Dell, HP, SAP and Evolve


Dell Inc. reported it failed to meet its first quarter revenue and earnings targets whereas Inc. delivered strong first quarter results. Meanwhile, Hewlett-Packard Co. announced better than expected second quarter results and layoffs of approximately 10 percent of its workforce. In other business news, SAP AG announced it was acquiring Ariba Inc. for $4.3 billion.

Focal Points:

  • Dell delivered disappointing first quarter 2012 revenues and earnings results, below even the low end of its guidance. Dell said it had revenues of $14.4 billion for the quarter, down four percent from the same quarter a year earlier, when it brought in $15.0 billion in sales. Net income for the quarter on a GAAP basis was $635 million, a 33 percent plunge from the year-ago quarter, which saw a net income of $945 million. Dell attributed some of the drop to a switch to tablet computers, which adversely affected notebook sales. Sales of notebooks for the quarter dropped 10 percent. Server and networking equipment sales were up two percent year-over-year while storage revenues fell eight percent. In pointing to its transformation, Dell executives noted enterprise solution and services accounted for 31 percent of revenues and 50 percent of margins, Dell-owned IP storage grew 24 percent, and services revenues expanded by four percent. Growth markets were flat, although the revenues in the BRIC countries grew by four percent. On the other hand, saw its first quarter revenues jump 38 percent year-over-year to $695 million from $474 million. However, the company reported a net loss on a GAAP basis of $19.5 million, whereas the company had a net income of 0.5 million in the prior year's quarter. Subscription and support revenues increased 38 percent over the same period while professional services and other revenues grew by 30 percent year-over-year. executives raised the company's full year revenue guidance to be in the range of $3 billion. Over the past year the company has grown its headcount by 51 percent.
  • HP surprised the analyst community by announcing decent second quarter 2012 results. Total revenues for the quarter were $30.7 billion, down three percent from the previous year's quarter of $31.6 billion. Net income on a GAAP basis fell to $1.6 billion, a drop of 30 percent from the year-ago quarter of $2.3 billion. Revenues for the Personal Systems Group were flat year-over-year while Imaging and Printing saw a revenue slump of 10 percent. Enterprise Servers, Storage and Networking sales declined six percent while Services slipped slightly and Software, which now includes the Autonomy acquisition, grew by 22 percent. The company also stated it has started a multi-year restructuring effort to "fuel innovation" and simplify business processes that will entail the laying off of approximately 27,000 employees, or 8 percent of its workforce, by the end of fiscal year 2014. The company is offering an early retirement program so that the total employees impacted by the restructuring will depend upon the number of participants in the program. No statement was made as to which countries would be affected although officials stated the workforce reduction plans would vary by country. Unnamed sources claimed that 10,000 to 15,000 of the cuts could come from the enterprise services group.
  • SAP America, a wholly owned subsidiary of SAP AG, has signed an agreement to acquire Ariba, a provider of collaborative business commerce solutions, for an all cash deal of $4.3 billion. The Ariba online buyer and supplier network facilitates more than $319 billion in commerce transactions, collaborations, and intelligence among more than 730,000 companies annually. Ariba has approximately 2,600 employees and is headquartered in Sunnyvale, CA. It is also the second-largest cloud vendor by revenue, according to SAP. Ariba experienced 38.5 percent annual growth in 2011, bringing in $444 million in total revenue. "The cloud has profoundly changed the way people interact," SAP Co-CEOs Bill McDermott and Jim Hagemann Snabe stated. "The impact will be even greater as enterprises connect and collaborate in new ways with their global networks of customers and partners. Cloud-based collaboration is redefining business network innovation, and we are catching this wave in the early stage of its evolution. The addition of Ariba will create the business network of the future, deliver immediate value to our customers and provide another solid engine for driving SAP's growth in the cloud."

Experton Group POV: Dell and HP are struggling through their transitions, with the economic and technical environment exacerbating stress points. Dell is being impaired by the shift to tablets and the slow services uptake by business clients. Furthermore, the company is having trouble navigating the markets outside of North America. The big gain in the BRIC countries was the result of the almost doubling of revenues in Russia, which was offset by losses in India and so-so increases in Brazil and China. In all of its markets the company remains heavily dependent upon client systems, which will be exposed over the next few years. Starting this past quarter Dell transitioned to a new reporting structure for its services and how it will engage with customers. Experton Group expects it will take a few quarters before the new organization functions effectively.

IT executives should expect Dell to struggle for the rest of the year, which will provide opportunities for negotiating better prices and terms. Similarly, HP is under tremendous stress and is losing business and profits in key sectors. The PC and Imaging businesses are merging and neither one is exhibiting strength, although the PC unit held its ground. One of the Imaging bellwether indicators is ink sales, which are down again by double digits. That combined with Apple Inc. tablet inroads and pressure from PC competitors will keep these commodity plays under stress for at least the next 12 months. The Services business, which resulted from the merger of HP's services group and EDS, is still not able to make significant headway and will need three to five years to turn around. The Business Critical Systems (BCS) Group, which is home to the Integrity line of Itanium processors, continues to shrink – it took a 23 percent drop in business year-over-year, primarily caused by Oracle Corp.'s decision to drop support and the ensuing lawsuits. BCS was a big provider of revenues and profits, which is now drying up. Software is the bright spot but it is off of a very small base – still under $1 billion. While the decision to reduce headcount may be necessary, it will add one more demoralizing factor on its workforce and make it more difficult to turn some of the businesses around. Fortunately for the company, it does have depth in its product lines and a sufficient R&D investment to keep its customers loyal until a turnaround occurs. IT executives should not count HP as down and out. It may be going through a tough patch, as it tries to recover from the problems created by its two previous CEOs, but IT executives should expect it to deliver innovative and competitive products and services and to remain a top contender and supplier. Although is on target to become the first cloud company to reach $3 billion in sales, gaining the next marginal sale is proving more difficult than most expected. It seems selling cloud computing services is just as difficult as selling hardware and software. has the vision and architecture to succeed and remain a leader in its spaces but achieving the levels of profitability that vendors long for is proving elusive.

Thus, IT executives will have the ability to negotiate pricing and terms and conditions and therefore, should treat cloud computing contract negotiations similar to the way it does traditional outsourcing deals. Lastly, the SAP acquisition of Ariba is a brilliant move by SAP. It gives the company control of the premier buyer-supplier network, which it can tightly integrate into its supply chain applications. This will give SAP a strong chip to play when dealing with Oracle as well as alter the procurement and supply chain outsourcing landscape and processes. IT executives should understand the vision SAP is envisioning and determine how it can be incorporated into their own organizations.