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Trip Report: Dell EMC 2017 Analyst Summit

The Dell EMC Analyst Summit in New York City during the week of 9 October was attended by four Wikibon analysts. After spending the better part of a year-and-a-half discussing integration plans and scale opportunities (e.g., “look at all the markets in which we’re #1!”), the company has pivoted to focus on customer problems and market opportunities. And we’ve think they’ve targeted the right opportunities – but they have some catching-up to do. Specifically, the company focused on:

  • Great financial progress. The act of taking Dell private freed the company from the burden of quarterly reporting, but at the expense of adding a load of debt. Dell EMC is navigating the challenges, partly by ensuring that operational discipline remains central to its business culture, whether public or private.
  • IoT. Dell EMC launched a major new initiative, which they call IQT – to emphasize the marriage of IoT and AI. It’s a serious effort, but it will need to evolve to be successful.
  • Building on hyperconverged and server strengths. As hybrid cloud becomes the planning default for enterprise IT, strong true private cloud offerings are important to large enterprises – and large infrastructure providers. The breadth of Dell EMC’s infrastructure portfolio means that the company is well positioned to both win – and lose – as hybrid cloud picks up pace. How it handles its portfolio transitions will have near and longer term customer implications, especially in terms of field engagement.

Great Financial Progress

Dell’s CFO, Tom Sweet, once again demonstrated evidence that Dell EMC is a well-run, tightly operating company. Table 1 shows a snapshot of Dell’s 1H FY18 Financial performance.

Non-GAAP
Revenue $37.8B
Gross Margin $11.7B
GM % 31.1%
Operating Income $2.7B
Cash Flow fm Ops $2.1B
Adjusted EBITDA $3.4B

Table 1. Dell Technologies First-Half FY18 Non-GAAP Results, As Reported At the 2017 Dell EMC Analyst Summit

Fifty percent of Dell’s revenue is derived from client solutions with 38% coming from infrastructure solutions and 10% from VMware. There’s a small contribution from other (Boomi, RSA and Pivotal).

Dell’s largest profit non-GAAP contribution however comes from its VMware software business with 34% from client solutions, 27% from infrastructure and a small contribution from other. Without VMware, Dell would be much less profitable.

The question most people ask about Dell is how it will service a massive $41B debt? Dell’s answer is twofold:

  1. De-lever by monetizing certain assets (e.g. Secureworks IPO, 2016 Perot sale, etc.); and
  2. Cash flow from operations. We don’t see this as problematic – if interest rates stay relatively low.

The bigger question to us is how will Dell continue to innovate and keep pace with the customer cutting edge? While the merging of the two companies continues to show great progress, knitting together the cultures of the two companies remains a key challenge. Why? In part because the result will have long-term effects on customer engagement.

EMC, prior to the acquisition, relied on acquisitions to fill gaps in its portfolio and keep pace with upstarts. While Dell spends about 6% of revenue on R&D (and can lean heavily on R&D spending by partners like Intel and Microsoft), that’s considerably less than other tech giants, including Amazon, Google, and Apple. Moreover, as Dell EMC works to retire debt, it is not positioned to be aggressively acquisitive. Dell’s answer to this at the analyst meeting was again twofold:

  • Dell Ventures is plowing about $100M per annum into startups. We saw presentations from several portfolio companies ranging from IoT, security, edge analytics, AI/ML.
  • A new management ethos. Dell exec Jeff Clarke has replaced David Goulden and has a title of Vice Chairman of Products and Operations. He was clear, echoing themes from Dell’s CFO, that Dell is unsatisfied with its performance in enterprise storage. Dell, according to Clarke, will rationalize its product portfolio and streamline its development efforts to focus its large engineering force on fewer products – and focus those products on a clear five-year roadmap.

IoT

The centerpiece of the event was IQT, Dell EMC’s singular approach to solving edge problems. Ray O’Farrell has been named the GM of the Division, and the corporation has dedicated about a billion dollars to start getting their solutions to customers. We believe that Ray is a great choice to lead the team. He has a background as an industrial IoT (IIoT) implementer and will retain his VMware CTO role. Dell EMC’s conceptual framework for IQT is:

  • Edge. Sensors and actuators exist here. Dell EMC seems to suggest that the capability of these devices will be limited.
  • Core. Distributed gateways capable of scaling to significant capacity reside in the core, as does most of the IQT software, including management, analytics, and security. Dell EMC suggests that this is where most application action will take place
  • Cloud. The repository for persistent, non-time-critical data will be the cloud, apparently in the form of public cloud options.

