Dell's software shift hobbled by tough year

Dell is sticking to the big bet it is making on developing its own software and storage technologies, despite a tough year for earnings in which the company showed flat growth
Written by Jack Clark, Contributor

Dell has reported full-year revenue of $62.1bn, showing flat growth after a tough, sluggish year in which it continued its shift to becoming a services-led organisation and dealt with pricing shocks from the Thai floods.

The company reported revenue on Tuesday of $16bn (£10.2bn) for the fourth quarter and $62.1bn for 2011, up two percent and one percent year-on-year, respectively. Operating income for the quarter was £931m, down 19 percent on the previous quarter's $1.14bn, while the year was $4.4bn, up 29 percent on the year before.

"[In 2011] we improved the cost position, execution and profitability of our client business, building on the success of the past two years. We strategically invested in datacentre capacity and solution centre capabilities around the world," Brian Gladden, the company's chief financial officer, said on an earnings call on Tuesday.

"We significantly increased the number of solutions sales specialists and increased our enterprise R&D spending. These investments have helped to reshape our business and will do so over the long term," he added.

The yearly revenue total set a new record for the company, but quarterly growth was crimped by an extra $150m spent on hard disks due to price inflation from the Thai floods. This also stopped the company from selling as many high-end bespoke systems as it would have liked.

"We just didn't get the mix of drives that we wanted, and it really forced us to sell lower or less configured, lower-end systems," Gladden said. This stopped Dell "from accessing higher-margin, more highly configured systems".

Quarterly revenue from the public sector was down by one percent to £3.9bn as poor financial climates hindered spending in the US and Western Europe, though this was offset by a five-percent increase in large enterprise revenue to $4.9bn.

Bright spots

But there were bright spots — Dell's storage revenue grew by 33 percent over the quarter to $463m, thanks to a 60-percent boost in Compellent storage revenue as Dell released 'converged infrastructure' products based around its own intellectual property. It was also a year in which Dell showed enough confidence in its own storage portfolio to break off its reseller relationship with storage titan EMC.

The year also saw the company host its first conference, Dell World, where chief Michael Dell spoke of his plan to transform the company into a services-led organisation, much like IBM or arch-rival HP.

Dell followed this announcement in October by forging a new software division within the company to spur development of Dell-owned intellectual property.

"Software obviously is playing an increasingly important role in the industry," Michael Dell said on the earnings call on Tuesday. "We've got a lot of success with a number of the acquisitions that have been software-related and believe there is significant opportunities for us to build a big business here... clearly, it's a significant opportunity for us."

Overall, Dell said he expects over time the company's strategy of developing as much technology as possible in-house will yield results, but from these earnings figures the evidence is inconclusive either way.

"Having a full portfolio of servers, storage, networking, services and increasingly software is very helpful in many of the opportunities that we find," he said.

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