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Market Update : 
Dell Q3 Earnings Call Transcript
Author: 123jump.com Staff
123jump.com
Last Update: 10:40 AM ET December 08 2008


 
Dell Inc. (DELL)
Q3 2009 Earnings Call Transcript
November 20, 2008 5:00 p.m. ET

Executives

Lynn A. Tyson Vice President, Investor Relations
Michael S. Dell Chairman, Chief Executive Officer
Brian T. Gladden Senior Vice President, Chief Financial Officer

Analysts

Kathryn Huberty Morgan Stanley
Richard Gardner Citigroup
Brian Alexander Raymond James
Tony Sacconaghi - Sanford C. Bernstein
Bill Shope Credit Suisse
Ben Reitzes - Barclays Capital
Louis Miscioscia - Cowen & Company
Keith Bachman Bank of Montreal
Shannon Cross Cross Research
Mark Moskowitz - J.P. Morgan
David Bailey - Goldman Sachs
Maynard Um UBS
Jeff Fidacaro - Merrill Lynch
David Wong - Wachovia Capital Markets, LLC
Bill Fearnley - FTN Midwest Research
Shebly Seyrafi - Calyon Securities (USA) Inc.

Presentation

Operator

Good afternoon and welcome to the Dell Incorporated third quarter fiscal year 2009 earnings conference call. Id like to inform all participants this call is being recorded at the request of Dell. This broadcast is the copyrighted property of Dell Incorporated. Any rebroadcast of this information in whole or part without the prior written permission of Dell Incorporated is prohibited. As a reminder, Dell is also simulcasting this presentation with slides at www.dell.com/investor.

Later we will conduct a question-and-answer session. If you have a question, simply press * then 1 on your telephone keypad at any time during the presentation. Id like to turn the call over to Miss Lynn A. Tyson, Vice President of Investor Relations. Miss Tyson, you may begin.

Lynn A. Tyson

Thank you. With me today are Chairman and CEO Michael Dell, and Senior Vice President and CFO Brian Gladden. Brian will review our third quarter results and how our business model is positioned to effectively compete in this demand environment. He will also review the progress weve made on our initiatives to improve our competitiveness. Michael will follow with his perspectives on how our products and services are well suited to how customers are approaching their IT spending in this environment.

To get additional insights on our results this quarter, please read the Q&A with Michael and Brian that we posted on our Dell Shares blog on Dell.com. Also weve expanded the web deck that accompanies this call to capture additional information many of our shareholders have requested. All growth comparisons made on this call are year-over-year unless otherwise stated. Our IR calendar for the balance of the year includes Michael at CSFB on December 2 and V-logs covering our global services and consumer businesses.

Finally, Id like to remind you that all statements made during this call that relate to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties which are discussed in our annual and quarterly SEC filings and in the cautionary statement contained in our press release and on our website. With that Id like to turn it over to Brian.

Brian T. Gladden

Thanks Lynn. Were pleased with our performance this quarter, especially against the backdrop of slowing global IT demands but we still have more work to do. Our direct model affords us the benefit of reading and reacting to demand signals faster than any company in our industry. As weve been indicating throughout this fiscal year, Dell has seen weakening in global IT and user demand and we expect this weaker demand environment to continue for the foreseeable future.

On our second quarter call we said wed already taken actions to improve profitability in the company and youre seeing it in our results this quarter. We achieved these results by continuing to improve our mix of products and services while also realizing the benefits of our initiatives to improve our cost structure and competitiveness. Our goal continues to be to drive a balance of liquidity, profitability and growth and optimize cash returns, regardless of the macroeconomic cycle.

So let me turn to the quarter which begins on Page 5 of our web deck. Revenue declined 3% on a 3% increase in units. Operating income reached 6.7% of revenue which helped to drive earnings per share up 9% to $0.37 a share. The improvement in operating income was driven by gross margins of 18.8% which benefited from improved mix, lower component costs and our COGS initiatives in the quarter.

Improvement in operating income was also aided by strong OpEx discipline with OpEx as a percentage of revenue of 12.1%. On a dollar basis this is an 11% decline in OpEx dollars versus last year. We also reduced headcount by another 2,200 sequentially. Our tax rate in the quarter was 28%, slightly higher than the second quarter, primarily reflecting a shift in the mix of income to higher tax jurisdictions. We pointed out this dynamic to you in our second quarter earnings as well.

I also want to highlight that in this quarter, we overlapped an 18% tax rate in Q3 of last year. In the quarter, on a pretax basis we absorbed $26 million of expense for amortization of purchased intangibles and $17 million in business realignment costs. We also recorded lower bonus expenses in the quarter versus last year, which favorably impacted operating income margin by about 50 basis points sequentially.

Cash flow from operations was a negative $86 million. Simply explained, while our receivables were down in the quarter with 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 4 days from our last quarter.




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