As Wikibon has argued, much of the action to catalyze next-generation business will occur at the edge. Indeed, we believe that is software is going to eat the world, it’s going to do so by taking huge bites at the edge. Dell EMC’s proposition that the IoT and edge technologies will be the basis for huge business and social change is unassailable. Moreover, their position that all computing won’t be moved into public clouds is also correct, for physical, legal, and business reasons. However, will the vast majority of IoT-related work be performed in a “distributed core,” and therefore is that where most of the industry opportunity resides?

Yes, but. Wikibon’s research finds that IoT will pull work to the edge as increasingly powerful computing technologies make combining primary data and advanced analytics both possible and cost effective. Gateways and edgecenters will play key roles in next-generation architectures, as will public cloud services. True Private Cloud (TCP) options will play foundational roles in business technology, in large measure because of the demands of IoT. However, for reasons of simplicity, cost, and physics (among many others), moving work as close to an event’s data as possible makes enormous sense, and that means putting as much work inside the sense-infer-action loops at the edge as possible.

Dell EMC is leveraging VMware assets for the primary software components of the IoT solutions. For example, VMware Pulse is used to manage, monitor, and secure IoT environments. An architectural question is, can VMware extend the reach of software assets into IoT where being lightweight, scalable, cost-effective, and real-time (or near real-time) will be critical. This “software-defined edge” (or perhaps distributed core), if successful, is a tremendous growth area beyond VMware (and Dell’s) position in the data center. At VMworld in Las Vegas this year, VMware CEO Pat Gelsinger said that NSX would be the biggest growth for the company over the next 10 years. When asked if NSX can be applicable to IoT environments, Nicira founder (current VC at Andreesen-Horowitz) Martin Casado said “Yes, especially with NSX-T. There is actually a distributed LTE stack that uses Open vSwitch and a design similar to NSX-T.” While the last 5+ years have focused on AWS and other hyperscale players pulling customers and applications to the public cloud, edge computing is emerging as an opportunity for Dell and others to catch a tailwind of growth.

Our belief is that IT-related technologies will diffuse all the way to the intersection between the digital and the real worlds – the edge – but that historically IT-focused vendors have enormous work to do to build and package at realistic edge price points, establish the complex solution-oriented ecosystems that the edge will require, and woo the OT (operational technology) community. Dell EMC is not immune from those challenges.

Build on HyperConverged and Server Strengths

Hyperconverged Infrastructure (HCI, which falls into Wikibon’s Server SAN category) is one of the strategic areas of synergy identified by Dell in the merger with EMC. EMC rode the wave of converged infrastructure (CI) with Cisco’s partnership to annual VxBlock sales of more than $3B. While the combined portfolio of Dell HCI solutions (Dell EMC VxRail, Dell EMC ScaleIO, Dell EMC XC Series) lead the market, it is still very early in the transition from CI to HCI. According to Dell CMO Jeremy Burton, 80% of customers are still buying building blocks rather than CI or HCI. Dell EMC has a strong focus on growth of the vSAN-based VxRail, and this HCI solution is extending throughout the portfolio as a building block for cloud and IoT solutions.

Can Dell EMC leverage its hardware strengths into software momentum? While VMware (even as a strategically aligned business, or SAB) continues to pay dividends for Dell EMC in a variety of crucial ways (including being the basis for partnerships with both AWS and Google Cloud Platform), other software elements haven’t caught fire. Michael Dell has said multiple times – and said so multiple times at the event – that he envisions Dell EMC as a strong software company. While the company has a broad array of great software assets, including VMware, RSA, Pivotal, and Boomi, and the company has made good strides in articulating how these software platforms could come together, we didn’t hear that clear, simple software promise that the industry has been seeking from Dell EMC for years.

Action Item. Dell EMC continues to impress with operational excellence, a vigorous customer focus, and smart decisions to recast its product and service portfolio to address near and longer term opportunities. Users should position Dell EMC as a very safe infrastructure bet, but not the only bet. As hybrid cloud matures, it will shift landscapes dramatically. Early indications, however, are that Dell EMC’s “open, with an opinion” approach is allowing it to keep abreast – and in important ways, shape – IT industry change.

 

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