Transcript: Michael Dell addresses Dell's future

July 17, 2012: 3:55 PM ET

Michael Dell, Chairman and CEO, Dell, was interviewed by Fortune's Andy Serwer at Brainstorm Tech in Aspen. They talked about the PC market, the enterprise, China, and Apple. 

Below is an unedited transcript of the discussion.

ANDY SERWER(Applause.)  Hey, Michael, how are you doing?

MICHAEL DELL:  Great, Andy, how are you?

ANDY SERWER:  Doing great, good to see you.  How is the weather in Round Rock, Texas right now?

MICHAEL DELL:  Well, you know, in the summer in Texas we have what I call FM weather, it's like the FM dial, it starts at 88 and goes to 108.  And it's pretty hot, yeah.

ANDY SERWER:  Yeah, well, same in New York.  So, this is why you've got a Texan and a New Yorker in Aspen, Colorado.  We're fleeing the miserable weather, and here to talk a little bit about Dell, your company.

MICHAEL DELL:  Great.

ANDY SERWER:  I was outside chatting with you just a minute ago and you said, "Well, you know, we're really not a PC company anymore."  And I was, like, whoa, you know, I mean, come on, Dell, you're a PC company.  You always have been a PC company 28 years now is it?

MICHAEL DELL:  28.

ANDY SERWER:  28 years.  And, you know, it sounds good.  Of course, you know, we're in the post-PC era, they say.  So, is it really the case that you're not a PC company now, or is it you don't want to be a PC company in the future?

MICHAEL DELL:  Well, in the last five years or so, we've really made a concerted shift in our business towards end-to-end IT solutions.  And if you think about the businesses that Dell is in today, there are really four of them.  Certainly, we start with the client business, which is kind of transforming with all the things that are going on in mobility and client virtualization and that brings new needs in terms of security and those kinds of challenges that exist.

MORE: Dell Ventures launches fund for storage startups

The next business for us is the enterprise data center, the server, storage, networking business.  We make about a third of the servers that are on the Internet and about a third of the servers in North America, you know, built a tremendous business in storage and networking, fueled by some acquisitions.  We've done about 25 acquisitions in the last three or four years.  And so all the things that are going on in cloud and virtual infrastructure, that's an enormous business for us.

Then we have the software business that centers around systems management, around IT security.  We are seeing about 29 billion security events per day protecting tens of trillions of dollars of assets for the biggest banks and financial services firms in the world.

And then of the 110,000 people at Dell, about 45,000 of them are in services.  So, we provide a broad range of IT services to help companies capture value from all of the IT that's out there.  So, for example, you know, let's say you fly on a One World airline, an airline that's part of the One World Alliance.  How do all these airlines link their miles together?  It's actually a pretty tricky problem.  They do that with the Dell (DELL) cloud.

So, we're right in the middle of some of the stickiest challenges in terms of how do you connect older applications to cloud applications?  How do you secure and how do you modernize IT environments and bring them off of the old mainframe and onto the X86 platforms, put them in the Dell cloud and do it more efficiently?  So it's a very different company than it was four or five years ago.

ANDY SERWER:  Am I wrong, or did I not hear you mention PCs there at all in that little soliloquy?

MICHAEL DELL:  I actually mentioned it very briefly at the very beginning.

ANDY SERWER:  Okay.

MICHAEL DELL:  But certainly, our business has changed quite a bit.

ANDY SERWER:  Okay.  All right.  I want to do a polling question right now because it speaks to your product mix and your revenue mix.  So, why don't we do one of these polling questions, which means, cue the music.  (Music.)  By the way, Marc Andreessen did not compose this, although he might have.

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Okay, here's the question for you all:  Last year, desktops and laptops accounted for 54 percent of Dell's revenue, down from 61 percent in 2008.  How big will Dell's PC business be in five years?  And you can see there:  50-54, 40-50, 39 or less.  To vote, simply text your answer to 42345 and we will post those results shortly.

Okay, so the other 46 percent is what now?

