Growth Priorities

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.

Thanks for joining us on Dell Shares.  I recently sat down with Brian Gladden, Senior Vice President and CFO, to discuss our recent announced actions to further globalize our operations around four key customer segments including large enterprise, public, and small and medium businesses. In this conversation, I ask Brian about what this new organization means for Dell, its customers, and why now was the right time to make this change.  We also touch base on the impact of this announcement on our financial statements and reporting structure and how this affects our broader cost savings initiatives. 

I invite you to watch the v-log.  We will respond to your questions and comments posted on this blog site as well as via email and over the phone. We look forward to hearing from you!  Thanks!

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.
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You had strong Q3 operating results in a challenging environment. What do you see as the highlights?
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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.
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What’s the strategic approach behind those results?
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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.
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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.
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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.
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How were you able to lower operating expenses so much in the quarter?
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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.
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What was different about cash flow in Q3 and how should we think about it going forward?
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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.

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You’ve talked a lot about growth in emerging countries. How did you do in that area in Q3?
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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.

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Can you continue to grow faster than the industry and improve your share position?
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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.

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What are Dell customers telling you about their plans for buying technology in the current economic environment?
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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.

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Commercial customers account for the majority of Dell’s business. How are their needs changing and what is Dell doing in response?
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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.

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Is the make-up of your commercial business changing?
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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.
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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.

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Your Global Consumer business saw significant improvement. What was behind that?
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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. 
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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.

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What is Dell’s plan for issuing additional debt to cover operating costs?
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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.

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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?
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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.

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.