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While all the press reports have focused on how well Dell performed in Q4 and FY10 – indeed its share price shot up 12% following the announcement – we have concerns.
Services grew by just 1% to $1.9b in Q4 (which is a decline in real terms which ever country’s inflation figures you take). We assume it was Dell’s warranty support services that dragged things down (it accounted for $1.1b of that figure) as outsourcing was up 2%, and project services were up 6%. These are the first full year results since Dell’s big foray into IT services with the $3.9b takeover of Perot Systems in September 2009. There are some positives though – the services backlog now stands at $13.9b (up 9% yoy), with outsourcing making up $7.2b (up 8%). Services now account for 13% of Dell’s total revenue or $7.7b, and it employs some 43,000 people worldwide. Its challenge is to now get them firing on all cylinders to turn that backlog into real business in 2011.
At a headline level, Q4 revenue (ended 31 December) was up 5% at $15.7b on a 7.3% margin (vs. a 3.4% margin in Q409) – clearly a reflection of its shift to higher margin services. The full year was up 16% to $61.5b with a 5.6% margin (vs. 4% in FY09). Rival IT hardware and services provider HP however grew its Q410 revenue (to 31 October 2010) by 8.1% on a margin of 12%.
Services continues to be the focus of acquisitions, including the recent purchases of ‘cloud-based’ medical archiving provider InSite One, information security services provider SecureWorks (see More pieces in Dell’s services jigsaw), and SaaS integrator Boomi (see What is Dell up to with Boomi). In a call with analysts, president of Dell Services Stephen Schuckenbrock, explained that bringing together ‘IP’ in this way is Dell’s ‘cloud strategy’, and its plan is to broaden the focus into other verticals such as the public sector and in to both large and SME clients. However we would like to see a clearer vision for what Dell wants to achieve through these various ‘cloud’ investments. We think HP articulates its vision far better with its hybrid cloud strategy (see here), and it has some concrete vertical industry initiatives to prove it (see Cloud playing bigger role in HP’s financial services business).
On the consumer hardware side of the business we are even more concerned about Dell’s prospects. As we noted here, many analysts (including us!) are predicting the demise of the netbook, with desktops only showing minimal growth over the next 3 years – by which time tablets will represent over 20% of all the 500m PCs sold worldwide. Dell’s attempt to get a slice of action with its own Streak 7 tablet (which hasn’t had a confirmed UK release yet) is unlikely to have Apple quaking in its boots.
