Dell’s 4Q Results: Barometer on PC Sales Plus Services

Shares of Dell, the No. 3 PC supplier, have surged 25 percent this year. Could investors be looking for the company to start surging in the services sector?

Growth in PC sales is hardly skyrocketing. For 2011, market researcher Gartner estimates, Dell's increase was a meager 1.8 percent although that was nearly triple the anemic 0.5 percent growth in the overall market.

Dell's share was 12.1 percent of the overall 352.8 million PCs shipped last year, Gartner said. Only Hewlett-Packard and China's Lenovo Group sold more.

Analysts expect Round Rock, Tex.-based Dell to report fourth-quarter net income of 51 cents a share, down from last year's 53 cents and last quarter's 54 cents.

Revenue is expected to rise only 1 percent to $15.94 billion from the year-ago figure or only $57 million from last quarter's $15.37 million.

Dell, which closed its fiscal year Jan. 31 like most major retailers, is also expected to report full-year net income of $2.12 a share on revenue of $62.03 billion, far better than 2011's net of only 35 cents on revenue of $61.49 billion.

Last quarter, Dell, generated nearly 20 percent of revenue from services, mainly software, which generates higher margins than selling PCs and servers. That was 6 percent ahead of 2010 and helped Dell increase its gross margins to 22.6 percent from only 19.5 percent a year earlier.

Dell has acquired various service providers in recent years including Perot Systems, SecureWorks and Compellent, which enable the company to better compete against rivals Hewlett-Packard, No. 1 in computer services and PCs, and IBM.

Dell recently hired John Swainson, the former IBM executive brought in to clean house at troubled software developer CA Technologies, the latest name for the former Computer Associates, as president of software.

The company may well be on the prowl to buy a midsized software company. Dell will also report its cash and investments. Last quarter, they stood at $16 billion.

At that level, surmises analyst Peter Misek of Jefferies, Dell might look at a company slightly less valuable than Houston-based BMC, valued at nearly $6.5 billion, such as Quest Software, valued at $1/73 billion or CommVault Systems, valued at $2.4 billion.

Oceanport, N.J.-based CommVault is more in the storage sector, which would help Dell compete better against EMC, which already resells products through Dell, as well as Oracle.

Potentially, CEO Michael Dell, 46, who founded the company in his dormitory at the University of Texas, could also face a challenge: last week, Greenlight Capital, the hedge fund managed by David Einhorn, said it had acquired 14 million shares.

That probably wouldn't be a problem considering that Dell himself still owns 243 million shares, or 14 percent of the outstanding equity.

Dell shares were at $18.33, up 17 cents, valuing the company at $32.9 billion in late morning trading.