Switch To High-Margin Business Drives Dell's Growth

A focus on higher-margin business and an increasing reliance on its growing intellectual property portfolio is pushing Dell into higher-value opportunities, the company's top executives said Monday during Dell's first fiscal quarter 2012 conference call.

That shift in strategy is behind Dell's first quarter financial results which saw the company's earnings grow a stunning 177 percent over the same period last year even as revenue stagnated at a mere 1 percent growth.

For instance, sales of Dell's higher-margin enterprise and SMB solutions and services rose while sales of its lower-margin consumer PCs fell over the past year. Dell is seeing the results of increasing investments in organic and non-organic research and development, said Brian Gladden, senior vice president and CFO of Dell.

"As we transition to more Dell-owned IP (intellectual property), we're selling more higher value products, and having deeper conversations with customers about their technology challenges and requirements," Gladden said.

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The shift to higher-value products and an increasing reliance on its own intellectual property is leading a fundamental shift in how Dell approaches the market, with the company increasing its R&D investment and pruning and eliminating non-core lower-profit businesses, Gladden said.

"We continue to believe profit share is of greater importance than revenue share," he said.

Gladden noted as an example the drastic changes Dell has gone through over the past year or so in its approach to the storage business, where the company made several strategic acquisitions including that of Compellent.

Those acquisitions came at a time when the long-term relationship between Dell and EMC essentially came to an abrupt end, a far cry from the days not too long ago when Dell was EMC's largest reseller and EMC fueled Dell's reach into the enterprise with its storage products.

Dell is already seeing its Fibre Channel storage pipeline from its Compellent sales exceed last year's EMC Fibre Channel pipeline, Gladden said. "And we're confident with the growth opportunity we have with this business," he said.

Gladden also said that the drop in storage revenue will by the end of the year turn into a year-over-year rise as EMC-based storage sales are almost completely replaced by Compellent sales.

Michael Dell, chairman and CEO of the company which bears his name, also emphasized the success Dell is having with its focus on its own intellectual property.

In addition to the growing Compellent business, Michael Dell also cited as his company's intellectual property prowess investments in such technologies as vStart, a converged infrastructure offering which combines Dell servers and storage to form the basis of a virtualized data center solution, as well as the introduction of its first scale-out NAS appliance based on technology from its Exanet acquisition.

"We're quickly becoming a leader in intelligent data management," Dell said.

In addition to a shift towards higher-value products, Dell has also shifted how it compensates its direct sales staff, Gladden said.

For instance, he said, the company emphasizes higher-margin sales in its compensation packages. It has also responded to longer sales cycles in the enterprise by extending the quota cycle for its sales reps to six-month or yearly growth instead of quarter-to-quarter growth.

Next: Impact Of The Tablet PC

Dell is also looking towards new technologies as an area of growth.

When asked about the potential impact tablet PC growth might have on traditional desktop and mobile PC sales, Michael Dell said his company is already engaged with customers on services related to security and other aspects of the tablet business. However, he did admit that the change is taking longer than he would like.

Dell is focused on creating solutions related to applications, security, and other areas for tablet PCs, but so far has not seen a big shift on the corporate side of that market, Michael Dell said. "We're not seeing (tablet PCs) replace the smart phone or PC in large numbers," he said.

Greg Richardson, an analyst with analyst firm Technology Business Research, wrote in a research paper after Dell unveiled its first fiscal quarter results that he expects Dell's shift to higher-value business to help increase the company's addressable market even as it pushes against such competitors as IBM and Hewlett-Packard.

"We expect Dell to go outside its comfort zone in coming quarters, targeting vertical expansion in key industries such as financial services and telecommunications, and strengthening its position in the services and security markets," Richardson wrote. "Dell’s continued expansion in new markets is predicated on its ability to integrate and execute with synergistic acquisitions and grow its partner ecosystem. As a vendor that traditionally preferred to work alone, Dell has done an about-face with its use of channel and service partners, and is designing solutions that enable partners to add high-margin revenue by attaching services to Dell offerings."