Earnings

When Dell announced Q2 financial results on Aug. 28, 2008, we reported continued conservatism in IT spending in the U.S., which had extended into Western Europe and several countries in Asia. The company is seeing further softening in global end-user demand in the current quarter and we felt it was important to share that with investors.

Dell will continue to execute against its five growth priorities of global consumer, small and medium business, enterprise, notebooks and emerging countries. The company expects to incur costs as it realigns its business to improve competitiveness, reduce headcount and invest in infrastructure and acquisitions, but is committed to working aggressively on cost initiatives that will benefit its P&L over time with improved growth, profitability and cash flow. The company grew unit shipments faster than the industry in the first half of calendar 2008 and expects to grow faster than the industry for the full year. 

In addition, Dell Senior Vice President & CFO, Brian T. Gladden, will address investors at the Bank of America Conference in San Francisco today, Tuesday, September 16.  Brian will talk about the company's strategic priorities and then take questions from the audience.  Brian's remarks will be Webcast live at 1:00 p.m. CT, and then be accessible via replay online at  http://www.dell.com/investor. I encourage you to listen in. In addition, the company will report third quarter fiscal year 2009 results Nov. 20, 2008, after the close of market.

All comparisons are year-over-year unless otherwise noted. Industry growth rates exclude Dell.

We announced Q2 results today.  Revenue was up 11% to $16.4 billion on 19% unit growth.  EPS were down 6% to $0.31 per share and cash from operations was $1.1 billion and $3.4 billion on a trailing four quarters basis.  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. 

This quarter we enhanced our competitiveness by introducing a more robust enterprise solutions portfolio, a new commercial notebook line and expanding our product portfolio in consumer, including our new Studio brand of desktops and notebooks.  Again this quarter we saw share gains in all major product categories and regions including rapid growth in BRIC and emerging countries. Global Consumer revenues grew 28% on unit growth of 53%, and BRIC revenues were up 46% on unit growth of 41%.

Our gross margins were 17.2% of revenue this quarter.  In EMEA we took strategic pricing actions ahead of cost improvements.  In EMEA we also increased the deferral of service revenue which was driven by some changes in how we market our service offerings in the region.  While this had a negative impact on reported profit in the quarter, it was neutral to cash and the revenue and profit will be recognized in future periods.  Gross margins were also impacted by the retail mix shift in our consumer business as we continue to expand our global footprint.   

We also saw an improvement in opex of 70 basis points sequentially and 160 basis points year-over-year, reflecting some of the progress we've made towards our $3 billion in cost initiatives.

We are balancing growth & profitability -- optimizing for growth, profit and cash flow over time.  Re-igniting demand can be an imprecise process, we believe we are building momentum and cost improvements should be more evident in the back half of this year -- which is what we said in April.  Our strategy to grow is fueled by confidence in our ability to harvest the cost improvements over the long-term. This three year time horizon allows us to take a "long view" of our business and maximize growth and profitability in that time frame. 

There is a clear line of sight to $3B of annualized cost savings.  We are targeting three key areas of total cost; in order of size they are:  product cost & materials, opex, and manufacturing and logistics.  We have detailed plans for savings, actions, and executive ownership with visibility out to the full three years, including bi-weekly interlock meetings now chaired by our CFO, Brian Gladden.  And, we feel that we have sufficient room to improve operating income as we improve gross margins and opex. 

Finally, scale is important.  Over the next four years global IT spending will approach $1.5 trillion.  Scale here is important because $1 of hardware spend pulls about $2 in additional spending -- this is one reason why unit growth matters for Dell.  In this regard, we are pleased with our broad based growth in the global commercial business.  In the past year, this business generated nearly $53 billion in revenue and $3.7 billion in operating income.  And we have been the #1 provider of commercial systems worldwide for eight years running. 

Beyond delivering hardware, today we are partnering with customers to solve pressing issues and deliver more end-to-end solutions.  Our sales, onsite systems engineering, high-availability database, and ProSupport service teams are helping customers manage everything from starting up and consolidating data centers to delivering flexible computing platforms running off of virtualized servers and storage. 

This growth in our enterprise portfolio demonstrates that customers are increasingly confident in our ability to design and support complete solutions.  As a result, they are expressing interest in a deeper direct relationship -- one that we hope to foster for years to come.

All comparisons are year-over-year unless otherwise noted. Industry growth rates exclude Dell.

We announced Q1 results today.  Revenue was up 9% to $16.1 billion on 22% unit growth.  EPS were up 12% to $0.38 per share and cash from operations was $143 million and $4.2 billion on a trailing four quarters basis.  We 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. 

A year ago we made a conscious decision to reignite growth, and our results this quarter demonstrate we're making progress.  For the first time in several quarters, Dell is growing faster than the industry in all major product categories and regions.  In the U.S. we grew 16% vs. flat industry growth.  In APJ we grew 43% vs. industry growth of 14%.  BRIC revenues were up 58% on a 73% increase in units.  And, Global Consumer revenues were up 20% and units were up 47% as we continue to move into retail.  These results reflect the strength of the Dell brand worldwide, and our ability to deliver the products customers want in the regions where they live and the places where they shop.

These are solid growth numbers in areas that matter and they are important first steps to driving competitiveness in our business.  Revenues and share are growing, enabling us to better scale operating expenses and deliver sustained earnings performance.  A year ago we made the decision to eliminate redundancies and better align our operating expenses, and last quarter we made a commitment to reduce total costs by $3 billion.  Here too we're making headway.  Our operating expenses are down 7% sequentially, headcount is down 7,000 year-over-year not including acquisitions, and profitability in Global Consumer improved significantly.  These are signs of tangible progress and we're confident this trend will continue. 

