3Q Earnings – Making Steady Progress to Long-Term Goals

Thu. Nov. 29, 2007

Tonight, we announced the results from our fiscal third quarter and hosted our first conference call in over a year (a replay of the call and downloads of the financials & presentation can be found here). Since wrapping up our investigation, this was our first opportunity to host an earnings call to discuss not only our most recent quarter's results, but the long-term strategy of our company

Before getting into some of the details around our earnings, and consistent with this blog's purpose, I wanted to highlight the value and importance of listening to earnings calls - not just our own, but of any company's. These calls provide investors and analysts (including individual shareholders to institutional investors, and sell-side brokerage analysts) one of the best ways to keep abreast of a company's performance and strategic priorities. You are welcome to join ours or listen to the replay (here).

As for our performance in the third quarter, the key takeaways were that we improved revenues, units, and profitability. We saw strength in our mobility products and continued to expand our business in international markets - particularly in Europe and Asia. We achieved $766 million in net income, generated roughly $1 billion in cash from operations, and drove our cash and investments balance up to $14.6 billion. This in particular is important because when we talk about creating value for our shareholders, cash generation is the ultimate litmus test, and essentially our goal is to maximize cash flows from operations over the long-term

During the call, Michael Dell, Don Carty and Steve Schuckenbrock discussed our efforts and progress towards improving our current business, re-igniting growth, and building for the future. Here, we touched upon our new executive leadership team and global business groups, new XPS products and small business product line, and factory openings in Latin America and Eastern Europe. And with our recent acquisitions of Zing, Silverback, ASAP, and our planned acquisitions of EqualLogic and Everdream, you are seeing us expand our portfolio of products and services and position ourselves for long-term growth.

Each specific business priority is part of the larger picture of business priorities that are being driven by our belief that information technology can be simplified and that we can drive long term shareholder value by focusing on growth in the consumer market, emerging countries, notebooks, solutions for the enterprise, and products and services for small to medium sized businesses. Our goal is to grow faster than the addressable opportunity in these areas, while keeping the company focused on driving strong cash flows from operations. These are more than ample growth opportunities for growth; the key will be to prioritize and execute.

We feel 3Q's results highlight the progress we're making towards our strategic priorities and building for the future. We're making good progress towards these goals, but there's more to be done To be sure, the path of progress won't be completely linear, but that happens sometimes when you're building and investing for the future.

del.icio.us email this digg

digg

Published Thursday, November 29, 2007 05:00 PM
by Robert L. Williams, Director - Investor Relations

Filed under: 21st Century IR, Earnings

Comments

Marc Somers said:

Smooth move on forward looking earnings comments. As a share holder for several years, the stock had just recently gotten back to around my original purchase price. Way to reward me for my patience.

November 30, 2007 9:27 AM

Brad said:

Our stock is down 15% today and now down for the year. Will we hear details on the stock buyback program before the shareholder meeting?

November 30, 2007 12:31 PM

Dell IR said:

Srikant - In Q1, Dell's payables balances reverted to lower, more historical levels combined with more evenly weighted sales in that quarter. Working capital traditionally helps generate positive cash flow for Dell and we expect that to remain structurally the same going forward. Ultimately, CCC can move around from quarter to quarter, but we still expect the company to generate cash on an annualized basis. So while our push into retail will likely have some effect on our cash conversion cycle, we do not expect it to be significantly altered.

December 6, 2007 10:18 AM

Robert L. Williams, Director - Investor Relations said:

Thanks for the question, Brad. We said in our earnings release that we will resume our repurchase program in early December. We currently have $1.4 billion remaining under the current authorization and we have the ability to enter the market when our trading restrictions are lifted on Tuesday morning. Any additional repurchase activity beyond the currently-authorized $1.4 billion will require an additional authorization by the BOD, which would be followed by a notification to investors.

November 30, 2007 3:28 PM

Brad said:

Dell is going to spend $4.5 billion over the next 3 years in advertising? That is over $4 million a day in advertising. Why does Dell need to spend that much money? If you cut that to $1 billion a year, that would add 20 cents in earnings per share, With a computer not being a new piece of technology and Dell being an already recognizable brand, seems your ad buget is too high.

December 2, 2007 7:02 PM

T.A.C. said:

Long-abused Dell stockholders, encouraged by recent company initiatives, would have been grossly disappointed by the totally unsatisfactory and business-as-usual conference call with analysts after the earnings report on November 29th.

Along with the numerical results, which after all weren't that bad, the passive and bureaucratic tone of Dell's management in the conference likely contributed to the hammering of the stock the next day. How is it that this drab, worn-out style is supposed to fight its way back to the top of the technology sector while breaking new ground in the global consumer area?

Dell's senior management conducted the call in such a stale, platitudinous, down-beat fashion -- tedious with the rhetoric of vague and empty aspirations such as "sustainable growth", "shareholder value" -- that it's hard to believe that it's energetic, creative, or even ticked off enough to turn things around. What was supposed to be the inaugural call of the rejuvenated Dell was identical to the tired sessions, filled with vague, discredited and unmet assurances, during the low-point of the Kevin Rollin's era. While the tedium about op ex, units, components costs, etc. is obviously indispensable in an earnings call, it's essential for a company in Dell's position -- a company that's forfeited any benefit of the doubt -- to convey a clarity of vision and a relentless, ruthless commitment to an operational strategy at every opportunity that affects the market psychology governing stock prices. Instead, Dell's managers offered only vague and empty "priorities".

