Dell: Can It Prosper By Turning The Virtual Desktop Into Gold?

Jun. 5.13 | About: Dell Inc. (DELL)

Dell (NASDAQ:DELL) has introduced DVS Enterprise For Window Servers 2012 into the market. It is an enhanced window server that enables many enterprises to enjoy a fast deployment of their converged infrastructure. The product will simplify the deployment of a desktop virtualization product for enterprises that operate in a Microsoft-based surrounding. In this article, I want to explain how the trend in the desktop virtualization market will favor Dell's new product. I especially want to show how a rising desktop virtualization market will enable Dell's enterprise division to improve its price multiples by 1%.

How will Dell's enterprise division show an improvement with the new product? The users of most corporate desktops increasingly require an access to iPads, smartphones and other popular devices. Due to this phenomenon, ABI Research forecasts that the worldwide market for such hosted virtual desktops will rise from about $500 million in 2009 to nearly $5 billion in 2016. Enterprises will play a significant role in this development. Dell is a leading player in the market and will benefit from the trend. This will boost the company's enterprise division revenues and improve the overall price multiples of the company.

Financial

The sales growth of Dell's enterprise division is inevitable. The division showed great promise in the company's fiscal 2013 first quarter results. It generated revenue of $3.1 billion, a 10% increase. Its operating income for the quarter was $136 billion, a 71% increase.

"We made progress building our enterprise solution capabilities in the first quarter and are confident in our strategy to be the leading provider of end-to-end scalable solutions," said Brian Gladden, Dell's chief financial officer.

In the fourth quarter, the revenue of the enterprise division grew 6% to $5.2 billion. The revenues for full-year 2013 were $19.4 billion. This was 36% of Dell's total revenues for the entire year and a 4% improvement over fiscal year 2012.

"We continued to execute our long-term strategy in Q4, and realized a 6% increase in our enterprise solutions and services business," said Gladden.

Dell's Virtualization Initiative For Enterprises

Dell has introduced a few desktop virtualization products for the enterprise market in the recent past. The DVS Enterprise for vWorkspace supports a remote desktop session and the virtual desktops that are configured from the same console. The DVS Enterprise For vWorkspace Reference Architecture is for an enterprise searching for a cost-effective product to support 5,000 desktops.

The newly introduced product is aimed at schools, universities and other enterprises. The target enterprise must have an existing Microsoft and education licensing and desire a limited-sized deployment. "This news is a continuation of our strategy to offer customers the broadest choice of end-to-end desktop virtualization solutions," said Steve Lalla, vice president and general manager, Cloud Client Computing, at Dell. "We are delighted to work with Microsoft on enhancements to our DVS Enterprise For Window Server 2012 solution and bring vWorkspace to our Microsoft virtualization customers looking for higher seat counts in their environment."

Dell needs to introduce the enhanced server to benefit from a rising desktop virtualization market as well as prepare itself for the plan to become a private company. It will also help the company to make some progress in its ambition to be the leading provider of end-to-end scalable solutions to enterprises.

Looking at the enterprise division revenues in the recent results, we noticed that it showed year-on-year growth. It is clear that Dell has been improved by its solutions for the enterprise market. So it can be said that Dell is operating efficiently with the division.

With a price to sales ratio of 0.41, Dell is trading cheaply, not surprising given that it has a gross margin of 21.72%. The new product will increase enterprise division revenues, improve the entire price multiples of the company, and lead to a sustainable management of Dell's total debt of $7.25 billion.

Competition

With an EPS of 1.06, compared with -6.85 for Hewlett Packard (NYSE:HPQ) and 1.22 for Lenovo, a price to earnings of 12.67, compared with none for Hewlett Packard, 10.72 for Apple (NASDAQ:AAPL) and 16.52 for Lenovo, Dell does appear to be operating on a competitive level. Hewlett Packard, Apple and Lenovo have a line of the desktop products to rival Dell's new solution. However, Dell's product is unique because it is pre-integrated and enables the enterprises to accelerate the operation of the virtual desktop infrastructure to end users.

Conclusion

There is a downside to a Dell investment. Given the company's announcement of an agreement to take the company private, it has no outlook for the fiscal 2014 second quarter. But based on the performance of Dell's enterprise division and the growth prospects arising from a use of virtual desktop solutions, we can say Dell's new product will improve the company's price multiples. Looking at the company's bid to become a private company, its debt, and the profitable enterprise division, we say buy the company for the short term and sell before it becomes a private entity.

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.