There is nothing wrong with Dell's short-term goals, and the overarching strategy is the right one.
A version of this article originally appeared on our US site, Fool.com.
Shares of Dell (NASDAQ: DELL.US) dropped like a bag of rocks on this week's earnings report. In the fourth quarter, the computer builder missed the average analyst's earnings target. Then the company issued timid revenue guidance for the next quarter. Never you mind that management set earnings guidance for the next full year significantly above Wall Street's forecasts, or that the margin-boosting strategy is firing on most of its cylinders.
Yeah, you heard me. This is nothing but a slight pause in Dell's recent climb -- a buy-in opportunity whose likes you might not see for years to come.
Marching to a new beat
Dell used to be the king of PC sales. But the company lost its iron grip on that high-volume but skimpy-margin market to Hewlett-Packard (NASDAQ: HPQ.US). New competition is coming up from the likes of Acer and Lenovo, companies close to the manufacturing Meccas of the Far East. Dell and HP can't win that war and turn a profit at the same time. Last year, HP famously considered giving up on PC sales altogether until an abrupt change in leadership put a stop to that move.
I think that was a brilliant idea, and I face-palmed hard when Meg Whitman chained herself to the PC industry again. Dell seems to agree and is slowly strolling down that avenue right now.
This holiday-boosted quarter, $3.2 billion of consumer sales boiled down to just $39 million of operating profit. You're looking at a 1.2% operating margin for that division. None of the other three business units held on to less than 8% of revenue.
Management's stated goal is to "prioritise operating income and cash flow". It's not a race to the bottom of the margin barrel just to collect massive revenue any more. Let HP fight that battle with Lenovo and Acer if it wants to; Dell is done.
But what about the terrible guidance?
You might also see some headlines screaming that the near-term sales guidance was terrible. Well, a 7% sequential decline may sound bad, but then you're coming off the holiday quarter. I hear that full-blown computer systems aren't terribly popular as Valentine's Day gifts or Easter egg stuffers this year. Moreover, last quarter contained an extra week thanks to this irregular 52.2-week Gregorian calendar we're stuck with. So fourth-quarter sales saw an artificial calendar boost of about 3%, and what goes up must come down on the other side.
Once more, with feeling: Dell guides to absolutely normal seasonal revenue patterns here. What's so disappointing about that?
And even if that single-quarter view does bother you, CFO Brian Gladden painted a full-year earnings target at more than $2.13 per share. That's at least 4% above Wall Street's projections for the fiscal year. Shouldn't long-term targets count for more than the myopic near-term goals?
The secret sauce
So how is Dell supposed to pull off that miraculous earnings performance without boosting sales? The answer is big and blue.
Like about half of Silicon Valley, Dell is assembling a facsimile of the IBM (NYSE: IBM.US) business model. It's all about giving enterprise customers all the tools they need to run a data centre, from consulting services to servers and storage boxes. Every acquisition Dell made in the last couple of years has moved the company closer to this ideal -- the only thing missing now is a networking component. But then again, IBM doesn't make its own networking gear, either. Call it an optional component.
In 1993, IBM was a struggling PC maker with a $20 billion market cap. Six years later, a strategy shift into the current enterprise computing buffet had produced a 1,300% shareholder return. It's no wonder that Dell, Cisco Systems (NASDAQ: CSCO.US) and Oracle (NASDAQ: ORCL.US) are falling all over themselves trying to copy that performance. Each of these would-be blueprint snatchers attacks the issue from a unique angle, being based in different sectors of the IT industry. Dell happens to be the closest thing to IBM's systems-focused starting position.
When done correctly, this strategy creates a Keiretsu of computing tools where every sale opens up avenues to follow-up deals. Need a server? Okay, and our consulting services can help you manage it, too. And hey, that data-warehousing storage unit would look great next to our data-management software!
All of these products and services are more profitable than a consumer PC or even corporate workstation could be. And need I remind you that IBM sold its PC division to Lenovo? Getting out of that business would follow the business template Dell chose very faithfully indeed. It's like removing a five-tonne anchor from your ankle.
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