Dell Grows Enterprise Solutions Sales, but PC Biz Still a Drag

Dell saw revenues and income drop in the second quarter, and downgraded its forecasts for the third quarter and entire year, as the PC business continues to struggle.

Dell is continuing to aggressively expand its efforts in enterprise infrastructure and services, but any success the company is having in that area is being offset by the continued worldwide slump in PC sales, which still account for about half of Dell's revenues.

Dell is in the process of transforming itself from a PC maker to an enterprise solutions and services provider, rapidly ramping up its capabilities in software, storage, networking and services while building out the features in its PowerEdge server portfolio. In announcing the company's second-quarter financial numbers Aug. 21, Dell executives said there was some success in that area-its solutions and services sales in both enterprises (9 percent over the same period last year) and small and midsized businesses (SMBs) (15 percent). Both segments saw sales gains in server, networking and services revenues. Overall enterprise solutions revenue climbed 6 percent, to $4.9 billion.

In addition, overall server sales jumped 8 percent in the quarter, networking revenue increased 94 percent and revenue for Dell's own storage products increased 6 percent, though CEO Michael Dell said during a conference call with analysts and journalists that he is looking for the storage business to ramp up faster.

However, PC sales-and in particular, PC consumer sales and sales in emerging markets-continued to be a drag on the company. Overall consumer sales were down 22 percent over the same period last year and consumer notebook revenue fell 26 percent. Sales of mobile devices dropped 19 percent, desktop revenue fell 9 percent and growth market sales decreased 11 percent.

The result was overall revenues that fell 8 percent, to $14.4 billion, and net income of $732 million, an 18 percent decrease. It also forced Dell executives to reduce its forecast for the second half of 2012 and to cut its full-year forecast and slash its revenue forecast for the third quarter, saying sales would fall 2 percent to 5 percent from the second quarter, to $13.8 billion to $14.2 billion.

Traditional PC market leaders Hewlett-Packard and Dell are getting hit hard by the global slowdown in PC sales, while also seeing rivals Lenovo and Acer gain ground. PC sales are being impacted by the rise of smartphones and tablets. In addition, consumers are holding onto their money in anticipation of the upcoming release of Microsoft's Windows 8 operating system in October.

Michael Dell and CFO Brian Gladden said in the conference call that his company will look to leverage the Windows 8 release a host of new products, from PCs and Ultrabooks to tablets and convertible devices.

"We are bullish about the product we've got coming [tied to] the Windows 8 launch," Gladden said.

However, while the company will continue to push its PC business-and executives expect to see sales stabilize early next year-the main focus will be on its transformation as an enterprise IT solutions provider. Dell over the past few years has been aggressive in buying businesses to bulk up its capabilities, including software (Quest Software), networking (Force10 Networks) and storage (Compellent and EqualLogic).

Combined with the company's 12th generation PowerEdge servers, Dell executives believe they have a strong enterprise story that will meet customer demand. "This is the best server lineup we've ever had," Michael Dell said, noting that the company has a growing business around migration from non-x86 platforms.

The 12 generation PowerEdges now account for more than half of the servers the company ships, he said.

Krista Macomber, an analyst with Technology Business Research, said in an Aug. 21 research report that she expects Dell to continue controlling its expenses to free up money for more acquisitions and research-and-development efforts.

"Further, it will leverage acquisitions such as Quest Software to increase its enterprise credibility and its ability to execute on solutions, as well as ultimately meet evolving customer demand for holistic solutions and support provided by a trusted advisor," Macomber wrote.

This is particularly true of its storage business, where "Dell is looking to the segment to solidify its reputation as an end-to-end, enterprise-caliber IT provider, particularly as storage grows beyond the array," she wrote. "Dell will continue investing in acquisitions and listening to customer pain points to evolve from third-party storage reseller to front-line provider and innovator of enterprise storage products."

Dell will do all this under the direction of a new head of is Enterprise Solutions unit. Marius Haas, a onetime HP executive, is taking over as president of Enterprise Solutions, replacing Brad Anderson, who led the group for seven years, Dell announced Aug. 21. Anderson oversaw the evolution of the server business, and was instrumental in the acquisitions that have helped Dell grow its overall enterprise IT portfolio.