BEIJING (TheStreet) -- U.S. computer maker Dell has found a way to beat China's rap against American tech companies over alleged security risks: pre-install a Chinese operating system on most of its machines sold in China.
Privately held Dell has thus avoided the costly consequences of a Chinese government computer security campaign that spread Wednesday to include Apple (AAPL) - Get Apple Inc. (AAPL) Report products. Targeted earlier were Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report and IBM (IBM) - Get International Business Machines (IBM) Report.
Allegations of data security threats prompted the central government's procurement agency to bar Apple products including iPads and MacBooks from future purchases, the Beijing News and other media reported Wednesday. The agency had no immediate comment.
In May, the government said it would stop buying computers pre-installed with Microsoft's Windows 8 operating system and told state-owned banks to phase out IBM servers. Microsoft is also the target of an ongoing anti-trust investigation by the Chinese government.
Dell has so far avoided Beijing's wrath. And the company vastly reduced the risk of future trouble last week by announcing a partnership with China Standard Software, also known as CS2C, which sells a Linux-based operating system called Kylin and lists on the Shanghai Stock Exchange. Terms were not disclosed.
Under the deal, the companies said, Kylin will be pre-installed on Dell's Latitude notebooks, OptiPlex desktops, Precision workstations and other products sold in China. The agreement may expand in the future to include Dell's Vostro computer products.
Kylin, which means "unicorn" in Chinese, and a related version called NeoKylin are operating systems developed by software engineers at the National University of Defense Technology, an institution jointly run by the Chinese government's education and defense ministries.
Chinese stock analysts in May predicted booming demand for Kylin would follow the government's ban on Microsoft 8. Shanghai shares in CS2C soared after the ban's announcement, but the stock's value since then has flattened.
Last week, the government's Xinhua news agency said the Dell-CS2C agreement would likely open doors for similar contracts with other computer makers that would switch to Kylin over Microsoft for pre-installed operating systems.
In a research report Wednesday, Tebon Securities analysts said Dell's decision to pre-install Kylin marked a turning point "from competition to cooperation" between international tech companies and China. "Foreign companies are taking the initiative to move closer to domestic software makers," the report said, opening the way for "future business opportunities."
Lin Hao, marketing chief for Dell Greater China, said the collaboration will give "Chinese users safe, easy to use and manage, strong and trustworthy end-user products.... Dell values cooperating with various partners in win-win situations."
Meanwhile, despite the Beijing black-listings, Microsoft and IBM haven't stopped trying to work with China. The government procurement office recently said it would continue buying Windows 7-related software from Microsoft, for example. And according to the CS2C website, an IBM executive recently visited company officials in Beijing to discuss future cooperation.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- MSFT's revenue growth has slightly outpaced the industry average of 11.1%. Since the same quarter one year prior, revenues rose by 15.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- MSFT's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MSFT has a quick ratio of 2.31, which demonstrates the ability of the company to cover short-term liquidity needs.
- Compared to its closing price of one year ago, MSFT's share price has jumped by 35.55%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MSFT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- Net operating cash flow has significantly increased by 61.17% to $9,514.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 39.78%.
- You can view the full analysis from the report here: MSFT Ratings Report