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Lagging Dell EMC midrange storage dampens upbeat earnings

Dell EMC on Thursday reported nearly $4 billion in storage revenue in its most recent quarter, marking its third consecutive positive earnings in storage. But executives refrained from sharing high-fives, noting “we have work to do” to boost Dell EMC midrange storage and recapture lost market share.

Storage market leader Dell EMC is part of Dell Technologies Infrastructure Solutions Group (ISG), which also includes Dell networking and server hardware. ISG generated nearly $9 billion in revenue, up 19%, mostly driven by a 30 percent growth in sales of 14G Dell PowerEdge storage servers and networking gear to $5.1 billion.

Last quarter, Dell EMC storage revenue increased 6%, less than half the 13% in the prior quarter. For the first quarter, Dell EMC storage grew 10%.

“Quite frankly, we would have liked to have seen higher growth in storage this quarter, but we do believe we have taken the right actions to drive meaningful long-term improvements in the storage business,” Dell CFO Tom Sweet said.

Dell EMC outpaced IBM, which reported a decline in storage revenue in its last earnings period, but lagged behind Pure Storage (34% year-over-year growth) and slightly behind NetApp (7% year-over-year increase).

Sweet said Dell EMC has set a target operating margin for ISG of 14% as part of a playbook to drive “a consistent, creaming-the-market trajectory that will allow us to recapture a fair amount of the share loss we experienced over the last number of years.”

Parent company Dell Technologies reported overall revenue of $22.5 billion for the quarter, up 15%, with a GAAP operating loss of $356 million. The Client Solutions Group, which includes client and consumer PCs, monitors and integrated software, contributed $10.9 billion, up 11%. The VMware segment chugged along at 15% growth, generating $2.2 billion, driven by a 17% jump in license revenue.

In a related matter, Dell said stockholders are expected to vote Dec. 11 on a complex buyback of its 81% stake in VMware. Dell picked up VMware when it acquired EMC.

The measure would return Dell to publicly traded status, without having to underwrite an initial public offering. Dell has proposed to convert its Class V tracking stock in VMware to Class C common stock, which would be publicly traded on the New York Stock Exchange under the ticker symbol “DELL.” If approved, trading is projected to start Dec. 28.

PowerMax, VxRail carry Dell EMC midrange storage

Growing the storage business has been a problem  – particularly Dell EMC midrange storage – since the 2015 merger with EMC. Prior to this year’s first quarter, Dell EMC storage market share declined in 15 of the previous 16 quarters. The vendor is taking a two-pronged approach to “stabilize” storage and recapture lost market share, said Jeff Clarke, a Dell vice chairman of products and operations at ISG.

One part of the strategy involves getting newly hired salespeople up to speed, Clarke said. “We need more storage buyers and we are putting in the capacity in both our enterprise and commercial sales organizations to do so.

“The second linchpin (is) to improve the overall competitiveness of the product. We have done that over the last 14 months,” refreshing high-end PowerMax (formerly VMAX) all-flash arrays with NVMe and adding other performance enhancements.

Clarke said high-end, file-based and all-flash Dell EMC storage each grew by double digits, while VxRail hyper-converged infrastructure posted triple-digit growth and is poised to top $1 billion in 2018. Dell does not provide a breakdown of revenue by individual products.

The laggard was Dell EMC midrange storage, which Clarke said did not “grow to the degree we would have liked.”  The midrange gear includes flagship all-flash Dell EMC Unity and SC Series (legacy Dell Compellent) arrays.

Overlapping midrange storage has been weighing on Dell EMC.  After insisting repeatedly it had no intention to winnow down redundant systems, the company reversed field in September,  forecasting a plan to combine engineering and launch new Dell EMC midrange storage in 2019.

Dell executives also dismissed concerns over Amazon Web Services’  announced plans to challenge legacy storage vendors by delivering racks of data center hardware for deployment on premises. Although Amazon’s announcement caught many in the industry off guard, Clarke said Dell EMC was not surprised by it.

“Not everything is going to (be stored in) a handful of public clouds. We’re seeing workloads repatriate to on-prem for cost reasons, security reasons, and performance reasons. And we think Dell Technologies is positioned quite nicely” to compete in this world.”

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