MICHAEL DELL:  You know, what I would argue is that, with all due respect to your polling question, probably a better way to think about this is revenue and profit because, you know, if you sell let's say $1 billion worth of PCs versus $1 billion worth of software, those are going to have very different characteristics in terms of free cash flow and margin.  So, herein lies some of the difficulty in looking at Dell strictly from a revenue standpoint because the business mix is shifting.

So, we're already at about half of our gross margin is not the PC.  You know, last year our cash flow grew 39 percent, the $5.5 billion.  So, the business mix is changing pretty dramatically and what I just kind of described is the new Dell in the last five years, that's gone from about $10-billion business to about a $20-billion business.

ANDY SERWER:  Okay.  You talked about enterprise solutions, right?  That's sort of the core strategy of the company?

MICHAEL DELL:  Yes.

ANDY SERWER:  How is that different from HP's strategy?

MICHAEL DELL:  You know, one of the things that we have done in this is we have the opportunity to basically approach this unencumbered by legacy.  And a lot of the companies that are out there in our industry are kind of stuck with old things.  And if you look at all sectors of our industry, whether it's in databases or semiconductors or systems management or apps or mobility, you know, broadband, et cetera, there's always a new way to do something, right?

So, what we have done in our organic and inorganic investments, essentially, is to shoot ahead of the puck.  So, if you think about what's going on in cloud integration and security or in client virtualization or in identity and access management and some of the challenges that companies have in making all this stuff work that is exciting and interesting, you know, a lot of discussion about mobile devices and that's tremendous and interesting and exciting.

But from an IT perspective, it's actually a huge challenge because, you know, ten years ago, in a company, the device, the network, and the apps were pretty tightly controlled by the company.  Now, the device, the network, and the apps aren't controlled at all by the company.  And so when the CIO or the CTO has to go to the audit committee and explain how is it that company information found its way onto these devices that aren't owned by the company and somehow leaked out?  You know, there are huge challenges in securing this.  So, you know, those are the kind of challenges that we're helping our customers tackle.

ANDY SERWER:  Okay.  And so how does that relate to you versus HP?

MICHAEL DELL:  I think the way it relates is that we're kind of attacking the new problems unencumbered by the legacy of the past.

Another very interesting thing that sort of came out of the origins of Dell was this direct business model and the ability to have contact with, you know, tens of millions of small and medium-sized businesses all over the world, particularly growth companies where all the growth in employment is.  You know, we're serving a lot of the startups and larger than startups here in this room and around the world.

Those firm, you know, tend to be the firms that adopt new technologies first and fastest.  And if you look at the technology portfolio that Dell has built, it's really centered there.  Certainly, it can scale up to some of the biggest requirements in the world.  And just to level-set here, you know, IT is about a $3-trillion industry.  And about $250 billion of the $3 trillion is consumer, and about $2.75 trillion is business, institutions, and government.  And of that $2.75 trillion, the largest portion and the fastest-growing portion is kind of the middle.  And so that's a place where if you look at our acquisitions, you look at our investments, that's a place where Dell absolutely has a leadership position.

You know, also, if you look in verticals, we're number one in healthcare IT.  Healthcare is a space where IT is growing pretty rapidly, not only in this country, but around the world.  And it's also a highly distributed industry.  You know, there are some large hospital groups, and we serve those, but you have large numbers of practitioners and regional hospitals and that sort of thing.

We have five billion medical images in our secure cloud.  Big, unique kind of vertical expertise to help these medical practices run very efficiently.

ANDY SERWER:  So if I'm to understand maybe, then, the sweet spot is small to medium businesses, servers to the extent that PCs are still a growth business there, and software solutions?  Is that kind of the sweet spot for you guys?

MICHAEL DELL:  Storage and data is --

ANDY SERWER:  Storage.

MICHAEL DELL:  -- a big deal.  Certainly, the network.  And I would tell you we do very well with the large customers, too.

What's interesting about the -- let's think about small computer systems.  When the X86 server or think of any new thing showed up, you know, social media, whatever.  It's usually not first adopted by the biggest companies in the world.  You know, the barrier to adoption and acceptance is lowest in the smaller, faster, more nimble companies.  And that's where this stuff takes off.  And then we scale it up.

