Dell Reports Record Third Quarter Earnings
-- Revenue for commercial enterprise products and services up 33 percent
-- Operating margin of 6.7 percent on a GAAP basis
-- Strong cash flow generation of $913 million; nearly $4 billion over the
last four quarters
ROUND ROCK, Texas--(BUSINESS WIRE)-- Global demand for all commercial products and services and solid supply-chain execution led to strong operating income for Dell in its third fiscal quarter, with GAAP operating income of $1.02 billion and record earnings per share of 42 cents. On a non-GAAP basis, operating income was $1.17 billion, or 45 cents per share.
The robust profit results came on a 19 percent increase in revenue to $15.4 billion, as commercial and enterprise sectors continue to be solid. Year to date, the company's revenue has grown 21 percent to $45.8 billion.
Fiscal-Year 2011 Third Quarter Highlights
(in millions) FY11 FY10 Change Revenue $ 15,394 $ 12,896 19 % Operating Income (GAAP) $ 1,024 $ 577 77 % Net Income (GAAP) $ 822 $ 337 144 % EPS (GAAP) $ 0.42 $ 0.17 147 % Operating Income (non-GAAP) $ 1,167 $ 740 58 % Net Income (non-GAAP) $ 875 $ 449 95 % EPS (non-GAAP) $ 0.45 $ 0.23 96 %
Information about Dell's use of non-GAAP financial information is provided under "Non-GAAP Financial Measures" below. Non-GAAP financial information excludes costs related primarily to the amortization of purchased intangibles, severance and facility-action costs, a merger termination fee, certain settlement costs and acquisition-related charges. All comparisons in this press release are year over year unless otherwise noted.
Results
-- Revenue in the quarter grew 19 percent and is up 21 percent year to
date.
-- GAAP operating income was $1.02 billion, 6.7 percent of revenue.
Non-GAAP operating income was $1.17 billion, 7.6 percent of revenue.
-- Cash flow from operations was $913 million, and Dell ended the quarter
with $14 billion in cash and investments.
Strategic Progress:
-- Strong operating leverage across all commercial business segments led to
record profitability, with operating income at 10 percent of revenue.
Revenue for the commercial business was $12.4 billion, up 24 percent.
-- Enterprise solutions and services revenue, which includes Perot Systems,
was up 31 percent. The company's EqualLogic storage business grew 66
percent.
Business Units and Regions:
-- Large Enterpriserevenue was $4.3 billion,up 27 percent from a year ago.
Operating income was $400 million, or 9.2 percent of revenue. Enterprise
solutions and services revenue was $1.7 billion, a 25 percent increase,
and client revenue increased 38 percent. Dell introduced its new virtual
integrated system (VIS) architecture and services that help customers
transition new and existing technologies to open, cloud-like models that
dynamically provision application workloads, and unify heterogeneous
data center assets into a more efficient common pool of resources.
-- Public revenue was $4.4 billion, a 20 percent increase (including the
integration of Perot). Operating income for the quarter was $451
million, 10.2 percent of revenue. State and local government business in
the U.S. represents approximately 9 percent of the total Public
business, less than 3 percent of Dell revenue, and was up 5 percent in
the third quarter. Dell built on its leadership as the No. 1 technology
provider to the health care industry with key customer engagements at
The Methodist Hospital in Houston, Western Maryland Health Systems, and
in China, Shanghai's Songjiang Hospital, to implement Electronic Medical
Record (EMR) systems and diagnostic image transfers that help improve
productivity and reduce operating costs.
-- Small and Medium Business revenue was $3.7 billion, up 24 percent.
Profitability was at a record high, with operating income at $391
million, 10.7 percent of revenue, up 39 percent from last year. In the
quarter, Dell introduced new PowerEdge servers, PowerVault storage, and
PowerConnect networking solutions that help small and medium businesses
affordably update technology infrastructures with easy integration,
minimal downtime and the ability to scale.
-- Consumer revenue was $3 billion, a 4 percent increase. The segment
improved to break-even operating income in the quarter, despite muted
consumer demand. Dell introduced a new family of XPS laptops in the
third quarter, featuring exceptional sound, video and 3D-capabilities.
The company streamlined its Consumer offerings to three brands:
Inspiron, XPS and Alienware during the quarter.
-- Asia-Pacific and Japan revenue grew 29 percent, EMEA increased 15
percent and the Americaswere up 18 percent. Revenue in Brazil, Russia,
India and China (BRIC) grew 30 percent overall, led by a 55 percent
increase in India. The company continues to expand its presence in these
important countries, which now represent 13 percent of total company
revenue.
