Dell's transformation into an infrastructure solutions and services vendor is fueling fewer sales, but more higher-end deals.
Dell is a company in transition during
a time of significant economic turmoil, and the results are showing in its
financial numbers.
Dell executives on Aug. 16 announced a second-quarter
profit jump of about 63 percent, to $890 million, up from $545 million during
the same period in 2010. That profit growth came on revenues of $15.7 billion,
which was only a 1 percent increase over the second quarter last year.
Dell CFO Brian Gladden said those
numbers were the result of the company's efforts to aggressively
grow its data center solutions and services portfolio
that encompasses not only higher-end servers, but also storage, networking and
services. This is happening as Dell looks to streamline lower-end businesses,
such as PCs and consumer electronics, and reduce the amount of technology it
sells from third-party partners, such as storage giant EMC.
Customers are having to adjust to the
changes in Dell's portfolio, but even as they may be buying fewer items right
now, what they are buying are higher-priced products. Those products are coming
from a mixture of in-house development and outside acquisitions, such as Dell's
most recent purchase of
storage vendor Compellent Technologies earlier
this year and the announcement in July of its intentions to buy networking company
Force10 Networks.
Dell is making the moves to grow into
more of a solutions-driven vendor that can compete against the likes of
Hewlett-Packard, IBM and Cisco Systems and take advantage of the demand from
enterprises for more converged infrastructure offerings.
The result of all this is higher
operating expenses and lower than normal revenues in the short term, but it
also will mean greater profits now and down the road for Dell, according to
Gladden. That's a trade-off the company is willing to make, he said.
"We're committed to this long-term
transformation," he said during a conference call with analysts and journalists.
"We're going to continue to make these long-term investments."
Greg Richardson, an analyst with
Technology Business Research, said the strategy is showing some results.
"Dell is leveraging acquisitions to
transform from a vendor of high-volume compute products to a provider of
enterprise-focused solutions, spearheaded by services," Richardson said in a
research note. "Dell's aggressive pursuit of inorganic growth is beginning to
bear fruit in the form of increased profitability."
Richardson said he expects Dell to
continue rounding out its portfolio through acquisitions that will help it gain
greater cloud and vertical-market capabilities to complement its efforts in
areas such as storage and networking.
Gladden and Brad Anderson, senior vice
president for Dell's Enterprise Solutions Group, said the company's focus on
the midmarket, next-generation computing, intelligent data management,
services, security and cloud computing is pushing the shift in customer buying
toward higher-end products. The result is strong numbers for the company's
enterprise business, with enterprise solutions and services revenue increasing
4 percent, to $4.6 billion.
The moves make sense, TBR's Richardson
said. He noted that as Dell has moved to end its relationship with EMC, overall
storage revenues for the quarter fell 20 percent. However, the prospects for
long-term storage revenues look good, he said, pointing out that revenues for
Dell's own storage products increased 15 percent.
"By holding the reins to storage
technology development, Dell controls more of its storage development roadmap,
enabling the company to foster integration between its storage and compute
portfolios, leading to cross-selling opportunities," Richardson wrote. "TBR
expects Dell to generate near-term storage revenue momentum by remaining true
to its roots, supporting midmarket deployments in industries such as the public
sector in which it has strong traction, while laying a trajectory to future
growth by establishing proof points of its capabilities to penetrate new
verticals, such as financial services and telecommunications."
However, as Dell undergoes this
transformation, it also has to deal with the fallout from the troubled economic
environment, particularly in the United States and Europe. While corporate sales
are strong, consumer demand for Dell products are slowing, and business with
the U.S. government is uncertain. Given all that, Dell executives cut their
full-year revenue estimates to 1 to 5 percent growth, down from the 5 to 9
percent they earlier had projected.
"It's clear the demand environment is
weaker than expected," Gladden said.
He said Dell had a lot of deals with
the U.S. government in the works, but that company officials are unsure how
many of those deals they'll be able to close, particularly in light of the
political environment in Washington, D.C., highlighted by the recent prolonged
battle over the debt ceiling and spending cuts.
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