(DELL) Dell Explains Blueprint for Growth

World’s second largest PC maker, Dell Inc. (DELL) chalked out some plans to earn better returns from investments. At its recent analyst meeting, the chief executive officer (CEO) Michael Dell expressed intentions to focus on the small and medium business (SMB) and health care segments.

Moreover, the CEO expressed optimism regarding Dell’s ability to shift focus to software applications and corporate-data management technology, to reduce dependency on PC sales.

Management believes that Dell is well positioned to benefit from a multi-year corporate PC refresh cycle. The company generates about 70.0% of sales from PCs and related products. The Dell chief believes that selective acquisitions, expanding product lines and additional sales staff could support expansion.

Now-a-days, Dell’s prime area of interest happens to be cloud computing. Accordingly, the company is on its way to build data centers so as to capitalize on related growth prospects.

In an effort to offer its cloud-computing customers a more complete line-up of products, Dell will sell the whole data center, instead of selling servers and storage solutions separately. For this purpose, Dell will spend roughly $1.0 billion in the next two years to open 10 data centers.

Dell also plans to double its Enterprise business (server, storage and networking) from ~$18.0 billion to ~$30.0 billion by 2014. This expansion activity will be backed by continued acquisition of scalable technologies and strong organic growth.

Dell expects its Services business to grow at a 7–9% CAGR over the next 3 years. Management asserted that its health care services business is quite sturdy and is now planning to expand its financial services. The continuous demand for Dell’s services can be credited to the addition of new products from acquired businesses.

Apart from adding products to the Dell suite, acquisitions also make it a comprehensive storehouse of corporate information technology needs. In the last fiscal year, it acquired as many as eight companies, including information-security firm SecureWorks Inc. Dell’s acquisition strategy has been paying off, as affirmed by its higher margins and new customer wins. It aims to use acquisitions to increase its presence in the storage business and expand its services and software units internationally. Moreover, prospective acquisitions of storage vendors will make Dell a strong competitor of key players such as International Business Machines Corp. (IBM) and Hewlett-Packard Co. (HPQ).

Management did not update the guidance, but rather reaffirmed its prior long-term financial targets of 5-7% revenue growth, more than 7% operating margin, and operating cash flow in excess of net income. The lion’s share of the company’s research and development investments will be dedicated to servers and storage in fiscal 2012.

Last but not the least, Dell announced its intention to buy back an additional $2 billion of common stock by the end of fiscal 2012. The company has already spent $1.6 billion on the repurchase of shares.

We think that the analyst day was not very eventful as no financial data was revised. However, investor sentiment seemed positive. The shifting focus from legacy PC sales toward the data-management market was notable and could drive revenue upward. Moreover, investors may be expected to remain loyal since they continue to get a good return on their investments in Dell. However, we should keep in mind that margins may fall due to acquisitions.

Currently, Dell has a Zacks #2 Rank, which equates to a short-term Buy recommendation.

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