 Welcome to another edition of Wikibon's weekly research meeting on theCUBE. I'm Peter Burris and once again I'm joined by in studio George Gilbert, David Floyer. On the phone we have Dave Vellante, Stu Miniman, Ralph Finos, and Neil Raden. And this week we're going to be visiting Dell EMC's Analyst Summit. And we thought we'd take some time today to go deeper into the transition that Dell and EMC have been on in the past few years, touching upon some of the value that they've been creating for customers and addressing some of the things that we think they're going to have to do to continue on the path that they're on and continue to deliver value to the marketplace. Now to look back over the course of the past year, it was about a year ago that the transaction actually closed and in the ensuing year there's been a fair amount of change. We've seen some interesting moves by Dell to bring the companies together, a fair amount of conversation about how bigger is better. And at the most recent VMworld, we saw a lot of great news of VMworld or VM where in particular, working more closely with Amazon and others or AWS and others. So we've seen some very positive things happen in the course of the past year but there are still some crucial questions that are addressed. And to kick us off, Dave Vellante, where are we one year in and what do we expect to hear this week? And foremost, Michael Dell was trying to transform his company. It wasn't happening fast enough. He had to go private. He wanted to be an enterprise player and amazingly he came up, he and Silver Lake came up with $4 billion in cash and they may very well pull off one of the greatest wealth creation trades in the history of the computer industry because for $4 billion, they're getting an asset that's worth, you know, somewhere north of 50 billion and they're paying down the debt that they used to lever that acquisition through cash flow. So like I say, for a pittance of $4 billion, they're gonna turn that into a lot of Dell, tens and tens of billions. If you look at EMC pre the M&A, or sorry, if you look at Dell pre-M&A or pre-merger, their transformation was largely failing. The company was making a lot of acquisitions but it wasn't able to reshape itself fast enough. If you look at EMC pre-merger, it was a powerhouse but it was suffering from this decade long collapse of infrastructure hardware and software pricing which was very much a drag on growth and cash flow so the company was forced to find a white knight which came in the form of Michael Dell. He had this low gross margin company, Dell's public gross margin before when private were in the teens, EMC was in the roughly 60% merged those together and you get a roughly 30% plus gross margin entity. I don't think they're there yet. I think they have a lot of work to do. So a lot of talk about integration and there's some familiarity with these two companies because they had a fairly large OEM deal for better part of a decade in the 90s but culturally it's quite different. Dell's a very metrics driven culture with a lot of financial discipline. EMC's kind of take the hill, do whatever it takes culture and they're in the process of bringing those together and a lot of cuts are taking place. So we wanna understand what impacts those will have to customers. The other point I wanna make is that without VMware in my view anyway, the combination of these companies would not be nearly as interesting. In fact, it would be quite boring. So the core of these companies have faced a lot of challenges but they do have VMware to leverage. I think the challenge that customers really need to think about is how does this company continue to innovate now that they can't really do M&A? If you look at EMC for years, it would spend money in R&D and make incremental improvements to its product lines and fill the gaps with M&A. And there are many, many examples of that. Isilon, Data Domain, Extreme I Own, dozens of others. That kept EMC competitive. So how does Dell continue that string? It spends about four and a half billion a year on R&D and according to Wikibon's figures, that's about 6% of revenue. If you compare that with other companies, the Oracle, Amazon, they're into the 12% Google's mid-teens, Microsoft obviously, to 12, 13% Cisco's up there. EMC itself was spending 12% on R&D. So IBM's only about 6% but remember, IBM's about two-thirds of the company's services. It's not R&D heavy. So Dell has got to cut costs. It's a must. What implications does that have on the service levels that customers have grown to expect and what's the implications on Dell's roadmap? I think we would posit that a lot of the cash cows are gonna get funded in a way that allows them to have a managed decline in that business and it's likely that customers are gonna see reduced roadmap functions going forward. The key challenge that I see for Dell EMC is growth. The strength is really VMware and the leverage of the VMware and their own install base. I think it gives Dell EMC the ability to keep pace with its competitors because it's got kind of the inside baseball there. It's got a little bit of supply chain leverage and of course its sales force and its channel are a definite advantage for this company. But it's got a lot of weaknesses and challenges, complexity of the portfolio. It's