DELL - Dell Inc.

[VAL9000]

Increased power and more complicated OS's on mobile computing devices is the opposite of thin client computing.  You can't call current tablets thin clients -- that's what I'm telling you and ValueInv.

 

On the software side this statement rings true, but on the hardware side I think that higher power devices will be needed to make the shift.  The reason I say this is that there is an inverse relationship between portable code and efficiency.  Lower level languages are much more efficient, but only operate on a specific architecture.  Higher level languages, such as HTML5, require a lot more processing power to deliver a convincing user experience.  Everybody seems to be in agreement that cloud applications are the future, but I think this approach will continue to push the envelope on processing power.

 

So, guys like ARM and Intel will have an interesting future.  Balancing power with efficiency is now the name of the game.

 

On that note, Microsoft has made a prescient move by choosing to support the ARM chip set with Windows 8.  And this helps their OEM partners in two ways:

1. They are forcing Intel to compete with ARM.  OEMs win because they will be able to sell a better product without any investment.

2. They are demonstrating that a Windows+ARM (WARM?) product can work (risk free to the OEM).  It's potentially a new line of revenue, but more importantly it's something that an OEM couldn't do on their own.  Intel needs Microsoft's support in a big way, but an individual OEM needs Intel much more than Intel needs any given OEM.  It would be corporate suicide for an OEM to begin producing Windows RT devices on their own.  Intel would gut them on chip pricing across all of their other products.  In a business where the lowest cost producer is the victor, these OEMs could never recover from making an enemy of Intel.

 

Ultimately I think that Intel will catch up and produce a reasonably efficient chip set based on the existing architecture, but I don't think it'll have much impact to how the OEMs operate.  So yeah, Microsoft is screwing someone with this whole device manufacturing business, but I think that someone is probably Intel.

 

[txlaw]

Increased power and more complicated OS's on mobile computing devices is the opposite of thin client computing.  You can't call current tablets thin clients -- that's what I'm telling you and ValueInv.

 

On the software side this statement rings true, but on the hardware side I think that higher power devices will be needed to make the shift.  The reason I say this is that there is an inverse relationship between portable code and efficiency.  Lower level languages are much more efficient, but only operate on a specific architecture.  Higher level languages, such as HTML5, require a lot more processing power to deliver a convincing user experience.  Everybody seems to be in agreement that cloud applications are the future, but I think this approach will continue to push the envelope on processing power.

 

So, guys like ARM and Intel will have an interesting future.  Balancing power with efficiency is now the name of the game.

 

On that note, Microsoft has made a prescient move by choosing to support the ARM chip set with Windows 8.  And this helps their OEM partners in two ways:

1. They are forcing Intel to compete with ARM.  OEMs win because they will be able to sell a better product without any investment.

2. They are demonstrating that a Windows+ARM (WARM?) product can work (risk free to the OEM).  It's potentially a new line of revenue, but more importantly it's something that an OEM couldn't do on their own.  Intel needs Microsoft's support in a big way, but an individual OEM needs Intel much more than Intel needs any given OEM.  It would be corporate suicide for an OEM to begin producing Windows RT devices on their own.  Intel would gut them on chip pricing across all of their other products.  In a business where the lowest cost producer is the victor, these OEMs could never recover from making an enemy of Intel.

 

Ultimately I think that Intel will catch up and produce a reasonably efficient chip set based on the existing architecture, but I don't think it'll have much impact to how the OEMs operate.  So yeah, Microsoft is screwing someone with this whole device manufacturing business, but I think that someone is probably Intel.

 

Great insight, and I don't disagree with you on processing power continuing to go up inside the local device.

 

However, things for INTC and ARM are getting more murky given recent developments.  I've been watching the debate on the INTC thread to see people's take on INTC and Surface.  Haven't yet heard any mention of AMD, Nvidia, or in-house chips (Apple's A6, Amazon's possible purchase of TI mobile processor biz, GOOG saying that they will consider designing chips). 

 

What's your take?

[bathtime]

Is it possible that laptop replacement by consumers may become less frequent due to the sturdiness of solid state drives?

 

Pretty much all the MacBooks I'd replaced prior were related to failed hard drives from dropping the computer - anywhere from a year to three years in the life of the laptop. I now have a Macbook Air with solid state drive and it feels a lot more resilient. I can't see being tempted to upgrade at this point as it's plenty fast, slim, and I love the SSD.

