DWT18: The Premptive Prequel

In the increasingly cloud-first IT environment the misperception persists that “Infrastructure? We don’t need no stinkin’ infrastructure” is the ‘truth’. However, somewhere, somebody is supplying hardware, software and services to a datacenter to enable the cloud to function. Just ask cloud’s dynamic duo, Amazon and Google (and Microsoft), who helped more than double the amount spent on datacenters last year.

While ODMs (original design manufacturers), whitebox and switches and public-domain software continue to proliferate, it comes down to three primary vendors in the broadline enterprise infrastructure business: , and Dell EMC. Big Blue looks like it has gotten it’s act together and is once again the profit-generating machine we’ve known forever (1Q18 $19.1 billion), while the post-Meg-HPE appears to be taking its new smaller-is-better philosophy and making a go of it (FY1Q18 $7.7 billion).

Meanwhile the world’s largest private technology company, Dell EMC/Technologies, which is holding Dell Technologies World, its annual customer event, next week in Las Vegas, has continued to prosper (FY4Q18 $21.9 billion), despite running up a truly massive debt with its EMC acquisition (approximately $46 billion). The company borrowed billions to go private in 2013, and then a lot more billions ($52 billion?) to buy EMC n 2016, so while the amount still owed is impressive, the amounts paid off – around $10 billion – are equally impressive.

The numbers were much less impressive for revenue ($13.6 billion), where HPE edged out Dell EMC for the fourth-quarter, 18.9% versus 18.0%. While IDC noted that “Investments on enterprise storage systems are increasing at a very healthy pace,” the original design manufacturers (ODMs) that sell directly to hyperscale datacenters recorded the biggest increase – 34.3% year over year – to just under $2.8 billion.

Gartner puts overall Q4 server revenues up 25.7% year-over-year, on just an 8.8% YoY increase in shipments. Dell EMC won bragging rights, with top spot for the year (19.4%), up 39.9% in Q4, versus HPE (19.3%), on a respectable 5.5% increase in Q4. For the year, shipments were up 3.1%, while revenues jumped 10.4%.

The latest numbers from IHS Markit show that Dell has supplanted HPE atop the datacenter server revenue heap. For the fourth quarter of 2017 Dell EMC accounted for17.9% of the market, worth $3.6 billion, just edging out white boxes (17.6%), and HPE (17.1%). The numbers are troubling for the non-ODMs, as white box shipped more units (24%), and while enterprises accounted for 44% in Q4 and 48% for the year, that segment is slowing down as cloud service providers (41%) are expected to overtake enterprises in 2019.

Overall, Dell reported a 9% increase in quarterly revenues, and a 13% increase in adjusted earnings, to $2.47 billion. Despite being so much smaller than its parent (82% ownership), VMware accounted for almost half of Dell’s overall $6.8 billion of cash flow in the last fiscal year, and in March reported rising sales and a profit forecast that exceeded analysts’ average expectation.

Having long-extolled the virtues of being a privately-held organization, it appears Michael Dell is now mulling a number of options to deal with the new US regulatory environment. The rumored reverse-merger option with software affiliate VMware, is now off the table, but an initial public offering is still under consideration.

Analyst Rob Enderle is fascinated by Dell Technologies, not least because ‘it is a very large merger that was not a near total disaster, in fact it was surprisingly well done largely because the two firms threw out the rule book.’ Unlike his frequent complaints about Whitman’s time at HPE – “she didn’t have the qualifications to run the company” – he attributes Dell’s success to its founder, ‘who was willing to both take risks and willing to admit he was wrong and correct a mistake.’ Michael Dell doesn’t hide from his mistakes – i.e. stepping down prematurely and the company’s acquisition process – ‘and instead learns from them.’

In his review of Dell’s latest PC refresh, analyst Charles King, Pund-IT, noted that the new offerings demonstrate ‘how the company is actively leveraging new technologies to enhance both the performance of its solutions and customer value.’ He said Dell deserves kudos for these well-considered and well-executed additions. ‘Predictable or not, the company’s efforts seem likely to positively impact both end users’ experiences and Dell’s commercial success.’

King thinks the companys track record a year after the acquisition has been ‘largely or even entirely positive.’ He said this was notable given the deal’s size – at $67 billion, almost double the size of the IT industry’s previous largest acquisition, HP’s 2001 purchase of Compaq for approximately $33 billion.

Next week we’ll get the latest news from Dell, and some indications of where it’s going. Given the company’s recent past, and the tremendous changes transforming everything, including digital convergence, the Internet of Things and cyber(in)security, I can hardly wait.

DISCLAIMER: I hold shares in many of the companies referenced in this article, and Dell will be looking after airfare and hotel while I’m at .

Author: Steve Wexler

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