Dell Earnings Don't Tell Big Transformation StoryDell Earnings Don't Tell Big Transformation Story

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 information 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 information. "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 information 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 information'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.)

Two years ago, Dell had PowerConnect switches. Meanwhile, HP's ProCurve and 3Com product lines began banging on Cisco's door. Just to confuse matters, Cisco was trying to break into the server business. While Cisco is still the player to beat in networking, it has suffered a few setbacks, opening the door for lower-cost players like HP and now Dell.

This past summer Dell acquired Force10, a strong secondary player in 10-Gigabit Ethernet switching, with about $200 million in revenue and 1,400 customers. Like it has done in storage, Dell plans to double Force10's workforce in the next year or so. Dell's networking VP and GM, Dario Zamarian, who left Cisco more than a year ago, admits that Force10 is simply a start, but he wouldn't let on what comes next.

Whether Dell grows its networking business through more acquisitions, internal development, partnerships, or some combination of those moves, Zamarian made it clear that Dell needs to offer Layer 4 and Layer 7 network services, citing security, load balancing, and overall orchestration as its areas of emphasis. If Darren Thomas's journey in storage is any guide, Michael Dell will be breaking out the checkbook often during the next few months. Dell must move fast here.

An upcoming information report on data center convergence will reveal that Dell is in the conversation, at least as far as 10-Gig Ethernet goes, but more as a secondary provider than a primary one. In fact, despite Cisco’s recent financial struggles, it’s still entrenched in the minds of information readers--95% of the respondents to our recent Data Center Convergence survey (these results will be available in December) say they’re looking at Cisco for 10-Gig Ethernet gear today and in 2012.

The best that can be said for Dell right now is that it’s well perceived as a low-cost networking provider. In separate information survey that went a bit deeper into data center networking, evaluating the industry players across a broad range of evaluation criteria, Dell ranked fourth as a primary source of 10 Gigabit Ethernet gear, behind Cisco, HP and IBM. The good news for Dell is that companies are looking to reevaluate their network architectures, mainly to achieve operational and capital cost savings, our survey finds. (This survey will also be available in December.)

As Dell continues its march into the data center, it has also realized that simply being an equipment provider is hardly where the customer value is. The value is more in how it's all integrated, managed, virtualized, and simplified. And here, too, Dell has begun to make some noise, launching vStart, a virtualization broker of sorts, earlier this year.

Dell's Advanced Infrasctructure Manager (AIM), a workload mobility tool (this was part of Dell's Scalent acquisition), and Virtual Integrated System (VIS) Creator, a VM manager, combined with vStart, make up a system that can rightly be seen as private cloud management.

Dell's Changing Culture

There’s much more evidence that this is a new Dell. Dell plans to spend $1 billion on R&D this year. It has opened a new facility in San Jose, Calif., to house engineering across its various new acquisitions. In late 2007, the company made a strategic decision to use channel partners to help move its technology, a major move given Dell's long-standing direct sales model. In December 2007, Dell began with less than a dozen deal registrations (essentially an entry into the company's shared CRM tool), says channel chief Greg Davis. Now it processes somewhere north of 1,400 each week. It now has 100,000 channel partners worldwide, and it will run 140,000 training classes this year, almost double the number it did in 2010.

Dell is also aiming at certain industries--among them, retail, banking and securities, energy, manufacturing, telecom/media/entertainment and webtech--having appointed Paul D'arcy head of industries. Back to the idea of talking with customers about solving their problems than selling them data center gear.

While D'Arcy repeated his mantra that "our customers are asking" for this, the truth is that Dell has a long way to go. Michael Dell positioned the previous era as the Home Depot approach--"servers on aisle three, storage on aisle four." Today, Dell can offer a more holistic solution, pieced together in part with the services expertise it acquired in the Perot Systems deal--and even run it for its customers in its data centers worldwide.

It's a start, and perhaps it's as deep as Dell is capable of going. But Michael Dell noted that the company has very different people and skills than it did five years ago. There are 45,000 people in Dell's services business, all operating with what Michael Dell calls a "solution-oriented mindset."

Michael Dell says customer evolution matters more than technology evolution; some companies still want to simply buy a bunch of hardware. In fact, 28% of Dell's revenue comes from developing and other fast-growing markets, and their needs are far more foundational, he says.

One of the most fascinating changes at Dell seems to be a renewed sense of purpose. The message was the same during nearly every one of our executive interviews: providing standards-based solutions; giving customers choice; helping customers solve business problems. The sense of optimism and passion were also the same.

Enterprise strategy VP Praveen Asthana talked about Dell's need to be visionary but pragmatic, and Michael Dell latched onto those words to describe the need for Dell to simplify customer environments and constantly add value. Asthana, when asked about Dell's play in big data, replied that the bigger issue is achieving big insights, noting that 90% of data warehouses are smaller than 5 terabyes. Michael Dell talked about big decisions and big impact.

Naturally, Michael Dell is loathe to call this the post-PC era. Despite the popularity of smartphones and tablets, he doesn't see a day when we won't have computers. He sees no slowdown in growth (in Dell's earnings report, desktop PCs were down 6% in revenue, and notebooks were down 2%, but gross margins were up 20% year-over-year).

And surely now is Dell's opportunity to dominate that sector given HP’s recent waffling--first saying it would sell its PC business, then pulling back after Meg Whitman was named CEO. When asked if Dell is still benefiting from HP’s flip-flop, Michael Dell says: "The fact that you're even asking means it's probably true."