Dell Earnings Don't Tell Big Transformation Story - InformationWeek

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Dell Earnings Don't Tell Big Transformation Story

Two years ago, Dell talked up a transformational message--that fell flat, reinforcing its image as little more than a box pusher. Now it's clear that Dell has stayed the course.

Dell announced its third quarter (FY 2012) earnings on Tuesday with $15.4 billion in revenue, which is merely flat year-over-year, but it chose to shine the spotlight on its increase in gross margin, operating income and earnings per share (up 20%), saying that the company was emphasizing higher value deals. The company also emphasized its growth in enterprise solutions and services (up 8% year-over-year, now accounting for 46% of the company's gross margin). Servers and networking revenues were up 13% year-over-year, and while storage revenues fell 15%, when isolating Dell storage IP, where the company has placed heavy emphasis, that revenue was up 20%.

Its size and its modest enterprise growth aren't a surprise--Dell’s server, PC, storage and other technologies are everywhere. The surprise is that Dell just might be poised for much bigger growth. And the surprise is that Dell got here with relatively little drama, without leadership bravado or boardroom bloviating.

Maybe it's because Dell is tucked away in an unassuming suburb of the Texas state capital, far from New York, the media capital and home to IBM, and Silicon Valley, home to just about every other major technology company, including arch-rival Hewlett-Packard. Or maybe it's because Dell has made its fortunes by making and selling mostly mundane and affordable products, building a brand around supply chain efficiency and execution rather than invention and sex appeal.

Whatever it is, it’s a strategy that seems to have worked well for most of Dell's 27 years--it’s now a $60 billion company--even as it has repositioned itself, mostly with acquisitions, these past several years.

Last week InformationWeek met with Dell executives, including CEO Michael Dell, at the company's headquarters in Round Rock, Texas. We heard about a company in the middle of a transformation, a new Dell entering markets in which it once teamed with other vendors, with the expectation that it will dominate the data center and the cloud, and perhaps be considered a "strategic solutions" partner, not just a technology supplier.

[ What does Dell rival IBM have up its sleeve next for the services business? See Rometty's Past Reveals IBM's Future. ]

Almost two years ago, Dell talked vaguely about standards and open systems and partners. Now, having acquired companies such as Perot Systems, Equalogic, and Force10 and having added more intelligent software capabilities, Dell’s executives talk more about solving customers’ problems—helping them increase hotel occupancy rates, for instance, or make healthcare more affordable rather than just selling them a basket full of commodity boxes.

Two years ago, Dell's transformational message fell flat, reinforcing the previously held notion that it was little more than a box pusher. Then, Dell was full of promises about owning the data center but without much wood to put behind it. Now it's clear that Dell has stayed the course, and that course includes opening up the checkbook to deliver on those promises.

Here's what we thought then:

All of this--the cloud (my colleague Charlie Babcock wrote more on this here more on this), the data center--is where Dell will have to grow up. If its newly marshaled army of specialists can front its now-formidable service organization behind an affordable, open solution, it will cease being just a box pusher or a brand that stands only for what it once was, holding on for dear life.

For now, that might mean targeting the small enterprise, the nascent data center, the tight wallets. But sometimes making inroads into more strategic territory starts with a simple declaration. It feels like Dell is ready to get on with it.

Get on with it Dell has.

Dell Wants To Manage Your Data

Storage has never been sexy, Dell's energetic VP and GM of storage, Darren Thomas, told InformationWeek. "It's not where you'd pull a superstar out of Northwestern to market storage," he says. Dell taught its main partner, EMC, how to battle at the low end of the market and about factory operations (the companies even co-managed factories), while EMC brought Dell into the high-end enterprise.

Three years ago, Dell acquired Equalogic for $1.4 billion, an unheard of sum for a storage company. Now that acquisition looks brilliant. Michael Dell points out that prior to Dell's acquisition, Equalogic had sold a total of 3,000 arrays. Now Dell's public sector division in China has already sold 1,000.

Since the Equalogic buy, Dell has also acquired Ocarina, Compellent, and Exanet, spending about $2 billion to shift away from reliance on EMC and toward owning storage IP. Dell has acquired a clustered file system, iSCSI and Fibre Channel products, and storage management (storage virtualization, tiered-storage, thin provisioning, and data de-duplication).

Dell has also doubled, and in some cases tripled, the teams of each company it has acquired. "We don't rape and pillage," Thomas says. "We ask them what they do best before we acquire them." And in short order, Dell has not only integrated these acquisitions, but it has also begun to integrate them with each other--the Exanet file system now sits inside of EquaLogic and Dell's Powervault technology, and it will also run on Compellent in 2012. Technology from the Ocarina acquisition now runs in Dell's DX Object Storage Platform. Early next year, Dell will offer a de-duplication product using Ocarina's technology.

To be sure, Dell is in a bit of an arms race with HP, which has, during the same time frame, acquired iBrix (a clustered file system), LeftHand Networks (an EquaLogic competitor), and, in a famous bidding war with Dell, 3Par. Thomas says EMC and NetApp are really Dell's main competitors, calling HP a "42nd cousin" to Dell in storage.

An extra dosage of hyperbole, but Dell is most certainly now in the game.

(Note: Read a detailed view of the state of storage, courtesy of InformationWeek Reports. Registration is required. This report, from earlier this year, shows Dell a firm third behind HP and EMC, and slightly ahead of IBM overall, at least in the eyes of InformationWeek's readers. The good news for Dell is that survey respondents indicated an uptick in iSCSI, storage and file virtualization, thin provisioning and data reduction technology like data deduplication--all areas around which Dell is now focused. Tiering, another area Darren Thomas hit upon, is still nascent, despite having been around for a long time--just under the moniker "hierarchical storage management" or HSM.)

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