ANDY SERWER:  Right.  I want to focus in on a point you just made about the consumer.  And I want to talk about Dell and the consumer.  And I've heard you make this point before that basically the consumer is 10 percent of enterprise, right?  250 versus --

MICHAEL DELL:  Well, of the $3-trillion industry, you've got about $250 billion --

ANDY SERWER:  Right, less than, right.

MICHAEL DELL:  -- is consumer, $2.75 trillion is business.

ANDY SERWER:  And you use that fact to suggest that it's not that important for you.

MICHAEL DELL:  It's not that it's not that important, we're more focused on the $2.75 trillion.

ANDY SERWER:  Right.  But of course we all talk about the consumerization of IT, okay?  And it seems to me that the 250 has an outsized presence, perhaps.  And I wonder what your consumer strategy is.  I mean, we all see that everyone's gaga about the consumer.  You guys have had various consumer incarnations.  There was the famous Dell Dude, who went and got himself arrested later on.  That was a difficult situation.  The guy who plays the Dell Dude.  Anyway, we're not focused on that.

But where does that come from?  I just remembered that because it was amusing, I'm sorry.  In any event.

MICHAEL DELL:  Stay focused, Andy.  (Laughter.)

ANDY SERWER:  I'm digressing, Michael.  Maybe it's a flashback.  In any event.  I want to know what your relationship with the consumer is.  What do you make for the consumer and how important is it?  And how much does it tie into the enterprise from your perspective?

MICHAEL DELL:  It absolutely ties in, and you're right, the consumerization of IT is a big deal.  And the growth in mobility and in smart phones and tablets is absolutely an enormous part of what's going on in IT.  And it has all sorts of implications across the whole, you know, sort of ecosystem.

So, you know, I'll give you an example.  One of our customers is a company in China called Tencent.  And Tencent has like 650 million customers and they're all people who use phones.

ANDY SERWER:  Right.

MICHAEL DELL:  So whenever someone gets on the Internet, they're hitting all this data, they're pulling all this data, that's driving the infrastructure business.

Now, back to the challenge of all this explosion in devices and data, now how do companies take advantage of that to extend their businesses out to large numbers of their customers?  What happens when those devices come into a company's environment?

You know, the security challenges around this are pretty enormous.  And through a series of acquisitions, we now have several thousand people at Dell that are -- and we're the leading managed security service provider in the world.  So, the big banks, the pharmaceutical companies, the aeronautics industry, anybody doing a lot of transactions, anybody who has valuable data to protect comes to Dell SecureWorks to secure that.

So, you know, and when you think about all these devices with free apps where data is sort of moving around very freely inside the smart phone, the risks and challenges that that presents to all these organizations that have valuable information to protect are pretty enormous.

ANDY SERWER:  So the way I hear you tell it, I mean, it seems like you don't really even compete against Apple.  I mean, it's a complementary business, isn't it?  Isn't Apple just a complementary business to Dell?

MICHAEL DELL:  We are not competing with them in many places that they play, for sure.

ANDY SERWER:  Where are you competing with them?

MICHAEL DELL:  Certainly in PCs and I think you'll see us also in tablets with Windows 8.  But if you look at the real engine of their business in terms of the iPhone, you know, we're securing iPhones and we're managing iPhones and helping customers deal with the challenge of how do they integrate that into their IT environment successfully.  And of course Android and all the other smart phones that are out there.

ANDY SERWER:  Right.  You, I believe, have announced or are going to announce a $60-million venture fund.  Have you announced it?

MICHAEL DELL:  We're absolutely announcing a $60-million venture fund focused just on storage.

ANDY SERWER:  You're going to announce it right here, right now.

MICHAEL DELL:  Announce it today, right here, right now.

ANDY SERWER:  Okay, that's it, doing it.

MICHAEL DELL:  You know, Dell actually has a long history of seed investments in interesting technology companies.  So, we were a very early investor in VMware, very early investor in Fusion-io, a number of other companies, not all of them worked out as well as some of those, but we really believe in this explosion of data driven a lot by smart phones, tablets.

