Earnings

We are scheduled to report our Fiscal 2010 first quarter earnings on May 28, 2009.  When you look at our financial tables you will notice a few key changes to how we report some of the information and I describe those changes below.  Our financial tables will also include our Fiscal 2009 results, by quarter, restated for these changes so that you can easily compare our year-over-year results.  As always, our IR team is here to answer your questions - so after we report our first quarter earnings we'd be happy to answer any questions you have about these changes.

Global Customer Segments

On December 31, 2008 we announced that to serve business customers with faster innovation and greater responsiveness we would change the organization of our commercial business from three geographic segments (Americas, Asia-Pacific and Japan and EMEA) to three global customer segments: Large Enterprise, Public and Small and Medium Business.  Our Consumer business, which was globalized in 2008, would remain unchanged.  In our first quarter, we completed our reorganization and changed our internal reporting to correspond to how we run our business.  As a result, we will now report revenue and operating income for four global customer segments.

Service and Product Revenue

There will be two primary changes to the reporting of our product and service revenue. One will affect our profit and loss (P&L) presentation and the other will change our supplemental line of business financial information for enhanced services and products.

• First, the Securities and Exchange Commission Rules (SEC) require enhanced service revenue and cost of goods sold (COGS) associated with those revenues to be presented separately on the P&L once that revenue reaches 10% of a company's total revenue. As a result of our strategy to diversify our revenue and profit streams we have hit that percentage and will now break out the services revenue and COGS. With the change in our P&L presentation we will classify revenue and COGS related to software with post contract customer support in the same line item as enhanced services in our P&L.
• Second, as a part of our review of our services disclosure we identified certain offerings that had previously been reported in services revenue that are substantially more similar to our standard warranty offerings, or "attached to the box" and therefore that revenue is more appropriately classified as product revenue and will be included in the product revenue in the future.

Organizational Effectiveness Expenses (OE)

Global customer segment operating income will no longer reflect the impact of OE expenses which include items such as severance and facility closure expenses. 

Compensation

Stock compensation expense has historically been excluded from the operating income of our segment disclosure.  In FY 2010 we have shifted a portion of our broad based long-term performance compensation from equity to cash.  The cash portion of the long-term performance compensation will be included along with stock compensation and excluded from segment operating income.  

I recently sat down with Jeff Clarke, Vice Chairman, Technology and Operations, to discuss a range of topics that have received investor attention including:

• Declining Client ASPs in the commercial customer business
• Desktop and mobility virtualization
• Progress on our $4 billion cost initiative
• Optimization of our global manufacturing and logistics network
• What we are going to do with the savings we realize from some of these initiatives

As always, I look forward to your questions and comments!

Brian participated in a fireside chat at the Morgan Stanley Annual Technology Conference yesterday.  You can sign up and be notified in advance via email of these events.  He started off by providing a brief overview of our latest quarterly and fiscal year results and then did some Q&A. In his message to investors, Brian emphasized profitability and liquidity as the two foremost priorities for us in this current economic environment and expressed confidence in our ability to extract further cost improvements in the business and emerge in a stronger competitive position.  As a short recap, I've included a few questions and answers Brian took during the meeting. I encourage you listen to the full webcast by clicking here.  As always, please provide your comments on Dell Shares.

1.       How would you characterize the current demand environment?

• The demand environment continues to be pretty tough year to date and we are seeing a lot of customers deferring purchase decisions due to the economy.
• We expect broad-based challenging environment to continue as budgets are likely to remain pressured at least through the first half of 2009.
• Our demand in Q4 was more linear than Q3 but the trends late in Q4 and in early Q1 are still negative.
• Do not know what magnitude of slowdown will be - but we will be nimble enough to rapidly adjust to the realities of the demand environment.

2.       How are you going to maintain gross margins in this environment?

• We have made significant progress in taking cost out of the box but there's more work to be done.
• We continue to make progress on the price and sell-to-value side of the equation as we introduce new products and will place an emphasis on smart pricing of these products.
• Progress here has provided a buffer to declining volumes late in the year and enabled us to remain competitive and deliver stable gross margins.
• We are confident in our ability to extract cost improvements even in a slowing demand environment and emerge in a stronger competitive position.

3.       Why haven't you made more acquisitions?

• Historically, our focus has been on organic growth... that model has worked for us successfully in the past.
• Having said that, we have made 9 acquisitions in the last year and a half and will continue to look for more opportunities that make strategic sense.
• We continue to look for opportunities in enterprise products, software and services, but it take two willing parties to make an acquisition work.
• In this environment, there's not much M&A activity going on because companies are not willing to sell at these low valuations.

