The State of Dell: Improved


Today I'm in Austin at the Dell Financial Analyst meeting where the company is sharing details of its operations. I'll cover the material that it has shared in brief and conclude with my sense of how the meeting went.


Life Cycles, Status of Hardware and Services


Dell is reporting that customers (business customers) are pushing out their replacement cycles. However, it is tracking an average replacement cycle for servers and storage of three years, laptops for three to four years, and desktop computers for four to five years. It is noting a preference for industry standard software stacks, which is what Dell specializes in, and arguing that proprietary software stacks, while being offered by other vendors, are not gaining in popularity.


It continues to have significant percentages of the high-profit segments it focuses on. It does $6.5 billion in servers (36 percent in U.S. for a #1 share, and 26 percent WW and #2 in share), $5.4 billion in services with a focus on modular offerings and cloud computing, and $2.7 billion in storage (#1 position in iSCSI at 36 percent share in U.S., and 12 percent WW and #3 share). The EMC partnership on storage, according to Michael Dell (who is presenting) remains strong.




Dell is taking a financially focused strategy towards acquisitions, targeted at filling product or service holes in current Dell capabilities or to expand the company in key areas that improve Dell's competitive position in the market. Companies selected will be vetted to make sure they fall within Dell's capability to merge with it, suggesting that very large mergers will likely not be part of this mix. The price that Dell will be willing to pay for these properties will be risk-adjusted for both merger impact and changes in the market, suggesting that Dell will not do hostile takeovers nor will it overpay for high-profile properties. It is specifically looking for companies that will have a high impact on Dell's financial situation, suggesting it will be looking for companies whose problems fall within Dell's strengths or firms that can address Dell's competitive weaknesses out of the door.


Operating Agenda


Brian Gladden, Dell's CFO, is presenting this segment. Dell is mirroring HP by putting profitability as its number-one goal and trading off market share where the two conflict. Liquidity is its number-two goal, suggesting efforts to do stock buybacks will be curtailed so it has a strong cash position for possible acquisitions and strong working capital levels. Reducing costs is #3 and similar to most of the industry, reflective of the times with $3 billion in reductions in product cost and $1 billion in G&A. #4 is improvements in products and services, with a continued high focus on product design and building next-generation enterprise services. #5 is expanding in emerging companies with a focus on large markets (think China). #6 is growth with a focus on high-profit segments.


Given the ranking, it is clear that Dell is focused on strengthening the balance sheet and bottom line and will trade off advancements in favor of these moves. This suggests a higher level of product stability and reliability to reduce product costs and warranty costs which, in this market, should likely be well received. It is interesting to note that the DSO (Days Sales Outstanding) has been drifting out, which would be consistent with corporate and other customers who are buying hardware having cash flow problems and difficulty paying on time. Dell is forecasting a downward trend, suggesting the financial positions of these customers are improving.


In terms of product mix, Dell is 59 percent client hardware, 17 percent Software and Peripherals, 15 percent Servers and Storage, and 9 percent Enhanced services. Dell remains largely a PC company and continues to leverage the relationships that result into servers and services. It is interesting to note that Dell, like HP, is practicing what it sells and reporting that a significant reduction of its own IT expenses has resulted in the company implementing aggressively its own new hardware and applying the practices that it advocates and services that it sells.


Large Enterprise


Steve Schuckenbrock, President Large Enterprise, is presenting and seems somewhat nervous (he is new to this role) and not as well prepared as the prior speakers who conveyed a stronger sense of confidence. Seems to be off chart as well, and I get the sense he didn't rehearse and is speaking off the cuff. Very hard to follow. The basic message appears to be that the existing environment is a mess of proprietary hardware including mainframes, mid-range, and UNIX (real Solaris) systems coupled with networking products, all of which don't work well together and are very painful to maintain. Dell's advantage is that it is not tied to the revenue. Overall message is that Dell's value proposition, which is far from unusual, is to use its services and hardware to reduce the costs that IT customers are currently paying for their aging and largely proprietary systems currently in place.


Public Sector


Paul Bell, President Public Sector, is presenting and starts by showcasing a 5 percent compound growth rate through 2012 (forecast) for this segment and admits that much of this will likely come towards the end of the forecast period. Dell reports that the new netbook targeted at schools is doing very well because it focused on things like durability and anti-microbial keyboards, which that segment has taken to.


