Dell In Transition: In-House Technology Now Drives Growth


Dell's acquisition strategy appears to be paying off as the company moves into higher-margin offerings at the expense of short-term profitability.

The acquisition of such product lines as EqualLogic and Compellent storage and KACE systems management technology has led to Dell growing margin even as it increasingly sheds many of the third-party products for which it receives lower margins, Dell executives said during the company's second-quarter financial conference call.

That is a strategy which will continue with more recent acquisitions, including Dell's planned acquisition of Force10 Networks, the executives said.

Dell on Tuesday reported second fiscal year 2012 quarter revenue of $15.7 billion, up a mere 1 percent over the same period of last year. The company also reported earnings for the quarter of $890 million, or 48 cents per share, up 63 percent over last year.

The disparity between profit growth and revenue growth stems primarily from a deliberate decision to move away from reselling other companies' products and towards selling higher-margin Dell-branded products, said Brian Gladden, Dell CFO.

Dell has also dropped the resale of a large number of retail and consumer products, as well as several third-party software offerings, Gladden said.

The biggest example of this shift is in Dell storage, where sales of EMC branded storage are quickly fading to insignificant as Dell ramps up sales of products based on its own intellectual property, Gladden said.

As a result, while sales of Dell storage overall fell 20 percent from last year thanks to a 62-percent drop in EMC storage sales, sales of the company's Dell-branded storage rose 15 percent, Gladden said. "Much of the remaining EMC storage business has transitioned over to Dell technologies," he said.

Dell's self-branded storage success stems from a couple of key acquisitions, including its $1.4 billion acquisition of iSCSI leader EqualLogic in 2007, and the acquisition of storage virtualization pioneer Compellent earlier this year for $876 million.

It is a strategy which is now being repeated with Force10, which Dell expects to help it move away from low-margin resale of networking gear from other vendors, said Brad Anderson, senior vice president of Dell's Enterprise Solutions Group.

Dell will see the same dynamics with its networking business once its Force10 acquisition closes that it saw with storage in the wake of its EqualLogic acquisition, Anderson said.

The primary difference between the Force10 and the EqualLogic acquisition is that Dell's networking business does not depend on a single third-party vendor in the same way that its storage business in the past depended on EMC, he said.

Anderson said to expect Dell's business to continue transitioning to its own brands into the future. "Where we now have industry-leading IP (intellectual property), we're going to sell the Dell-branded (products)," he said.

The focus on developing Dell's own technology is a far cry from the days when Dell was known primarily as a reseller of others' technology.

Michael Dell, chairman and CEO of the company which bears his name, said that Dell added about 2,000 R&D personnel during the second quarter alone.

In servers, for instance, rather than the old me-too approach, Dell has been investing in differentiated products. Anderson said that Dell was the first server vendor to provide servers that worked in temperatures of up to 113 degrees Fahrenheit.

"Unfortunately, those are temperatures we are getting used to here in Texas," he said in reference to the heat wave currently engulfing the state.

Dell during the second quarter was also the first company to bring to market a cloud computing solution based on the OpenStack initiative, he said. Dell, working with Cloudera, was also among the first to market with an open-source Hadoop solution for managing large volumes of enterprise data, he said.