Dell’s Shifting Focus To Services Triggers Plans Of Going Private

DELL: Dell logo

Dell’s (NASDAQ:DELL) shares surged 13% to $12.29 on Monday, on talks that the company may be going private. The past year was rough for the company as its shares tanked from $18 to $9, mainly due to its shifting business model, the weak PC market and the company’s focus on services. The market continues to consider the company a PC maker, even though this is no longer its biggest business.

We estimate that its services business accounts for nearly 30% of its value, followed by servers and networking accounting for 13% and the notebooks business for 13%. The stock has taken a beating as the company’s revenue dropped 11% last quarter and came in at $13.7 billion. Shifting from its main business, PC manufacturing and sales to services is a long term strategy, one that the market hasn’t received well. Taking the company private will help Dell stay on track without having to worry about short term loss in sales. The shift may also be a sign that the company values its shares higher than its current market price, and this may be a sign of value that is yet to be unlocked. It also allows the management to focus solely on running the company and not having to worry about compliance. [1]

See our full analysis on Dell

Unlocking Value For Dell

Dell may still be one of the top PC makers in the world with nearly 10% market share, but this is not where its business is headed. While it will continue to focus on mid and high end PCs as well as tablets, the majority of its value in the coming years will be driven by services, which tends to have higher margins, as well as steady revenue. Services contracts are sticky in nature and long term in nature, which will ensure less volatile revenues and a stable customer base.

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Dell is targeting $5 billion in software sales in the coming years, and it plans to achieve this by targeting key areas such as network security, cloud storage, systems management, business analytics, virtualization and thin client systems. The company expects security and systems management to be a billion dollar business in the next few years.  Services have higher margins and the associated contracts tend to be long term. John Swainson, former chief executive of CA, was appointed as head of Dell’s newly formed software division, and he has laid out plans to target mid sized companies that are underserved by rivals such as HP and IBM. [2]

Dell is targeting mid-sized companies with 200-2,500 employees, which it feels is an underserved market, and it expects this market to generate $5 billion in sales in the next few years. To scale up quickly and meet demand, it has been using cash generated from its PC business to buy out companies in its areas of interest. Dell has bought SecureWorks and SonicWall for its security business, and acquired Clerity, Wyse, AppAssure, Scalent and Kace for its systems management segment. Its most recent acquisition was the $2.4 billion buy out of Quest.

The company plans to combine hardware and software into pre-configured devices and sell them to mid-sized businesses and support them through its services arm. It also plans to sell Windows 8-based tablets with pre-installed management software to its institutional clients, making the tablets more useful for the customers.

Services and software contribute to nearly 30% of our price estimate for the stock. If software revenue was to reach $5 billion by 2015, as the company expects, we can see upside of nearly 20% to our current price estimate. For such a significant transition, management needs to be focused on running the business with a long term perspective, rather than meet short term revenue and profit goals. The argument for taking it private is that it could free significant time and resources, which could be better used to run the business rather than provide regulatory reporting, quarterly guidance and manage investor’s near term expectations.

We currently have a $12 Trefis price estimate for Dell, which is in-line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. Dell Said To Be In Buyout Talks,, Jan 15, 2013 []
  2. Dell Pins Software Hopes on the Midmarket,, July 20, 2012 []