Dell, with an eye on storage, to keep up acquisitions

By : |June 30, 2011 0

AUSTIN, USA: Dell Inc plans to keep making acquisitions and expects to hold on to recent gains in profit margins, as it expands into areas such as storage and computer services.

CEO Michael Dell said on Wednesday the computer maker will focus on "midmarket opportunities," including small and medium businesses in the public sector and the healthcare industry as the company looks for long-term revenue growth of about seven per cent.

Also Read: Dell: All set to reign data storage with acquisitions

Addressing a key investor concern, executives at an annual analyst conference said they expect to sustain recent improvements in gross margins, and continue to see strength in corporate information technology upgrades.

Shares in the company, once the world’s top maker of computers, closed up 2.6 percent at $16.42.

The company, which is diversifying its revenue base in the face of weakened consumer demand, has enjoyed renewed favor from investors after quarterly results rose and it raised its 2012 outlook in May on strong corporate sales and improved profitability.

"We…heard a much better tone and story than in recent years. Dell still has a way to go on their transformation, but we were impressed that they have accomplished what they set out to do over the last year," said Wells Fargo analyst Jason Maynard.

"It is not entirely clear if the recent improvements in margins are temporary given better demand/spending versus their structural changes. For now, we believe this remains the primary debate on the stock," he said in a client note.

Dell, which did not update its forecasts for fiscal 2012 at the conference in Austin, Texas, has been trying to move into fast-growing tablet and smartphone markets and such businesses as data center equipment.

Storage and service remain a key area of growth for the company. Dell expects revenue from storage to grow 15 percent to 20 percent a year on average in the next four years, and revenue from services to expand an average 7 percent to 9 percent a year over the same period.

Dell, which has steadily conceded market share to Hewlett-Packard Co and Acer Inc in past years, has shown progress on improving margins by moving into higher-margin businesses.

Its first-quarter gross margin was 23.4 percent, the highest since the same quarter in 1992. The company also has been focused on wringing savings out of its supply chain, helping boost margins.

"That has made Dell much healthier and much more competitive," Michael Dell said.

Selective Acquistions
Dell is looking to expand its services business in Europe and Latin America, executives said. Dell on Wednesday forecast revenue of $4 billion to $5 billion in storage by fiscal 2015, up from $2.3 billion in fiscal 2011. And it expects its technology services business to generate $10 billion to $11 billion in the same period, from $7.7 billion last fiscal year.

The services unit has signed 60 percent more deals so far this year, amounting to about $800 million, compared with the same period last year, said Steve Schuckenbrock, head of Dell’s services unit.

The company is investing in growing the services team, he said.

Dell also is increasingly using acquisitions to help it be a one-stop shop for corporate information technology needs, snapping up about eight companies in its last fiscal year, including information-security company SecureWorks Inc.

With Dell continuing to face competition in data center computing from companies like International Business Machines Corp and HP, the company said it remains on the hunt for small to mid-sized assets that can further its ambition of becoming a one-stop shop for corporate technology needs.

Dell would use acquisitions to increase its presence in the storage business, among other markets, or to geographically expand its services and software units, Chief Financial Officer Brian Gladden told Reuters.

But it would eschew a strategy adopted by rival HP, which bought Palm and its operating system software.

"It’s counter to our strategy," he said. "We tend to be much more open to multiple (operating systems)."

Some Wall Street analysts see Dell becoming more acquisitive within software, focusing on cloud applications and its services group. Dell had about $15.2 billion in cash and investments at the end of its first quarter.

"We are being selective and patient as we think about our acquisition strategy," Gladden told the conference earlier.

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