Dell's Q4: There's little middle ground on the future

Dell is plunging ahead with a transformation plan that revolves around software. However, analysts note Dell is still tethered to the PC business.
Written by Larry Dignan, Contributor

The middle ground on Dell's prospects has eroded in a hurry. Analysts are either upbeat or bummed about the company's prospects as it diversifies away from hardware into software and services.

Dell reports its financial results on Tuesday and is expected to report fourth quarter earnings of 51 cents a share on revenue of $15.94 billion. For fiscal 2012, Dell is expected to report earnings of $2.12 a share on revenue of $62.03 billion.

Analysts seemed to be heartened that Dell has been a consistent performer in recent quarters. According to Gartner, Dell is gaining share in PCs and x86 servers, but storage is challenging. Dell has pivoted away from a partnership with EMC to selling its own storage gear.

The other notable item in the quarter was that Dell hired John Swainson, former CEO of CA, to run a new software unit. Some analysts such as Jefferies Peter Misek argue that Dell is going to go shopping for software players such as BMC. Misek said:

We believe Dell is on the prowl for a $1B to $3B acquisition in the software space, specifically systems software. Dell recently announced that John Swainson will be the president of Dell’s new Software Group.

For now, the wild card for Dell's fourth quarter will be the hard drive shortage, which has impacted tech companies.

Stifel Nicolaus analyst Aaron Rakers said in a research note:

While it is well known as this point that the PC/server/storage industry will be faced with HDD shortage related challenges in 1H2012 given the Thailand flooding, our checks have pointed to Dell managing through this dynamic better than most other companies. That said, we do think it would be too optimistic to think that the company was or will be unscathed totally – either in terms of component pricing or by the absolute inability to ship some solutions (or likely both, in our opinion).

Overall, Rakers argued that Dell's transition to software and services and operational improvements will "continue to bear fruit over coming quarters."

Sterne Agee analyst Shaw Wu isn't all that impressed with Dell. Wu recently downgraded Dell to an "underperform" from "neutral." Wu said Dell's transition to higher margin businesses is a work in progress.

The "company remains in a tough competitive fundamental position and despite efforts to diversify, we estimate 70%-75% of its business is tied to PCs," said Wu.

Specifically, Wu said:

We believe Dell remains in a tough competitive position sandwiched between lower-cost players (Lenovo and Acer) and Apple encroaching more in its core PC business as Macs and iPads gain share. Despite efforts to grow beyond a PC company, we estimate 70%-75% of its business is tied to PCs. This includes peripherals, software, and services. In addition, we see HPQ, IBM, and CSCO competing more in its core market in small-medium business (SMB) and servers. We view Dell as a company in transition that needs to take more aggressive steps.

Related: Suddenly, Dell is a Software Company!

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