This quarter, you will also notice we changed our reporting structure to completely break out Global Consumer from each one of the regions.  We are now reporting four operating segments, Americas Commercial, EMEA Commercial, APJ Commercial, and Global Consumer and we are providing five quarters of historical data for each segment.

Finally, on the earnings call today we will be introducing our new CFO, Brian Gladden, to the broader investment community.  A 20 year GE veteran and formerly CEO of SABIC Innovative Plastics, we're happy to have Brian join our team.

All comparisons are year-over-year unless otherwise noted.

Last Thursday, we announced our fiscal fourth quarter 2008 results; the replay of our conference call and a copy of our transcript can be found on the investor relations web site.  For the quarter we posted revenue growth of 10% on $16 billion in sales and 19% unit growth.  Operating income was $776M, or 4.9%.  EPS was $0.31 per share and cash flow from operations was $1.2 billion.

For the full year, we grew revenue 6% to $61.1 billion, generated $3.4 billion of operating income, increased EPS 15% to $1.31 per share, and generated $3.9 billion in cash flow from operations.  Cash flow from operations grew faster than both net and operating income. 

During the call we discussed our results, citing both regional and product highlights.  Then we placed particular emphasis on two areas - cost and growth initiatives.  Let me cover a few of the questions we are getting from investors.  Two key themes emerged.  They were costs and the pace of our progress against our key growth initiatives. 

Our expenses have grown faster than revenue and we are out of cost position relative to peers in some product areas, price points and regions.  This was the result of our products and supply chain not being optimized to most efficiently provide customers what they value.  As stated, we have a multi-billion dollar opportunity to reduce costs over the next several years.   As described during our earnings call, we're working on multiple fronts to become more competitive.  We are recommitted to reducing our headcount, but headcount in and of itself is not the answer either.  Everything we do is being scrutinized.  This includes our supply chain, and at a deeper level it includes how we design our products.  You will see more activity towards improving our competitiveness in Q1, and this process will continue throughout the rest of the year.

Second, Dell is taking action against several different priorities in parallel.  They are not meant to be sequential steps, but are step function changes to reignite our growth.  I hope you realize that we're building for the long-term.  Sometimes you need to make decisions for the short term that can adversely impact performance, but are absolutely the right for the long-term - as a result some of our actions won't be linear.  There have been a lot of moving parts as we integrate several acquisitions, work towards improving our sales force effectiveness and realign the rest of our organization against our key priorities.   Some of these changes take time, but the foundation is there and the changes are showing improvement.

Examine the BRIC countries where our revenue grew faster than the industry up 36%, and units were up 50%.  And look at retail where we had no presence a year ago; we have already sold one million units worldwide and are at a one billion dollar revenue run rate.  And in notebooks we won 72% of the product awards applied for in this category.  We have an amazing brand that we are just now beginning to leverage in retail, globally or through the channel. 

Michael said, "The acceleration in our growth is just a first step as we execute against the five priorities. We have a lot more to do to restore our competitiveness so that we can deliver long-term profitable growth."  There's more to come, and we look forward to updating you on all our priorities at our upcoming analyst meeting and hope to see you then. 

Tonight, we announced the results from our fiscal third quarter and hosted our first conference call in over a year (a replay of the call and downloads of the financials & presentation can be found here).  Since wrapping up our investigation, this was our first opportunity to host an earnings call to discuss not only our most recent quarter's results, but the long-term strategy of our company

Before getting into some of the details around our earnings, and consistent with this blog's purpose, I wanted to highlight the value and importance of listening to earnings calls - not just our own, but of any company's.  These calls provide investors and analysts (including individual shareholders to institutional investors, and sell-side brokerage analysts) one of the best ways to keep abreast of a company's performance and strategic priorities.   You are welcome to join ours or listen to the replay (here).

As for our performance in the third quarter, the key takeaways were that we improved revenues, units, and profitability. We saw strength in our mobility products and continued to expand our business in international markets - particularly in Europe and Asia. We achieved $766 million in net income, generated roughly $1 billion in cash from operations, and drove our cash and investments balance up to $14.6 billion. This in particular is important because when we talk about creating value for our shareholders, cash generation is the ultimate litmus test, and essentially our goal is to maximize cash flows from operations over the long-term

During the call, Michael Dell, Don Carty and Steve Schuckenbrock discussed our efforts and progress towards improving our current business, re-igniting growth, and building for the future. Here, we touched upon our new executive leadership team and global business groups, new XPS products and small business product line, and factory openings in Latin America and Eastern Europe. And with our recent acquisitions of Zing, Silverback, ASAP, and our planned acquisitions of EqualLogic and Everdream, you are seeing us expand our portfolio of products and services and position ourselves for long-term growth.

Each specific business priority is part of the larger picture of business priorities that are being driven by our belief that information technology can be simplified and that we can drive long term shareholder value by focusing on growth in the consumer market, emerging countries, notebooks, solutions for the enterprise, and products and services for small to medium sized businesses. Our goal is to grow faster than the addressable opportunity in these areas, while keeping the company focused on driving strong cash flows from operations. These are more than ample growth opportunities for growth; the key will be to prioritize and execute.

We feel 3Q's results highlight the progress we're making towards our strategic priorities and building for the future. We're making good progress towards these goals, but there's more to be done To be sure, the path of progress won't be completely linear, but that happens sometimes when you're building and investing for the future.