got a big debt load that hamstrings its ability to do M&A. I think services is actually a big opportunity for this company. Servicing its large install base. And I think the key threat is cloud and China. I think China with its low cost structure you made a deal like this inevitable. So I come back to the point of Michael Dell's got a cut in order to stay competitive. All right, so one of the, sorry Dave. We hear a lot about sort of innovation strategies which are gonna relate to the edge. EMC, Dell EMC is not enough, an edge strategy and it needs to, it's behind HPE in that regard. One of its major competitors and it's gotta get into the game. And it's gonna be really interesting to see how they are leveraging data to participate in that IoT business. Great summary Dave. So you mentioned that one of the key challenges that virtually every company faces is how do they reposition themselves in a world in which the infrastructure platform of the foundation is going to be more cloud oriented. Stu Miniman, why don't you take us through very quickly where Dell EMC is relative to the cloud? Wow. Yeah, great question Peter. And just to set that up, it's important to talk about one of the key initiatives from Dell and EMC coming together. One of the synergies that Michael Dell has highlighted is really around the move from converged infrastructure to hyper-converged infrastructure. And this is also the foundational layer that Dell EMC uses today for a lot of their cloud solutions. So EMC had done a great job with the first wave of converged infrastructure through partnering with Cisco. They created the V block, which is now VX block, which is now a multi-billion dollar revenue stream. And Dell did a really good job of jumping on early with the hyper-converged infrastructure trend. So I'd written research years ago that not only was it through partnerships but through OEM deals. If you look at most of the solutions that were being sold on the market, the underlying server for them was Dell and that was even before the EMC acquisition. Once they acquired EMC, they really get kind of control, if you will, of the VMware vSAN business, which is a very significant player. They have an OEM relationship with Nutanix who's doing quite well in the space and they put together their own full-stack solution which takes Dell's hardware, the VMware vSAN the go-to-market processes of what used to be VCE and they put together VX rail which is doing quite well from a revenue and a growth standpoint. And the reason I set this all up to talk about cloud is and if you look at Dell's positioning, a lot of their cloud starts at that foundational infrastructure level. They have all of these enterprise hybrid clouds and different solutions that they've been offering for a few years and underneath those, really it is a simplified infrastructure hardware offering. So whether that is the traditional VCE converts infrastructure solutions or these newer hyper-converged infrastructure solutions, that's the base level and then there's software that wraps on top of it. So they've done a decent amount of revenue. The concern I have is, Peter, you laid out, it's very much a software world. We've been talking a lot at Wikibon about the multi-cloud nature of what's going on and while Dell and the Dell family have a very strong position in the on-premises market, that's really their center of strength, is around hardware and customer and the enterprise's data center and the threat is public cloud and multi-cloud and if it centers around hardware and especially when you dig down and say, okay, I wanna sell more servers which is one of the primary drivers that Michael wants to have with this whole family of solutions, how much can you really live across these in various environments? Of course, they have partnerships with Microsoft, there's the VMware partnerships with Amazon which is interesting, how they even partner with the likes of Google and others you can be looked at but from that kind of center of strength is on-premises and therefore they're not really living heavily in the public and multi-cloud world unless you look at Pivotal. So Pivotal's a software and that's where they're gonna say the big pushes but it's these massive shifts of large install base of EMC, Dell and VMware compared to the public cloud that are doing the land grab. So this is where it's really interesting to look at and the announcement that we're interested to look at is how IoT and Edge fits into all of this. So, David Floyer and you Peter we'll research about how. Yeah, we'll get to that. We'll get to that into the Edge, but yeah, we'll get to that in a second Stu. There's a lot of nuance there, so. We'll get to that in a second Stu but one of the things I wanted to mention, David Floyer, is that certainly in the case of Dell they have been a major player in the Intel ecosystem and as we think about what's gonna happen over the course of the next couple of years what's gonna happen with Intel is it gonna continue to dominate and what's that gonna mean for Dell? Sure, Dell's success. I mean what Stu has been talking about is the importance of volume for Dell being a volume player and obviously when they're looking at Intel the PC is a declining market and ARM is doing incredibly well in the mobile and other market places