Growth Priorities

Dell announced first-quarter fiscal-year 2010 financial results on May 28^th. Brian Gladden, Senior Vice President and CFO, discusses the results and the company's outlook. Please review earnings materials on the Dell Investor Relations Q1 events page.  All comparisons are year-over-year unless otherwise noted.

We announced Q1 results today.  Revenue was down 23% to $12.3 billion.  EPS was $0.15 per share and cash from operations was $761 million.     

I am pleased to have Brian Gladden join us on Dell Shares to provide his view on the first 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 our conference call that can be found on the investor relations web site.   As always, we encourage you to ask questions or leave comments on Dell Shares.

The netbook is a product category that has received considerable attention over the past several months from the media and investment community, so I wanted to share Dell's point of view on it.  We see this relatively new product as another category of the notebook market and one that is growing rapidly.  In Dell's case, the Inspiron Mini line is an excellent way for us to continue down the path of expanding the number of product platforms designed around specific customer needs and cost points.  As for the opportunity, Wall Street analysts estimate netbooks may reach 20 to 30 million units in calendar 2009 while IDC expects total notebook units for 2009 to be approximately 148 million on a worldwide basis.  Thus, netbooks are certainly a meaningful and growing part of the overall notebook market with the potential to represent 13 to 20% of total notebook units shipped worldwide this year.  Revenue and profit share will be lower given the lower average selling prices for netbooks.

 Dell entered this category last fall and currently offers three products in the "netbook" segment in 9, 10 and 12-inch screen sizes.  Consistent with Dell's overall consumer approach to differentiate based on industrial design as well as specific functionality in each price point, the Mini line-up is stylish and packed with solid mobility features including integrated 3G mobile broadband connectivity.  Dell has also established key cellular broadband partnerships in North America and Western Europe and recently announced a deal in which China Mobile will offer 3G broadband on the Mini 10 inch netbook in China.

 We view netbooks as incremental to conventional notebooks with some differences in usage by mature and emerging geographies.  In mature markets, we believe netbooks will principally function as secondary devices.  People looking for basic email, web access and social networking functions may favor the small screen sizes, keyboards and lower power footprint.  They also serve as an excellent travel companion device for those who are highly mobile and looking for a smaller form factor on the road.  However, a traditional notebook is generally a better option for consumers looking to perform functions such as photo and video editing or use productivity software applications such as Office.   In emerging markets we believe that many first-time and value conscious users may be attracted to netbooks as they offer basic functionality at an attractive price point.  Netbook usage may find its way into other areas besides consumer, such as schools and education.  Though this may act to reduce overall hardware average selling prices, it also presents an excellent opportunity to increase the addressable industry opportunity and raise margins through attached services, software, etc.

 Overall, there are different usage models and applications that will drive people towards different sized devices and technologies.  This is a quickly evolving space that will see the introduction of more powerful and more efficient processors from the likes of Intel, so we will watch this play out.  Regardless of where these technology improvements take us, Dell's direct relationships with its customers, allow us to deliver what customers want and take them where they want to go with the proper features, whether it is mobile broadband, keyboard configuration, screen size, etc.  The growth in this space looks to outpace that of traditional notebooks over the next several years, and Dell will be a part of that growth.

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!

Today, Dell announced it will begin using Ingram Micro Inc. and Tech Data Corporation in the U.S. and Canada to sell Dell products to small and medium businesses.  In addition to retail, system integrators and value added resellers, customers now have the choice to use two distributors with whom many partners are already engaged.  The initial offering will consist of pre-configured Dell systems which will be competitively priced with similar products available directly from Dell.  Currently, these systems include Dell Vostro desktop and notebook configurations in addition to select Dell peripherals. There are plans to broaden the product availability in the future. 

So why are we doing this?  In response to partner feedback, Dell is expanding its partner program by providing multiple routes-to-market:  direct, PartnerDirect, and distribution. This change offers another solution for partners that have immediate business needs.  Customers seeking specific technology requirements will still have the opportunity to take advantage of Dell's build-to-order product line through its PartnerDirect program.    This partner expansion is another demonstration of Dell's ability to be fast and flexible and continuing to provide value to our customers.

How does this fit into our strategy?  Dell's growth strategy involves reaching more customers worldwide, including expanding our relationships with value-added resellers and distributors.  We are committed to create efficient solutions and product leadership across all of our businesses.  In May 2007, Dell announced the company would explore new ways to reach customers.  This led to the inception of the PartnerDirect program, which has grown to a global business with more than 35,000 registered partners worldwide.

Our current indirect business generates more than $12 billion of Dell's run-rate annual revenue.  We expect this new route-to-distribution to provide another vehicle where customers can choose Dell as their solution.  In February, we reported on the growth of this PartnerDirect program.  We've seen a lot of progress in our PartnerDirect program and will continue to pursue opportunities that create valuable customer solutions and offer long-term growth.  For more information on today's announcement, check out Greg Davis' blog and vlog, where he discusses PartnerDirect and our new distributor partnership. 

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.