Retail

Dell Equity Analyst Meeting

Today more than 200 participants, including analysts and investors, joined us in Austin for Dell's Analyst meeting.  There were also a record breaking number of webcast attendees for this meeting, where we broke our record of 400, rising to nearly 500 participants. This meeting was an opportunity to hear directly from Dell's senior leadership on our near-term operating agenda and long-term strategy and address questions or concerns.  The presentations from this meeting are available for viewing online,

This year, the meeting and briefings took place the same day.  Dell executives discussed the company's strategy and operating agenda along with a financial overview and update on its four customer segments. 

We are competing in a rapidly changing environment.  As a result, we are improving our core business performance while expanding and extending across a broader set of customer solutions.   Key messages delivered today were Dell's differentiated view of how to win in enterprise, our strategic mission "to provide disruptively great value to our customers", and that both these items will be realized through a combination of internal investments, partnerships and inorganic growth.

The meeting was opened by Michael Dell, Chairman of the Board and CEO, where he discussed Dell's key assets, view on the enterprise, and long-term priorities.  Michael noted that Dell has a strong presence and currently holds #1 or #2 share position in most key segments.  He also covered strategic priorities to deliver operating income and cash flow growth as well as the requirements needed to win longer-term.

Brian Gladden, CFO, followed and built on striking the optimal balance between liquidity, profitability and growth.  Brian reviewed Dell's operating agenda, gave an update on the solid progress on $4B cost reductions, and provided a long-term value creation framework that articulated Dell's vision for revenue growth, profitability and cash flow generation.  He also stated that Dell is well positioned to benefit from an economic recovery and will continue to provide strong liquidity.

Steve Schuckenbrock, President of Large Enterprise, walked us through our higher-value & higher-margin enterprise vision which addresses innovation and virtualization in next-generation data centers vs. our competitors' full-stack approach.  He also reviewed how Dell is delivering steady growth in its core business while powering enterprise efficiency through innovation without legacy.  For example, we approach services very differently from our competitors.  We believe services should be customizable, a la carte, and available remotely.  We let customers choose which services they want and when they want them.  And we provide solutions where consultants are available - but not required. 

Paul Bell, President of Public Sector business, addressed how Dell is aligning its global organization for balanced geographic expansion via vertical solutions designed for three unique customer bases -Education, Government, and Healthcare.  Paul mentioned the challenges in this segment due to the macro environment, but also highlighted opportunities that exist internationally as well as those related to stimulus funds. Requirements needed to win in the Public sector include deep expertise in the sector-specific challenges, solutions investments, technology leadership, and solid partnerships.

Steve Felice, President of Small & Medium Business, presented Dell's plans to lead in the SMB space through innovative solutions and its go-to-market strategy.   Steve reviewed the varied needs across the customer base of Small Businesses and Medium Businesses as well as regional opportunities to grow the business. He highlighted the solutions and product offerings that will help drive growth in each of these areas along with the benefits offered through SMB's go-to-market strategy.  Having a multi-channel strategy will enable Dell to expand presence in under-represented geographies and drive incremental growth in enterprises and solutions.

Ron Garriques, President of Dell's Consumer Group, walked through consumer's brand architecture, its multi-channel customer portfolio and how it's bringing a disruptive approach to PCs.   Dell grew to 33,000 retail stores globally in two years.  Clearly, there is a lot of opportunity to continue to grow in this retail space.  Ron reviewed Consumer's plan to grow faster than the industry through aggressively managing costs to reflect the multi-channel infrastructure, expanding global presence, and offering competitive products.  He also reviewed plans to reinvigorate Dell.com to create a destination for all customers.

If you haven't already seen the presentations, I encourage you to watch a replay of them here. 

As always, we welcome any questions or comments.

-Rob

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.

Starting today and through Saturday, we are attending The World Money Show in Orlando, Florida - one of several annual conferences that provide a venue for individual investors to learn more about best practices of investing and financial planning. This year, The World Money Show will feature more than 300 workshops and 150 speakers with an opportunity to hear leading experts talk about the global economy, investments and personal finance.  It is a great way for you to learn via panels and workshops in addition to interacting with company representatives and investor relations professionals.

So why are we attending this event? Individual investors own roughly 20% of Dell and this is one of many opportunities for us to meet directly with you - our current and potential shareholders. We are fully committed to our retail shareholder program and believe it is especially important during times of economic uncertainty and market volatility to reinforce the face-to-face relationship we have with our individual investors.  

Prior to this event, we also attended three individual investor conferences last year - The World Money Show Orlando in February, The Better Investing National Convention in Schaumburg in June and the Money Show in Washington DC in November.   We will also be attending The Better Investing National Convention in Atlanta in June of 2009. 

At this event, we will be at booth #303 in the Exhibit Hall of the Gaylord Palms Resort and Convention Center in Kissimmee, Florida, today through Saturday. We hope you will stop by and check out our booth!

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.

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.