and Dell's success is essentially tied to Intel. So the question to ask is if Intel starts to lose market share to ARM and maybe even IBM, what is the impact on that on Dell? And in particular, what is the impact on the Edge? So if you look at the Edge there are two primary parts. We put forward there are two parts of the Edge. There's the primary data which is coming from the sensors themselves from the cameras and other things like that. So there's the primary Edge and there's the secondary Edge which is after that data has been processed. And if you think about the primary Edge AI and Dell go to the primary Edge because that's where the data is coming in and you want the highest fidelity of data so you want to do the processing as close as possible to that. So you're looking at these examples in autonomous cars. You're seeing it in security cameras but that all of that processing is going to much cheaper chips very, very close to the data itself. What that means is that most of that IoT or could mean is that most of that IoT could go to other vendors other than Intel to go to the ARM vendors. And if you look at that market it's going to be very specialized in the particular industry and the particular problem it's trying to solve. So it's likely that non-IT vendors are going to be in that business and you're likely to be selling to OT and not the IT. So all of those are challenges to Dell in attacking the Edge. They can win the secondary Edge which is the compressed data initially compressing at a thousand to one probably going to a million to one compression of the data coming from the sensors to a much higher value data but much, much smaller amounts both on the compute side and on the storage side. So if that bifurcation happens at the Edge the size of marketplace is going to be very considerably reduced for Intel and Dell has in my view a strategic decision to make of whether they get into being part of that ARM ecosystem for the Edge. There's a strong argument for saying that they would need to do that. And they will be announcing something on Monday I believe or next week and we're going to hear a lot about that but when we think ultimately about the software that Dell and EMC are going to have to think about they're very strong in VMware which is important and there's no question that virtual machines will remain important if not only from an install based standpoint but from in the future how the cloud is organized and arranged and managed. Pivotal also is an interesting play especially as it does a better job of incorporating more of the open source elements that are becoming very attractive to developers. But George, let me ask you a question ultimately about where is Dell in some of these more advanced software worlds? When we think about machine learning when we think about AI these are not strong markets right now or not huge markets right now but they're leading indicators. They're going to provide cues about where the industry is going to go and who's going to get a chance to provide the tooling for them. So what's our stake right now and where Dell is, Dell EMC is relative to some of these technologies? Okay, so that was a good lead in for my take on all the great research David Floyd has done which is when we go through big advances in hardware, typically relative price performance changes between CPU, memory, storage, networking when we see big relative changes between those then there's an opportunity for the software to be re-architected significantly. So in this case, what we've called Unigrid what David's called Unigrid previously is the ability to build scale out extremely high performance clusters to the point where we don't have to bottleneck on shared storage like a sand anymore. In other words, we can treat the private memory for each node as if it were storage, direct attached storage, but it is now so fast in getting between nodes and to the memory in a node that for all intents and purposes it can perform as if you had a shared storage or a small cluster before only now this can scale out to hundreds perhaps thousands of nodes. The significance of that is we are in an era of big data and big analytics and so the issue here is can Dell sort of work with the most advanced software vendors or who are trying to push the envelope to build much larger scale data management software than they've been able to. Now, Dell has a upward sort of an uphill climb to master the cloud vendors. They build their own infrastructure hardware but they've done pools of GPUs for instance to accelerate machine learning training. Dell could work with these data management vendors to get pools of this scale out hardware in the clouds to take advantage of the NoSQL databases, the NewSQL databases. There's an opportunity to leapfrog. What we found out at Oracle at their user conference this week was even though they're building similar hardware, their database is not yet ready to take advantage of it. So there is an opportunity for Dell to do, to start making inroads in the cloud where their generic infrastructure wouldn't. And one more comment on the Edge. Now I know David was saying on the sort of Edge device that's looking more and more like it doesn't have to be Intel compatible but if you go to the Edge gateway, the thing that bridges OT and