When Michael Dell announced that he was stepping down as CEO of the company he founded 20 years ago in his student dormitory, there was genuine surprise among industry-watchers.

Could Dell‘s notoriously efficient business model have come off the rails; could the wunderkind be ready to run an even larger company; could the competition have finally learnt how to beat Dell at its own game?

The truth is a lot less dramatic: having taken the company to $41 billion in revenues, the naturally introverted 39-year-old now wants the scope to enjoy his achievement – and to see if there is another hobby out there other than work, says Dell’s next CEO Kevin Rollins, the founder’s right hand man for many years.

Not that Michael Dell is letting go completely. He will continue to participate in operational decision-making as chairman of the company. But he certainly leaves Dell in good shape.

In the company’s closing quarter of fiscal 2004, revenues jumped 18% to $11.5 billion, with much of that growth driven by Dell’s expansion into new markets. It took a further step in correcting the public perception of the company as a ‘PC assembler’ by chalking up phenomenal sales for servers. While most of the industry’s growth during the quarter was at the low end of the desktop and notebook categories, shipments of Dell PowerEdge servers rose 40% over the year-ago period, a growth rate that is more than double the pace being enjoyed by the rest of the server sector. The momentum was even greater in the US, where server sales growth hit 49%.

Elsewhere, Dell’s relatively recent push into storage systems was running even faster, with product revenues up 47%. And its foray into printers, that began in March 2003, was marked by the shipping of its 2 millionth device during the quarter.

Company business was also strong globally: product shipments were up more than 30% and revenues up 23% in Europe, the Middle East and Africa, and by over 20% in the Americas region.

The upshot was that net profit at the company jumped yet again, rising 24% to $749 million and giving Dell a net margin of 6.5%.

universal profitability

Dell, however, is still battling against fierce competition, in a market that it once predicted would be less crowded – at least at the top.

When Hewlett-Packard first announced it was acquiring Compaq in 2002, a mocked up photograph of Dell troops lowering a Compaq coffin into a grave famously did the rounds at Dell’s Austin, Texas headquarters. Even those behind that will have to acknowledge that their prediction has not exactly come true.

Just look at costs and profitability. With the acquisition, HP set itself a target of cutting costs by $2.5 billion in the first two-and-a-half years. Actually, the company managed to achieve even larger savings of $3.5 billion in just the first 12 months, the company’s CEO Carly Fiorina revealed at a technology seminar in March.

Moreover, HP’s recent financial results have caught even the most jaded HP observers by surprise. In its kick-off quarter of fiscal 2005, for example, growth was running at 9% and, says Fiorina, the company was profitable across all of its main business units.

Despite that, the picture is not universally rosy. Revenues at the company’s enterprise systems group, which comprises servers, storage systems and enterprise software, rose 5% to $3.9 million. And in a reversal of historical fortunes, the servers and storage division reported an operating profit of $154 million on revenues down 3% to $3.7 billion, while the software unit posted an operating loss of $46 million, despite growing revenues by 9% to $200 million during the quarter.

Server mix

Within the server group, there were contrasting performances. Revenues from ‘industry-standard’ Intel-based servers rose 15%, driven by unit growth of 23%. In contrast, Unix server revenues slumped by 13%, with demand for the former Digital Equipment Alpha servers falling by 32%.

In contrast, orders for the company’s new flagship high-end server, Superdome, rose by 52%.

The picture of legacy and renewal was similar within the storage operation. Sales of high-end and midrange storage arrays were strong, up a respectable 14%, though the demise of older storage systems resulted in a slight shrinkage of the overall storage operation. One of HP’s biggest strategic moves, the ramping up of its services operation, seems to be gaining momentum. Although revenue from all services activities grew by 6% year-on-year to $3.2 billion, growth was much better in the areas of the services market the company is targetting closely.

Ongoing weak demand resulted in a decline in consulting and integration service revenues of 10%, and intensifying price pressure meant growth in customer support revenues was restricted to 7%. However, in managed services, revenues were up an impressive 27%.

Lastly, in PCs – where Dell and HP have consistently gone head-to-head, HP managed growth of 20% to $6.2 billion, allowing it to snatch the global PC leadership position from Dell. That performance also marked a watershed for the company: after many years of being labelled “a great printer company” with a computer interest, HP can point out that printers now account for less than a third of its revenues, making the PC division the company’s largest unit for the first time ever.