Total Cost

This afternoon after the close of the financial markets, we shared a press release announcing that year-over-year demand for our information-technology products appears to have stabilized, and that we expect to report a slight sequential revenue increase in our fiscal second-quarter 2010, which ends July 31.  In the announcement, we also said that we anticipate a modest decline in Q2 gross margins, the result of higher component costs, a competitive pricing environment, and an unfavorable mix of product and business-segment demand.  Also, we shared that over the longer horizon we are targeting 5-7 percent compounded annual sales growth, operating income at or above 7 percent of revenue, and cash flow from operations exceeding net income. It's important to point out that such results are dependent on broad global economic improvement accompanied by higher worldwide IT spending, including sustained double-digit growth rate in demand for computer systems.  As always is the case with announcements like these, I highly encourage you to read the complete press release for additional details and disclosures.

This news was released prior to our analyst meeting, which will take place Tuesday, July 14^th here in Austin, TX and is available live via webcast on Dell.com/Investor.  The analyst meeting is an opportunity for analysts, investors, and you to listen to Dell Leadership and review our strategy and financial overview, and ask questions directly to the executives which you can do via the web this year.   At the analyst meeting, Dell executives will discuss the company's strategy and operating agenda along with a financial overview and update on its four customer segments.

As always, our IR team is here to answer your questions.

 - Rob

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.

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!

Last week, we achieved yet another milestone in enterprise computing with the launch of our latest enterprise solutions - including our 11th generation PowerEdge servers, a new EqualLogic storage product, and new systems management capabilities. These offerings are specifically designed to help our customers become more efficient and maximize their return on investment in data centers. As part of this launch, we introduced 14 new enterprise products that help customers cut cost and complexity through simplified management, industry leading virtualization and innovative solutions. Two members of our executive leadership team, Steve Schuckenbrock, President, Large Enterprise, and Brad Anderson, Senior Vice President, Enterprise Product Group presented at the launch event in San Francisco on March 25^th.

In today's discussion, I am going to focus on our blade servers. Data centers today have faced increasing challenges as they have grown. The sprawl of many servers, plus the resulting challenges to power and cooling, has dramatically increased the role of blade servers. According to industry research firm IDC, in calendar Q4 of 2008, blades made up roughly 15% of the x86 server market by volume and Dell was ranked #3 worldwide with 9% market share. Per IDC, we grew our blade units by roughly four times the industry growth rate in calendar Q4 of 2008. IDC also projects that blades are expected to experience strong growth in the mid-twenty percent range from 2010-12.   

With our M-series blades, the goal from the beginning was to design the most power efficient server enclosure in the world. Another driving force in data centers today is virtualization. Blades fit perfectly in a virtual environment as they take up less space than normal rack mount servers and together with virtualization, provide customers a physical and virtual consolidation to save data center space and ease management. Dell provides industry leading solutions for customers running virtualization. Our ability to boot directly to VMware software is also a key differentiator for us. Dell's virtualization servers provide 50% more DIMM slots in the M905 than any competitive four socket server and 33% more high speed I/O.

So how competitive are our blades? We hired a third party firm to run the exact same server configurations and benchmarks on Dell, IBM, and HP blade enclosures. The result showed that our existing M-series blades had up to a 19% power advantage, and up to a 12% performance advantage, over our nearest competitors. Last week, we announced some further enhancements to our M-series blade portfolio - our new blade architecture now has 27 percent lower acquisition cost and delivers 17 percent lower TCO (total cost of ownership) over 5 years per rack compared to HP's c-Class.

So from a competitive standpoint, we are very well positioned in the blade market space and we are the only vendor to provide fully modular switches allowing customers to grow their blade enclosure throughput as their data center needs grow. With our M-series blades, we also offer FlexAddress, which is a low cost way to keep the server's Ethernet or Fibre Channel connection when changing a blade. This can help reduce customer downtime and works with any switch infrastructure a customer uses today. Designed to solve the major challenges of any data center, our M-series blades can be the ideal way to unlock the optimal data center within a customer environment by maximizing the power, cooling, and consolidation needs of today and tomorrow.

As always, we encourage you to ask questions or leave comments on Dell Shares.

In March last year, we announced actions to enhance the company's competitiveness, improve our cost structure and optimize operations.  At that point, we announced the closure of desktop manufacturing in Austin.  More recently, we announced a new global segmentation and the migration of computer systems production in EMEA to Dell facilities in Poland and contract manufacturers by the beginning of Dell's fiscal 2011.  The combination of these efforts, in addition to a revitalization of our entire product and service portfolio , continue to help us drive toward delivering on $3 billion in annualized cost savings by the end of fiscal 2011.

Today we announced that we expect to recognize in our fiscal 2009 fourth quarter a pretax expense of $135 million associated with further optimizing our global manufacturing and distribution network, and the continued rationalization of Dell's workforce. 

In addition, we will incur $145 million in pretax, non-cash stock option expense, including $106 million in accelerated vesting of previously awarded stock options.   Dell routinely evaluates its compensation program, including the use of stock options.  The acceleration, effective Jan. 23, covers 20.4 million shares with a weighted-average exercise price of $22.02.  The action means Dell will recognize all expenses associated with these options in Q4, rather than over time.  This action is a non-cash expense based on SFAS 123R stock option accounting.  The remaining $39 million of stock expense is related to an annual true-up of full-year stock-based compensation forfeitures. 

Together the cost-reduction and stock-option actions will total pretax $280 million, or 11 cents per share.  The company will announce its Q4 and full fiscal-year 2009 financial results on Feb. 26.