3Q Earnings - Executive Q&A

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New insights and perspectives into Dell and the world of investor relations.

DellShares

New insights and perspectives into Dell and the world of investor relations.

3Q Earnings - Executive Q&A

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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.

  • Mr Dell and Mr Gladden - this is the 3rd (??) quarter in a row that the cash conversion cycle is trending down. Are you going to put a stake in the ground at some point and decide that the CCC cannot exceed a certain day number? How important is this factor to the overall health of the company?
  • Robert, Thank you for your question. We are driving several initiatives around working capital including a working capital council that Brian leads that’s driving key process improvements and should result in an improvement of our cash conversion cycle back to historical levels – which is closer to negative 30 days, plus or minus. In addition, our receivables were down in the third quarter with the lower revenue but our payables were down more, as we reduced spending in the second half of the quarter to make the demand environment. When our shipments, production and procurement return to a more typical relationship, we expect a reversal of this cash dynamic. Thanks again! Rob