Eight Questions for Dell the Man About Dell the Company
First, he announced that Dell Ventures had launched a $60 million venture capital fund intended to invest in start-up companies working in the data storage space.
Second, asked on stage whether Dell is experiencing a slowdown in China, its largest geographical market outside the U.S., he confirmed, without elaborating, that it is. “That would be an accurate statement, yes,” he told interviewer Andy Serwer. Dell shares closed down 7 cents at $12.12.
The rest of his hour-long appearance on the stage at Fortune Magazine’s Brainstorm Tech conference, here in Aspen, Colo., (now much sunnier than yesterday, thanks) revolved around the standard fare of other interviews Dell has given in recent months: Dell is transforming itself. Its goal is nothing less than to make the personal computer business — for which it has been best known for more than two decades — the minority of its business, and to make its enterprise-oriented IT solutions operations — servers, services, software, security — the unmistakable majority of its business.
The trouble is that transformation takes time, and investors are an impatient bunch. A well-worn stat that Dell and other executives like to share is that about
half 80 percent of Dell’s business comes from business and public sector customers. That’s good though it does include a lot of commercial PCs, or as Dell called them onstage — briefly confusing Serwer at one point — clients.
[Update: I revised the paragraph above after receiving an email from Dell correcting me: About 80 percent -- not half -- of its business comes from business and public sector customers.]
The other big story about Dell in recent years has been its acquisitions. Its most recent deal is a $2.4 billion purchase of Quest Software, which it won after a weird on-again, off-again bidding scrum with a private equity group.
Before that was a string of three deals in three days, the most significant of which was Wyse Technology.
Oh, so there was a third bit of news, but only for those with the right kind of ears: Dell disclosed that the company had spent a grand total of $5 billion on acquisitions this year, including the $2.4 billion for Quest. Since many of the recent acquisitions have been of smaller private companies, the exact amounts have been undisclosed.
The acquisitions are part of the transformation: Dell is in the classic build vs. buy conundrum, but lately finding that it’s easier to buy companies that have established products and customers.
After sitting on the stage for an hour, Dell agreed to an interview with AllThingsD. My first question was about the new fund:
AllThingsD: So you announced today the creation of this $60 million investment fund aimed at storage companies. You’ve been acquiring storage companies in the last few years and were also an early investor in Fusion-io, which is a storage company of sorts. What opportunities do you see in storage?
Dell: As you’ve probably seen, Dell has been acquisitive. We think there are opportunities to catalyze certain spaces, and storage is one of them. And so we have a specific fund just for that. It’s part of our whole corporate development effort and under Dave Johnson’s team. He’s been leading our acquisition efforts along with the business unit leaders. So this is specifically organized around making early stage investments in storage companies. We think there’s still a lot of innovation to come. We think there’s still potential for a lot of change and excitement.
Let’s talk a bit about the acquisitions you’ve been doing lately. You bought Wyse, you bought Quest, you bought SonicWall. Is there something specific you’re looking for in the deals you pursue?
We tend to look at this from the perspective of how the tech landscape is changing and what new requirements customers have, and how we build the capacity to respond to those needs while expanding the range of things that Dell can do. Sometimes that results in organic investments, sometimes it results in acquisitions. So we identify a space, let’s say client virtualization, which is what Wyse does. Wyse actually has some really great software for managing virtual clients, and we had partnered with Wyse quite a bit. The best acquisitions for us are firms that we’ve worked with and so we know a lot about them.
Is your hunt for acquisitions complete? Any hints on who might be next?
You will see us continue to do acquisitions. [Hahaha.] I find that if we tell you what we’re going acquire, the target gets a lot more expensive. So we’ll tell you after.
What did you see that you like at Quest and made you willing to pay $2.5 billion for it?
It’s right in one of the sweet spots for us. It connects with a lot of things we already do: Systems management, security, identity management, the application performance monitoring, data protection. They have some assets around client virtualization. They have some interesting things they do around dealing with data. We have a service called Boomi that does data integration. If you have, say, two cloud services — like Salesforce and Netsuite and Workday or some other combination of stuff, Oracle — we’re the best in the world at getting all that to work together and we do something like a million integration events a day.
Do you think the market unfairly values Dell on the assumption that it’s still primarily a PC company? Is the market getting the story or is the transformation just not complete?
Some shareholders get it and some of them don’t. That’s how markets work. Most who have looked at it carefully say this is the right thing to be doing. They quibble about some of the smaller points, but they see the larger logic of what we’re doing and our job is to keep doing it.
I hesitate to approach a comparison to Hewlett-Packard and the events at that company over the last year, but in light of how the PC market has been performing lately and given what the Gartners and IDCs of the world have been reporting, have you ever considered spinning the PC operations out?
We’ve never considered anything like that. I think, broadly speaking, the numbers those organizations have reported are directionally correct. And certainly there are all sorts of factors and reasons for that. But there are still a lot of PCs being sold and it’s still an integral part of how companies and organizations use information. Now it’s shifting. You have value shifting into servers and services and all the stuff we’re doing. When you look at the profit margins, that has shifted a lot. We’ve roughly doubled the size of the new part of Dell from $10 billion to $20 billion.
You mentioned China slowing down, but how does the PC market overall look to you? At least part of the slowdown can be arguably blamed on the market waiting for Microsoft to get Windows 8 out the door. How do you see it?
I don’t want to say anything further on China other than what I said onstage. There are multiple factors. There are economic factors, there’s the Windows transition and all this other stuff going on. How do you proportion all of those? No one has any scientific way of doing that. Windows 8 is pretty good. I’m using it. Our business is still indexed pretty heavily toward the commercial market, and there are still businesses that haven’t upgraded to Windows 7 yet. So they’re not going to immediately go to Windows 8. What happens is, someone gets Windows 8 in the office and shows it off, and people start asking for it. Consumers tend to upgrade a lot faster than businesses. They’re a lot more conservative.
Dell has taken some knocks over the years for not spending all that much on research and development. Historically, your R&D expense has always been relatively small as a percentage of sales versus your peers. Now there’s a critical narrative that says Dell is buying companies to make up for the R&D you didn’t do last decade. Is that fair?
As a counterpoint, I’d say all you have to do is go to the U.S. Patent and Trademark Office and look up the 5,000 patents we have been granted and applied for over the years. We’ve been filing patents since 1988. We didn’t get them all in the last few years. They read on pretty fundamental stuff in our industry. Could we have done more? Absolutely. Another way to think about it, though, is that when you’re 19 years old and the company is growing really fast, someone could have said that you could grow it to $60 billion in size and you have to do the same thing and only one thing until you get to that size because if you don’t you’re going to get distracted and confused. That’s kind of what we did. We did the same thing until we got to $60 billion, and when we reached that point we decided we needed to do some new things. Could we have done it at $20 billion or $30 billion? Yeah, maybe. But I spend my time thinking about the future. I have to say it could have turned out a lot worse.