After its third quarter results and fourth quarter outlook drove its stock toward a three-year low, Dell Inc. announced its sixth acquisition of the year. The acquisition of privately-held Gale Technologies, unlike the preceding ones, reflects the company’s effort to shift its focus from a PC-centric business to a more enterprise-centric service business. Financial terms of this small but important deal have not been divulged.
Santa-Clara-based Gale Technologies develops infrastructure automation software that helps customers streamline the deployment, use and provisioning of cloud-based infrastructure. Management of hybrid cloud computing environments gets easier with much lower supervision and operating costs. Its blue-chip customers include Alcatel-Lucent , Ericsson (ERIC - Free Report) and Verizon Inc. (VZ - Free Report) .
The assets of Gale Technologies would form a division named Enterprise Systems & Solutions. With the new division, the tech giant is expected to focus more on the development of management solutions for converged infrastructure, which will facilitate the process of data center automation. Dell plans to retain Gale's intellectual properties and to invest in sales/engineering to reduce integration time.
Despite reporting a dismal third quarter, Dell’s server and networking revenue gained momentum with an 11.0% year-over-year increase. In this context, it is necessary to mention that another tech giant IBM Corp. (IBM - Free Report) registered a year-over-year decline in server revenue. This indicates a solid growth trajectory for Dell and we believe that Gale will provide adequate support with its technological know-how and rich client-base to achieve higher revenue growth.
We understand that the shift to the higher-margin enterprise business is critical to Dell’s survival and success. For the past few quarters, Dell’s financial results have failed to impress investors and we believe that the main reason for the disappointment is the delay in the process. But keeping in mind the increasing demand for cloud solutions and Dell’s performance in its Enterprise business, we believe that the company has the potential to turn around as soon as the acquired units start generating material revenues.
Currently, Dell has a Zacks #5 Rank (short-term Strong Sell rating), reflecting its lackluster fourth quarter view, falling share prices and a weak PC market. But we would like to turn investor attention toward another server vendor, Cisco Systems Inc. (CSCO - Free Report) , which has a Zacks #2 Rank (short-term “Buy” rating), reflecting its first quarter 2013 earnings beat.