March 2008 - Posts

  • Dell Driving Actions to Enhance Competitiveness and Optimize Operations

    I know that sounds like a mouthful, so let me take a few minutes to discuss what we announced today.  In May of last year, we announced we were taking steps to improve the competiveness of our operating model, profitability and cash flow.  Restoring competitive advantage means fixing things in our business that will allow us to provide even more value to our customers - and investing in things that will allow us to deliver better and more products and services to our customers around the world.  

    Improving profitability means just that and this can be achieved by improving our cost position which is embedded in cost of goods sold (COGS) - like designing products that have the right features for our customers - things they want and value.  Operating expenses (Opex) is also a part of profitability and we believe we can do a better job of managing these expenses - things like reducing headcount (net of acquisitions) and moving more of our people to front line positions - positions that actually touch the customer.  And when you generate profits - cash flow follows.  At least this is the case for Dell.  On an annualized basis we typically generate operating free cash flow in excess of net income - so the more net income we generate - the more cash we generate.  And at the end of the day it's cash that fuels shareholder value.

    So in our press release we said we believe we have a $3 billion opportunity to reduce total costs - this includes both COGS and Opex.  Now this does not happen over night.  In fact we said we believe it will take three years to achieve an annualized savings of $3 billion.  This means that before you adjust for growth, we believe our costs at the end of our fiscal 2011 will be $3 billion lower than at the end of fiscal 2008.   A company can do several things with this benefit.  They can use it to strengthen their competitive position and invest back into their business which helps drive growth, they can use it to improve profitability, or they can do both.  We will use it for both - and the split will depend on a variety of things including marketplace dynamics and our growth initiatives.

    In our release we also announced that we will be closing our desktop manufacturing in Austin, Texas.   Over the last three years, driven by the massive shift in customer preference for notebooks - especially among consumers, industry forecasts for the rate of growth of desktops have declined from 10.8 percent to 3.6 percent.  And the desktop to notebook mix in the U.S. has declined from a 70/30 split in 2005 in favor of desktops to a 50/50 split today.  Our fiscal fourth quarter of last year reflects this change as we grew notebook units year over year by 37 percent and desktops by 10 percent.

    Lastly - in our release we announced we would undertake a strategic assessment of ownership and operating structure alternatives for our Dell Financial Services financing activities.  And that this assessment will primarily focus on the consumer and small/medium business aspect of this business.  We acquired the remaining 30 percent of DFS from our partner, CIT, in December of last year. 

    There is a lot of concern out there right now about the credit markets and we've been getting a lot of questions so let me clarify two things relative to Dell. 

    First, our assessment of our DFS business is unrelated to what is going on right now in the credit markets - we completed the acquisition and so the natural next step is to pursue our strategy, simple as that.  Many companies - GE and Target - to cite recent examples - often assess the ownership structure of their financing companies.  In our case we are primarily evaluating three key things:  (1) can DFS provide even better and most robust product offerings to our customers, (2) can we accelerate the investments we are making in DFS and, (3) are there more efficient ways to fund DFS.   Our assessment may result in no change, or a sale to or partnership with a fully dedicated financing company.

    Second, relative to our consumer financing receivables - less than 20 percent of our net customer receivables - or $1.6 billion - were to subprime customers.   This percentage is similar to what it was in our fiscal third quarter.  Based on our assessment of these customers financing receivables and the associated risks, we believe we are adequately reserved.  If you are interested in this topic I encourage you to read Note 2 Financial Instruments, and Note 6 Financial Services of our Fiscal 2008 10K that we filed today.

    To get an update on all of the initiatives we have underway at Dell - I encourage you to listen to our equity analyst meeting which will be held in Round Rock, Texas on Wednesday April 2nd and Thursday April 3rd.   You can reach the web cast and accompanying slides via this link: Dell Analyst Meeting.  If you can't listen right away - it will be up on our web site for a while.

  • 4Q Earnings – Making Progress Against Long-Term Priorities

    All comparisons are year-over-year unless otherwise noted.

    Last Thursday, we announced our fiscal fourth quarter 2008 results; the replay of our conference call and a copy of our transcript can be found on the investor relations web site.  For the quarter we posted revenue growth of 10% on $16 billion in sales and 19% unit growth.  Operating income was $776M, or 4.9%.  EPS was $0.31 per share and cash flow from operations was $1.2 billion.

    For the full year, we grew revenue 6% to $61.1 billion, generated $3.4 billion of operating income, increased EPS 15% to $1.31 per share, and generated $3.9 billion in cash flow from operations.  Cash flow from operations grew faster than both net and operating income. 

    During the call we discussed our results, citing both regional and product highlights.  Then we placed particular emphasis on two areas - cost and growth initiatives.  Let me cover a few of the questions we are getting from investors.  Two key themes emerged.  They were costs and the pace of our progress against our key growth initiatives. 

    Our expenses have grown faster than revenue and we are out of cost position relative to peers in some product areas, price points and regions.  This was the result of our products and supply chain not being optimized to most efficiently provide customers what they value.  As stated, we have a multi-billion dollar opportunity to reduce costs over the next several years.   As described during our earnings call, we're working on multiple fronts to become more competitive.  We are recommitted to reducing our headcount, but headcount in and of itself is not the answer either.  Everything we do is being scrutinized.  This includes our supply chain, and at a deeper level it includes how we design our products.  You will see more activity towards improving our competitiveness in Q1, and this process will continue throughout the rest of the year.

    Second, Dell is taking action against several different priorities in parallel.  They are not meant to be sequential steps, but are step function changes to reignite our growth.  I hope you realize that we're building for the long-term.  Sometimes you need to make decisions for the short term that can adversely impact performance, but are absolutely the right for the long-term - as a result some of our actions won't be linear.  There have been a lot of moving parts as we integrate several acquisitions, work towards improving our sales force effectiveness and realign the rest of our organization against our key priorities.   Some of these changes take time, but the foundation is there and the changes are showing improvement.

    Examine the BRIC countries where our revenue grew faster than the industry up 36%, and units were up 50%.  And look at retail where we had no presence a year ago; we have already sold one million units worldwide and are at a one billion dollar revenue run rate.  And in notebooks we won 72% of the product awards applied for in this category.  We have an amazing brand that we are just now beginning to leverage in retail, globally or through the channel. 

    Michael said, "The acceleration in our growth is just a first step as we execute against the five priorities. We have a lot more to do to restore our competitiveness so that we can deliver long-term profitable growth."  There's more to come, and we look forward to updating you on all our priorities at our upcoming analyst meeting and hope to see you then. 

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