Recent news that a group of private equity investors might be in talks to buy Dell has sent the stock soaring in the past few days. Shares are currently around the $12.60 (£7.90) mark as of writing this piece, and they closed well over $13 back on Tuesday, compared to below $11 four days prior. The jump has been interpreted as proof that investors are cheered by the idea that Dell needs rescuing, and a number of pundits across the web shared quotes to that effect.
This chatter is the precursor to the really miserable Q4 results that everyone knows are coming. Dell hasn’t reported its own results yet, but preliminary sales info points to a widespread slump across the entire market. Overall PC shipments fell 6.4 per cent, Dell’s position in the worldwide market has slipped to third, and Windows 8 did nothing to boost sales. Dell has spent $13 billion (£8.1 billion) on acquisitions since 2008, including $5 billion (£3.1 billion) in 2012 alone. That’s enough to rattle plenty of cages.
Looking at Dell’s financials, however, the need for a private equity buyout is a lot less clear. Note that Dell’s fiscal years are one year ahead of the calendar year – fiscal year (FY) 2013 is calendar year (CY) 2012.
First, here’s the company’s gross margin split between products (hardware) and services (software). Dell has been making a push into enterprise offerings in recent years, where gross margins are significantly higher. While we already know Q4 is going to be ugly as far as unit shipments, Dell’s performance through Q3 looked good on the gross margin front. The revenue split between the two categories was 78.7 per cent products to 21.3 per cent services as of Q3 2013. That’s a shift from fiscal year 2010, the first year the company split revenue into those two categories. In FY 2010, the split was 82.6 per cent hardware, 17.4 per cent software.
That’s not a lot to show for $13 billion in acquisitions, but integrating new products and services takes time. How about net income – the amount of money left over when the bills are paid?
By objective standards, these margins are pretty terrible. Our net margin figures include software products, and we doubt it’s an accident that the figures look the way they do. Margins are steady in FY 2007 and 2008, than plunge in FY 2010 (that’s calendar 2009), right as netbook sales go through the roof. The recent gains are driven by higher revenue from services and some average sales price (ASP) recovery as netbook sales dwindled.
While it’s true that Dell’s margins are objectively lousy, they aren’t terribly out of line with what other PC OEMs make from consumer products sales. Everyone is going to take a hammering in Q4, not just Dell.
Dell’s real problem is that it’s known primarily for cheap computers instead of innovative ones. Its focus on supply chain management and streamlining has left precious little room for creating the kinds of computing experiences that drive Apple’s high margins. The many acquisitions since 2008 have led to charges that the company is poorly differentiated. But a private equity bid without a new business plan isn’t going to fix any of those issues.
Dell’s best bet would be to invest in new devices that put consumer experience first. Bring in designers to consider every angle, from port location to screen quality. Isolate the audio jacks. Offer high resolution, non-glossy display options. They need to talk about the innovations baked into hardware, how that benefits the consumer, and use Dell’s massive economies of scale to secure better prices on quality components.
They need to stop stuffing systems full of shovelware and replace dozens of dubious offerings with targeted options that make sense. There’s an opportunity here – consumer’s perception of pre-installed software would change dramatically if they actually had control over what software was pre-installed in the first place.
There are rumours that the company is investing in something called Project Ophelia that packs an entire system into a flash drive. Connect the drive to any device with a HDMI port (technically it’s MHL), and Ophelia becomes a thin client capable of running multiple operating systems from the cloud. I don’t know if there’s much mass market appeal for this type of device, but Dell did buy Wyse, a leading provider of thin client systems, in 2012. This type of partnership could be a game changer. At the very least, it could secure Dell a spot as a company that knows how to innovate.
If going private is what gives Dell the courage to challenge the status quo, branch out, and build better systems, than I’m all for going private. Objectively, however, there’s little reason to think Dell is in a dramatically different position to its peers. The troubles facing the PC industry are systemic, as are the solutions.
While we’re on this PC theme, you might also want to check out my article from earlier today: The PC industry should be aiming for higher prices and better quality.