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.

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!

We recently received several good technical accounting questions regarding our DFS business from people in the investment community.  In light of the recent news in the banking industry, this is understandable.  Since our responses to these questions reflect information already in the public domain we thought it would be useful to post them to Dell Shares.  The answers that you will find below come from information in the public domain that can be found in our earnings releases, earnings web decks, SEC filings and comments on our Investor Relations blog Dell Shares.

Also note that our accounting for DFS follows many FASB/GAAP guidelines for financing activities, including:

• FAS 140: Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
• FAS 157: Fair Value Measurements
• FAS 13: Accounting for Leases

These pronouncements serve as good reference points as you review our accounting and related disclosures.

Below you will find the questions we have recently received with respect to DFS along with the full detail of our answers.  As always, please don't hesitate to call or email us if you have any questions or post directly to Dell Shares.

Question & Answers on DFS

Question:  A general overview of the four types of financing receivables (Revolving loans, fixed-term leases and loans, residual interest and retained interest). The Q's and K's give a brief description of each but I'm looking for a bit more color for each:

• Types of customers, timing of revenue recognition, etc.
• Revolving Loans: general length, decline of no-interest promotional balance?
• Fixed-term leases and loans
• Residual interest
• Retained interest
• How much of Dell's revenue is financed through better than normal terms (net30)? i.e. through DFS or receivables greater than 30 days that are then securitized?

Answer:  Receivables / Customers

• There are two primary types of financing products: 
  • Revolving loans balances primarily reflect financings with Consumer customers, with a smaller portion to small business customers.  Based on historical payment patterns, revolving loan transactions are typically repaid on average within 12 months. 
  • Fixed term leases and loans are offered to commercial customers, including large businesses, public entities, and small businesses.  Terms are usually 24 and 36 months.

• The decline of no-interest promotional balance is driven by a combination of strategic business decisions to end no-interest promotional loans to small business, lower the use of promotions as well as lower duration of no-interest promotional period in Consumer, and seasonality of Consumer sales.

• Other financing receivables are:
  • Residual interest: the remaining investment in equipment on sale-type leases
  • Retained interest in securitized receivables sold by Dell

• The vast majority of Dell terms are 30 days.  New financing originations through DFS: $1.0 billion for the fiscal three months ended October 31, 2008 and $3.3 billion for the fiscal nine months ended October 31, 2008.  We don't disclose percentages.

Revenue Recognition

• All Dell product revenue is recognized up front with the exception of the residual interest Dell holds on leased equipment
• Residual equipment revenue is recognized when the asset is disposed
• Interest income is recognized over the life of the revolving or fixed term receivable
• Fee income is recognized when assessed
• For securitized receivables, gain or loss is recorded at time of sale.  Accretion on retained interest is realized over time, along with quarterly valuation adjustments.

Question:  Comparability of finance receivable balances before/after acquisition of remaining DFS interest from CIT.   The FY09 filings note a portion of the receivables are due from CIT with a spike at February 1, 2008, is this related to the acquisition? Or is this related to a separate transaction?  How will the expected decline in CIT funded receivables affect Dell's ability to offer customer financing?  Cash flow?

Answer:  The increased receivable due from CIT at fiscal year-end 2008 is not related to the acquisition of CIT's portion of DFS in Dec 2007, or any other specific transaction.   CIT receivables were $444M at February 1, 2008 and were reduced to $31M on October 31, 2008. The decrease in the CIT receivables is primarily due to the liquidation of CIT receivables and funding lower volumes of promotional receivables through CIT. 

Question:  Residual interest valuation: can you walk me through the difference in the inputs for the "time of sale" and "valuation" inputs? Is this a time of sale vs balance sheet date comparison? Was the increase in monthly payment rates due to delinquencies or refinancing?

• Receivable securitization:
• Are the receivables interest bearing? (prior to securitization)
• Is the retained interest the interest only portion of the securitized receivables?
• Is the ABS a public securitization? i.e. public disclosure on the terms/performance?

