Editor’s note: Krista Macomber is a Research Analyst with Technology Business Research.


HAMPTON, N.H. – Dell’s (Nasdaq: DELL) aggressive investment in acquisitions, R&D and sales and marketing to transition from high-volume hardware manufacturer to trusted IT advisor is resulting in consistent profit expansion while pressuring near-term revenue growth.

Dell has acquired five companies to-date in 2011 and its R&D expense annual run rate is approaching $1 billion – keeping revenue flat annually for the second consecutive quarter at $15.4 billion while supporting operating margin growth of 70 basis points annually to 7.4% in 3Q11.

(Read earnings report coverage here.)

Dell’s efforts to deliver higher-value solutions are supporting hardware growth. (The company did recently fall to No. 3 in global PC sales behind No. 2 Lenovo, which operates its executive headquarters in Morrisville, N.C. HP remains No. 1.)

Servers posted the fastest growth of Dell’s product segments, increasing 13.3% annually, on the back of demand for virtualization. Following the October termination of its reseller agreement with EMC, Dell continues to expand and drive sales of its owned storage technologies, such as Compellent and EqualLogic. Dell-owned storage revenue grew more than 20% in 3Q11 for the second consecutive quarter.

As Dell integrates the Force10 acquisition and increase focus on its networking portfolio, TBR anticipates accelerated revenue growth for the segment in 4Q11.

TBR believes Dell has positioned to offset weak spending in the consumer segment and the Public Sector in mature markets going forward. Dell will invest cautiously, continuing to align R&D and sales and marketing spend on growth opportunities around enterprise solutions. Dell will support profitability by rationalizing acquisitions and streamlining its supply chain. Furthermore, Dell will mitigate potential future impacts to its HDD supply following 3Q11 flooding in Taiwan by working closely with suppliers.

Balanced Messaging

Balanced messaging will enable Dell to remain true to its core PC customer base while fueling the enterprise solutions initiative.

Dell will leverage its expansive PC business as new fuel for the solutions strategy. Dell positions its PCs as secure, manageable endpoints to the overarching IT solution, painting a picture of more comprehensive solutions skill sets as compared to competitors such as IBM. This opens doors for Dell to engage customers in more strategic conversations around mission-critical solutions. Furthermore, as tightening consumer and mature Public Sector budgets extend the IT lifecycle, an image of unwavering dedication to PCs reassures customers that the business will remain core to Dell in years to come; Dell worked to capitalize on near-term HP customer uncertainty, beginning in the PC space but expanding across the larger IT landscape, in 3Q11. Dell is expanding its enterprise-class hardware capabilities, including storage and networking, while simultaneously highlighting the utility of client hardware serving as the interface to the datacenter and cloud-based IT environment.

The Tablet Opportunity

Tablets will provide fertile ground for Dell’s expansion across high-growth verticals.

Dell will utilize tablets to further link its solutions to customer-specific solutions and increase traction in high-growth verticals. Considering Dell’s expansive desktop and notebook PC customer base, TBR views client hardware as the natural path of least resistance to increased penetration of the enterprise for Dell. Dell will stimulate momentum around solutions by spurring adoption of its tablets in high-growth verticals, such as insurance, healthcare and education, in addition to the Public Sector by leveraging applications and professional services to tailor devices to customers’ specific requirements.

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