Dell talks up R&D, but effort a work in progress

Dell CEO Michael Dell is working hard to position the company as more than just a PC vendor. In fact, Dell is pushing the company upstream so much he's willing to walk away from low-margin PC deals and spend more on research and development.

The catch is that Dell's talk hasn't caught up to his R&D spending as a percentage of revenue. Here's what Dell said on the company's third quarter earnings conference call.

Our improved profitability and cash flow have enabled us to move forward with strategic investments both organic and inorganic. Innovation in both hardware and software is fueling our new product pipeline. We're now investing in R&D at an annual run rate approaching a billion dollars. Dell now has 5,000 patents granted for pending around the world and has over 20 R&D (centers) globally. We've made five acquisitions since the beginning of this year. This is enhancing our capability as an enterprise solutions provider with a focus on server, storage, networking and security.

That phrase "solutions provider" came up frequently. Dell even walked away from $2 billion in PC deals because they didn't fit the company's broader strategy to move upstream to higher-end IT partnerships. In other words, Dell let HP off the hook amid its rival’s uncertainty so it can focus on servers, storage, networking, services and software as a service.

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Dell's message is that the company can innovate and be more of a key partner in enterprise IT. For now, Dell's messaging hasn't caught up to its R&D spending.

CEO Dell touted a $1 billion annual run rate in R&D spending. Dell's annual sales for fiscal 2012 ending Jan. 30 should come in about $62.5 billion. At its annual run rate, R&D will be 1.6 percent of revenue. For respectability, Dell needs to hit 3 percent perhaps.

For the nine months ended Oct. 31, Dell's R&D spending was $620 million, up 26 percent from the same time frame a year ago. On $46 billion in sales, Dell's R&D spend to date is 1.3 percent.

In other words, Dell's R&D spending is headed up, but still within historical norms in recent years.

Dell is making progress but has more to go. To wit:

• For the year ending Jan. 28, 2011, Dell reported R&D spending of $661 million, or 1 percent of revenue.
• For fiscal 2010, R&D spending was $624 million, or 1.2 percent of revenue.
• For fiscal 2009, Dell's R&D spending was $665 million, or 1.1 percent of revenue.
• For fiscal 2008, Dell spent $610 million, or 1 percent of revenue, on R&D.
• For fiscal 2007, Dell spent $498 million, or 0.9 percent of revenue, on R&D.

Simply put, Dell is moving the needle on R&D, but it will take time to garner returns and change the perception that the company doesn't innovate. Dell's R&D spending---more in nine months of fiscal 2012 than entire years before---is a good start, but it's just a beginning.

More on R&D and tech companies:

• Apple's R&D spending hits bottom as percentage of revenue
• A look at HP's decade-long R&D slide
• Gauging the return on R&D: Do tech giants spend too much?