Dell Aims to Overtake HP in Servers

Michael Dell

Michael Dell

Dell isn’t letting the challenges of going private distract it from achieving larger goals of becoming a leading enterprise IT portfolio company. The first target: Overtaking rival Hewlett-Packard in server sales.

In an internal memo obtained by Bloomberg, CEO Michael Dell laid out the goal of knocking off HP in total server shipments. According to Gartner, HP’s fourth quarter market share was 26.5 percent to Dell’s 21.3 percent. While a 5 point difference doesn’t seem like much, it’s a huge gulf that must be bridged and then sustained.

“It is an exciting and achievable goal, which will put us in a strong position,” Michael Dell wrote in the memo. “We’ve made so much progress in building out our enterprise capabilities.”

Additionally, Dell is looking to expand its presence in emerging and strong overseas markets, including China, India and Brazil, as well as expand capabilities in cloud computing, tablets and personal computers.

PC sales are at the root of Dell’s current revenue and operating challenge. The one-time market leader has seen PC sales steadily erode to the point where it’s now running third behind Hewlett-Packard and Lenovo on a worldwide basis and second to HP in the U.S. market. In regulatory filings related to its planned leveraged buyout, Dell reduced its near-term revenue forecast by $10 billion over the next four years; its 2013 profits were also adjusted from $3.7 billion to $3 billion.

Becoming a private company will help Dell achieve its goals as it will not have to worry about satisfying Wall Street investor short-term expectations. Michael Dell and private equity firm Silver Lake Management have tendered a $24.4 billion plan to take the company private. The plan is being challenged by alternative plans, one by Blackstone Group and the other by activist investor Carl Icahn.

Just how Dell plans to close the server sales gap with HP is undefined. While conceivable that Dell can increase server sales, it’s unlikely that it can completely eclipse HP in server types. Dell has a number of entry-level and mid-tier server models suitable for small and midmarket businesses. However, HP has high-performance servers, such as the Integrity line, that are more suitable for the enterprise market.

And it’s worth questioning whether becoming number one in servers really makes a difference, as more entry-level and midmarket server buyers are increasingly turning to cloud-based resources and hosted services as alternatives to buying. HP has seen its server sales erode by as much as 7 percent over the last year because, in some part, to this trend.

Dell’s advantage is its channel, which is loaded with small and midmarket resellers. The company is pivoting toward recruiting more enterprise solution providers and system integrators. However, Dell is still able to move more product through the SMB channel, where HP has struggled during its restructuring.

Greater channel investments are expected when Dell completes its leverage buyout later this year. No matter which plan is adopted, Dell will need to accelerate sales and cash flow to manage the billions of dollars in debt it will take on. The channel has already proven invaluable in delivering revenue growth for Dell.