Quotes:
Michael Dell, chairman of the board and chief executive officer: "Our strong results demonstrate that we are listening to customers and delivering what they want. It validates that our strategy to offer choice and efficiency at every level of the IT enterprise computing stack is taking hold, and we are more focused than ever to being a true partner - not merely a provider - to our customers. Dell is growing in the right areas, and I'm very excited about our momentum."
Brian Gladden, chief financial officer: "Our teams delivered outstanding results in the quarter. With solid demand in our commercial segments, we executed well and that led to record profitability for the company and especially in our important enterprise solutions and services business. We are pleased with our year-to-date revenue growth of 21 percent and non-GAAP operating margin of more than 6 percent. These results position us well for a very good financial year, and we remain focused on our commitment to deliver balanced revenue and operating income growth along with solid cash flow generation."
Company Outlook:
The company expects to see continued strength from the ongoing client refresh among large corporate accounts and strong growth in enterprise products and services. Fourth quarter revenue is expected to track in-line to slightly up from the third quarter as commercial demand remains stable while consumer demand remains more muted. The company expects full-year revenue to track toward the mid-point of the 14-to-19 percent range set earlier in the year and non-GAAP operating income growth to be between 28 and 32 percent.
About Dell
Dell Inc. (NASDAQ: DELL) listens to customers and delivers worldwide innovative technology, business solutions and services they trust and value. For more information, visit www.dell.com. The third-quarter analyst call with Michael Dell, chairman and CEO; Brian Gladden, CFO; and, Steve Felice, senior vice president, Consumer and SMB business unit, will be webcast live today at 4:00 CST and archived at www.dell.com/investor. To monitor highlighted facts from the analyst call, follow on the Dell Investor Relations Twitter account at: http://twitter.com/dellshares. To communicate directly with Dell, go to www.dell.com/dellshares.
Non-GAAP Financial Measures:
This press release includes information about non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share (collectively the "non-GAAP financial measures"), which are not measurements of financial performance prepared in accordance with U.S. generally accepted accounting principles. In the following tables, Dell has provided a reconciliation of each historical non-GAAP financial measure to the most directly comparable GAAP financial measure under the heading "Reconciliation of Non-GAAP Financial Measures" and has presented a detailed discussion of its reasons for including the non-GAAP financial measures and the limitations associated with those measures under the heading "Use of Non-GAAP Financial Measures." Dell encourages investors to review the reconciliation and the non-GAAP discussion in conjunction with Dell's presentation of these non-GAAP financial measures.
Special Note:
Statements in this press release that relate to future results and events (including statements about Dell's future financial and operating performance, anticipated customer demand, including seasonal trends and client refresh timing and scope, enterprise solutions strategies, component costs, cost controls, retail agreements, channels, supply chain improvements, and new products, as well as the financial guidance with respect to revenue and non-GAAP operating income) are forward-looking statements and are based on Dell's current expectations. In some cases, you can identify these statements by such forward-looking words as "anticipate," 'believe," "could," "estimate," "expect," "intend," "confidence," "may," "plan," "potential," "should," "will" and "would," or similar expressions. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including: weak global economic conditions and instability in financial markets; weak economic conditions and additional regulation affecting Dell's financial services activities; intense competition; Dell's cost-cutting measures; Dell's ability to effectively manage periodic product and services transitions; Dell's ability to effectively manage the growth of its distribution capabilities and add to its product and services offerings; Dell's ability to achieve favorable pricing from its vendors; Dell's reliance on third-party suppliers for product components, including reliance on several single-sourced or limited-sourced suppliers; disruptions in component or product availability; successful implementation of Dell's acquisition strategy; Dell's ability to generate substantial non-U.S. net revenue; Dell's product, customer, and geographic sales mix, and seasonal sales trends; Dell's ability to access the capital markets; loss of government contracts; customer terminations of or pricing changes in services contracts, or Dell's failure to perform as it anticipates at the time it enters into services contracts; Dell's ability to hedge effectively its exposure to fluctuations in foreign currency exchange rates and interest rates; counterparty default; unfavorable results of legal proceedings; Dell's ability to obtain licenses to intellectual property developed by others on commercially reasonable and competitive terms; expiration of tax holidays or favorable tax rate structures, or unfavorable outcomes in tax audits and other compliance matters; Dell's ability to maintain strong internal controls; changing environmental and safety laws; the effect of armed hostilities, terrorism, natural disasters, and public health issues; information technology and manufacturing infrastructure disruptions or breaches of data security; Dell's ability to attract, retain, and motivate key personnel; the risk of temporary suspension or debarment from contracting with U.S. federal, state and local governments as a result of settlements of an SEC investigation by Dell and Dell's Chairman and CEO; and other risks and uncertainties discussed in Dell's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for its fiscal year ended January 29, 2010 and its Quarterly Report on Form 10-Q for the quarter ended July 30, 2010. In particular, Dell's expectations with regard to revenue and non-GAAP operating income for the full fiscal year ending January 28, 2011 assume, among other matters, that there is no significant decline in economic conditions generally or demand growth specifically, no significant adverse currency fluctuations which are unhedged, and no significant adverse component pricing or supply movements. Dell assumes no obligation to update its forward-looking statements.