4.       Can you comment a little bit on how you are managing working capital at Dell?

• Liquidity is #1 priority for us in this environment.
• During this period of declining revenue growth, we are aggressively managing our cash conversion cycle.
• For inventory, we have reduced our strategic buys, which also helps us benefit from cost deflation.
• Our payables have been impacted by the demand environment but we do not expect any significant structural changes.
• Given the current demand environment we would like to maintain our cash conversion cycle, and we continue to believe there are opportunities to improve our cash conversion cycle over time.

5.       Where should we expect to see Dell 2 years from now?

• We will take advantage of this downturn to reshape our revenue portfolio and better position us competitively.
• Over time, our goal is to move the weight of our portfolio to higher margin offerings and recurring revenue streams.
• We will accomplish this by migrating to a solutions-driven business with an increased mix of enterprise products, services and bundled solutions.
• We will also make strategic acquisitions as necessary that fit our model.

Dell announced fourth-quarter fiscal-year 2009 financial results on Feb. 26. Brian Gladden, Senior Vice President and CFO, discusses the results and the company's outlook. Please review earnings materials on Dell Investor Relations Q4 events page.  All comparisons are year-over-year unless otherwise noted.

We announced Q4 results today.  Revenue was down 16% to $13.4 billion.  EPS was $0.18 per share and cash from operations was $729 million.  For the full year fiscal 2009, revenue was $61.1B and EPS was $1.25. Cash flow from operations was $1.9B, and we completed the year with $9.5B in cash and investments.

Each quarter we evolve the format here on Dell Shares to provide you with a little more insight into what is going on in our business.   This quarter, instead of writing our traditional earnings blog, I am pleased to have Brian Gladden join us on Dell Shares to provide his view on the fourth quarter, the economy, industry demand and the company's outlook. 

 Also, we strongly encourage investors to read the full press release and earnings presentation; and listen to a replay of our conference call that can be found on the investor relations web site after the earnings call.   As always, we encourage you to ask questions or leave comments on Dell Shares.

Chairman and CEO Michael Dell and CFO Brian Gladden
Discuss Dell Q3 Fiscal Year 2009 Performance

Dell announced third-quarter fiscal-year 2009 financial results on Nov. 20.  Michael Dell, chairman and CEO, and Brian Gladden, discuss the results and the company’s outlook. You may also listen to the earnings conference call and view the earnings presentation here.
__

You had strong Q3 operating results in a challenging environment. What do you see as the highlights?
__
Brian Gladden: I like how we achieved the results. We’ve got more to do, but showed discipline in further improving competitiveness and capturing profitable growth, while being more focused than ever on what customers need. We produced our best operating income in dollar terms in 11 quarters. Dell’s business model lets us see trends in the economy and IT and react to them faster. That was evident in our improved profitability: earnings per share increased 9 percent to 37 cents. Expenses were down to 12.1 percent of revenue—and down more than $200 million from Q3 last year. We remain determined to drive balanced performance in growth and profitability over time.
__

What’s the strategic approach behind those results?
__
Michael Dell: First, we’re focusing on expense management and regaining cost leadership. We made progress in the quarter on operating expenses and product costs consistent with the plan we outlined in April. We are on a path that will yield significant overall cost savings—both an advantaged cost structure in our direct business, which is 75 percent of our revenue, and a competitive structure in our channel business. Enhanced efficiency in our model is allowing us to deliver value for our customers and improved profitability for Dell.
__
Second, we’re expanding our presence in the enterprise. Current conditions are driving more customers to look for great technology that’s cost effective. That’s our core strength. In addition, CIOs are more focused on driving IT productivity and simplification, and they like the idea that they can simplify and save money. We are in a great position to help them with virtualization and remote infrastructure management, and the enhancements we’re making to our enterprise solutions portfolio are addressing these needs.
__
Third, progress in Global Consumer has been fueled by a first wave of product innovation and cost-structure improvements. As these enhancements roll to our small-and-medium-business and emerging-country customers, we have a big, ongoing opportunity to grow our direct business as well as our value-added reseller and retail channels.
__

How were you able to lower operating expenses so much in the quarter?
__
BG: By continuing to take unnecessary costs out of our operations and products, something we’ve been doing for several quarters. For example, since the second quarter of last year we reduced global employment by close to 11,600, net of acquisitions. We’re on track to achieve our goal of $3 billion in annualized cost reductions by 2011.
__

What was different about cash flow in Q3 and how should we think about it going forward?
__
BG: We have a very strong balance sheet with $8.9 billion in cash and equivalents, and over the last three quarters generated $1.2 billion in cash. Cash flow from operations was negative $86 million. Simply explained, while our receivables were down in the quarter with the lower revenue, our payables were down significantly more, as we reduced spending in the second half of the quarter. When our shipments, production and procurement return to a more typical relationship, we expect a reversal of this cash dynamic. Our cash conversion cycle ended at negative 25 days – a decline of four days from last quarter.