Its global organization is assisting in this success by making sure the right resources can be made available, including best practices, wherever they are needed. Dell is disproportionately focused to a significant degree on the U.S. market at the moment and is attempting to shift that focus to the rest of the world so that it has a better geographic mix. Ranking of focus areas from first to sixth is: Vertical Solutions, Emerging Markets, Funding Vehicles, Strategic Partnerships, Core Coverage and Customer Focus. This last really refers to targeted marketing, or this ranking would suggest a problem because you can't succeed in Vertical Solutions without an equally high focus on customers.


Vertical areas of focus (not ranked) are Higher Education, Government, K-12 Education and Healthcare Life Sciences. In Higher Education, the focus is on high-performance computing, where the highest margins and greatest need for increasing performance exists. For Government, it is on hardened laptops that now have cladding of ballistic materials and unique military specification hardware materials. K-12 has a focus on the connected classroom and unique networking and teaching aids. On Healthcare and Life services, Dell is focused on medical record management and clinical mobility.


Small and Medium Business


Steve Felice, President of Small and Medium Business, is presenting. This is the fastest-growing segment for Dell and it is this segment that lends itself more strongly to Dell's model, competitively, than any other at the moment. Medium and Small businesses are very different, with 38 times the spending on technology for medium businesses as compared to small businesses, and medium businesses have two thirds of the profit pool. Because of this, Dell is focusing more aggressively on the Medium business side of this group.


Priorities (ranked) are: Growing operating profit; Focused offerings (storage, security, and manageability services); Go-to-market and Brand. This is a simpler market and these goals reflect this simplicity. In this segment, it has a new brand, Vostro, and this also showcases the need to grow the visibility and values associated with this brand. Build to order has been a positive market differentiator for Dell historically but it continues to build its retail channel relationships in an attempt to better match the retail presence of competitors. Overseas, with India and France as examples, Dell is increasingly the brand of choice and/or leading in consideration as a result of focused marketing in these geographies targeted at this segment. This is a heavily instrumented segment for Dell, with 10 million customers it can monitor and manage trends to create custom targeted offerings for the segment. Dell will be placing a significant amount of emphasis on computing appliances for this segment going forward. Solutions in a box that simply need to be plugged in to function.


Consumer Segment


Ron Garriques, President Consumer Business, is presenting. This was the segment that founded Dell and remains important to the company. It is reporting top-line (revenue) and bottom-line (profit) growth in this segment. It is facing an increase in complexity in the channel, while Dell was initially mostly direct it is moving to retail and distributors and beginning to move into telco partnerships with things like netbooks. Dell remains relevant and significant in this market in most regions worldwide but is increasing focus on growing competitive in Europe where it is under-penetrated at the moment.


Dell is differentiating in this segment through a large variety of selling channels and the unique ability to highly customize offerings with custom artwork and unique colors. This includes network connectivity and wide ranges of hardware configurations, ranging from screen sizes to internal components. Dell has multiple brands for this segment: Dimension is its utility brand; Inspiron is its mobile simplicity brand; Studio focuses on multimedia; Adamo is focused on luxury; and Alienware on gaming. The competitive advantage that Dell is bringing into retail is the increasing ability to combine product that people can touch with their configure-to-order (via kiosk) capability that has historically defined the company. It is planning to increase its Web presence so that all customers (users) of Dell products will be pulled to their site to increase the quality of the relationship with these users and overall sales through Dell.com (think software, accessories, unique services, and additional PCs). There is the hint of a coming Dell LTE smartphone and that Dell will be creating a unique solution that blends hardware, software, services and connectivity back into other Dell offerings into a unique, very attractive, and compelling solution.


Wrapping Up


With the one noted exception, what each executive presented was on message and to point. They met the requirements for understanding their respective markets and having unique strategies for each segment. They lacked customer validation, with the exception of their own aggressive adoption of their technology, which makes it difficult to assess how well this is being received by customers outside of their financial performance, which appears to be improving.


On adopting its own technology, I still believe this to be one of the first checks an enterprise buyer should do before selecting a vendor. If a vendor doesn't use its technology aggressively, it suggests it neither sees the value it is selling nor is it fully grasping the problems that customers are likely to have with it and therefore can't effectively mitigate them. Overall, Dell seems to have an improved understanding of what makes it unique and making use of these unique strengths and weaknesses. It is beginning to apply those strengths to differentiate in the market. I think it is still under marketing its solutions but seems to be doing a better job of targeting the marketing it is doing to distinct customer groups. It remains too heavily dependent on the PC segment, but is gradually improving this mix. Dell may be overly conservative with acquisitions given this critical and admitted need for a more balanced product model.