Dell, Inc. (

DELL

)

F3Q2011 (Qtr End 10/29/2010) Earnings Call

November 18, 2010 5:00 pm ET

Executives

Rob Williams - VP, IR

Michael Dell - Chairman and CEO

Brian Gladden - SVP and CFO

Steve Felice - President, Consumer, Small and Medium Business

Analysts

Katy Huberty - Morgan Stanley

Toni Sacconaghi - Sanford Bernstein

Richard Gardner - Citigroup

Brian Alexander - Raymond James

Maynard Um - UBS

Steven Fox - CLSA

Ben Reitzes - Barclays Capital

Keith Bachman - Bank of Montreal

Aaron Rakers - Stifel Nicolaus

Mark Moskowitz - JPMorgan

Brian Marshall - Gleacher & Company

Jayson Noland - Robert Baird

Abhey Lamba - ISI Group

Amit Daryanani - RBC Capital Markets

Chris Whitmore - Deutsche Bank

Presentation

Operator

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» Dell Perot Systems Integration Conference Call Transcript

Good afternoon and welcome to the Dell Inc. third quarter fiscal year 2011 earnings conference call. I'd like to inform all participants that this call is being recorded at the request of Dell. The broadcast is the copyrighted property of Dell Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Inc. 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)

I'd like to turn the call over to Rob Williams, Vice President Investor Relations. Mr. Williams, you may begin.

Rob Williams

Thank you. With me today are Michael Dell, Brian Gladden, and Steve Felice, Head of our Consumer, Small and Medium Business. Brian and Steve will review our third quarter results then Michael will follow with his comments.

We have posted a web deck on dell.com and we released a VLog on Dell shares. I encourage you to review these materials for additional perspective. In Q4 we will be attending the Credit Suisse Technology Conference on November 30, Barclays Capital Conference on December 9 and the Raymond James Conference on December 14, as well as CES in January.

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 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 on today's call we will be referring to non-GAAP financial measures, including non-GAAP gross margin, operating expenses, operating income, net income and earnings per share. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in the slide presentation posted on the Investor Relations portion of our website at dell.com and in our 8-K filed today. I encourage you to review these documents. Please also note that unless otherwise mentioned, all growth percentages refer to year-over-year progress.

Now I'll turn it over to Brian.

Brian Gladden

Thanks, Rob. I'd like to start by saying, that we had a good third quarter with solid revenue and profitability growth and good cash flow. Highlights for the quarter include improvement in our gross margins, continued expansion in emerging markets and sustain strength in our global commercial customers demand, as they continue to see value in our products, services and solutions. These accomplishments validate our strategy and demonstrate we're making progress towards our long-term value creation framework.

Revenue for the quarter grew 19% year-over-year, driven by our enterprise solutions and services business and a strong commercial client refresh. We believe we're making strategic progress in improving our consumer business, but we do still have work to do there. And Steve Felice is here today to provide an update on both consumer and SMB later in the call.

Execution on pricing and cost initiatives and the favorable component environment led to the highest operating income we've seen in nearly five years. The profitability in our commercial businesses was driven by improved product margins in our enterprise solutions and services and client hardware businesses.

Let's take a closer look at the third quarter P&L and key performance metrics, which are provided for your reference on pages five and six in the web deck.

Revenue in the third quarter was $15.4 billion, up 19% year-over-year. Enterprise solutions and services grew 31% to $4.3 billion in revenue. Our client product business grew 18% to $8.5 billion, driven by commercial client hardware revenue growth of 23%. Sequentially, consolidated revenue was down 1%, primarily due to a softer than anticipated consumer demand environment.

On a GAAP basis, operating income was $1 billion or 6.7% of revenue, earnings per share was $0.42, which was up 147% year-over-year and up 50% sequentially. Interest and other benefited from the receipt of the $72 million merger termination fee. For the rest of this call, I'll refer to non-GAAP financial measures.

Operating income grew 58% to $1.17 billion or 7.6% of revenue. All of our commercial segments showed improved operating leverage in the quarter. The commercial segment as a whole delivered 10% operating income, representing a 230 basis point increase from the previous quarter. We delivered 20% gross margins, driven by better supply chain execution, pricing discipline and broad component across the clients, which affected all of our lines of business, from client hardware to services to software and peripherals.

As these component cost declines work themselves through the industry supply chain, we do expect the industry pricing environment to more fully reflect these changes. We continue to manage operating expenses well, while we're making important strategic investments in the company. OpEx at $1.9 billion or 12.4% of revenue was up slightly, primarily driven by increased expense related to our performance based compensation. As we told you in June, our variable compensation plans are directly tied to revenue growth, operating income growth and cash flow.

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