Consolidated statements of income, financial position and cash flows and other financial data follow.
Dell, PowerEdge, PowerVault, PowerConnect, Inspiron, XPS and Alienware are trademarks of Dell Inc.
Dell disclaims any proprietary interest in the marks and names of others.
DELL INC.
Condensed Consolidated Statement of Income and Related Financial Highlights
(in millions, except per share data and percentages)
(unaudited)
Three Months Ended % Growth Rates
October July 30, October
29, 30,
2010(1) 2010(1) 2009 Sequential Yr. to
Yr.
Net revenue
Products $ 12,520 $ 12,645 $ 10,746 (1 %) 17 %
Services, including 2,874 2,889 2,150 (1 %) 34 %
software related
Net revenue 15,394 15,534 12,896 (1 %) 19 %
Cost of net revenue
Products 10,415 10,931 9,269 (5 %) 12 %
Services, including 1,976 2,017 1,394 (2 %) 42 %
software related
Total cost of net 12,391 12,948 10,663 (4 %) 16 %
revenue
Gross margin 3,003 2,586 2,233 16 % 34 %
Selling, general 1,816 1,679 1,501 8 % 21 %
and administrative
Research,
development and 163 162 155 1 % 5 %
engineering
Total operating 1,979 1,841 1,656 7 % 19 %
expenses
Operating income 1,024 745 577 37 % 77 %
Interest and other, 52 (49 ) (63 ) 206 % 181 %
net(2)
Income before 1,076 696 514 54 % 109 %
income taxes
Income tax 254 151 177 67 % 43 %
provision
Net income $ 822 $ 545 $ 337 51 % 144 %
Earnings per share:
Basic $ 0.42 $ 0.28 $ 0.17 50 % 147 %
Diluted $ 0.42 $ 0.28 $ 0.17 50 % 147 %
Weighted average
shares outstanding:
Basic 1,939 1,952 1,956 (1 %) (1 %)
Diluted 1,949 1,960 1,966 (1 %) (1 %)
Percentage of Total
Net Revenue:
Gross margin 19.5 % 16.6 % 17.3 %
Selling, general 11.8 % 10.8 % 11.6 %
and administrative
Research and 1.0 % 1.0 % 1.2 %
development
Operating expenses 12.8 % 11.8 % 12.8 %
Operating income 6.7 % 4.8 % 4.5 %
Income before 7.0 % 4.5 % 4.0 %
income taxes
Net income 5.3 % 3.5 % 2.6 %
Income tax rate 23.6 % 21.7 % 34.5 %
Net Revenue by
Product Category:
Servers and $ 1,844 $ 1,890 $ 1,539 (2 %) 20 %
Networking
Storage 543 624 508 (13 %) 7 %
Services(1) 1,924 1,915 1,244 0 % 55 %
Software and 2,579 2,535 2,394 2 % 8 %
Peripherals
Mobility 4,858 4,700 4,191 3 % 16 %
Desktop PCs 3,646 3,870 3,020 (6 %) 21 %
Consolidated net $ 15,394 $ 15,534 $ 12,896 (1 %) 19 %
revenue
Percentage of Total
Net Revenue:
Servers and 12 % 12 % 12 %
Networking
Storage 3 % 4 % 4 %
Services(1) 12 % 12 % 10 %
Software and 17 % 17 % 19 %
Peripherals
Mobility 32 % 30 % 32 %
Desktop PCs 24 % 25 % 23 %
Net Revenue by
Global Segment:
Large Enterprise $ 4,326 $ 4,549 $ 3,403 (5 %) 27 %
Public 4,442 4,580 3,695 (3 %) 20 %
Small and Medium 3,665 3,535 2,956 4 % 24 %
Business
Consumer 2,961 2,870 2,842 3 % 4 %
Consolidated net $ 15,394 $ 15,534 $ 12,896 (1 %) 19 %
revenue
Percentage of Total
Net Revenue:
Large Enterprise 28 % 29 % 26 %
Public 29 % 30 % 29 %
Small and Medium 24 % 23 % 23 %
Business
Consumer 19 % 18 % 22 %
Consolidated
Operating Income:
Large Enterprise $ 400 $ 288 $ 174
Public 451 369 352
Small and Medium 391 323 282
Business
Consumer - (21 ) 10
Consolidated
segment operating 1,242 959 818
income
Severance and (31 ) (24 ) (123 )
facility actions
Broad based
long-term (75 ) (87 ) (78 )
incentives
Amortization of (89 ) (87 ) (40 )
intangible assets
Acquisition-related (23 ) (16 ) -
Consolidated $ 1,024 $ 745 $ 577
operating income
Note: Percentage growth rates and ratios are calculated based on underlying data
in thousands.
