Dell's Even Sweeter on Storage

Storage and servers were Dell Computer Corp.'s (Nasdaq: DELL) fastest-growing segments in the most recent quarter, and analysts say they expect the trend to continue (see Dell's Q1 Profits Swell).

Dells first-quarter storage revenues of $315 million were up 65 percent compared to the year-ago quarter, and up 5 percent sequentially. Goldman Sachs & Co. analyst Laura Conigliaro writes in a research note that she expects those revenues to jump an additional 8 percent in the current quarter, to $343 million.

"I think you're going to continue to see growth in that storage arena that is consistent with what you've seen in the past," company chairman and CEO Michael Dell said on a conference call after the company reported its results yesterday.

Storage accounts for only 3 to 4 percent of Dell’s $36.9 billion annual revenues -- so it's not yet a substantial part of the company's overall portfolio. At the rate the segment is growing, however, it could soon become very important, according to Dushyant Desai, an analyst with U.S. Bancorp Piper Jaffray. "It is a nontrivial part of their overall business," says Desai. "Maybe in another one and a half or two years' time, it could reach the 10 percent level."

One thing that boosted Dell's storage sales during the quarter, and that promises to keep the money flooding in, is the company’s recent decision to manufacture rather than just resell the EMC Corp. (NYSE: EMC) Clariion CX200 product (see EMC, Dell Keep Dancing)."What could have been EMC's revenues now are Dell's," Desai says. "Dell always squeezes their suppliers and comes out a winner." EMC does earn a licensing fee from each CX200 that Dell manufactures and sells, but it generates less revenue than it would if Dell resold EMC's hardware.

But while Dell may benefit most from their partnership, Desai is quick to point out that it's helping both Dell and EMC expand their market and take share from competitors like Hitachi Data Systems (HDS), Hewlett-Packard Co. (NYSE: HPQ), and Network Appliance Inc. (Nasdaq: NTAP).

Analysts also suggest that EMC’s NAS deal with Microsoft Corp. (Nasdaq: MSFT) could be beneficial to Dell (see EMC Kisses Microsoft's NAS). "We believe the recently announced Microsoft/EMC NAS alliance could provide Dell with another strong product offering in the storage market in the long term," writes Thomas Weisel Partners analyst Kevin Hunt in a research note today.

In addition to furthering its EMC partnership, Dell has also introduced new SAN bundles of hardware, software, and services for small and midsized businesses and institutions.

Dell posted both soaring profits and revenues for its first quarter of 2004, which ended May 2, 2003. The company reported net earnings for the quarter of $598 million, or 23 cents per share, up 31 percent from the $457 million, or 17 cents a share, earnings for the year-ago period. Meanwhile, revenues for the quarter jumped 18 percent to $9.5 billion from $8.1 billion a year ago.For the current quarter, Dell said it anticipates a 15 percent increase in revenues to more than $9.7 billion, and a 26 percent increase in earnings per share to 24 cents per share.

While Dell’s results are indeed impressive, they didn't exceed company or analyst expectations, and the company’s stock slipped nearly 2.5 percent in afternoon trading today on concerns that it might be overpriced. The value of the company’s shares, which are currently trading at $31.40 a pop, has sky-rocketed 40 percent since February. "Most of the good results had already been factored into the stock price," says Desai.

— Eugénie Larson, Reporter, Byte and Switch