Dell Is Just Getting Warmed Up

| About: Dell Inc. (DELL)
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Dell (DELL) delivered earnings of $0.51 per share. On a one-penny miss, finicky analysts that apparently have not lived through a serious recession are now running for cover, calling for an end to the PC, the demise of Dell to its competitor Hewlett-Packard (NYSE:HPQ) or continuing the misguided comparison of Dell to Apple (NASDAQ:AAPL). Dell and Apple are about as similar as a basket of miniature iPhones and a basket of Dell Solutions and Services consultants.

Comparing FY11 to FY12 -
Dell highlighted its 4th quarter and FY11 results as follows:
  • Record earnings per share in fiscal fourth quarter
  • Enterprise solutions and services revenue up 27 percent for full year
  • Revenue increase of $8.6 billion in FY11 - largest single-year increase in company history
Dell's expanding strength as an enterprise solutions provider and continued strong execution during the fiscal fourth quarter drove record results and "one of the company's most successful financial quarters ever."
Dell highlighted its 4th quarter and FY12 results as follows:
    • Revenue of $62.1 billion for the fiscal year, $16 billion in Q4
    • Record enterprise solutions and services revenue of $18.6 billion for fiscal year, $4.9 billion in Q4
    • Cash flow from operations of $5.5 billion for fiscal year, $1.8 billion in Q4
Dell’s further expansion as an enterprise solutions and services provider highlighted the company’s "most successful financial year ever."
Once again Wall Street's enamored view of Apple is perhaps clouding the judgment of analysts who fail to understand the value in a technology company such as Dell that delivers consistent earnings and billions in free cash flow.

In his comments on CNBC this morning, Analyst Shaw Wu focused almost solely on the recent hard drive shortage and ignored the Enterprise Solutions and Services division, which delivered record earnings of $4.9 Billion. The CNBC Halftime Report guys did a number on Dell today, suddenly falling in love with Hewlett-Packard, a company they were raking over the coals not too long ago, claiming HP would not gain investors back until late 2012.

Dell Services also kicked in its first fully accountable year of revenue. How does $7.7 billion sound? Remember when Wall Street went all goo-goo eyed over GM's acquisition of EDS for $2.4 billion? How quickly the memory fades -- or perhaps some of today's analysts do not study market history. Dell's recent acquisition of H. Ross Perot's second multibillion-dollar baby, Perot Systems, is paying off in a big way for Dell. Perot Systems is now known as Dell Services.

On a side note, it is worth stating that in its heyday, EDS employed 139,000 people worldwide. As of summer 2011, Apple employs a little over 60,000, and most of them are not Americans. I don't know about you, but from where I'm sitting as an old-fashioned, patriotic American who cares about the economic welfare of my nation, I'll take 50 EDSs any day of the week over one Apple. Yes, I'm opinionated. But so are the mainstream Wall Street market barkers.

Dell's Services is raking in the bucks as President Obama's Race to the Top program is now fully kicking in with millions of dollars in Department of Education grant monies available for technology. From a hometown perspective, one of two school districts here in Laredo, Texas, just announced a program to put a laptop in the hands of each of each of its high school students. And we are not alone. Schools across the nation continue to upgrade technology.

The U.S. Department of Education funds over $185 billion worth of grants each year, and technology investment is part of that mix. And if Secretary of Education Arne Duncan gets his way, technology spending in education will increase at a rapid pace in the near future:

To help remedy those gaps, the Department of Education is launching a unique public-private partnership called Digital Promise.

Digital Promise is a bipartisan initiative that will be sustained primarily by the private sector. It was created by a law signed by President George W. Bush. Federal seed money will fund the program's start-up, but it will be overseen by a board that includes business executives-such as John Morgridge, the chairman emeritus of Cisco, and Irwin Jacobs, co-founder of Qualcomm-who will work with researchers, educators and other private-sector leaders.

Digital Promise's aim is ambitious: to advance breakthrough technologies that transform teaching and learning in and out of the classroom, while creating a business environment that rewards innovation and entrepreneurship.

Dell accounts for this type of revenue stream under the heading of Public:

Public revenue was $4 billion, a 4 percent increase driven by strong server and storage sales. Operating income for the quarter was $366 million, or 9.2 percent of revenue. For the full year, Public delivered strong performance with operating income of $1.5 billion, or 8.8 percent of revenue. Server revenue growth of 13 percent and storage growth of 12 percent balanced demand decline for desktop and laptop computers.

The bottom line is that Dell is well situated in a leadership position to grow its Dell Services division, along with its Enterprise Solutions and Services division, at a rapid pace.

And on a final note, the services divisions of technology companies generally outlast the gadget manufacturing divisions in the long run. Take IBM, for instance. Since dumping its PC division on Lenovo, IBM is on a roll, and its share price is soaring.

I believe Dell is just getting warmed up. And I bet the share price will not be sitting at $17 for long, unless the market crashes due to European fallout from the impending Greek bond default, or some other exogenous event rather than fundamental underpinnings.

Disclosure: I am long DELL.