Dell's First Quarter a Bump in Company's Transformation

Dell’s revenues fell 4 percent and its profits 33 percent as the company continues to move away from its PC and server roots to become an enterprise solutions provider.

Dell€™s well-publicized transformation from PC maker to enterprise solutions and services vendor is well on its way, but it won€™t happen without some challenges.

That was on display May 22, when Dell executives announced that in the first three months of the year, the company saw revenue drop 4 percent from the same period in 2011, to $14.4 billion, and profits fall 33 percent, to $635 million.

The numbers were significantly short of what Wall Street analysts had expected, and the company€™s stock took a predictable beating. However, while admitting that the first-quarter financial results were €œmixed€ and that Dell had some areas to shore up, Brian Gladden, Dell€™s senior vice president and CFO, said the world€™s third-largest PC maker remained committed to its strategy, warning reporters and analysts on a conference call that results of the transformation would €œnot be linear.€

€œThis is a long-term strategy and will take time,€ Gladden said, adding later that €œwe€™re trying to move as quickly as possible in this transformation.€

The company€™s enterprise efforts also had some mixed results. Dell€™s Enterprise Solutions and Services Group saw revenues rise 2 percent over the same period last year, to $4.5 billion. The group now comprises 31 percent of Dell€™s revenues and half of its gross margin. In addition, revenues for Dell-owned storage IP were up 24 percent, although€”thanks in part to some leftover EMC-related sales€”total storage revenue fell 8 percent.

In addition, Gladden noted that Dell announced five new acquisitions related to its transformation strategy during the quarter.

However, large enterprise revenue fell 3 percent year-to-year, and Dell executives talked about some delays they€™re seeing in enterprise IT spending. Federal spending looks promising, they said, but other public spending is slowing.

In a May 22 research note, Krista Macomber, an analyst with Technology Business Research (TBR), said that despite the numbers, Dell€™s transformation is still on track.

€œThe enterprise revenue decline is not yet a significant threat to Dell€™s strategic direction,€ Macomber wrote. €œConsidering Dell€™s expansive existing install base and go-to-market know-how within the midmarket, Dell€™s midmarket customers are adopting its solutions and services ahead of enterprise sector customers. Adoption trends are evidenced by Dell€™s reported SMB [small and midsize business] revenue growth of 4% year-to-year in 1Q12, with solutions and services revenue increasing 17% over the same time frame.€

Dell also expects an enterprise boost from the release during the quarter of its 12th-generation PowerEdge servers, a portfolio that Chairman and CEO Michael Dell called €œincredibly strong. €œ He said he expects that the new servers will quickly become more than 25 percent of Dell€™s server mix.

Gladden and Steve Felice, president and chief commercial officer for Dell, said there were some hurdles the company needs to overcome. They said that the company€™s sales strategy was not where it needed to be, and noted the highly competitive enterprise environment, which includes such tech giants as IBM and Hewlett-Packard. Felice said the company will revamp some of its sales efforts, including pushing more integrated solutions rather than single-product sales.

That move makes sense, according to TBR€™s Macomber.

€œDell will focus on simplifying its product bundling and more effectively capitalizing on core product lines and acquired IP alike,€ she wrote. €œCompetition from rivals such as HP and IBM will remain strong, but adapting to longer and more complex sales cycles with enterprise customers and focusing on selling integrated solutions rather than singular pieces of the infrastructure will help Dell to win more deals and increase its market share.€

Dell also was hurt by a 10 percent drop in notebook revenues€”including a 15 percent decline in consumer notebooks€”which executives attributed to the competitive environment and consumer migration away from PCs and toward mobile devices such as smartphones and tablets. They also noted that Dell is moving toward more of a mix of higher value systems, relying less on the low-cost PCs that some consumers are trending toward.

During a question-and-answer period during the conference call, some analysts speculated that consumers also may be putting off buying new systems until later this year, when Microsoft launches its next-generation Windows 8 operating system. Along with improved PC sales, Dell also could see a boost from new tablets it plans to release in conjunction with the Windows 8 launch.