This summary is based on the third quarter fiscal 2009 earnings call conducted by Dell Inc. (DELL) on November 20, 2008.
Management:
Vice President, Investor Relations: Lynn A. Tyson
Chairman, Chief Executive Officer: Michael S. Dell
Senior Vice President, Chief Financial Officer: Brian T. Gladden
Key Investors Issues
- EPS were 37 cents a share compared to 34 cents a share last year.
- Profit was $727 million compared to $766 million a year ago.
- Revenue was $15.16 billion compared to $15.65 billion a year ago.
Third Quarter Highlights
Dell earnings improved solidly as a result of disciplined cost management and an improved mix of products and services in a challenging demand environment.
- Earnings per share increased 9% to 37 cents, on revenue of $15.2 billion.
- The company is continuing to focus on five growth areas: Notebooks, Enterprise, Global Consumer, Small and Medium Business and Emerging Countries.
- Dell revenue was down 3% on unit-shipment growth of 3%.
- Operating income improved 22% to $1 billion, or 6.7% of revenue, driven by gross margins of 18.8%, which benefited from an improved mix of products and services, lower component costs, and continued progress on cost-reduction initiatives announced in April.
- Operating expenses were 12.1% of revenue, an 11% decline on a dollar basis from a year ago. The company ended the quarter with 2,200 fewer positions than in the second quartre, and down 9% from one year ago.
- Global industry demand slowed through October, adversely affecting the company’s cash conversion cycle, which ended at negative 25 days, and resulted in negative cash flow from operations of $86 million. As company growth stabilizes, more typical cash generation is expected to resume.
- Year to date, cash flow from operations was $1.2 billion and the company ended the quarter with $8.9 billion in cash and investments.
- Dell spent $400 million to buy back 21 million shares.
- Revenue from outside the U.S. was 48% of Dell’s total revenue. For the BRIC countries of Brazil, Russia, India and China, revenue increased 20% and shipments 43%. They accounted for 9% of Dell’s global revenue.
Dell’s commercial business serves large corporations; public customers comprised of government, education and health care; and Small and Medium Business (SMB).
- By the end of the second quarter, the company had seen a slowdown in demand in most customer segments and concentrated efforts where there was both profit and growth opportunity as it improved mix of products and services. As a result, global commercial operating income increased to more than 8% of revenue as revenue declined 6%.
- Laptop units were flat as the company transitioned to the new Latitude Series E and Dell Precision laptop product lines, ranging from the lightest ultra-portable in the company’s history to the most powerful mobile workstation. Server units declined 4% and growth in storage revenue was flat. Enhanced services revenue, which is largely driven by Dell’s commercial business, was up 7% to $1.4 billion.
- Dell’s portfolio of scalable enterprise products is the strongest in its history, having over the past year expanded both its server and storage products.
- The company also introduced four new models of OptiPlex commercial desktop systems. These systems cut power consumption by up to 43%, speed serviceability time by more than 40% versus Dell’s competition and include a portfolio of cloud services that can be toggled on and off as needed.
- Reflecting the overall spending slowdown, Americas Commercial had an 8-percent decline in revenue, on a 14% decline in units while operating income improved both sequentially and year over year.
- Dell’s EMEA commercial business had a 5-percent decline in revenue while shipments were essentially the same as a year ago. Actions taken to improve profitability in EMEA resulted in a 62% increase in operating income dollars sequentially. This improvement was driven primarily by lower operating expenses and an improved mix of products and services.
- In APJ, Dell’s commercial business had a 2% increase in revenue on a 15% increase in shipments and operating income grew by over 60%. APJ had success with the launch of Dell’s Vostro A Series laptop and desktop systems, specifically designed for businesses, governments and institutions operating on limited budgets in emerging countries.
Dell’s Global Consumer business increased revenue 10% over last year on a 32% increase in unit shipments – led by continued success in the global retail channel and a more diversified product portfolio.
- Dell’s growth was more than two times the rate of the industry.
- Operating income was $112 million or 4% of revenue, compared with a loss a year ago. It is the highest level of profitability for this business in 13 quarters.
- Year to date, operating income margins were 1.7% of revenue. The improvement in profitability year-over-year was driven by a 24% reduction in operating-expense dollars along with lower product and component costs.
- Dell consumer products won 41 awards, led by the selection of the new Inspiron Mini 9 as one of Time Magazine’s “Best Inventions of 2008” and CNET’s “10 Most Cutting Edge Products of 2008.” The Studio Hybrid earned a “Hot Hardware Recommended Award” and the Studio Desktop a CNET “Editor’s Choice” award.
Fiscal 2009 Outlook
Dell believes that global IT end-user demand will continue to be challenging. Against this backdrop the company will continue to focus on improving competitiveness, lowering costs and improving its mix of products and services to optimize liquidity, profitability and growth. The company will continue to incur costs as it realigns its business to improve competitiveness, reduce headcount in certain areas and invest in infrastructure, growth opportunities and acquisitions.
Key questions from the third quarter earnings call conducted by Dell Inc. on November 20, 2008.
Kathryn Huberty (Morgan Stanley):
The perception in the market is that Dell is largely a fixed cost business. Can you walk through some of the specific steps you have taken to become more flexible?
Brian T. Gladden: There is a couple things. One is we are working to variablize costs as much as we can. And when you think about contract manufacturing and the ODM strategy, that is one big element. That is something that you will continue to see us do. I think the other thing that we have done is been aggressive with fixed costs in the G&A structure in the business. So no metric around that, but that has been our approach and we have been impressive.
