Notebooks

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.

Today we introduced our new, business Latitude E-Series notebook line.  This is the largest product rollout in our history.  You may remember that one of our five strategic priorities is focused on notebooks.  This launch is another milestone in notebooks as we move further down the path of expanding our number of products, designing around specific cost points and customer needs, while simplifying the overall experience for our customers. 

As background, Dell has long been a leader in the commercial notebook space, currently holding 32.9% and 19.2% share positions respectively in the US and worldwide according to IDC.  Overall our corporate business is a $52 billion business based on the past four quarters and Dell has sold over 50 million Latitude notebooks since the product's introduction in 1994.  The importance of our notebook priority is underscored by a number of trends.  Notebooks are expected to outsell desktops by seven times during the course of 2008, growing to a $137 billion opportunity by year-end.  This increase will be fueled by explosive growth in the emerging countries, where Brazil, Russia and China all grew at over two times the industry in the past year.  In fact, many new users are simply skipping desktops and adopting notebooks as their first PC. 

Size isn't the only important dynamic defining the notebook industry, as notebook replacement cycles are typically faster than desktops and carry traditionally higher average selling prices and margins. 

We typically undertake a wholesale refresh of our business products every five to six years to provide consistency and longevity for our corporate customers.  This time around we have made significant changes from the typical corporate product rollout.  We have listened to our customers whether they are road warriors, typical office users, or those with specialty and advanced performance needs.  Based on that input, we have completely revamped the line, differentiating ourselves from the competition in terms of design, performance and portfolio breadth. 

Some of the key product highlights, which set Dell apart from the competition with this launch, are: 

• A completely new look as we have made use of advanced materials, more aggressive design, and even added colors as we are beginning to see "consumerization" in the business market.
• Highly mobile business customers continually ask for more battery life. In these news systems, battery lives can last as long as 19 hours on a single charge and have accelerated charging capabilities.
• Dell Latitude ON, which provides near instant access to email, internet, and other calendar related items with multi-day battery time without full operating system start.
• Better connectivity and security features with Dell Control Point. Dell Control Point is an exclusive application enabling management of all connection configurations and customizable security profiles in one spot rather than making changes in several control panels and applications.
• This new product line also has significant range with everything from an ultra-portable system weighing in at only 2.2 lbs to a semi-rugged notebook, which has an outdoor viewable display and shock mounted hard drive to a product with superior graphics capabilities and a quad-core processor to handle the most demanding computing needs.

You will hear a lot about this launch over the next several weeks.  I encourage you to learn more about the E-Series products at our E-Series site launch page (http://www.digitalnomads.com/).

 As always, we welcome your comments and feedback on the launch through this blog.  We look forward to hearing from you!