Analyst Meeting

• Dell Equity Analyst Meeting - Day 2

  Thu. Apr. 03, 2008
  by Robert L. Williams, Director - Investor Relations

  The second and final day of our equity analyst meeting featured presentations by Michael Dell, Chairman of the Board and CEO, and Don Carty, Vice Chairman and CFO. 

  Right up front, Michael addressed Dell's ability to execute.  He made it clear that Dell is making progress on transforming the company and we are seeing evidence in our recent growth, yet we still have to move faster on costs.  There are no longer any fixed costs within Dell - essentially everything is variable right now.  We have a $3 billion cost opportunity and we're taking aggressive actions to restore our competitive advantage.  We believe operating expense will be down as a percentage of revenue this year.  We also want to deliver a unit growth premium to the industry - this was the case in Q4, and it looks like it is continuing in Q1.  

  Don Carty spoke about Dell's financial heritage - one built on striking the optimal balance between liquidity, profitability and growth.  He said that Dell's execution against these priorities hasn't been up to our standards or your expectations.  Dell is strengthening its competitive position and improving profitability by reducing total costs in three ways.  First, we will reduce operating expense, including headcount and compensation.  Second, we will reduce product and procurement costs by designing for price segments and removing features that are not valued by our customers.  Finally, we will reduce manufacturing and logistics costs by optimizing our global manufacturing network.

  Later in the morning, other senior executives hosted panel discussions on our five key growth initiatives. 

  Steve Felice, SVP and President of Dell Asia/PAC, reviewed our strategy in emerging countries.  Emerging countries represent 85% of the world's population, 30% of worldwide GDP, more than 50% of the worldwide GDP growth... and are a significant opportunity for Dell.  In the IT hardware space, the next billion customers will come from emerging countries.  By 2012, these countries will make up 38% of the world's PC shipments, up from 11% in 1996 (per IDC and Dell estimates).  

  Dell is tailoring its products, services and engagement models in these countries to help ensure our place in this tremendous growth opportunity.  In India and Brazil, for example, we largely work directly with customers.  China is closer to a 50/50 split between direct and the channel, while Russia is predominantly channel focused.  We complement these approaches with specific products and services tailored to the needs of customers in those countries.

  Dave Marmonti, SVP and President of Dell EMEA, then discussed what we're doing in small and medium enterprises (SME).  Within our SME initiative, we have four global sub-initiatives that will drive our growth: sub-segmentation, customer relationship management, IT-as-a-service and a flexible global channel strategy.  Ultimately, we'll bring differentiated products and capabilities to SMEs who just want to focus on their business, not their IT.

  Ron Garriques, President of Dell's Global Consumer Group, said that his goal is simple and straightforward - grow faster than the industry and do so profitably with a great cash conversion cycle.   We get there by getting to the point where COGS and operating expense is competitive and best in class; and by innovating our products and services in order to delight customers independent of the channel they buy through. Growing the profitability of this business is the number one priority.

  Jeff Clarke, SVP of Dell's Business Client Product Group, covered our growth strategy in notebooks.  In a nutshell, Dell will deliver more segment-specific products for consumers, SMEs and customers in emerging countries, while being cost competitive across all price bands and channels.

  Finally, Brad Anderson, SVP of Dell‘s Business Enterprise Product Group, talked about what we're doing in enterprise.  Last year, $289 billion was spent on enterprise-related IT. Dell's share was a mere 4.4 percent of that.  We get a significant share of total server revenue, but we're under-represented in the other categories of spend - storage, systems management, professional services and support services, etc. So we're creating solutions for customers' greatest challenges.  We'll simplify IT with differentiated, industry-leading solutions, including blades, power & cooling, virtualization, iSCSI storage and cloud computing.

  Each of these growth priorities implies there are significant opportunities ahead for Dell.  Our growth in every instance won't be linear, but taken together they represent a thoughtful vision of our industry, the problems and solutions we're tackling, and the white space we're addressing.  It's clearly up to us to drive the right cost model to enhance our competitive position.

  Again, if you haven't already seen the webcast or presentation, I encourage you to watch a replay of them here. 

   

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• Dell Equity Analyst Meeting – Day 1

  Wed. Apr. 02, 2008
  by Robert L. Williams, Director - Investor Relations

  Today, 250 equity analysts and institutional investors joined us in Round Rock for Dell's equity analyst meeting. These meetings, which are available via live webcast, serve two important purposes.  First, they give this audience and all of you an opportunity to hear directly from Dell's senior leadership, and second, it's our chance to help you understand where we're going financially, share our key initiatives and address questions and concerns.

  The meetings and briefings are spread over two days, with the first day being a prerequisite to discussing our growth priorities on day two.  We spent the first day providing a framework by which investors could understand the fundamental changes we're making to Dell's business model - from manufacturing to channels to services.  

  Dell has always been known for its direct model.  With it, we created a direct customer relationship model and build-to-order manufacturing capability like the world had never seen.  Our assets were global and our cycle times were some of the shortest in the industry. 

  But today's PC economics are much different.  Moore's law led to better performance, rapid growth and lower selling prices, ultimately leading to smaller absolute cost advantages.  And growth shifted from desktops to notebooks and from large enterprise customers to consumers and small enterprises.  Our customers are more diverse than ever before.  We now need to serve them in very different ways. 

  Mike Cannon, President of Dell Global Operations, talked about how Dell is optimizing its global manufacturing network to better meet customer needs.  By matching product design to customer segments, we're able to eliminate embedded product costs.  Getting this part right actually enables us to think more broadly about our manufacturing model and enhance the value we provide our customers.

  Many have also questioned how being direct works with channel. The reality is that we have a $10 billion global partner business that we've steadily built for 23 years.  Paul Bell, SVP & President of Dell Americas, spoke to our channel strategy and the investments we're making to better work with VARs and systems integrators. The flexible engagement model we've developed is backed by a compelling value proposition for our partners: our strong brand; a broad portfolio of industry-leading products; and simple, beneficial terms.  It's designed to minimize conflict while building trust and mutually beneficial relationships.  Since we announced this new initiative in Q3, we've worked hard to bring our regional partners onboard to make our solutions available in the geographies that need them most.  

  Steve Schuckenbrock, SVP Global Services & CIO, spoke about how customers spend a massive share of their IT budgets on services and how they face a burning need to shift this spend from maintenance to innovation.  We approach services very differently from our competitors.  We believe services should be customizable, a la carte, and available remotely.  So Dell's new services model combines disruptive technologies with our core strengths to provide customers convenient and affordable enterprise-class support and monitoring services.  Through ProSupport and the assets we acquired through several acquisitions we are building a platform that allows us to remotely manage the client lifecycle.  We let customers choose which services they want and when they want them.  And we provide solutions where consultants are available - but not required.  We have a $6.2 billion global services business today, and there is no reason it can't double over the next 3-4 years.

  These are changes in the way Dell interacts with customer. They set a foundation upon which we'll build our future success.

  If you haven't already seen the webcasts or presentations, I encourage you to watch a replay of them here. 

   

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• Dell Driving Actions to Enhance Competitiveness and Optimize Operations

  Mon. Mar. 31, 2008
  by Lynn A. Tyson, VP - Investor Relations

  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 2^nd and Thursday April 3^rd.   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.

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