 

Anyone else having a similar experience?

[rmitz]

Is it possible that laptop replacement by consumers may become less frequent due to the sturdiness of solid state drives?

 

Pretty much all the MacBooks I'd replaced prior were related to failed hard drives from dropping the computer - anywhere from a year to three years in the life of the laptop. I now have a Macbook Air with solid state drive and it feels a lot more resilient. I can't see being tempted to upgrade at this point as it's plenty fast, slim, and I love the SSD.

 

Anyone else having a similar experience?

 

I think most people would just have replaced the hard drive.  They're cheap and usually an easy repair, either for the user or their repair people.  In the case of a 3 year old machine it's a good excuse to upgrade, but I can't see replacing a 1 year old machine for a hard drive.

[racemize]

I just don't drop mine =p.  My laptops have a 3-4 year cycle for me, and I usually sell them to friends at a discount. 

[VAL9000]

Great insight, and I don't disagree with you on processing power continuing to go up inside the local device.

 

However, things for INTC and ARM are getting more murky given recent developments.  I've been watching the debate on the INTC thread to see people's take on INTC and Surface.  Haven't yet heard any mention of AMD, Nvidia, or in-house chips (Apple's A6, Amazon's possible purchase of TI mobile processor biz, GOOG saying that they will consider designing chips). 

 

What's your take?

 

I'm not sure exactly, but my guess is that it has to do with where software and hardware are going right now.  Software companies are getting value out of getting lower (that is, doing the hardware, too).  Hardware is becoming less modular.  Under the covers, things are becoming less modular, too.  It used to be that you had a microprocessor, a math co-processor, and a bunch of other weird chips that did specific things.  The integrated circuit is rapidly consolidating functionality into fewer chips (e.g. System on a Chip).  So if you extend the idea that software guys are now designing hardware, and then combine it with the idea that hardware is consolidating into basically a single chip, then it makes sense that a software company would want to own the chip design, because really the chip design is just a piece of software anyway.

 

So yeah, license all of the IP from the likes of AMD and Samsung, then tie all of the bits together with chip design software, and then send it to Taiwan to get it printed.

 

This could really screw with Intel's model for end user devices.  Thanks for bringing it up.

 

For how this would impact Dell.  It could go two ways (or more?).  One they could do the same thing and put other software on their hardware.  Or two they could become a channel distributor of these devices.  I think the second is more likely, which gives full credit to your idea that Dell will sell 3rd party devices into an overall solution for customers while backing out of the hardware manufacturing business.  Great thinking on that tx.  It really adds up in many scenarios.

 

[bathtime]

I just don't drop mine =p.  My laptops have a 3-4 year cycle for me, and I usually sell them to friends at a discount.

 

I guess the subset of laptop users who have butterfingers is smaller than those who drop their phones. :)

 

I thought I could just replace the hard drive last time around, but the repair guy found that it was actually an internal power connection that had been damaged and the fix was not far from replacement cost.

 

 

[txlaw]

Speaking of VDI, DaaS, and thin clients:

 

http://content.dell.com/us/en/corp/d/secure/2012-10-17-dell-cloud-client-citrix.aspx

[Guest valueInv]

http://venturebeat.com/2012/10/18/amd-ceo-fears-pc-market-to-stay-sluggish-for-several-quarters/

[Parsad]

Short, but good article on Dell and its focus on SMB's..."For Dell, Consolidation is Innovation"...Cheers!

 

http://bits.blogs.nytimes.com/2012/10/18/for-dell-consolidation-is-innovation/?partner=yahoofinance

[BargainValueHunter]

http://seekingalpha.com/article/933121-dell-big-upside-even-with-a-conservative-valuation

 

Dell does not specify the exact share of software in sales, so we did not include it in the beta calculation.

 

We use an unlevered beta of 1.14 for services (15%) and 1.33 for the rest (85%), which results in an aggregate unlevered beta of 1.30. Reflecting leverage, we end up with a levered beta of 1.82.

 

For the risk-free rate, we use the 10-year Treasury Bond (1.66%) and for the equity risk premium we follow A. Damodaran (6.35%).

 

This leads to a cost of equity of 13.2%. Including the cost of debt (post-tax) of 3.4%, the weighted average cost of capital is 10%:

 

The comparable multiples method is the most favorable to Dell, with an estimate at $19-20 a share.