(1) Includes the results of Perot Systems Corporation ("Perot Systems"), which
was acquired on November 3, 2009.
(2) Interest and other, net for the three months ended October 29, 2010 includes
Dell's receipt of a $72 million merger termination fee.
DELL INC.
Condensed Consolidated Statement of Income and Related Financial Highlights
(in millions, except per share data and percentages)
(unaudited)
Nine Months Ended % Growth Rates
October 29, October 30,
2010(1) 2009 Yr. to Yr.
Net revenue
Products $ 37,251 $ 31,601 18 %
Services, including software related 8,551 6,401 34 %
Net revenue 45,802 38,002 21 %
Cost of net revenue
Products 31,731 27,033 17 %
Services, including software related 5,966 4,177 43 %
Total cost of net revenue 37,697 31,210 21 %
Gross margin 8,105 6,792 19 %
Selling, general and administrative 5,325 4,685 14 %
Research, development and 492 445 11 %
engineering
Total operating expenses 5,817 5,130 13 %
Operating income 2,288 1,662 38 %
Interest and other, net(2) (65 ) (107 ) 39 %
Income before income taxes 2,223 1,555 43 %
Income tax provision 515 456 13 %
Net income $ 1,708 $ 1,099 55 %
Earnings per share:
Basic $ 0.88 $ 0.56 57 %
Diluted $ 0.87 $ 0.56 55 %
Weighted average shares outstanding:
Basic 1,950 1,953 (0 %)
Diluted 1,961 1,959 0 %
Percentage of Total Net Revenue:
Gross margin 17.7 % 17.9 %
Selling, general and administrative 11.6 % 12.3 %
Research and development 1.1 % 1.2 %
Operating expenses 12.7 % 13.5 %
Operating income 5.0 % 4.4 %
Income before income taxes 4.9 % 4.1 %
Net income 3.7 % 2.9 %
Income tax rate 23.2 % 29.3 %
Net Revenue by Product Category:
Servers and Networking $ 5,519 $ 4,228 31 %
Storage 1,721 1,593 8 %
Services(1) 5,730 3,700 55 %
Software and Peripherals 7,610 7,022 8 %
Mobility 14,121 11,957 18 %
Desktop PCs 11,101 9,502 17 %
Consolidated net revenue $ 45,802 $ 38,002 21 %
Percentage of Total Net Revenue:
Servers and Networking 12 % 12 %
Storage 4 % 4 %
Services(1) 12 % 10 %
Software and Peripherals 17 % 18 %
Mobility 31 % 31 %
Desktop PCs 24 % 25 %
Net Revenue by Global Segment:
Large Enterprise $ 13,121 $ 10,088 30 %
Public 12,878 10,664 21 %
Small and Medium Business 10,724 8,743 23 %
Consumer 9,079 8,507 7 %
Consolidated net revenue $ 45,802 $ 38,002 21 %
Percentage of Total Net Revenue:
Large Enterprise 29 % 27 %
Public 28 % 28 %
Small and Medium Business 23 % 23 %
Consumer 20 % 22 %
Consolidated Operating Income:
Large Enterprise $ 971 $ 538
Public 1,118 1,028
Small and Medium Business 1,027 758
Consumer (4 ) 98
Consolidated segment operating 3,112 2,422
income
Severance and facility actions (112 ) (395 )
Broad based long-term incentives (249 ) (246 )
Amortization of intangible assets (264 ) (119 )
Acquisition-related (59 ) -
Other(3) (140 ) -
Consolidated operating income $ 2,288 $ 1,662
Note: Percentage growth rates and ratios are calculated based on underlying data
in thousands.
(1) Includes the results of Perot Systems Corporation ("Perot Systems"), which
was acquired on November 3, 2009.
(2)Interest and other, net for the nine months ended October 29, 2010 includes
Dell's receipt of a $72 million merger termination fee.
