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Dell retools for the midmarket

(Slightly) less revenue. But more profit

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Consumers and governments in the United States and Europe are crimping their spending, but businesses of all sizes are still refreshing their servers, storage, and PCs. As a result, Dell was able to come close to meeting Wall Street's revenue expectations in its second quarter.

The company even brought more money to the bottom line than was anticipated. However, Dell is going to make the IT sector jumpy in the coming days because it cut revenue guidance for the remainder of its fiscal year.

Part of that revenue decline is due to Dell pulling back from certain businesses, explained Brian Gladden, Dell's chief financial officer, in a call with Wall Street analysts going over the numbers. This includes the unwinding of its storage reseller agreement with now-rival and once-partner EMC as well as cutting back on certain retail partners peddling its PCs, ditching software reselling deals on its machines that didn't net the company the profits it desired, and killing off a bunch of consumer electronics devices.

Gladden said that these discontinued businesses represented over $1bn in revenues over the course of a year, so it is material. But Dell is unapologetically focusing on servers, storage, and services and specifically on the midmarket where it can extract more profits.

In the second quarter of fiscal 2012 ended in July, Dell posted $15.7bn in sales, up 1 per cent compared to the year-ago period. Product sales were flat as a pancake at $12.6bn in the quarter, with services and software revenues rising 6 per cent to just over $3bn. Net income rose by 63 per cent, to $890m, and that is what company founder Michael Dell and his top brass are focused on.

Dell pushed just over $2bn in servers and networking gear in its fiscal Q2, up 9 per cent from the prior period, while storage sales declined by 20 per cent to $502m.

A Sandy Bridge just far enough

Brad Anderson, senior vice president of Dell's Enterprise Solutions Group, said that server buying among its public sector customers was a bit lower than average, and was only up 5 per cent among large enterprises, and that SMB server spending was strong and SMB server buying was "incredibly strong" in Asia. Anderson said that as far as Dell could see, there has been no slowdown in spending on its current PowerEdge servers, and one of the reasons for this is because the launch date for Intel's forthcoming "Sandy Bridge" Xeon E5 processors "is not real obvious yet".

Intel is expected to launch the new processors for workhorse two-socket servers sometime in the fourth calendar quarter of this year. Motherboard and whitebox server maker Super Micro said two weeks ago that as far as it knew, the Xeon E5s were still on track for Q4 and that its products were ready to go as soon as Chipzilla transforms into Shipzilla.

With Advanced Micro Devices already shipping its 16-core "Interlagos" Opteron 6200 processors for two-socket and four-socket servers to OEMs and Intel getting ready to launch the Xeon E5s, you might think that server buyers would give pause. But apparently not. Anderson said that server ASPs keep trending up and that he expected for PowerEdge sales to continue to hum along in Dell's fiscal Q3 because of the uncertainty around Intel's launch date for the Xeon E5s.

Dell's storage business is taking it on the chin because the company is no longer reselling EMC storage gear. If you break out the PowerVault, Compellent, Equalogic, and DX Object Storage revenues – these are products that are all owned by Dell, and the latter three lines through recent acquisitions that caused the EMC OEM deal to unravel – then Dell's homegrown storage sales were up 15.6 per cent to $393m. That means EMC-related storage sales plummeted by 61.6 per cent to $109m. It will take a few more quarters for this EMC business to zero out and make the compares easier for Dell.

Dell's services business, beefed up considerably by its acquisition of Perot Systems a while back, accounted for just over $2bn in revenues, up 6 per cent. Dell's outsourcing sales were up 6 per cent in the quarter, to $699m, and transactional services revenues (support contracts on hardware and software) rose by the same 6 per cent to $1.2bn. Dell's project revenues, which include all kinds of consulting engagements, had a 12 per cent bump in fiscal Q2 to $187m. Dell booked $1bn in new signings in the quarter, and its services backlog was up 11 per cent to $15.4bn as the quarter ended, with $6.8bn in deferred warranties and $8.6bn in services still unfulfilled but under contract.

Consumer PC slowdown

The desktop PC business was off 3 per cent, to $3.73bn and its mobile PC business was up 1 per cent to $4.76bn. Dell's consumer business, which is mostly PC clients with a smattering of software and services, was only up 1 per cent year-on-year to $2.9bn. Dell said that client sales in its public sector were up a stunning 34 per cent, attesting to the desire to upgrade PCs at government agencies and educational institutions despite the budgetary uncertainties local, state, and national governments are facing.

Gladden said that the US consumer business was a bit weaker than expected, and that in some regions and sectors Dell saw some softness at the end of Q2 and into Q3.

Because of the changes Dell has made to its businesses and the uncertainty of the consumer and public spending in the United States and Europe, Dell is backing off on its revenue projections for fiscal 2012. The company now says it will grow sales by between 1 and 5 per cent, down from the 5 to 9 per cent it previously told Wall Street it could do. The good news is that non-GAAP operating income is now predicted to rise by 17 to 23 per cent this fiscal year, up from a previous guidance of an increase of 12 to 18 per cent over fiscal 2011 that Dell provided earlier this year at its analyst day.

Dell said that it figured sales in the third quarter would be flat sequentially from Q2, which in the wake of the Great Recession has become the new normal for the company. ®

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