__
You’ve talked a lot about growth in emerging countries. How did you do in that area in Q3?
__
MD: Very well. In the fastest-growing countries and regions we continued to expand at a multiple of the industry rate. We believe we gained significant share in the BRIC countries—Brazil, Russia, India and China—and outperformed the industry across Asia-Pacific and Japan. Our BRIC business is up 20 percent versus last year to more than 9 percent of revenue. In fact, our total revenue from those four countries alone would rank among the Fortune 500 companies.

__
Can you continue to grow faster than the industry and improve your share position?
__
BG: Yes. While we have grown faster than the industry so far this year, we have seen a dramatic change in demand worldwide continuing through the third quarter. In this environment, we will carefully select growth opportunities with a preference toward protecting profitability. This will continue, although there will be products, segments and countries where we selectively choose to grow at a multiple to the industry.

__
What are Dell customers telling you about their plans for buying technology in the current economic environment?
__
MD: The range of the global economic challenge is obvious to everyone. Customers of all types are still buying technology, but they’re doing so at slower rates, and want to save money when they’re buying and using IT. Our core strength is providing great technology that’s powerful, reliable, flexible and cost effective. We’ve been a primary driver on the price-performance value curve for years and will continue to be. No company is better positioned than Dell to respond to customer needs.

__
Commercial customers account for the majority of Dell’s business. How are their needs changing and what is Dell doing in response?
__
MD: Their IT agendas have changed. They want to increase productivity and get more value from their IT spending. And they want us to help them get more out of their current IT infrastructures. Foremost in their minds is virtualizing their server, blade and storage infrastructure to improve use and reduce energy costs. We’re helping them do that. We’re also helping them lower costs and increase productivity by managing IT through the cloud and remote infrastructure management tools.

__

Is the make-up of your commercial business changing?
__
BG: Yes. Over the last four quarters the revenue and profit mix of our commercial business has improved significantly, with more than a third of our revenue now coming from higher-margin products like servers, storage, services and software and peripherals. As I’ve said, we took a measured and balanced approach this quarter to growth and profitability. As a result, operating income margins increased to more than 8 percent of revenue.
__
MD: And our commercial products are our strongest ever. During the quarter we launched the new E-series of Latitude notebooks and new Dell Precision notebooks. We refreshed our OptiPlex desktops with four new models. In enterprise computing, our portfolio of scalable products and services is terrific. We now cover nearly 90 percent of customer server requirements, and our plans for next year will get us to 95 percent. We expanded our storage portfolio with “pay as you grow” EqualLogic and PowerVault storage products. And in services, our increasing cloud and remote infrastructure-management services are addressing the biggest customer pain points and two-thirds of the $1.2 trillion IT industry.

__
Your Global Consumer business saw significant improvement. What was behind that?
__
BG: Our consumer revenue was up 10 percent in the quarter on a 32-percent increase in product shipments. In addition to our direct business online and on the phone, we’ve made our consumer products available in almost 20,000 retail outlets globally. Internally, we reduced our consumer operating-expense dollars by 24 percent from a year ago, which helped improve profitability along with lower product and component costs. 
__
MD: We have our broadest, most exciting consumer product line-up ever – in just about any color or configuration you could ask for. Consumers want style and performance, along with mobility, connectivity, and value, and that’s what we’re delivering. We’ve regained feature and design leadership in many categories, and customers are responding. You’re seeing that in products like the Inspiron Mini, the Studio Hybrid desktop, and the Studio 15. Our consumer products collected 41 awards in the third quarter alone. Never has there been a better time to get more technology for the money: built just for you or ready to take home today.

__
What is Dell’s plan for issuing additional debt to cover operating costs?
__
BG: We’re very comfortable with our financial position. We have access to traditional short- and long-term funding. We have an established commercial paper capacity of $1.5 billion with $253 million outstanding at quarter-end. And we issued $1.5 billion of long-term debt in the first quarter of this year. We filed a new debt shelf registration earlier this month that we can use for future debt, as needed, as capital market conditions improve.

__
Given volatility in the credit market, why did you decide to keep Dell Financial Services and what does it contribute to Dell’s business results?
__
BG: A very thorough strategic assessment of DFS clearly showed that the best option for our customers and Dell was to continue to own that business. DFS is a strategic asset for Dell and drives incremental sales and margin. It is profitable for us in the current economic and credit cycle and we will continue to effectively manage credit and funding risk. We intend to invest in DFS technology, people and product capability.