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SEC woes aside, Dell making strides

Dell's second-quarter earnings aside, CIOs would do well to keep an eye on two things when it comes to the world's No. 2 computer maker: storage and professional services.

The good news/bad news out of Dell Inc. last week caused a brief stir on Wall Street. Investors lauded improved second-quarter earnings but ultimately agreed with CEO Michael Dell that the world's No. 2 computer maker is "still in the early stages" of remaking itself. Shares rose modestly before giving up 21 cents by market close Friday.

Turning around a ship of state doesn't happen overnight.
Charles King
analystPund-IT Research
CIOs would do well to follow Dell's progress in two areas -- professional services and storage -- industry analysts said. The more pertinent news for them might well come out of next week's VMWorld event in San Francisco, where it would be natural for a company interested in exploiting the growing interest in virtualization to make some noise.

The company reported that second-quarter earnings increased 46% compared with last year, due largely to strong sales of servers and notebook PCs. Expenses and fines related to the federal and internal investigations of the company's bogus accounting practices, however, cut into those earnings. There was also the head-scratching fact that the company couldn't meet demand for its hip new Inspiron and XPS color notebooks.

Bottom line: By Friday afternoon, shares had slipped 21 cents and the consensus was that founder and returning CEO Dell no doubt is right. "While we've made progress against our goals, we are still in the early stages of transforming our company's structure, cost and operations," Dell said in a statement.

Charles King of Pund-IT Research in Hayward, Calif., said, "Turning around a ship of state doesn't happen overnight."

That the company saw growth in most of its businesses is a good sign, King said. The shakeout over the SEC investigations took some of the wind out of its sails, obviously. But Dell, who returned to the company in February, and the executives he's brought in deserve "a pat on the back," King says. "It's probably best to get as much of the bad news out of the way as quickly as possible and move on."

For CIOs, Dell's continuing position as a leader in the x86 product area, in desktops, notebooks and servers, means the company can't be counted out -- the market's myopic focus on short-term performance notwithstanding.

Dell has not been a big player in storage, but the company is well-positioned to exploit the growing interest in server virtualization, and, in particular, the software offerings from market darling VMware Inc. Since VMWare's focus on the x86 space is also Dell's primary area of interest and expertise, "there are some pretty obvious opportunities for the company to press forward with," King said. When Microsoft finally delivers Windows Server 2008, Dell will be in a position to profit from that as well. Dell produces it own lower-end storage and has a partnership with EMC Corp.'s higher-end products, so the dynamic for growing that end of the business is there.

CIOs also would do well to keep an eye on Dell's push into professional global services. While attention to professional services was "long overdue," Michael Dell is making progress on that front. The $340 million purchase in early August of ASAP Software Inc., which sells products for managing software licensing, purchasing, renewals and compliance, is likely to be followed by other acquisitions and/or product development in professional services, King said.

"Dell has experienced some tough times. It's good to remember that the company is still doing $60 billion worth of business a year," King said. "So long as the vendor continues to deliver value for its customers, it will continue to be thought relevant, no matter what short-term challenges the company runs into."

Frank Gillett, who covers the company for Cambridge, Mass.-based Forrester Research Inc., agreed. He said he didn't see anything in the second-quarter earnings report that raised "giant concerns." Server and storage sales "seemed fine," though not as big a part of the business as desktops or laptops.

"From someone who looks at the company in aggregate, it sometimes feels that things are a little overblown," Gillett said. But it will take time to "turn the crank," and he said the jury is out until later this year, at soonest, about Dell's reinvention of itself.

There are still core questions about where the growth will come from and the limits of Dell's direct sale model. The recent press release, for example, talked about making products "simpler" for the enterprise customer, but that's a tall order. It usually involves having a highly complex system "under the covers" so the experience is simple for the customer, Gillett said.

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"It's one thing to say ordering a server from Dell will be easy. But if you're saying that putting a Dell product in your data center will make things simpler, that implies a combination of R&D, technology and service, and it isn't clear how that relates to the thing Dell is famous for, which is running their own production chain really well," Gillett said. "Frankly, folks on the enterprise side have been skeptical of that."

For CIOs, Dell is present on the PC side and on the data center side. From the PC side of things, Dell is chugging along OK, Gillett said. On the data center side, Dell is "staying in the fight" on server products. Dell has the EMC partnership on storage products and some of its own simple stuff.

"There are two things I'd watch. Do they elevate their efforts on storage, which is a significant market but one that hasn't really yielded itself to a lower-priced, standard commoditized approach the way servers have," Gillett said. The second question mark is server virtualization.

"It will be interesting to see any announcements come out of VMWorld," he said. "That would be a natural event where a vendor might want to make some noise."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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