Dell Seeks to Double Size of Data Center Business

Dell Inc. plans to “double the size” of its $16 billion data center and technology services business in three years by shifting staff, increasing sales incentives, and buying more companies, executives said.

Chief Executive Officer Michael Dell, speaking at the company’s annual analyst meeting today in Austin, Texas, said 65 percent of Dell’s 96,000 employees work in “solutions,” including systems for corporate data centers and technology services, up from 49 percent two years ago. Dell’s enterprise business may reach $30 billion by fiscal 2014, executives said.

“The only way to do that is through M&A,” said Jayson Noland, a senior analyst at Robert W. Baird & Co. in San Francisco, who has an “outperform” rating on Dell shares. “You can’t do that organically.” Dell could acquire in areas including security and systems-management software, he said.

Dell, the world’s third-largest maker of personal computers, yesterday said it would return to growth in revenue and operating income in fiscal 2011 after a two-year slump. Companies are replacing aging PCs, and Dell is expanding into products and technology services for corporate data centers.

The company, based in Round Rock, Texas, bought Perot Systems Corp. for $3.6 billion in cash last year to expand into computing services, and acquired storage maker EqualLogic Inc. for $1.4 billion in 2008. Dell had $10.9 billion in cash and short-term investments on its balance sheet as of April 30.

Acquisition Targets

The company will continue to acquire vendors with strength in data centers and business computing, CEO Dell said at a reception for analysts yesterday. He said today that “we haven’t ruled out any category” of acquisition target.

“They don’t have a track record so it will be interesting to hear how they plan to change the revenue mix,” said Abhey Lamba, an analyst at ISI Group Inc. in New York, who has a “hold” rating on Dell shares.

Dell may acquire companies that make data-center software, provide technology services in specialized markets including health care and produce networking equipment, Chief Financial Officer Brian Gladden said in an interview. Dell’s cash position would enable it to buy the companies it needs to meet its enterprise growth targets without using stock, he said.

“We feel like we can do what we need to do without doing a stock transaction,” Gladden said.

Gladden told the analysts that Dell’s sales staff has incentives to increase revenue in the enterprise business -- services, computer servers, and networking equipment -- faster than in its PC business.

Shifting to Services

The company is trying to lessen its dependence on PCs, moving into services and smartphones and releasing a tablet computer. Dell, more than three years into a turnaround effort, has announced plans to cut more than 10,000 jobs and has outsourced production, shutting factories to save money.

Services accounted for 13 percent of revenue in the first quarter, while about 55 percent came from desktop and mobile PCs. Services revenue has increased an average of 2.9 percent in Dell’s two most recent fiscal years, while sales of PCs, laptops, servers, storage devices and software have declined.

Dell said in a statement yesterday that it expects 2011 operating income, excluding some costs, to rise as much as 23 percent this year. Revenue will jump as much as 19 percent from fiscal 2010 ended Jan. 29, when sales fell 13 percent to $52.9 billion. Sales were little changed in 2009.

Stock Value

Dell shares have fallen 47 percent since Jan. 30, 2007, the day before Michael Dell returned as CEO. Over that period, Hewlett-Packard Co. gained 6.5 percent, and International Business Machines Corp. rose 29 percent.

Dell fell 89 cents, or 6.4 percent, to $12.93 at 4 p.m. New York time in Nasdaq Stock Market trading.

The stock is attractively priced relative to its competitors, said Jeff Schwarte, a portfolio manager at Principal Global Investors, a unit of Principal Financial Group Inc., who manages $1.55 billion and doesn’t personally own Dell shares. Dell’s price-to-earnings ratio of 10 is lower than competing computer-hardware companies, Schwarte said.

“It’s a conflict stock; that’s why there’s a valuation discount,” he said. “It’s not Apple, where everyone knows the story.”

Analysts surveyed by Bloomberg expect Dell to earn 30 cents a share before some items in its second quarter ending in July, compared with 27 cents a year earlier.

PC Shipments

Worldwide PC shipments rose more than 27 percent in the first quarter of 2010 and are expected to climb 19.8 percent this year, to 354.8 million machines, according to market researcher IDC. Shipments increased by 3 percent in 2009.

Hewlett-Packard had 19.7 percent of shipments in the first quarter, Acer Inc. accounted for 13.6 percent, and Dell 13.3 percent, IDC said. Dell PCs sold for an average price of $657 each in the quarter, compared with $700 for Hewlett-Packard and $594 for Acer, according to market researcher Gartner.

In Dell’s May 20 earnings call, CFO Gladden said prices had been “more stable” than they were last year.

Gladden told analysts today that Dell wants to double its 1 percent profit margin on consumer PCs. Gladden has said he plans to expand Dell’s total operating margin to 7 percent, from 4 percent in the fiscal 2011 first quarter.

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