Dell’s hardware revenue continues to grow, but further gains will depend on a faster go-to-market transformation
Krista Macomber, Data Center Analyst
SEP 03, 2014 01:40 AM
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Nearly one year into its privatization, Dell's portfolio and go-to-market investments demonstrate consistent strategic focus. Dell continues its quest to become a provider of customer-centric solutions by leveraging channel partners and reducing barriers to collaboration internally and with technology and service provider partners. Dell's core hardware revenue declined during its corporate restructuring in 2H13, dragging down corporate revenue and profitability, but TBR estimates Dell's heighted focus on leveraging channel partners during 1H14 is driving year-to-year growth across its lines of business. As a result, we estimate Dell's corporate revenue rose 5.9% year-to-year to $15.4 billion during 2Q14 and operating margin improved 180 basis points to 3.7%. In 3Q14 we believe Dell's recovering hardware business will help corporate revenue grow 10.2% to $15 billion and operating margin rise 180 basis points to 3.3%. However, TBR believes challenges, largely tied to go-to-market execution, will continue to hinder the success of Dell's corporate transformation.

As the commoditization of base-layer hardware shifts IT infrastructure value to software, Dell faces an uphill battle building market awareness and gaining customer acceptance in noncore but strategic markets. Dell's increased presence in the channel will buoy near-term gains, but TBR believes Dell faces long-term challenges evolving its large and mature base of direct sales staff to articulate business value over speeds and feeds and embrace co-selling with partners. Additionally, we believe future partner retention will be dictated by Dell's ability to differentiate around portfolio and ease of doing business value as competitors also eye ecosystem leverage as important to surviving the industry transition to cloud-, mobile- and big data-focused IT infrastructure.

A resurgent commercial PC business and consumer market share gains are fueling the recovery of Dell's PC business

TBR believes a modest rebound in the commercial PC market and Dell's wider global reach made possible by its expanding presence in direct sales channels continued to help Dell's PC business turnaround in 2Q14. A concerted effort by Dell to strengthen its channel operations by improving pricing, order processing and logistics systems, in tandem with a flurry of incentive-laden programs for its Windows 8, 2-in-1 PCs helped lift EUC revenue 6.9% from 2Q13 to an estimated $9.5 billion, the segment's highest total since 2Q12. Dell's organic direct-focused business remains strong among SMBs, and its efforts to embrace the channel beginning in 2H13 have greatly contributed to the 6.9% year-to-year revenue increase and 4.6% boost to EUC unit shipments. TBR believes revenue and unit shipment gains generated by leading vendors Dell, HP and Lenovo are at the expense of second-tier vendors such as Asus, Samsung, Fujitsu and Toshiba.

Dell remains focused on maturing its software offerings and developing a cohesive suite of capabilities that it will use to gain access to new markets

TBR estimates Dell Software revenues at $380 million in 2Q14 — another quarter of year-to-year growth due to continued investments bolstering the vendor's maturing software portfolio. However, Dell's challenges pertaining to go-to-market execution are prominent in the company's software group, which struggles to generate larger revenue gains despite growth on the hardware side. TBR believes estimated operating margin in 2Q14 of -13% highlights the software group's continued struggle to integrate with Dell's core hardware businesses and build a more unified suite of software assets instead of individual point products.

Overcoming this challenge will require seamless collaboration in Dell's software group to deliver an integrated portfolio that provides customers business-solution-led applications. In August Dell announced the release of its Backup and Disaster Recovery Suite, which combines AppAssure, NetVault Backup and vRanger solutions (all acquired software solutions, two by way of Quest Software) to provide data backup and protection. The backup and recovery suite shows Dell is capable of combining acquired software technologies into packaged solutions that meet demand for critical business requirements such as data protection. However, TBR believes Dell Software will see limited progress in enterprise markets in 2H14 with stand-alone software solutions such as Backup and Disaster Recovery Suite. Dell must more effectively complement its nascent software solutions with its established hardware offerings and market business outcome-driven infrastructure to customers. To gain faster access to noncore markets and deliver future-ready IT platforms around big data, mobility, security and cloud, Dell's software and infrastructure capabilities must be leveraged as packaged solutions whenever possible.