IT, that's probably going to be their best opportunity on the Edge. The challenge though is it's not clear how easy it will be in a low touch sort of go to market model that Dell is accustomed to because like they discovered in the late 90s it cost $6,000 per year per PC to support and no one believes that number until Intel did a study on itself and verified it. The protocols from all the sensors on the OT side are so horribly complex and legacy oriented that even the big auto manufacturers keep track of the different ones on a spreadsheet. So mapping the IT gateway server to all the OT Edge devices may turn out to be horribly complex for a few years. It's not a question of May, it is going to be horribly complex for the next few years. I don't think there's any question about that. But look, here's what I want to do. I want to ask one more question and I'm going to go do a round table and ask everybody to give me what the opportunity is and what the threat is. But here's before I do that, the one thing we haven't discussed and David, I'm going to throw it over to you is we've looked at the past of, Dell talks a lot about the advantages of its size and the economies of scales that it gets. And Dell's not in the semiconductor business or at least not in a big way. And that's one place where you absolutely do get economies of scale. They got VMware in the system software business, which is an important point. So there may be some economies there. But in manufacturing and assembly, as you said earlier, Dave, that is all under consideration when we think about where the real cost efficiencies are going to be. One of the key places may be in the overall engagement model. The ability to bring a broad portfolio, package it up and make it available to a customer with the appropriate set of services. And I think this is why you said services is still an opportunity. But what does it mean to get to the Dell EMC overall engagement model as Dell finds or looks to find ways to cut costs to continue to pay down its debt and show a better income statement? Let me take the customer view. I mean, I think you're right. This whole end-to-end narrative that you hear from Dell for years you heard it from HP, I don't think it really makes that much of a difference. There is some supply chain leverage, no question. So you can get somewhat cheaper components. You could probably get supplies, which are very tight right now. So there are definitely some tactical advantages for customers, but I think your point is right on. The real leverage is the engagement model. And the interesting thing from, I think our standpoint is that you've got a very high touch EMC direct sales force. And that's got to expand into the channel. Now EMC's done a pretty good job with the channel over the last half a decade. Dell doesn't have as good a reputation there. Its channel partners are many more, but perhaps not as sophisticated. So I think one of the things to watch is the channel transformation and how Dell EMC brings its services and its packages to the market. I think that's very, very important for customers in terms of reducing a lot of the complexity in the Dell EMC portfolio, which just doubled in complexity. So I think that is something that is gonna be a critical indicator. It's an opportunity, and at the same time, if they blow it, it's a big threat to this organization. I think it's one of the most important things, especially as you pointed out in the context of cost cutting. If they lose sight of the importance of the customer, they could hit some bumps in the road and open it up for competition to come in and swoop some of their business. I don't think they will. I think Michael Dell is very focused on the customer and EMC's culture has always been that way. So I would bet on them succeeding there, but it's not trivial task. Yeah, I would agree with you. In fact, one of those statements that we heard from Michael Dell and other executives at Dell EMC at VMworld over and over and over again on theCUBE and elsewhere, was this notion of open with an opinion. And in many respects, the opinion is not just something that they say, it's something that they do through their packaging and how they put their technologies into the marketplace. Okay, guys, rapid fire, really, really, really short answers. Let's start with the threats and then we'll close with the positive note on the strengths. David Floyer, really quick, biggest threat that we're looking for, looking at next week. The biggest threat is the evolution of ARM processes and if they keep to an Intel-only strategy, that to me is their biggest threat. Those could offer a competition in both the mobile, increasing the percentage of the mobile and also in the IoT and other processor areas. All right, George Gilbert, biggest threat. Okay, two, summarizing the comments I made before. The comments I made before, one, they may not be able to get the cloud vendors to adopt pools of their scale out infrastructure because the software companies may not be ready to take advantage of it yet. So that's cloud side. Nope. You just get one. Dave Vellante. Interest rates. Excellent. Stu Miniman. Stu Miniman. Software. Okay. Come on, Stu, give me an area. Dell's a hardware company. Everything George said, there's no way the cloud guys are gonna adopt Dell