Earnings calls are fatuous and loaded with excruciating, lemming-like blather -- "great quarter guys", "can you add a little color or granularity", "ramp up" -- foisted by frequently short-sighted analysts with next to zero accountability. But they're obviously influential, not least in creating perceptions. Dell's previous CFO used to say "you know" literally hundreds of times in a call, several times a sentence, which was emblematic of an apparently undisciplined, unfocused, and unaesthetic ethos at Dell that contributed to the company's decline. Teenagers aren't allowed to get away with the "you know" tick yet the CFO of Dell was allowed to speak in a way that prohibited articulate advocacy of the company's strategies and vision, such as they were, during a period of crisis.

Dell is trying to turn a new leaf. It's also trying to introduce new ways of business generally in the technology sector. By radically refurbishing the substance and manner of its earnings conference calls Dell could enhance its image and contribute towards both these goals: Don't be so passive and defensive that the analysts, perpetrators of a system of short-sightedness, pot shots, and hype that is damaging to American economic health, can unilaterally set the purpose, tone, or direction of the call. If management has a vision or five part priorities, state it emphatically and clearly. If the company is making promising commitments in initiatives including industrial design, state it aggressively and explain that the short-term costs are radically outweighed by the potential gains. Is anyone home in Investor Relations to re-think and juice up corporate advocacy? The new Dell's going to be an innovative company. Don't innovative company's innovate?

While we're at it:

Don't start the call saying how "generally pleased" the company is, as Donald Carty did. It's old. No one cares about whether the company has a warm feeling.
We couldn't care less about Donald Carty's "previous life and previous incarnation". It's not about him. Focus on Dell.
Obviously mindful of the damage done by Cisco's John Chambers in gratuitously popping off about the state of the economy several weeks ago, Michael Dell wisely and tersely answered, "Don’t have any predictions for you on that", when one of the analysts tried a "gotcha" question about the economy. Hewlett-Packard's Hurd similarly explained recently that he was not an economist and didn't aspire to be one when an analyst tried to see whether he suffered from the same verbal incontinence as Chambers. So why does Carty then follow on Michael Dell with some observations about the economy? Didn't he get the memo? Don't just talk about shareholder value. Make a relentless, disciplined commitment to doing everything that will contribute to it.
Carty says, "We clearly recognize we haven’t run our core business as efficiently and as effectively as we can and should, so we’re putting a lot of effort into that." Is he talking about the most recent quarter? Two years ago? It's almost certainly the latter. But how is it possible for a responsible corporate spokesperson to leave it ambiguous as to whether he stating that Dell's not currently running its business efficiently? Does that contribute to shareholder value?

Dell might say long-time shareholders have nothing to complain about: They're still about 1000% up, or whatever the figure is. That would be a self-serving way of viewing Dell's decline. Long-time shareholders held on and lost large amounts of wealth because they had well-founded belief in the company despite all the criticisms about "mere commodities", no R&D, etc. The company badly betrayed those shareholders. It's well-past time for the company to show that it gets that point, even in the way it conducts conference calls.

December 2, 2007 10:27 PM

Ajax Norton said:

I am surprised that Dell is trying to get up and move but very slowly at initiatives it clearly seems to me shouldve happened long back. I am surprised that it took so long for a company like Dell to come up with a major update to their Server Blades and even today its a preview...when do we see the real deal! Hey and what about them tablet PC's. Sure sure not a hugh market (other vendors will disagree on this) but what stops Dell from doing Novelty!! The problem with Micheal Dell and his team is that while they want high pressure and speedy execution, its never strategic or clear long term thinking for their company. The Equalogic bit may be nice but its pricey acquisition at this stage, rather with all that money they couldve developed their own IP. I dont think its rocket science to do iSCSI, Dell has been doing it for a while....but hasnt really put real resources behind it.

Micheal and his team should also focus on generating shareholder value which this company has forgotten to do. All those people who keep seeing Dell shares move sideways or down...must be kicking themselves for buying Dell stock. I hope Micheal loses his sleep the price he and his team should pay for letting Dell stock slide. True Hardware has been unsexy...but thats because youve made it that way. Apple has made efforts and have executed very well. While Apple may be hot and fashionable, Dell is considered as a solid company, I am sure by making the right moves...you can get the stock to rise...backed by transparency and yes...ACTUAL PERFORMANCE.

Expectations are so low that anything Micheal does may not have a great impact on the stock, worst...Dell is inept in managing news flow and slow at executing key initiatives like Channel policy. What took you so long? And its supposedly going to hit on 4th Dec. But nobody trusts you....atleast a version 1.0 shouldve come 9 months back, atleast the dealers in the market would feel that Dell is trying. Dell is just not serious other than doing some retail deal. But typical DELL you will highlight small victories...this will amuse your investors to their horror and your stock will drop some more.

Make the change DELL, get rid of lethargy and get sexy in your approach to products, in your approach to the market and use your aggression to win back. Its possible...but you gotta think really long term.

December 3, 2007 8:58 AM

Srikant Mantravadi said:

Traditionally, Dell has achieved a positive cash flow impact from working capital. In fiscal 2008, however, working capital has had a negative $2.072 billion impact, by far the most negative cash effect in the company's history.

Digging a little deeper, it appears that the negative cash impact from working capital impact came primarily from an unusually-large Q1 reduction in payables and accrued expenses. Was this a function of Dell's new strategy to seek retail distribution partners and should we expect such large working capital cash impacts in the future?

December 4, 2007 11:51 AM