Dell warns PC slowdown threatens transition to infrastructure sales

Form 10-K says Dell's manufacturing methods are losing relevance and sales integration is slow

Dell has released its new Form 10-K, the annual warts-and-all disclosure of every possible risk a public company faces, and suggests that slowing PC sales are a risk to its strategy of becoming an infrastructure technology leader.

Much of the stuff in a 10-K is boilerplate: just about every such document includes something like Dell's statement that “Dell Technologies' business could suffer if Dell Technologies does not develop and protect its proprietary intellectual property or obtain or protect licenses to intellectual property developed by others on commercially reasonable and competitive terms.”

But there's also some very Dell-specific stuff in this one, such as the news that “Dell Technologies expects its strategic transformation to an essential infrastructure solutions provider to take more time and investment, and the investments it must make are likely to result in lower gross margins and raise its operating expenses and capital expenditures.”

We also learn that “For Fiscal 2017, Dell Technologies' Client Solutions business generated approximately 60% of Dell Technologies' net revenue, and largely relied on PC sales.”

Things quickly get interesting, as follows:

“Moreover, revenue from Client Solutions absorbs Dell Technologies' significant overhead costs and allows for scaled procurement. As a result, Client Solutions remains an important component in Dell Technologies' broad transformation strategy.”

The Register reads that as meaning that Dell gets good deals on components because it buys in big volumes for PCs, and those deals help to keep its infrastructure prices keen.

The document goes on to warn that “Dell Technologies continues to rely on Client Solutions as a critical element of its business, Dell Technologies also anticipates an increasingly challenging demand environment in Client Solutions and intensifying market competition. Current challenges in Client Solutions stem from fundamental changes in the PC market, including a decline in worldwide revenues for desktop and laptop PCs, and lower shipment forecasts for PC products due to a general lengthening of the replacement cycle for PC products and increasing interest in alternative mobile solutions.”

“PC shipments worldwide declined 5.7% during calendar year 2016, and further deterioration in the PC market may occur. Other challenges include declining margins as demand for PC products shifts from higher-margin premium products to lower-cost and lower-margin products, particularly in emerging markets, and significant and increasing competition from efficient and low-cost manufacturers and from manufacturers of innovative and higher-margin PC products.”

Those manufacturers are very much on Dell's mind because “the built-to-order model that Dell Technologies historically has used is losing competitiveness in an environment where profit pools are moving toward lower-margin segments primarily based on a build-to-stock model.”

The 10-K also says that cross-selling so that PC sales result in enterprise sales isn't happening a lot, yet. The company is optimistic because not much work has been done and it “thus far has limited overlap in the base of large customers for the Client Solutions business and the [infrastructure] business.” But there's also the admission that “... returns from Dell Technologies' prior acquisitions have been mixed and will require additional investments to reposition the business for growth, while cross-selling synergies have not been achieved as anticipated.” Some of the above isn't alarming: Dell and EMC only finalised things late last year so it's understandable that cross-selling isn't yet at ramming speed.

But build-to-order has been Dell's secret sauce for decades. If it becomes less important, the company will lose a differentiator. The potential for further slowdowns in PC sales to make it harder, or more costly, to build enterprise kit is also a scary thing to read. So's the dependence on PCs, not least because Dell has an awful lot of debt to service.

Two other notables from the 10-K: the company admits it's nowhere in tablets, which may not be a bad thing, and says it nipped another sale to an Iranian embassy in the bud. ®

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