Dell’s Server Sales Slump Continues

‘We’re going to compete where we need to compete and we clearly want to grow the customer base, but we want that customer base to be long-term and the right type of customer for us in terms of profitability cycle that makes sense overtime,’ says Dell Technologies CFO Tom Sweet.

The worldwide leader in servers has suffered yet another rough period as Dell Technologies reported its third straight quarter of large server revenue declines on Tuesday.

“It is a competitive [server] market out there in the large bids,” said Jeff Clarke, vice chairman of Dell Technologies, during Dell’s third fiscal quarter earnings call with media and analysts Tuesday night. “It’s an aggressive marketplace from a pricing point of view. We’re competing, but those bids are clearly competitive. Probably the other thing that’s important to notice, [server deals] are taking longer to close. The caution that we’re seeing with our large customers is certainly being seen in our ability to close transactions or how long it’s taking to get the order closed.”

Dell’s server and networking business dropped 16 percent year over year to $4.2 billion in its third fiscal quarter, which ended Nov. 1, 2019. The company previously reported a 12 percent drop in its server business year over year in its second fiscal quarter. During Dell’s first fiscal quarter, the company reported a 9 percent drop in server and networking revenue year over year.

Clarke attributed the server slump to a large sales drop in China – such as with Chinese hyperscaler operators -- while also pointing out that the worldwide server market hit a record high in 2018.

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“Clearly we saw unprecedented growth in the industry last year – that growth is being digested by the largest companies in the world and we’re seeing that primarily in those large enterprise in the United States and EMEA,” said Clarke. “China has been a headwind for the last three quarters, and that continues to be a headwind for us in that marketplace.”

Tom Sweet, chief financial officer at Dell Technologies, said the Round Rock, Texas-based company isn’t going into bids that isn’t deemed profitable for Dell in the long-term.

“We clearly see where component cost deflation is being used to price pretty aggressively right now. We see that trend generally in the large bids across the globe and in China,” said Sweet. “We’re going to compete where we need to compete and we clearly want to grow the customer base, but we want that customer base to be long-term and the right type of customer for us in terms of profitability cycle that makes sense over time. So we are being selective. That’s just the dynamic we’re in right now. Our transactional server business is holding up reasonably well, so the weakness is in those two areas.”

Although Dell’s server sales were a disappointment, the company excelled in the storage market once again. Dell’s third quarter storage revenue increased 7 percent year over year hitting $4.1 billion.

“We saw just a continued progress of our PowerMax platform and the new Unity XT – both of them were growing in the double digits. So very strong demand for our new storage products, which is encouraging,” said Clarke. “The continued build-out of on-premise private cloud VxRail plus VMware Cloud Foundation are clearly things that are highlights of our storage business and storage demand.”

Overall, Dell’s Infrastructure Solutions Group -- which includes servers, storage, data protection and networking – decreased six percent year over year to $8.4 billion, mainly due to the server sales decline. Orders for Dell’s flagship hyperconverged infrastructure solution, VxRail, increased a whopping 82 percent year over year in the third quarter.

Dell’s largest revenue driver continues to be its Client Solutions Group (CSG) made up of PCs, notebooks, tablets and monitors. For its third quarter, CSG sales grew 5 percent year over year to $11.4 billion. Commercial CSG sales grew 9 percent year over year to $8.3 billion, while consumer CSG revenue fell 6 percent to $3.1 billion.

Total revenue for Dell Technologies was $22.85 billion, up 2 percent compared to $22.48 billion in revenue Dell generated in the same quarter one year ago. Dell’s net income for the quarter was $552 million, up from a loss of $895 million year over year.

Dell reported total gross margins of $7.1 billion, up 20 percent compared to $5.9 billion in the same quarter one year ago.

Dell’s stock is down 3 percent in after-hours trading Tuesday night at $53.19 per share.