Dell Technologies Inc. posted its first report card since its mammoth acquisition of EMC Corp., reporting a $2.06 billion loss in the third quarter of fiscal 2017 on $16.2 billion in sales.
However, Dell executives pronounced overall performance as “solid” and expressed confidence that revenues and operating margins will grow strongly as the benefits of its consolidation with EMC and its federated companies take effect.
Dell said legacy revenues were flat but that the addition of EMC increased total revenue by 28 percent. Officials cautioned that the consolidation with EMC and its operating companies makes year-over-year comparisons extremely difficult, adding that the discontinuity is likely to continue for several years. As a quasi-public company, Dell isn’t required to issue guidance on future revenues or profits.
Growth businesses strong
“The overall market was slightly better than expected for calendar Q3,” said Chief Financial Officer Tom Sweet. Unexpectedly strong PC sales somewhat offset a structural weakness in server revenues compounded by delays in customer orders while the merger with EMC was completed.
The infrastructure business contributed $6 billion in revenues and profits of $1.9 billion. Server and networking revenue was $2.9 billion in the quarter, down 8 percent from a year ago. Storage revenue was $3 billion, which Treasurer Tyler Johnson said was “up substantially.” Declines in traditional disk storage were offset by growth in all-flash arrays, which Johnson said are growing in the “high double-digits.”
Dell said its growth businesses, including hyper-converged servers and flash storage, are all strong. “Our hyper-converged trajectory has taken off remarkably over the last couple of quarters,” Sweet said. but he added that “there’s a bit of a headwind out there. Other server vendors are having headwinds as well.”
The EMC acquisition has improved Dell’s position in the hyper-converged market by adding the popular VxRail system to its own XC appliance, which is based upon Nutanix Inc. software. “We see software-defined everything driving server growth,” said Goulden. “We see a shift going on and we are [now] in a better position to lean into that shift.”
VMware Inc., which Dell picked up as part of the EMC acquisition, was another bright spot, with $1.3 billion in revenue and operating income of $548 million. “We’re already seeing synergies in selling VxRail in broader distribution with vSphere,” Sweet said. The company said Pivotal Software Inc. also had a strong quarter, although it declined to provide specifics.
Trading profit for cash flow
Dell’s business strategy is shaping up to be hardware-centric, with the company divesting a large portion of its profitable software business in order to focus on cash flow generated by server, PC and storage sales, said David Vellante, chief analyst at Wikibon, a sister company to SiliconANGLE. Dell reported that its discontinued operations, which include software and services, yielded gross margins of 40.2 percent in the quarter, compared with 31.7 percent for its remaining businesses.
“They are trading off higher-margin software businesses that don’t fit with their strategic core for cash,” Vellante said. “Hardware companies generally have a problem becoming software companies,” he added, with IBM being the sole exception.
Wikibon projections from late 2015 that Dell will emerge from the EMC acquisition as a $75 billion company are roughly on track, Vellante said. That sets the stage for an interesting showdown with HPE, which has pursued a similar strategy by divesting most of its software and services businesses over the past year. “Dell is bigger [than HPE], has the PC component and appears to be more profitable, but with a boatload more debt,” he said. “These two are lining up as interesting competitors.”
The bigger competitor for both companies is Amazon Web Services, which reported 33 percent operating income margins in its most recent quarter, more than double those of Dell. “Dell has maintained its supply chain leverage, which will be key in competing with Amazon,” Vellante said. “Going forward, I think Dell can do very well in the enterprise.”
Goulden is skillfully leading the server business through a transition as spending moves to hyper-converged infrastructure and the cloud, the analyst added. Dell will lead in all-flash storage thanks to EMC’s market share and its head start on that business.
Dell also hasn’t exited the software business entirely. The VMware, Pivotal and Virtustream units that it picked up with the EMC acquisition, combined with the Boomi Inc. integration platform it acquired in 2010, “allows Dell to integrate its vast portfolio,” Vellante said. As Dell pays down its debt, it will be in a position to make further acquisitions.