Dell Server Sales Drop Partly Due To ‘U.S.-China Trade Tensions’

‘We have a good relationship and a good business there, but clearly the U.S.-China trade tensions are a bit of an overhang on the business,’ says Dell CFO Tom Sweet, during the company’s first fiscal quarter earnings report.

Dell Technologies, the global market leader in servers, reported a 9 percent drop in server revenue in its first fiscal quarter partially due to a sales drop in China.

“China is an important market for us, it’s our second largest market,” said Tom Sweet, chief financial officer of Dell Technologies, during the company’s first quarter earnings conference call on Thursday. “We have a good relationship and a good business there, but clearly the U.S.-China trade tensions are a bit of an overhang on the business. We did see more competitiveness in the market, principally in the server space this quarter [compared] to a year ago.”

Dell’s server and networking revenue dropped to $4.2 billion in its first fiscal quarter, which ended May 3, 2019, representing a 9 percent decline year over year.

“The macro dynamic around trade and tariffs is one we’re watching just because of -- you think about the impact on business confidence, consumer confidence, you think about the impact on our domestic China business – those are the dynamics that we’re also keeping our eye one,” said Sweet. “We were soft in servers in China. Some of that was by design as we stepped away from these large deals that didn’t make sense to us from a profitability perspective.”

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Sweet said Dell decided to back off some larger enterprise deals because it wasn’t profitable for the company.

“We did plan for slower server growth coming into this year, but we did see some slower server growth than we anticipated. This was more pronounced in a few areas, principally China, and in certain large enterprise opportunities,” said Sweet. “We also saw in the large enterprise space a handful of deals that, quite frankly as we were looking at them, the profitability profile just didn’t make sense to us… There is demand out there if you want to take it, but sometimes the profitability framework doesn’t make sense.”

After many quarters of strong storage growth, Dell reported $4 billion in storage revenue for its first quarter, down 1 percent year over year. Jeff Clarke, Dell Technologies Vice Chairman, Products and Operations, said he wasn’t worried about the slight storage sales drop.

“Our external storage business is healthy, delivering solid year-over-year orders growth,” said Clarke. “When I look at our price band performance across our portfolio, I’m quite pleased on an orders basis. Orders had healthy growth for the year. We grew in the high price bands, the midrange price bands and the entry level price bands across our variety of products – whether that’s our PowerMax products, our Isilon unstructured product, our Unity product. We’re pleased with that velocity of our core storage array business.”

Unphased by the storage drop, Clarke is bullish about Dell’s storage portfolio and product roadmap ahead. “The product line continues to get stronger. Where we were a year ago compared to where we are today is night and day,” he said.

Overall, the Round Rock, Texas-based infrastructure giant generated $21.9 billion in revenue for the first quarter, up 3 percent year over year. Dell’s $21.9 billion in sales was slightly below analyst expectations of first quarter revenue of $22.5 billion, according to Zacks Investment Research.

The company’s Infrastructure Solutions Group (ISG), which includes storage, servers, networking and hyper-converged infrastructure, reported $8.2 billion in revenue, down 5 percent year over year.

Sales in Dell’s Client Solutions Group increased 6 percent year over year to $10.9 billion. Commercial revenue grew 13 percent to $8.3 billion, while consumer sales were down 10 percent to $2.6 billion.

The company paid down approximately $400 million in gross debt in the first quarter and approximately $15 billion in gross debt over the two and a half years since the closing of its EMC acquisition.

Dell stock was down three percent in after-hours trading at $64.20 per share.