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Dell sees servers, storage as key to profits

update By continuing to attack the storage and server market, the company predicts it will hit record profit as soon its fourth quarter.

update Dell Computer says it's nearing new company records for revenue and profits, despite few positive signs of a PC market turnaround.

Speaking at a meeting with analysts in Austin, Texas, senior executives said the company will reach record revenue in its fiscal third quarter that ends Nov. 1, while marking gains in sequential unit shipments as high as 8 percent to 9 percent. Dell had previously expected a 5 percent to 6 percent sequential jump.

Dell, which on Tuesday increased estimates for its third quarter, also expects to enjoy record profit as soon as its fiscal fourth quarter by following goals laid out earlier this year, Chief Financial Officer Jim Schneider said at the meeting.

In April, Dell executives said that the company is seeking to double its annual revenue over the next few years to about $60 billion, while cutting its costs by $1 billion.

The trick to Dell achieving higher revenue and profits will be to further cut costs while gaining market share against competitors, the executives said at the time.

Dell executives said Wednesday that the company has been executing on its plan and is now on track to cut more than $1 billion in costs this fiscal year, which ends in January. The company is also on track to double revenues within about 5 years, thanks to further gains in market share in the PC and server markets, and its entry into managed IT services and other new businesses, executives said.

The PC market, which bottomed out last year, has shown little sign of improvement after getting off to a good start in the first quarter. Positive signs have come mainly in the form of limited PC replacement programs at some large companies and sales of notebook PCs. But Dell executives said the company's growth plans will let it meet goals, even if the market remains flat.

"We have already begun to see a number of companies roll out fairly significant projects," said CEO Michael Dell. However, "I think that most of them have taken a fairly conservative posture."

Any PC market recovery will be tied to an improvement in the economy, Dell said. So, "We've plotted our strategy assuming there's not going to be a lot of growth."

Executives said Dell will achieve its goals by continuing to attack the market for servers and storage. Dell has been making inroads in this market with an approach that uses standard equipment from suppliers such as Intel, while spending its own research and development money on making hardware such as servers work well together.

Meanwhile, Dell reiterated that it hopes its fixed-price approach to services will boost its presence in that market.

Dell plans to use its new flat-rate professional services, such as server migration or setting up storage area networks (SANs), as the fulcrum that will help the company boost its market share in services.

Dell has developed a menu of sorts that includes a number of fixed-price services. This lets customers choose services, such as migrating from Unix-based servers to new ones based on Linux, and combine them with Dell's hardware.

The plan is similar to what Dell has done in other markets. Dell has seen market share gains in servers and storage thanks to new systems, such as blade servers, that are based on standard components such as Intel processors. Blade servers are modular, making them easy for Dell to manufacture while giving customers the ability to customize.

Meanwhile, Dell's low cost-structure has allowed the company to sell systems that cost less than the custom-built hardware that customers used in the past.

Dell's "success to date has been a very steady march," Dell President Kevin Rollins said.

One area where Dell's approach has already worked well is in high-performance computing clusters, Rollins said. Clusters combine large numbers of otherwise standard servers to create supercomputer-like performance at a much lower cost than buying a supercomputer. Customers can also add additional servers, otherwise known as nodes, as their need for performance grows.

So far this year, Dell has sold 185 clusters, including a 2,008-node cluster to the State University of New York that can deliver up to 5.6 trillion calculations per second, rivaling many supercomputers.

Next year, Rollins said, the company expects to install more than 500 clusters.

Customers can follow a similar path with Dell's storage systems, including those such as the new Dell/EMC CX600, that are the result of Dell's partnership with EMC.

Dell shipped just over 10,000 terabytes of storage in its fiscal 2002. The company forecasts that it will ship nearly 20,000 terabytes in fiscal 2003, which will end Jan. 31. That increase includes a significant jump in SAN and network attached storage (NAS) systems, the company said.

Printers-the final frontier?
While Dell seeks a greater piece of the PC pie, which includes desktops, notebooks and servers, it is also looking to nearby markets. The company has been selling network switches and digital projectors, for example. But its most brash move yet will be into printers.

Dell will make its entry into the printer market sometime in the first half of next year. The company said last month that it will tap Lexmark to create a Dell-branded line of ink-jet and laser printers.

Dell has said it doesn't expect to make large revenue gains at the outset. But executives made it clear the company believes it can capture a large percent of the revenue in that market.

"We believe these products cost too much and that there's an opportunity to drive (down) the cost that people pay for the lifecycle of printing products," CEO Dell told analysts. "We think it's a significant opportunity for Dell and for our customers."

Despite its rise in market share and prominence, Dell will eventually reach a point of diminishing returns, where entry into new areas and its market share gains don't provide the same payoff as before.

Cost cutting and increases in manufacturing efficiencies ultimately face the same fate, analysts said.

"Dell faces structural maturation in its core business, desktops and notebooks, which generate about 80 percent of revenues. Furthermore, Dell has captured the most of the benefits of asset velocity and inventory turnover, with incremental competitive advantage stemming from its operating expense structure," U.S. Bancorp Piper Jaffray analyst Ashok Kumar said in a recent report. "As hopes for a corporate replacement cycle fade, Dell needs new drivers to fuel its growth engine."

But company executives believe the day when its market share gains or manufacturing advantages will dry up is a long way in the future.

"If you look at our share in the PC market, it's only 15 percent. We have a long way to go in our most developed business (PCs) in terms of market share. I believe there's a lot of running room with share gain there, in addition to the opportunities beyond that in servers, storage, data networking...and services," Michael Dell said.