Dell's EMC Deal Hits Hard Reality of Rising Costs, Cloud Shift

Six months after merger, Dell grappling with changing hardware tastes, rising component costs, cloud competition


March 30, 2017

2 Min Read
Pat Gelsinger and Michael Dell
Pat Gelsinger, CEO, VMware (left), speaking with Michael Dell, CEO of Dell Technologies, on stage at VMworld 2016.VMware

Brian Womack (Bloomberg) -- About six months after completing one of the biggest mergers ever in the technology industry, Dell Technologies Inc. is grappling with changing tastes in hardware and rising component costs, underlining the challenges of the EMC Corp. acquisition.

In its fiscal fourth quarter, Round Rock, Texas-based Dell reported sales of $20.1 billion and an operating loss of $1.7 billion. During a call with analysts Thursday, Chief Financial Officer Tom Sweet said the company is paying more for some memory and display parts that go into its big lineup of tech gear.

Chief Executive Officer Michael Dell is betting the $67 billion merger with EMC can help the company succeed in a market that’s under pressure from providers such as Inc. and Microsoft Corp. Cloud system infrastructure services -- which let customers access computer and storage capabilities without the hassle of buying their own gear -- are expected to see revenue growth of 37 percent to $34.6 billion this year, according to research firm Gartner.

"So far so good," Sweet said in an interview. But the numbers have to be put “against the backdrop of an ever-changing market," he said. “We’re generally on track from where we thought we would be. It’s early on, but we are seeing the power of the portfolios and the relationships starting to evolve.”

Dell had sales of $16.2 billion in the fiscal quarter ended Oct. 28, which included 52 days of EMC’s and VMware’s results. With the merger, Dell combined its well-known computers and servers with EMC’s lineup of storage gear.

Sweet told analysts, without giving specifics, that the cost of key parts that go into personal computers and other products were rising. Rivals such as Hewlett Packard Enterprise Co. have highlighted this trend recently too.

"While Dell did not quantify any impacts from increased component pricing, nor constraints, it is clear that the company has seen a broad-based increase that will become more notable going forward," Aaron Rakers, an analyst with Stifel Nicolaus & Co., wrote in a research note.

The Client Solutions Group, which includes personal computers, had sales of $9.8 billion in the fiscal fourth quarter, up 11 percent from a year earlier. The Infrastructure Solutions Group, which includes servers and storage, had sales of $8.4 billion, without giving year-ago numbers.

Rakers said storage sales likely dropped around 8 percent, based on his estimates, adding that Dell reported "solid results" in some of its newer offerings in that business.

Since the closing of the deal, Dell has paid down about $7 billion in debt, the company said.

VMware, also part of the Dell deal with EMC, had revenue for the fiscal fourth quarter of $1.9 billion with operating income of $565 million.

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