TBR is confident Dell is increasingly seeking opportunities to leverage relationships with customers, particularly via its hardware business, to offer more comprehensive solutions and compete more effectively against competitors such as HP and IBM. For example, in July Dell released two new data backup appliances: the DL1000, powered by Dell AppAssure data protection software and the DR2000v, with native support for Dell's NetVault and vRanger backup software applications. Packaging hardware and software solutions such as DL1000 and DR2000v is an effective way for Dell to expose its software offerings to its larger hardware customer base while extending the vendor's ability to provide end-to-end solutions that integrate with security, cloud and data workloads. TBR expects Dell to use this strategy more consistently to upsell and cross-sell customers on its expanding software portfolio.

Dell's long-term cloud market share depends on building its status as a cloud integrator by messaging improved business value

Dell will remain a strong cloud hardware components competitor from a near-term perspective through its Data Center Solutions (DCS) business, heritage in industry-standard hardware and recent converged systems innovations. However, TBR believes Dell is struggling to raise its profile in the eyes of cloud customers. We believe it faces an uphill battle as competitors including HP and Cisco leverage their broad Helion and Intercloud strategies, respectively, to build segues from core hardware businesses and into new high-value areas such as PaaS and security. TBR believes Dell's reliance on hardware in the cloud marketplace has the potential to slow its cloud market share growth, threatening future customer relationships and growth opportunities.

With cloud value increasingly resulting from ecosystem engagement, Dell has the opportunity to leverage partners to accelerate its cloud market share growth. Specifically, TBR believes Dell's close collaboration with Red Hat and continued investment in its fast-growing Boomi cloud integration platform position the vendor to craft a message of best-of-breed, fit-for-purpose infrastructure while aligning with customer requirements for infrastructure openness, flexibility and choice. Success of this strategy will be dictated by Dell's ability to distill simple, cohesive messaging that unites its cross-portfolio value and resonates with the improved business outcomes that can be achieved by leveraging Dell's cloud solutions.

Dell reshaped its services organization to compete more effectively

The role of Dell's services organizations is driving closer relationships with broader engagement between Dell and its customers and will be augmented with key appointments of new leadership In 2Q14 the strategic partitioning of the Dell Services organization into Hardware Support & Deployment Services and SecureWorks (managed security), with the remaining Dell Services' capabilities of BPO, Application Services and Infrastructure & Cloud Services remaining under the Dell Services moniker, launched three focused, nimble organizations able to address specific market sectors. All three groups quickly adjusted to the new structure and collectively achieved another quarter of growth, estimated to be 3.1% year-to-year, with estimated revenue of $2.2 billion during 2Q14.

TBR estimates Support & Deployment revenue grew 2.6% year-to-year, ending with $1.3 billion in estimated revenue during 2Q14, with demand for ProSupport and ProSupport Plus offerings helping drive the expansion. TBR believes Support & Deployment Services took steps to consolidate its service delivery resource pools, closing a 1,000-seat facility in Mohali, India, and transferring the technical support and customer care responsibilities to other India-based service delivery centers. SecureWorks Managed Security Services combined with Infrastructure and Cloud Services secured an estimated $650 million in revenue during 2Q14, with 8.1% estimated year-to-year growth. TBR believes growth was driven by primarily small and midsize enterprises in the U.S. increasingly turning to Dell's recognized name to augment their IT departments. Finally, the Application Services and BPO secured an estimated $300 million in revenue during 2Q14, an estimated contraction of 3.1% as the organization ramped up its Application business line and continued to pivot its BPO business from margin-dilutive, commoditized service contracts to higher-value, knowledge-services-oriented engagements.

The newly condensed Dell Services organization also secured new leadership in 2Q14 to guide the organization in its next stage of development and increase its offshore service delivery contribution to nearly half of its overall service delivery by the end of 2014. Dell Services appointed Ganesh Murthy, most recently executive vice president and chief financial officer of HP subsidiary Mphasis, to serve as vice president and CFO and speed the Dell Services' transition to more effectively leverage global service delivery labor pools across its business lines. Dell Services also appointed Prasad Thrikutam, who most recently served as head of Infosys Americas, president and global head, Application Services. Thrikutam will be responsible for raising the overall profile of the Application Services segment in the global marketplace as enterprises and midsize businesses seek to modernize their legacy applications for migration to cloud infrastructure. TBR believes Dell Services' transition to focused service delivery components will help define its capabilities and value to customers, but getting the message to the public remains a sticking point. TBR expects Dell will increase its investment in programs educating Dell channel partners about the capabilities and value of the refined Dell Services organization in 2H14.

Note: Estimates are based on TBR's assumptions to date. TBR's final data analysis will publish in the Dell quarterly reports on Sept. 12, 2014.

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients' needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.

 

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