EMC's infrastructure gear. This is a software play. Dell's been cutting their software assets and I'm really worried that I'm gonna see a edge box that doesn't have the intelligence that they need to put to the intelligence that they say that they're gonna put it. So specifically the software that's capable of running the edge centers, so to speak. Rolfinos. Yeah, I think the hardware raised to the bottom, that's the big part of their business and I think that's a challenge that we're looking at going head on head with HPE especially. Neil Raiden. Neil Raiden. Private managed cloud. Or what we call true private cloud. Which goes back to what Stu said, related to the software and whether or not it ends up being manageable. Okay, threats. Threats. David Floyer. David Floyer. I mean opportunities, strengths. Opportunities, yes. The opportunity is being by far the biggest IT place out there and the opportunity to suck up other customers inside that. That's a big opportunity that you need. They can continue to grow by acquisition. Even companies the size of IBM might be future opportunities. George Gilbert. On the opposite side of what I said earlier, they really could work with the data management vendors because we really do need scale out infrastructure and the cloud vendors so far have not specced any or built any. And at the same time, they could. Just one George. Stu Miniman. Dave Vellante. Dave Vellante. I would say one of the biggest opportunities is 500,000 VMware customers. They've got the server piece, the networking piece kind of and storage and combine that with their services prowess. I think it's a huge opportunity for them. Stu, are you there? Stu, are you there? Ralph Finoz. Oh, sorry, I was in the middle of it. Okay, there you go. Go ahead, Stu. It was Dave Stallmine, but it's not the VMware install base. It's really the Dell, the Dell EMC install base and those customers that they can continue moving along that journey. Ralph Finoz. Ralph Finoz. Yeah, highly successful software platform that's gonna be great. Neil Raiden. Neil Raiden. Too big to fail. All right, I'm gonna give you my bottom lines here then. So this week we discussed Dell EMC and our expectations for the Analyst Summit and our observations on what Dell has to say. But very quickly, we observed that Dell EMC is a financial play that's likely to make a number of people a lot of money, which, by the way, has cultural implications because that has to be spread around Dell EMC to the employee base. Otherwise, some of the challenges associated with cost cutting on the horizon may be something of an issue. So the whole cultural challenges faced by this merger are not insignificant, even as the financial engineering that's going on seems to be going quite well. Our observation is that the cloud world ultimately is being driven by software and the ability to do software with the other observation that the traditional hardware plays tied back to Intel will by themselves not be enough to guarantee success in the multitude of different cloud options that will become available or opportunities that will become available to a wide array of companies. We do believe that true private cloud will remain crucially important and we expect that Dell EMC will be a major player there. But we are concerned about how Dell's going to evolve as a, or Dell EMC's going to evolve as a player at the edge and the degree to which they will be able to enhance their strategy by extending relationships to other sources of hardware and components and technology, including crucially the technologies associated with analytics. We went through a range of different threats. If we identify two that are especially interesting, one, interest rates. If the interest rates go up, making Dell's debt more expensive, that's going to lead to some strategic changes. The second one, software. This is a software play. Dell has to demonstrate that it can, through its 6% R and D, generate a platform that's capable of fully automated or increasing the degree to which Dell EMC technologies can be automated. In many conversations we've had with CIOs, they've been very clear. One of the key criteria for the future choices of suppliers will be the degree to which that supplier fits into their automation strategy. Dell's got a lot of work to do there. On the big opportunity side, the number one from most of us has been VMware and the VMware installed base. Huge opportunity that presents a pathway for a lot of customers to get to the cloud that cannot be discounted. The second opportunity that we think is very important that I'll put out there is that Dell still has a lot, Dell EMC still has a lot of customers with a lot of questions about how digital transformation is going to work. And if Dell EMC can establish itself as a thought leader in the relationship between business, digital business and technology and bring the right technology set including software but also packaging of other technologies to those customers in a true private cloud format, then Dell has the potential to bias the marketplace to their platform even as the marketplace chooses an increasingly rich set of mainly SaaS but public cloud options. Thanks very much. And we look forward to speaking with you next week on the Wikibon weekly research meeting here on theCUBE.