Answer:  The valuation of the retained interest is based on an expected future cash flows model which includes management's expectations of future payment rates and credit loss rates, reflecting Dell's historical rate of payments and credit losses, industry trends, current market interest rates, expected future interest rates, and other considerations.   The monthly payment rate is the most significant estimate involved in the measurement process.  Other significant estimates include the credit loss rate and the discount rate.  The discount rate is a management estimate of the time value of money / required rate of return and is reflective of historical market-based rates and riskiness of the cash flows. We disclose valuation sensitivities in our footnote on financing receivables in each Form 10Q and Form 10K.

The difference between "time of sale" and "valuation" assumptions reflects the composition and characteristics of the assets sold, versus the total portfolio.

The increase in the monthly payment rate in the three month period ending October 31, 2008 reflects a change in the composition of assets sold during the period.  We don't disclose the composition of assets sold.

Question:  Are the receivables interest bearing? (prior to securitization)  

Answer:  Generally, yes.

Question:  Is the retained interest the interest only portion of the securitized receivables?

Answer:  Retained interest represents expected cash flows after all the other senior positions (principal and interest) are paid off.

Question:  Is the ABS a public securitization? i.e. public disclosure on the terms/performance?

Answer:  No.  Dell has 3 private multi-seller conduit facilities.

Question:  In reference to the receivables securitizations of $1.2B at 10/08 (asset securitization section), is that over and above the financing through DFS?

• New financing originations through DFS: $1.0 billion for the fiscal three months ended October 31, 2008 and $3.3 billion for the fiscal nine months ended October 31, 2008.

Answer:  $1.2 billion is part of DFS financing. 

In May 2007, we announced the company would explore new ways to reach customers via the channel.  A little over a year ago, Dell launched its PartnerDirect program in the U.S. and later in EMEA to engage the value-added-resellers and systems integrators in the channel.  At the onset, there was a great deal of skepticism of the program and whether Dell, historically known as a ‘direct' company, could work differently and build trust in the channel. 

Since launching a year ago, Dell's partner program has grown to more than 37,000 registered partners worldwide, with over half this number coming outside of North America, and based on last quarter's results the channel generated nearly $12 billion in run-rate revenue. 

With the new business segmentation announced on Dec. 31^st, 2008, PartnerDirect is now being run as one-global organization.  Under the leadership of Greg Davis, VP and General Manager of Global Commercial Channels, PartnerDirect is now a global program offering the same benefits to partners worldwide.  Today, our partners can access the PartnerDirect portal in 19 languages in 148 countries. 

We also created a Partner Advisory Council, where we host face-to-face meetings with our partners semi-annually and host teleconferences almost every month.  The Partner Advisory Councils are held in every region, and include special councils tied to our certification paths.  At the core of the PartnerDirect program is the ability to listen and implement changes from the feedback our channel partners give us.  We also solicit partner feedback through a variety of social media tools, including Dell's Channel blog. 

Channel conflict still exists in some cases and improving deal registration was key for our partners.  Today there is over 70% approval of deals that are registered, and we work directly with partners to qualify deals that might not otherwise meet our criteria.  We examine each conflict on a case-by-case basis to determine what the best solution is for all concerned.

Additionally, when we first began the program we launched with a minimum deal registration of $75,000, and have since changed this amount to $50,000.  We are working on reducing the deal registration minimum even further, based on requests from our partners.   At the start of this program, we had less than 20 deals being registered; today we have over 500 per week.  Additionally, we have been working with partners to extend credit lines and work directly with customers to offer Dell leasing.

Our partner certification efforts are focused on our enterprise architecture, managed services and federal government certifications.  In addition to certification, we offer training programs where we actively work to build our partners' knowledge and experience with our products and services to support their business' growth.  This is an area of focus for us, as we continue to develop and refine our training offerings.  

We've made progress in this first year of the PartnerDirect program, and with a new global organization, we will increase our global initiatives, leverage programs and tools worldwide to deliver further efficiencies, save costs for our partners, and continue to find opportunities to drive long-term growth.

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.