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

Dell Reports Sales Gain as It Considers Strategic Options

Considering possible reverse merger with VMware or Dell IPO; Revenue climbed 9 percent in fourth quarter, EBITDA rose

Nico Grant (Bloomberg) -- Dell Technologies Inc., the world’s largest private technology company, reported an increase in revenue in the fourth quarter after a retooling of its sales team to target its biggest enterprise clients and a jump in corporate demand for servers.

Once a household name for its line of personal computers, Dell has expanded to compete in a broader swath of the information technology market. Faced with a growing threat for cloud computing services from Inc. and Microsoft Corp. as an alternative to Dell’s server and storage hardware businesses, the company has focused on its top-tier customers and is winning deals such as one last month with Formula One team McLaren Technology Group.

Dell has also sought partnerships with BlueData Software Inc., Meta and other firms to resell their products to its enterprise clients.

Revenue climbed 9 percent to $21.9 billion in the period ending Feb. 2, the Round Rock, Texas-based company said in a statement Thursday. Adjusted earnings before interest, tax, depreciation and amortization rose 13 percent to $2.47 billion.

Dell was aided by a general surge in demand for servers late last year. Global server revenue jumped 27 percent in the fourth quarter, while shipments rose 8.8 percent, buttressed by strong economies around the world, research firm Gartner said Thursday. Dell narrowly surpassed rival Hewlett Packard Enterprise Co. in worldwide market share, notching 19.4 percent to HPE’s 19.3 percent, based on fourth-quarter revenue. IBM came in third, with 14.1 percent of the market.

Chief Executive Officer Michael Dell is also still weighing changes to his eponymous company’s corporate structure, including a possible reverse-merger with software affiliate VMware or an initial public offering for Dell. Palo Alto, California-based VMware’s more profitable software offerings could boost the margins of the broader company as Dell contends with more than $48 billion of debt surrounding its 2016 acquisition of hardware-maker EMC Corp.

On a conference call, Dell declined to go into detail about its future plans for VMware, but Senior Vice President of Investor Relations Rob Williams said the company was considering its options as part of its “ongoing multiyear strategic planning” and was acting “from a position of strength.”

After largely missing the shift to the cloud, Dell, which has a large hardware footprint, has nurtured its ties to the more profitable VMware, integrating its software with Dell’s equipment and pitching its customers on VMware’s products.

The software company’s relevance to its parent can be seen in the numbers. Dell, which includes VMware’s earnings in its financial statements, said VMware accounted for almost half of Dell’s overall $6.8 billion of cash flow in the last fiscal year, despite contributing a small share of overall revenue. VMware CEO Patrick Gelsinger said last week that the partnership between the two firms will yield $700 million in cost savings and other benefits this fiscal year.

Dell’s strategy of paying down debt makes VMware’s cash flow more important, according to Keith Bachman, an analyst at BMO Capital Markets.

“We believe that some form of transaction is more likely to occur than not,” Bachman wrote in a note.

VMware, the leading maker of virtualization software that combines multiple workloads on a single server computer, reported rising sales and a profit forecast that exceeded analysts’ average expectations last week, but its strong performance was tempered by investor concerns over what Dell’s plans for it may be. Dell owns 82 percent of VMware’s stock.

Hardware Business
The company has prioritized high-end servers that offer more computing power and advanced memory systems to process lots of data -- positioning the offerings to support artificial intelligence and internet-of-things applications. Higher component costs have threatened margins across the industry, so Dell has sought to preserve profits by reducing manufacturing costs and raising prices for new customers.

Dell’s storage hardware business shrunk 11 percent to $4.2 billion. Less-specialized storage hardware has struggled in the public-cloud era, when companies can keep data lodged on Amazon Web Services or Microsoft Azure rather than buying and maintaining in-house hardware.

“We’ve got more work to do there,” Chief Financial Officer Thomas Sweet said on the call. “That’s a growth area for us that we need to attack and ensure that we’re taking our fair share of that marketplace.”

Sales of Dell’s desktop and laptop computers rose 8.3 percent to $10.6 billion. The advance was led by sales to companies, which grew 9.5 percent to $7.3 billion. Demand from consumers increased 5.8 percent during the holiday shopping quarter. The company has prioritized selling computers to businesses because they buy more ancillary software and services, boosting the unit’s profit margins. One consequence has been ceding overall market share to rivals HP Inc. and Lenovo Group Ltd., both of which lead Dell in unit sales, according to data from research firm IDC.

Dell has paid down $10 billion of loans and bonds since the EMC acquisition, but maintains around $46 billion in debt, according to data compiled by Bloomberg.

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