Daily Archives: August 28, 2009

Vonage Stock Fades Badly to End Surreal Week

Earlier this week, I commented on the bewildering run enjoyed by Vonage’s stock.

Before the surge, the VoIP company made some minor announcements about the extension of a service offering to international markets and its push to get an application on the iPhone, but those didn’t seem to provide sufficient reason for the rip-roaring ride the stock took up the charts.

Vonage’s fundamentals haven’t changed. It’s still a company hard pressed competitively by wireless service providers on one side and triple-play carriers and cable MSOs on the other. If Vonage tries to transform itself into a mobile-VoIP play, it will go up against Google, Skype, and many others. It’s boxed in, and its path to sustainable prosperity isn’t obvious.

Now, after the baffling and blistering rise of its stock, Vonage has seen its shares fade and plummet just as abruptly as they shot skyward.

We can wonder what games, if any, were being played behind the scenes.

Dell Must Offer Enterprises More than PCs

The markets and their murky makers seemed to react too favorably to the second-quarter results Dell posted yesterday, inexplicably just before — and not after — trading halted for the day.

On the surface, there’s not much encouragement to be found in the results. Below the surface, there’s not much that inspires confidence, either.

Yes, Dell is cutting costs, having contracted 40 percent of its manufacturing to third parties. The cost reductions have resulted in better gross margins. Cost cuts, though, don’t help grow the top line, and that’s where Dell will continue to struggle.

The company pointed to sequential revenue growth in a few product categories and market segments, but it cannot deny that, for the fourth straight quarter, it has posted drops in sales and earnings from a year earlier.

Dell says it can resume growth on the strength of a corporate upgrade cycle for PCs. Dell expects that cycle to begin with the release of Windows 7, starting in the USA and then going global.

Says eponymous company CEO Michael Dell:

“The size of the installed base of old hardware has never been greater. I’m here to tell you there’s going to be a refresh cycle next year. It’s not all going to come in the first month or the second month, but over the course of the year.”

I concur, but only to a point.

As Reuters’ Eric Auchard notes, PC refresh cycles have gotten weaker as the justification behind them, the release of new iterations of Microsoft’s Windows, have become less compelling. Dell is counting on corporate CIOs that stuck with Windows XP over the uncertain charms of Windows Vista finally taking the plunge for Windows 7. In some cases, that will happen, but in others it won’t.

For many companies and organizations, economic conditions remain unprecedentedly harsh. Ben Bernanke can tell them happy days are here again, but they won’t believe it until their own fortunes improve. Spending could remain tight, and PCs might not get replaced until they fall apart. If that happens, the corporate upgrade cycle might not be as prompt, sustained, or predicable as Michael Dell would wish.

What about the consumer market? For Dell, it’s just not a strength, and the company doesn’t seem committed to changing the situation. Again, quoting Mr. Dell:

“If current demand trends continue, we expect revenue for the second half of the year to be stronger than the first half. We are expanding our capabilities in enterprise technology and services and investing in or core business to distinguish Dell both with customers and in operating performance.”

Despite distracted and slapdash runs at the consumer space, as evidenced by its strangely half-assed handset for the Chinese market, Dell knows that it has lost the consumer space, that 80 percent of its revenue is derived from the enterprise.

That’s fair enough. Dell’s best chance for redemption lies in the enterprise, not in the consumer sphere.

The key for Dell will be in what it does with its corporate war chest, with the acquisitions it makes in the months ahead. It needs to acquire software and services that will help it capture a bigger share of the efficiency-focused expenditures of enterprise clientele.

Those customers, like Dell itself, are continuing to look for solutions that help them do more with less.

Huawei Bides Time, Disavows Interest in Alcatel-Lucent

Rumors had been circulating that Alcatel-Lucent might be an acquisition target of Huawei, the ambitious and strengthening Chinese telecommunications-equipment vendor.

Well, Huawei has told us not to give that blather a second thought.

Ross Gan, Huawei’s global head of corporate communications, presumably with the approval of those above him in the chain of command, said the following:

“Our customer-centric innovation strategy is driving Huawei’s growth and that remains our strategy. Huawei has no plans to take a stake in Alcatel-Lucent.”

That’s an unambiguous statement, though admittedly Huawei’s plans, like those of any other vendor, are subject to change at later dates.

Considering that the chatter alluded to a potential Chinese acquirer of Alcatel-Lucent, perhaps Huawei’s rival, ZTE Corp., might be sizing up the Franco-American telecommunications-equipment monstrosity (and not in a good way) for purchase.

That, too, is an unlikely scenario. A PR representative from ZTE said the acquisition talk probably was just a rumor. That’ s not an unambiguous denial along the lines of the statement issued by Huawei, but nor is it a strong indication that a deal is in the works.

Consolidation is occurring in a telecommunications-equipment market that has been severely battered by two protracted and punishing downturns in the last decade. Companies have gone out of business, and further M&A activity, driven more by sellers’ desperation than by prospects of market growth, are on the horizon.

Nonetheless, Huawei and ZTE aren’t in a rush to pull out their checkbooks or call their investment bankers. Time, you see, is on their side.

Huawei, after many fits and starts, is finally making tangible sales progress with North American carriers after winning patronage in many European accounts, and ZTE has similar aspirations. Both companies are heading in the right directions, figuratively and geographically.

Why should Huawei, in particular, tilt at regulatory windmills — remember its involvement in the aborted Bain Capital deal for networking-equipment vendor 3Com? — when it can play a patient waiting game? There’s no rush. Alcatel-Lucent, presuming Huawei wants it, isn’t going anywhere. None of the other major telecommunications-equipment vendors seemed poised to take it out.

In Huawei’s collective mind, the regulatory environments in the USA and Europe could evolve. As Huawei becomes more of a known entity, and as the situation worsens for less-fortunate vendors in the telecommunications-equipment space, Huawei might find that regulatory resistance slowly transforms into something approaching an embrace.