 

Historical multiples, implicitly assuming a return to a long-term mean, would value Dell at $17 a share.

 

Finally, discounting the NOPAT gets us the most pessimistic valuation at $15 a share. If we did not assume negative growth by 5% a year, the estimate would be at $17 a share.

 

The weighted average yields a valuation at $17 / share, to be compared with a market price of $9.8 / share.

 

Conclusion

 

Considering a safety margin of 10%, and a target price of $15.5, we see an upside of 60% relative to current market price.

 

The 3.3% dividend could help us to wait around for the stock price to come back up, and is for the time being largely covered by the FCFC. However it could eventually be reduced depending on how the Desktop PC and Mobility divisions fare (further drops or flattening).

 

At current market prices I prefer HP to dell, but under $10 we buy the cheap upside of Michael Dell successfully turning Dell into a global leader in corporate IT solutions and services.

[Guest valueInv]

Short, but good article on Dell and its focus on SMB's..."For Dell, Consolidation is Innovation"...Cheers!

 

http://bits.blogs.nytimes.com/2012/10/18/for-dell-consolidation-is-innovation/?partner=yahoofinance

Analyze their acquisitions and see which of those target SMBs. You'll have your answer.

 

[T-bone1]

Good interview with the heads of new dell

 

http://allthingsd.com/20121019/seven-questions-for-dell-enterprise-head-marius-haas-and-software-head-john-swainson/?reflink=ATD_yahoo_ticker

[Guest valueInv]

Let's pretend its business as usual:

 

http://online.wsj.com/article/SB10001424052970203400604578070654156033138.html?mod=googlenews_wsj

[txlaw]

Looks like DELL might be trying to work not just with Marvell, but also Calxeda, on ARM-based servers, which would make sense since Calxeda is in Austin.

 

http://content.dell.com/us/en/corp/d/secure/2012-10-24-dell-arm-server-open-source-apache.aspx

[txlaw]

http://gigaom.com/cloud/dell-has-sold-1m-webscale-servers-in-five-years/

 

http://www.youtube.com/watch?feature=player_embedded&v=O1r-n5pgmD0

[Guest valueInv]

http://gigaom.com/cloud/dell-has-sold-1m-webscale-servers-in-five-years/

 

http://www.youtube.com/watch?feature=player_embedded&v=O1r-n5pgmD0

 

"DCS doesn’t sell to just anyone, though. The unit’s banner customer used to be Facebook (although it has since begun building much of its own gear, and claims to be off vendor gear entirely for its newest data center),"

 

Expect more to follow.

[Guest hellsten]

Longleaf Partners Funds Quarterly Report is out:

http://southeasternasset.com/quarterly_reports/Longleaf093012.PDF

 

Far more

importantly, the growing, higher margin Enterprise

Solutions and Services (ESS) business had strong

networking and server growth with servers gaining

market share. While ESS represents about

one-third of revenues, it constitutes over half of

profits and a far higher share of our appraisal. The

company’s transformation to a solutions-based

company is well underway and leverages Dell’s

direct distribution advantage of over 20,000

employees responsible for customer relationships

with small and mid-size businesses. Interestingly,

IBM successfully refocused its business over a ten

year period starting in the early 1990’s from

mainframe hardware to multifaceted technology

solutions for large-scale customers. The head of

IBM’s mergers and acquisitions was Dave Johnson,

who joined Dell in 2009 to lead its strategy to

enhance solutions offerings and has purchased a

number of companies and products that have

grown through Dell’s expansive distribution. If we

assume that EUC continues its rapid decline and

has no value, we appraise the remaining ESS

business at over twice the current stock price. With

adjusted cash earnings of $2.00/share and an

enterprise value of less than $3.50/share (share

price minus net cash and DFS), the stock trades at

less than a 2X adjusted P/E for a growing business

(ESS) with good margins and an owner/operator as

CEO who is focused on growing value per share.

[Josh4580]

http://www.bloomberg.com/news/2012-11-15/dell-s-sales-forecast-misses-estimates-amid-pc-industry-slump.html

 

"Dell has spent $12.7 billion on 17 acquisitions since 2009, adding products for corporate data centers to lessen its reliance on PCs."

