Will Dell Lose Data-Center Customers to the Open Compute Project?

Dell’s earnings for its most recent quarter—possibly its last before going private—did not end on a positive note: the company reported significant declines in both revenues and profits, as analysts even began questioning its historically strong server business.

Dell announced revenue of $14.3 billion for the fiscal 2013 fourth quarter, a decline of 11 percent from the same quarter last year (although a 4 percent increase sequentially), on top of $56.9 billion for the year. Net income plunged 31 percent to $530 million.

Dell’s server revenue increased 5 percent, driven by what the company claimed was strong demand for its hyperscale data center solutions business, as well as migration to the company’s 12th-generation servers. Revenue-wise, Dell’s Server and Networking Business unit grew 11 percent, to $9.3 billion. Enterprise Solutions and Services, along with the IP Storage business, each experienced 4 percent growth.

Wall Street focused on Dell’s consumer business, which declined 24 percent to $2.8 billion; desktop and mobility revenue dipped 20 percent. But the real blow came when analysts started wondering what it would mean for Dell if companies like Facebook began turning to their own, internally designed servers.

Server designs generated from Facebook’s Open Compute Project have opened the door to companies ordering up their own servers rather than having a manufacturer (such as Dell) do it for them; analysts have suggested that Facebook’s “Group Hug” hardware could further commoditize the market.

When asked how Dell would fare in this brave new world, chief financial officer Brian Gladden replied that only a few top OEMs had gone down that route.

“It’s not a new dynamic,” Gladden said, according to a transcript of the call. “This is something that we’ve seen for the last few years. It is relatively isolated to a few number of large scale customers who can make the economics work, and given that, we’re still seeing strong growth in that business, and significant opportunities to continue to grow the hyperscale business. So I don’t think it’s a new dynamic.”

Tom Sweet, Dell’s corporate controller, noted that the company’s Data Center Solutions Group could serve this growing interest in customization: “The other thing I would add is that there is a push on certain hyperscale people to provide their own boxes, but the benefit that we drive is around the engineering and logistics and some of the other service capabilities that come along with our suite of solutions.”

In December, Dell began designing for specific workloads with its Active Infrastructure converged architecture, following that up in January with specific solutions for SAP’s in-memory HANA database. Dell executives have also said that, in addition to DCS, specialized software and other solutions can add the margins that commodity hardware strips out.

But it’s probably disconcerting for Dell to observe some of its largest customers considering the custom route. Thank goodness Dell’s going private and won’t have to talk about the possible impact on its businesses, right?

 

Image: kubais/Shutterstock.com

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