And what's really interesting is when you go look at companies, particularly companies with, let's say, less than 50,000 people or less than 10,000 people, there are enormous numbers of them.  And as they're starting to store huge quantities of data, are they actually using that data to make better decisions in real time about their business?  Very, very few of them are.  And so that's an enormous opportunity.  There are a number of firms out there addressing that.  We're certainly addressing it in terms of data protection, data management.  How do you store all this data?  And beginning to help customers capture value from it.

How do you integrate all this?  So I want to go to the cloud, but I have, you know, older apps and I have cloud -- I want to connect two cloud things together.  How do I do that?  Well, that's -- those are the kind of capabilities we provide our customers.

ANDY SERWER:  Right.  So, just to give us a headline on this, so you are initiating a $60-million venture fund to invest in storage and cloud startups?  Is that accurate?

MICHAEL DELL:  This is actually just on storage.

ANDY SERWER:  Just on storage, okay.

MICHAEL DELL:  We're doing other investments, but this is specifically focused on storage.  Storage has been a huge area for Dell.  We acquired EqualLogic and Compellent and a few other companies in the storage area and have built a rather large and fast-growing storage business with our own IT now.

And, you know, we see this as an area of continuing innovation.  And also what you're seeing is the -- you're seeing this converted architecture emerge in the data center where the line between a server and storage and the network is sort of disappearing as you get virtualization, you get in-memory computing, Flash is showing up inside these servers, and it's allowing for lots of new applications and lots of new uses for this data.

ANDY SERWER:  Right.  It sounds very compelling, Michael.  Your stock did take a pretty big hit this spring, though, and I'm wondering what that's about.

MICHAEL DELL:  I think the market's been pretty tough, Andy.

ANDY SERWER:  I agree with you on that.  (Laughter.)  Okay.  I think you got hit maybe a little bit worse than the market, though.

MICHAEL DELL:  Yeah.  Well, you know, I think we'll see about that you know as -- I'll let the market decide what the price is for our stock.  You know, our job is to build a great company.

ANDY SERWER:  Okay, fair enough.

MICHAEL DELL:  And to do so, really not thinking about, okay, are these actions going to, in a short period of time, cause our stock price to go up or down?  You know, I've been doing this for 28 years, I'd like to be doing it for many, many more years to come.  And so if you look at our results, they've been relatively volatile generally in the upward direction.  And, you know, we're making pretty significant changes in the nature and the portfolio of our business, and it doing it in a fairly fearless way.  You know, we've spent almost $5 billion just so far this year on acquisitions in changing the profile of the company, investing billions organically as well.

ANDY SERWER:  I should point out that you came back to be CEO five years ago is it?

MICHAEL DELL:  2007.

ANDY SERWER:  Right.  So, interesting perspective there.  Another interesting thing that is increasingly uncommon, I should say, is that you own 13 percent roughly of your company's stock?

MICHAEL DELL:  Something like that.

ANDY SERWER:  Something like that.  What do you think about these new companies where the founders seem to want to hang onto control of the stock by issuing two classes?

MICHAEL DELL:  That would be nice, yeah.  (Laughter.)

ANDY SERWER:  How come you didn't do it?

MICHAEL DELL:  I didn't really think about it.

ANDY SERWER:  Interesting.

MICHAEL DELL:  You should have asked me 25 years ago.

ANDY SERWER:  I guess so.  All right, so you can see --

MICHAEL DELL:  I haven't really had issues there.

ANDY SERWER:  But it's interesting because you've retained a measure of control of the company.  Does it afford you to take a longer-term view?

MICHAEL DELL:  I think that it's important to be able to understand the perspective of shareholders and if you have a structure that somehow doesn't allow you to do that or blinds you to it, I don't think that's -- I wouldn't think that's a particularly good idea both as an investor and as a founder of a company.

ANDY SERWER:  All right.  I may take that as a bit of an indictment.

You can see here I just wanted to draw your attention to the fact that the winning vote was, C, which is 39 percent or less.