 

Funny, Dell's market cap right now is $16.5 billion.  Granted, they overpaid a ton for most of those acquired businesses.  I bet IBM wasn't making $2-$3 billion acquisitions to transition to a services company.  Is any of Dell's forays outside of PC's organic?

[shalab]

Straight from the horse's mouth:

 

Strategic Highlights:

 

Dell Enterprise Solutions and Services revenue grew 3 percent year over year to $4.8 billion. The company year to date is 4 percent ahead of last year’s ES&S revenue at $14.2 billion, accounting for greater than 50 percent of the company’s gross margin thus far this year. The ES&S business is on an annual run-rate approaching $20 billion.

 

Server and networking revenue for the quarter grew 11 percent. Dell was the only top-3 server provider to have positive unit growth in the quarter. Dell’s server growth was driven by its new, 12th-Generation line, leadership in hyper-scale infrastructure solutions and an increase in customer adoption of cloud solutions for their IT requirements. Dell’s differentiated intellectual property and solutions have resulted in solid growth in this business.

 

Dell’s Services business continues to execute well, with gross margin percentages improving sequentially for the sixth consecutive quarter, as the company focuses on the most profitable areas of the business. Growth in support, deployment and security services highlighted the quarter.

 

Business Units and Regions:

 

Large Enterprise revenue was $4.2 billion in the quarter, an 8 percent decline. Operating income was $325 million, or 7.8 percent of revenue.

 

Public revenue was $3.8 billion, an 11 percent decrease. O perating income for the quarter was $352 million, or 9.2 percent of revenue.

 

Small and Medium Business revenue was $3.3 billion, a 1 percent decline. Operating income was $349 million, or 10.6 percent of revenue.

 

Consumer revenue was $2.5 billion, a 23 percent decline. Operating loss was $65 million or minus 2.7 percent of revenue.

 

Revenue in Americas was down 9 percent; Asia-Pacific and Japan was down 11 percent; and EMEA was down 15 percent.

[txlaw]

Another ugly (though profitable) quarter. 

 

Consumer OI went way negative.  Public sector, not surprisingly, was hit given austerity measures and deferred IT spending.  Large enterprise likely deferred IT spending due to fiscal cliff.  Win 8 launch probably meant deferred IT spending across the board.  We'll see if there's some rebound in IT spending next quarter, but I wouldn't count on it.

 

Servers and networking doing well, but very worrisome to see Dell IP storage growth going negative YoY.

 

Software backlog flat, but that's fine, as I expect that to grow once Swainson gets things going and Quest is fully integrated.

 

Haven't yet gotten to listen to CC.

[txlaw]

This was posted in MSFT thread.  Worth reading, Win 8 launch timing and adoption certainly affects DELL.

 

http://winsupersite.com/windows-8/windows-8-sales-well-below-projections-plenty-blame-go-around

[Guest hellsten]

http://i.dell.com/sites/doccontent/corporate/secure/en/Documents/jkhgff133qsldeck.pdf

 

• Free cash flow of $1.3B; $3.4B trailing twelve months

• Ended 3Q with $14.2B cash and investments

 

Dell's P/S is now on the same level as Lenovo's. Mr. Market is crazy ;D

[txlaw]

Another ugly (though profitable) quarter. 

 

Consumer OI went way negative.  Public sector, not surprisingly, was hit given austerity measures and deferred IT spending.  Large enterprise likely deferred IT spending due to fiscal cliff.  Win 8 launch probably meant deferred IT spending across the board.  We'll see if there's some rebound in IT spending next quarter, but I wouldn't count on it.

 

Servers and networking doing well, but very worrisome to see Dell IP storage growth going negative YoY.

 

Software backlog flat, but that's fine, as I expect that to grow once Swainson gets things going and Quest is fully integrated.

 

Haven't yet gotten to listen to CC.

 

Meant to say "services backlog and related software" flat, but actually the backlog appears to have shrunk sequentially. 

 

Fiscal cliff?

[ERICOPOLY]

Remember that Shuckenbrock video I posted where he seemed to put some pretty heavy positive spin on everything?

 

I notice he sold more than 2/3 of his stock earlier this year around $17/$18 -- and so did some other execs.  Some pretty heavy insider selling. 

 

I think the video however came out after the selling.

 

It always looks suspicious when there is heavy insider selling, videos about how great things are going, and then in the same year some pretty nasty turn of events in the business.

 

Except last year Michael Dell bought a bunch.