Dell, Inc. (DELL)
Q4 2010 Earnings Call Transcript
February 18, 2010 4:00 p.m. CT

Executives

Rob Williams – Director of Investor Relations
Michael Dell – Chairman and Chief Executive Officer
Brian Gladden – Chief Financial Officer

Analysts

Toni Sacconaghi – Sanford Bernstein
Benjamin Reitze – Barclays Capital
David Bailey – Goldman Sachs
Richard Gardner -- Citigroup
Katy Huberty – Morgan Stanley
Bill Shope – Credit Suisse
Maynard: Um -- UBS
Brain Alexander – Raymond James
Shannon Cross – Cross Research
Mark Moskowitz – JP Morgan
Keith Bachman – Bank of Montreal
Steven Fox -- CLSA
Jayson Noland – Robert W. Baird

Presentation

Operator

Good afternoon and welcome to the Dell Incorporated Fourth Quarter Fiscal Year 2010 Earnings call. I like to inform all participants that this call is being recorded at the request of Dell. This broadcast is the copyright property of Dell Inc. Any broadcast 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.

(Operator Instructions) If you have a question, simply press star then one on your telephone keypad at any time during the presentation. I’d like to turn the call over to Rob Williams, Director of Investor Relations. Mr. Williams you may begin.

Rob Williams – Director of Investor Relations

Thank you, Casey. With me today are Chairman and CEO Michael Dell and CFO Brian Gladden. Brian will review our Fourth Quarter results then Michael will follow with his perspective on the demand environment. We’ve posted on our web deck on www.dell.com and we released a VLog with Brian on Dell Shares. I encourage you to view these as there is additional perspective. You’ve told us that you want more visibility into our enterprise solutions strategy.

As a result for Q1, we will be attending the Goldman Sachs Technology Conference on February the 24th with Brian and Peter Altabef, President of Dell Services. The following week, Brad Anderson who runs our Enterprise Product Group will be with us at the Morgan Stanley Tech Conference and we will be attending the Financial Times Investing in a Sustainable Future Conference on March 24th. Also mark your calendars for our Analyst Meeting on June 23rd and 24th in Austin.

Next I’d 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 and events 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. We assume no obligation to update our forward-looking statements. Please note that today’s call we will be referring to non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP measures in the slide presentation posted on the Investor Relations portion of our website at www.dell.com. Additionally, please refer to our 8-K filed today that contains a full reconciliation of all financial measures. We encourage you to review the reconciliation of non-GAAP gross margin, operating expenses, operating income, net income and earnings per share to the most directly comparable GAAP financial measures.

When we get to Q&A, please limit your questions to one with one follow-up. Now I’d like to turn it over to Brian.

Brian Gladden – Chief Financial Officer

Thanks Rob. First, we saw solid growth returns to the business in the quarter. We’re encouraged by the underlying demand strength we’re seeing across the business and particularly our commercial businesses where we saw double-digit year-over-year growth in both unit shipments and revenue. The market demand improvements, we saw at our third quarter accelerated into our fourth quarter and we’re cautiously optimistic with how our new fiscal year is starting up as well. We’re also beginning to see some pretty fundamental shifts in the company’s capabilities and in our financial framework.

We continue to invest to grow our enterprise business. We’re seeing solid growth in servers, storage and services and with the addition of Perot Systems, our new Dell Services Business now represents 13% of our total company revenue. We’ve also made outstanding progress in improving our cost position over the past two years. And wze think we’re well positioned to benefit from improving demand trends. While our gross margins are very solid in the commercial business units, we did see some weakness in our overall margin rates due to the strong seasonal growth of our consumer business which also suffered from relatively weak margins during the quarter. For the full year we delivered 18.2% gross margins on a non-GAAP basis. And we made fundamental improvements in our COGS structure and our OpEx structure which we believe positions us well for the future. We generated nearly $4 billion of operating cash flow which is twice the cash we delivered last year.

As we look forward, we’re very confident our commercial businesses are poised for earnings growth as demand returns. And then our strategy to expand into higher margin and recurring revenue streams in business like servers, storage, software, and service solutions is progressing well.

With that let’s move to the fourth quarter P&L and the key performance metrics which you’ll find on pages six and seven of the posted web deck. Including our acquisition of Perot Systems, revenue in the fourth quarter was $14.9 billion, up 11% year-over-year and up 16% sequentially. Ex-Perot total revenue improved in Large Enterprise and SMB both year-over-year and sequentially.

Also without Perot our Public business experienced a normal season sequential decline but it was still up year-over-year. On a GAAP basis, our gross margins were 16.6%, our OpEx was 13.2% and our operating income was 3.4%. Earnings per share on a GAAP basis were $0.17 per share. For the remainder of this discussion, I will be speaking to non-GAAP financial measures. Beginning with gross margins, the non-GAAP results was 17.4% driven primarily by the typically heavy mix of consumer revenue in the quarter. Additionally as we discuss coming into the quarter we also saw component cost pressures specifically DRAM across the business and we felt this most in our consumer business where we were locked into holiday retail deals in some cases with fixed pricing.