The changing market dynamics have forced leading U.S. technology firms, Dell (DELL) and Texas Instruments (TXN), to make significant strategic changes. While Dell is building its business more vertically, transitioning into a full service business solutions provider taking on clients that are too small for IBM or Cisco (CSCO),TI has altogether decided it can no longer compete in the mobile chip space that it helped pioneer with its OMAP SoCs. Both companies are casualties of slow response to fundamental market changes that have little to offer investors today.
The effects of Lenovo's climb towards the top of the PC industry, coupled with the weak global economic environment and the rise of tablets and smartphones were written all over Dell's latest financial release. Its quarterly revenues dropped by 11% to $13.72 billion due to declines in both consumer and sales revenues by 23% and 8%, respectively, which has caused profits to slide by 47% to $475 million. Dell's "mobility" business unit, which should have cashed in on the changing trends, has instead posted a 26% fall in revenues to $3.5 billion.
Dell's inability to reap profits from its mobility division raises further questions. So far, the business seems to be going opposite to the industry trends as the revenue contribution of the mobility division has fallen from 31% last year to 25%, but that of desktop computers has actually increased from 22% to 23%.
Dell's net margins have now reached their lowest levels this year of 3.46%. The company is now hoping that the holiday shopping season would offset some of the current fall and that consumers have only delayed their purchasing decisions due to the poor economic environment rather than abandoning the idea of getting a new PC altogether. Although Windows 8 has reportedly upped the demand for computers, so far, sales figures and rumors have been unspectacular.
Despite the expected increase in sales, Dell expects to earn $14-$14.4 billion in revenues in the next quarter, which is 10% lower from the year-ago-quarter at the high end of the scale and below analysts' expectations of $14.5 billion.
However, Dell has proudly highlighted its 11% increase in servers and networks unit as the company is now focusing more on generating revenues from cloud computing, networking hardware and software rather than its traditional - and failing - trade in laptops and peripheral devices.
The company recently acquired Gale Technologies, which specializes in infrastructure automation, for an undisclosed price as it moves forward to form an Enterprise Systems and Solutions unit. Most of Dell's acquisitions have focused on small enterprise players, and the company has preferred not to disclose the terms. However, it did disclose the $2.4 billion acquisition of the management software developer Quest Software in June,
But Dell is still primarily a PC vendor and is still in the midst of attempting to change its core business. At this point, the board would be wise to dump founder and CEO Michael Dell who was outspoken in his condemnation of the move to mobile and while he has proclaimed that Dell is no longer a PC company, Dell's balance sheet doesn't offer a lot of comfort for a prolonged retrenchment process.
By giving up OMAP and with it the mobile SoC business, Texas Instruments is expecting to generate net savings of $125 million by the end of 2013 and will reduce its workforce by 5% or 1,700 people. In the end, TI was not ever an innovator in the mobile space, buying off-the-shelf ARM cores and 3rd party graphics processors to create chips that were eventually out-competed by those with significant R&D budgets allocated to it.
The in-house capabilities of large firms operating in the mobile segment, such as Apple (AAPL) and Samsung (SSNLF.PK), have made this potentially lucrative segment of mobile chips uncompetitive for TI. Qualcomm (QCOM) is beginning to completely dominate the smartphone market at the high end and Broadcom (BRCM) and MediaTek are more willing to get their hands dirty on the low end. In fact, Qualcomm has its sights focused up towards Intel (INTC) rather than down at those it's already pulled away from.
TI rightly believes that there is little room for it and while it will continue to manufacture chips for Amazon's (AMZN) Kindle as long as it remains feasible, the OMAP line of ARM SoCs will die out with the current generation. The company will instead divert its resources towards widening the scope of OMAP (Open Multimedia Applications Platform), not in the raw computing space but rather into wireless chip technology used in a wide range of electronic devices from cars to washing machines. There have been rumors of Amazon acquiring TI's OMAP division, but so far the two companies have remained silent on the issue.
At this point, neither Dell nor TI have a solid plan that can justify buying their stocks based on future plans and the projected book of business. Their stories are interesting but not compelling enough to warrant an investment at this point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.