Dell Inc. F1Q11 (Qtr End 04/30/2010) Earnings Call Transcript

Dell Inc. F1Q11 (Qtr End 04/30/2010) Earnings Call Transcript
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Dell Inc. (DELL)

F1Q11 Earnings Call

May 20, 2010 5:00 pm ET

Executives

Robert Williams – Director of Investor Relations

Michael S. Dell – Chairman and Chief Executive Officer

Brian T. Gladden – Chief Financial Officer

Brad Anderson – Senior Vice President, Enterprise Product Group

Analysts

Kathryn Huberty - Morgan Stanley

Brian Alexander – Raymond James

Richard Gardner - Citigroup

Toni Sacconaghi - Sanford Bernstein

Bill Shope - Credit Suisse

Jayson Noland - Robert W. Baird & Co., Inc.

Stephen Fox – CLSA

Benjamin Reitzes - Barclays Capital

Maynard Um - UBS

Chris Whitmore – Deutsche Bank

Mark Moskowitz - J.P. Morgan

Aaron Rakers – Stifel Nicolaus

David Bailey - Goldman Sachs

Shannon Cross – Cross Research

Rob Cihra – Caris & Company

Jeff Fidacaro – Susquehanna Financial Group

Louis Miscioscia – Collins Stewart LLC

P

resentation

Operator

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Welcome to the Dell Inc. first quarter fiscal year 2011 earnings call. (Operator Instructions) I would like to turn the call over to Rob Williams, Director of Investor Relations. Mr. Williams, you may begin.

Robert Williams

Thank you. With me today are Michael Dell, Brian Gladden, our CFO and Brad Anderson who leads our server storage and networking solutions group. Brian and Brad will review our first quarter results then Michael will follow with his perspective on our growth strategy.

We just posted information on Q1 results and a VLog with Brian and Brad on our IR site at Dell.com. I encourage you to review these materials. Our upcoming investor relations activities include the Bernstein CEO conference on June 3

rd

and our analyst meeting here in Austin on June 23 and 24

th

.

Next I would like to remind you that all statements made during this call that relate to future results and events including statements about Dell’s future financial and operating performance, expected component pricing, global currency volatility and anticipated customer demand are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from these 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 will be referring to non-GAAP financial measures including non-GAAP gross margin, operating expenses, operating income, net income and earnings per share. 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 Dell.com and our 8K filed today which we encourage you to review. Please note that unless otherwise mentioned all growth percentages refer to year-over-year progress.

Now I would like to turn it over to Brian.

Brian Gladden

Thanks, Rob. We had a solid first quarter in an improving global environment and demand has picked up especially with our commercial customers who make up approximately 78% o our revenue. We had solid unit and revenue growth in the quarter. Solution revenue which includes enterprise servers and networking, storage and our services business was up 38% to $4.2 billion aided by the acquisition of Perot Systems. We also saw very strong demand in the emerging countries around the world.

Our entire commercial business continued to benefit from improved demand and the hard work we have done to improve our cost structure and the critical investments we are making to build out our enterprise business. Our nearly $50 billion commercial business is performing well and this validates our strategy to expand our investments in servers, storage, software and services. Given the strategic importance of our enterprise business we have asked Brad Anderson to share his view on the progress we are making in enterprise solutions and discuss some of the underlying growth we are seeing there.

But first, let’s look at the first quarter P&L and the key performance metrics which are laid out on chart’s five and six in the web deck. Revenue in the first quarter was $14.9 billion up 21% year-over-year and flat sequentially. This is slightly better than our typical historical seasonality. On a GAAP basis operating income was $619 million or 4.2% of revenue and earnings per share was $0.22 which is up 47% year-over-year. On the rest of this call I will refer to non-GAAP financial measures.

Operating income grew 29% to $824 million or 5.5% of revenue. Sequentially, gross margins improved slightly to 17.6% and our OpEx was 12% of revenue. We continue to focus on improving operating income while making key investments in products and in sales and services resources. Net income and earnings per share were both up 20% year-over-year. Net income was $584 million while earnings per share was $0.30 per share.

Our financing and other expenses were $68 million, up versus prior quarter driven primarily by currency valuation of certain balance sheet items due to a strengthening U.S. dollar. Our tax rate was 22.8% and reflects the net benefit of certain effectively settled foreign tax audits. For the year we do expect our tax rate to be in the 27% range consistent with our previous outlook.

We generated $238 million in cash flow from operations and $400 million in free cash flow in the quarter. Over the past four quarters we generated $4.3 billion in free cash flow. As you know the first quarter is typically our weakest cash flow quarter as we make year-end bonus payments during the quarter. We also used about $130 million of cash to build some strategic inventory given the current component environment.

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