Dell grows but profits hit by component cost headwinds

Dell says it has struggled to make higher memory and SSD component costs stick with the channel and customers, which hit its profitability on servers, storage and networking in its Q1

Dell Technologies has declared itself pleased with its maiden results under its new go-to-market structure, but admitted it took a hit from rising component costs.

For its first quarter ending 5 May 2017, the Texas-based giant posted an operating loss of $1.5bn on revenues of $17.8bn (£13.9bn).

Dell is a private company, but still divulges its numbers, partly because it now owns VMware courtesy of its recent merger with EMC.

Dell's Client Solutions Group saw revenue rise six per cent year on year to $9.1bn and operating income hit $374m.

Its Infrastructure Solutions Group (ISG) chipped in with $6.9bn revenue, comprising $3.2bn from the server and networking side - a five per cent annual rise - and $3.7bn from storage. But ISG's profitability was hit by a number of factors, including the well-documented spike in the cost of components such as memory, some spot prices for which Dell said have doubled over the last year. Operating income for this division consequently fell to $323m, with operating margin tumbling to roughly five per cent, down steeply from 12 per cent the previous quarter.

"We're pleased with the overall results in the first quarter of our new go-to-market structure and the demand velocity we saw in a challenging component cost environment," Dell Technologies CFO Tom Sweet said in a statement.

On a Q1 conference call, Dell Technologies president David Goulden opened up about Dell's component headwinds, saying that although the vendor had tried to make the cost increases stick in the channel and its rate prices, this had not always been possible.

"Customers don't like paying more [than] what they paid last quarter - that typically not being the case in IT," he said. "Typically, in the IT industry, there are expected price decreases on a sequential basis, not price increases."

Sweet said some memory spot prices had roughly doubled year on year, with SSD component costs also up 20 per cent or more.

Goulden added that the component cost hikes have been most acute in servers, where he stressed that Dell had gained on its closest competitor.

"A certain amount of the pricing increase will actually stick and yield the incremental return, others will not, because the customer either won't go there, or somebody else in the market hasn't increased their price and you wind up in a competitive environment," he added on the call, a transcript of which can be found here.