MICHAEL DELL:  I endorse this message.

ANDY SERWER:  You do?

MICHAEL DELL:  Yes.

ANDY SERWER:  So we're, clearly, living in a post-PC world?

MICHAEL DELL:  We're -- well, what's interesting about this term that you used, the post-PC world, is that it was first coined when there were about 100 million PCs sold a year.  And now there are --

ANDY SERWER:  When was that, roughly?

MICHAEL DELL:  It was around 1999.  And now there about 380 million PCs sold per year.  So, apparently, the post-PC age has been pretty good for the PC.

ANDY SERWER:  Okay, fair enough.  I want to open up for the questions.  So, many questions out there.  We've got one right here from the Senator from Massachusetts.  Please identify yourself, Senator.

MICHAEL SCHRAGE:  It's Michael Schrage.  (Laughter.)  Another word you didn't mention, you said PCs.  You mentioned PC direct.  When I cover Dell, you had figured out how to do direct for servers and all different -- and it was a remarkable business model, it was lean, people emulated it, some with greater success and lesser success.  As you move more to this systems marrying cloud, et cetera, does that direct model that you began in your dorm room, is that just like an anachronistic memory or is it still the core of the next generation of innovation?

ANDY SERWER:  Yes.  How does it fit in?

MICHAEL DELL:  It's still incredibly important to us.  And we have about two billion interactions per year with customers.  I think about the relationships we have with the world's biggest companies and all sorts of small and medium-sized companies.  That direct relationship is incredibly important.

Having said that, you know, as we have products and services and offerings that have -- you know, let's say a much higher gross margin, a software-like gross margin, we actually want to have incredibly wide distribution and reach.  And so having a network of partners -- and we now have about 110,000 partners around the world that sell our solutions as part of what they do.

And so direct is still incredibly important to us.  It's still the significant majority of our business, but we also have this partner aspect of the business.  All the businesses that we've acquired were partner driven, even if we were one of the biggest partners of the companies we've acquired.

But you know, direct continues to be, Dell.com continues to be a very important asset for us and that relationship with customers is --

MICHAEL SCHRAGE:  But it's not your future.

MICHAEL DELL:  I think the relationship with customers is an enduring asset and an important asset.  We have absolutely flipped the business to emphasize intellectual property, product, design, and so there are aspects of our past that are important and valuable, but clearly as we move more into software and into converged infrastructure, you know, the billion dollars a year we're investing in R&D, the 5,000 patents we have issued and applied for, that is incredibly important to Dell's future.

ANDY SERWER:  Michael, what about your business in China?  What is that like and are you feeling the effects of any slowdown there?

MICHAEL DELL:  It's on the order of a $5-billion business, so it's a sizeable business for us.  It's the largest business outside the United States.  I can tell you that there are some challenges in China right now.

ANDY SERWER:  Be more specific, it's a really important topic I think.

MICHAEL DELL:  I'm going to be there in early September with our board of directors.  I'll give you a better update after that.  But I think, generally speaking, the demand for technology in China is tremendous.  You know, we think about 60 percent of the Chinese Internet runs on Dell servers, and so we have a huge success in selling our infrastructure solutions to those Chinese companies.  Anybody who's doing anything mission critical like stock exchange, a bank, a power grid, you know, those are our customers.  You know, we're designing the IT architecture for, you know, a lot of the key state-owned enterprises with our services group.  And we've acquired Bearingpoint to be able to kind of fuel that.

So, our business is fully integrated in China across all aspects, and it's 100 percent Dell owned.  So, we love the business, it's an important business.  And emerging markets are a big deal for us because the next billion users are coming from these countries and the next ten.

ANDY SERWER:  But are you seeing a slowdown in sales growth in China?

MICHAEL DELL:  That would be an accurate statement, yes.

ANDY SERWER:  Okay.  Other questions?  Right here?

QUESTION:  Can you talk a little bit more about this new storage fund?  What kind of technologies or companies do you expect to invest in?  And I know you said you're an investor in Fusion-io.  Is Flash memory a big thing for you guys?  Be great to hear a little bit more.

