" comment be interpreted as there will be significantly less M&A going forward?

 

I think the solutions portfolio has been filled out pretty well, but they will likely continue to do M&A.  I think he just means that they have a full fledged platform now that is a growth business. 

 

But I may have more thoughts after I actually watch the keynote this weekend.

[alwaysinvert]

http://www.informationweek.com/global-cio/interviews/michael-dell-bill-clinton-share-the-stag/240144375

 

Interesting to hear that DELL is now close to being number one in servers worldwide.

 

http://www.informationweek.com/hardware/desktop/michael-dell-our-transformation-is-compl/240144292

 

"You don't look around and say, 'What's for sale?' or 'What can we buy?'" he said. Instead, Dell attempts to craft "a clear business strategy" by focusing on customers. "I remember seeing customers and saying, 'Hey, here's a new server, and we've got gigabytes and petabytes and terabytes,'" Dell said. "Their reaction was very polite, but they said, 'I don't really care about all that. What do you know about my business? What do you know about the verticals I'm in? Can you help me solve my problems?'"

 

Dell Word website:

http://dellworld.com/

Thanks, txlaw.

 

Can the "transformation complete" comment be interpreted as there will be significantly less M&A going forward?

 

I think the solutions portfolio has been filled out pretty well, but they will likely continue to do M&A.  I think he just means that they have a full fledged platform now that is a growth business. 

 

But I may have more thoughts after I actually watch the keynote this weekend.

Yes, I hope I will have time to go through the talks this weekend too.

 

Some of my case for Dell has rested on the assumption that the M&A risk will be lower going forward - but to what extent is another question -, so if this would be the official standpoint it would be a pretty big boon to the case in my view. Obviously not necessarily better for Dell as a company, but certainly easier to evaluate for me.