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Dell Technologies (NYSE: DELL), the Texas-based technology company, will be announcing its quarterly results on the 24th November. The company has been expanding its product and service range over the years, but will the comprehensive market coverage help to offset the impact from the Covid-19 pandemic? In 2020, the dynamics are different between its product and service divisions.
Can Dells’ product division also find inspiration from its smaller and younger services unit that has seen no impact from the ongoing pandemic?
Considering how turbulent 2020 have been so far, Dell had shown good resilience. For the first half of the year, the company saw its product revenue shrink by 5% ($34,490 billion in 2019 vs $32,775 billion in 2020), while services resulted in 10% growth ( $10,788 billion in 2019 vs $11,855 billion in 2020).
Strong services performance is related to a few factors: leadership’s strategic focus on services, expanding services range, and the company’s ability to combine its hardware solutions with services.
Dell isn’t unique in wanting to shift its hardware dominated business model towards services. The profit margins in hardware manufacturing have been declining year after year. The competition is higher than ever with more and more brands springing up in the market and taking pieces of the pie.
The profitability isn’t the only concern for the company in its products division. Its cash flow statement shows that for the first half of the year, net income has dropped from $4,561 billion in 2019 to only $1,281 billion in 2020. Delays in revenue collection are most likely related to longer payment terms by the retailers and business orientated partner companies.
Even though so far this year has been challenging for Dell, we can expect some positive news in its upcoming quarterly announcements. We estimate that the product category will still see weaker performance compared to the same period in 2019; however, the reduction will be less than 5%.
The services are likely to continue to show support for growth. Suppose Q2 and Q3 were all about the initial shock and attempts to figure out what’s going on. In that case, Q4 might be less turbulent for businesses, as many already realised the environment they need to operate in and more likely to accept it as a norm. Such realisations will help Dell’s order book, as clients will be more willing to invest in its services and products.
Right now, Dell has a dilemma: its services unit continues to grow, delivering higher margin profits for the company, contributing almost a quarter of the revenues. On the other side is the product unit, which provides lower margins; however, it still makes up 3/4 of the revenue.
Dell will continue expanding its services offerings; however, the growth from the unit won’t be sufficient to completely offset the reduced demand for its products and mounting pressure on the margins. Some of the services also coexist with its products and therefore, will require continuous innovation for the company to stay in the market. The good news is that the company hasn’t changed its R&D budgets despite the ongoing economic challenges it faces, which gives some optimism about its capabilities in delivering market-leading products.
Disclaimer: I have no positions in any of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. All information should be independently verified and should not be relied upon for purposes of transacting securities or other investments. See terms for more info.