MICHAEL DELL:  Yeah, what's happening in Flash memory is kind of an interesting place to start because if you think about the relationship between servers and storage and how sort of performance occurs and apps are distributed, not what we're able to do is put large amounts of memory -- we've actually designed this ourselves into our 12th-generation servers that we're shipping now.  Put several terabytes of memory directly in the server.  We acquired a little company that gives us cache coherency across a large number of servers.  And so you start to rethink what is a server, what's storage, what's the network when you have virtualization and now you have 50 virtual machines, 100 virtual machines, 500 virtual machines in one.  So, the storage world is really getting shaken up a tremendous amount.

So, these are the kinds of things we'll be investing in.  And you'll see us continue our acquisitions in that area.  The idea behind the venture fund, of course, is to get out in front and fund some of these new ideas that we think are going to be interesting and important.

ANDY SERWER:  Two more quick question.

HEIDI SINCLAIR:  Hi, Heidi Sinclair with Weber Shandwick.  So, Michael, you've done an amazing job with transforming the business, creating the new Dell.  But one could argue that the Dell brand and reputation continues to lag that transformation.  So, I'm curious what you're doing to revitalize your brand going forward.

MICHAEL DELL:  It's important for us to get out and explain what we're doing because a lot of people remember Dell for what we did five years ago or ten years ago.  And, you know, when I get in front of a group of 25 CIOs or CTOs and explain what Dell is today, you know, there's a lot of, "Oh, I didn't know you did all that."  So, you know, we have 20,000 direct sales people that are in the field and talking to customers and so that's sort of our frontline army.

Certainly, there are all sorts of other media forums that we can use to get that message out.  You know, I think as we -- every time we acquire another company, like we're just acquiring Quest Software, we acquired Wyse, we acquired SonicWALL, you know, as we acquire these companies, it gives us an opportunity to tell the story again, and potentially to a whole new group of customers.

You know, SonicWALL has a million customers and some of them are Dell customers, but some of them aren't Dell customers.  So, we have to continually get out and explain what it is we're doing.

In December of this year, we're going to have a second Dell World event, so we'll have 5,000 customers come to Austin, Texas, spend a few days, and they'll get completely immersed in everything that we're doing present day and future oriented.

And when people come to an event like that, they come with a very deep understanding.  But a lot of evangelism is required.  I think because the company had such a rapid rise on a relatively monolithic and pretty easy-to-understand business model and now it's a pretty different company.

ANDY SERWER:  I want to just squeeze in one more quick question even though we're over time.

QUESTION:  Michael, what would you say the lack of innovation on the software windows has been to affect PC sales?  And with this, have you pulled back your investment in R&D on PCs?

MICHAEL DELL:  If I look at the billion dollars that we're investing in R&D, it is heavily oriented toward what I'll call the new Dell.  Certainly, when you have an ecosystem like the one you're referring to and for whatever reason it changes or there are new factors involved, I think all the participants are likely to change what they do.

Certainly, we're finding for great return on our capital and future growth opportunities, I've kind of laid out where Dell is investing.  One thing I will say about the client environment, we're seeing absolutely massive S-curve adoption of client virtualization.  And one of the reasons is all of this stuff that's going on with mobility.  So, if you're a company and you have people that are now bringing their own PCs to work, they have tablets, they have smart phones, but you have all these older kind of PC applications, how do you make all that work?  And everybody knows about server virtualization, so now they're virtualizing the client.  And we acquired the leading company in that space, we're number one in the world, and it's growing at a very, very rapid rate and, you know, we're seeing huge projects, 10-, 50,000-seat projects where the client is now in the data center and it's a virtual client and you access it with whatever device you want, anywhere you are.

And you build in security through that virtual session through the mobile device so that the CIO can actually go explain how this works and still keep their job.

ANDY SERWER:  Okay.  Still keep their job.  I've got to get us moving here, otherwise I won't be able to do that.  So, let's thank Michael Dell for coming today.  Thanks a lot, Michael.  (Applause.)

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