Dell to keep up acquisitions, sustain margin growth

AUSTIN, Texas Wed Jun 29, 2011 2:07pm EDT

A man wipes the logo of the Dell IT firm at the CeBIT exhibition centre in Hannover February 28, 2010. The world's largest IT fair CeBIT opens its doors on March 2 and runs through March 6. REUTERS/Thomas Peter

A man wipes the logo of the Dell IT firm at the CeBIT exhibition centre in Hannover February 28, 2010. The world's largest IT fair CeBIT opens its doors on March 2 and runs through March 6.

Credit: Reuters/Thomas Peter

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AUSTIN, Texas (Reuters) - Dell Inc DELL.O expects acquisitions to remain a critical focus for the computer maker, which is expanding into areas such as storage and services.

Chief Executive Michael Dell said on Wednesday the No. 2 PC 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 7 percent.

Addressing a key area of concern, executives at the company's annual analyst conference said they expect to sustain recent improvements in gross margins, and continue to see strength in corporate information technology upgrades.

The PC maker, 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.

Dell, which did not update its forecasts for fiscal 2012 at the conference, 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, which expects revenue from the two segments to grow as much as 54 percent and 30 percent in the next four years.

Shares in the company, once the world's top maker of computers, rose 3 percent in mid-day trading to 16.49.

Dell, which has steadily conceded market share to Hewlett-Packard Co (HPQ.N) and Acer Inc (2353.TW) in past years, has shown good 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 has also 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 ACQUISITIONS

Dell forecast revenue of $4 billion to $5 billion in storage by fiscal 2015 while it expects its technology services business to generate $10 billion to $11 billion in the same period.

The services unit has signed 60 percent more deals so far this year, amounting to about $800 million as compared to 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 is also 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 the likes of International Business Machines Corp (IBM.N) and HP, the company said it will look at acquisitions as a way to compete.

"We are being selective and patient as we think about our acquisition strategy, and we think we can deliver strong returns on the deals that we do," Chief Financial Officer Brian Gladden said at the conference.

Dell told Reuters in May that it was on the hunt for acquisitions of companies with valuations of $1 billion to $5 billion that can help it be a one-stop shop for corporate technology needs.

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.

(Reporting by Poornima Gupta in Austin, writing by Sinead Carew in New York. Editing by Gerald E. McCormick, Lisa Von Ahn and Robert MacMillan)

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