(3) Other for the nine months ended October 29, 2010 includes amounts for the
$100 million settlement of the SEC investigation and a $40 million settlement
for a securities litigation matter.
DELL INC.
Condensed Consolidated Statement of Financial Position and Related Financial
Highlights
(in millions, except for "Ratios")
(unaudited)
October 29, July 30, October 30,
2010 2010 2009(2)
Assets:
Current assets:
Cash and cash equivalents $ 12,889 $ 11,694 $ 12,795
Short-term investments 492 744 331
Accounts receivable, net 6,407 6,565 5,279
Financing receivables, net 3,588 3,272 2,318
Inventories, net 1,294 1,372 952
Other current assets 3,118 3,562 3,196
Total current assets 27,788 27,209 24,871
Property, plant and equipment, net 1,948 1,980 1,978
Investments 662 633 828
Long-term financing receivables, net 709 622 311
Goodwill 4,259 4,264 1,748
Purchased intangible assets, net 1,553 1,638 607
Other non-current assets 235 294 682
Total assets $ 37,154 $ 36,640 $ 31,025
Liabilities and Equity:
Current liabilities:
Short-term debt $ 826 $ 1,627 $ 351
Accounts payable 11,278 12,465 9,947
Accrued and other 3,898 3,812 3,637
Short-term deferred services revenue 3,093 3,009 2,926
Total current liabilities 19,095 20,913 16,861
Long-term debt 5,168 3,623 3,442
Long-term deferred services revenue 3,447 3,311 3,054
Other non-current liabilities 2,631 2,632 2,643
Total liabilities 30,341 30,479 26,000
Stockholders' equity 6,813 6,161 5,025
Total liabilities and equity $ 37,154 $ 36,640 $ 31,025
Ratios:
Days of sales outstanding (1) 41 41 40
Days supply in inventory 9 10 8
Days in accounts payable (82 ) (87 ) (84 )
Cash conversion cycle (32 ) (36 ) (36 )
Average total revenue/unit (approximate) $ 1,380 $ 1,340 $ 1,290
Note: Ratios are calculated based on underlying data in thousands.
(1) Days of sales outstanding ("DSO") is based on the ending net trade
receivables and most recent quarterly revenue for each period. DSO includes the
effect of product costs related to customer shipments not yet recognized as
revenue that are classified in the other current assets. At October 29, 2010,
July 30, 2010, and October 30, 2009, DSO and days of customer shipments not yet
recognized were 38 and 3 days, 38 and 3 days, 37 and 3 days, respectively.
(2) Prior period amounts have been revised to reflect a reclassification between
short-term deferred service revenue and accrued and other.
DELL INC.
Condensed Consolidated Statements of Cash Flows
(in millions, unaudited)
Three Months Ended Nine Months Ended
October 29, October 30, October 29, October 30,
2010 2009(1) 2010 2009(1)
Cash flows from
operating activities:
Net income $ 822 $ 337 $ 1,708 $ 1,099
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and 234 191 745 593
amortization
Stock-based compensation 69 65 225 211
Effects of exchange rate
changes on monetary
assets and liabilities (14 ) 32 23 58
denominated in foreign
currencies
Deferred income taxes 20 52 (35 ) (88 )
Provision for doubtful
accounts - including 82 80 299 290
financing receivables
Other - 56 4 75
Changes in assets and
liabilities, net of
effects from
acquisitions:
Accounts receivable 308 137 (588 ) (456 )
Financing receivables (46 ) (177 ) (459 ) (556 )
Inventories 77 (112 ) (241 ) (83 )
Other assets 707 117 743 93
Accounts payable (1,306 ) 233 (175 ) 1,551
Deferred services 137 (10 ) 402 34
revenue
Accrued and other (177 ) (200 ) (165 ) (183 )
liabilities
Change in cash from 913 801 2,486 2,638
operating activities
Cash flows from
investing activities:
Investments:
Purchases (123 ) (406 ) (1,186 ) (1,182 )
Maturities and sales 346 325 1,184 1,307
Capital expenditures (93 ) (70 ) (284 ) (249 )
Proceeds from sale of - - 18 16
facility and land
Purchase of financing (430 ) - (430 ) -
receivables
Collections on purchased 20 - 20 -
financing receivables
Acquisition of business, (24 ) - (246 ) (3 )
net of cash received
Change in cash from (304 ) (151 ) (924 ) (111 )
investing activities
Cash flows from
financing activities:
Repurchase of common (200 ) - (600 ) -
stock
Issuance of common stock 2 - 11 -
under employee plans
Issuance (repayment) of
commercial paper (900 ) 143 (176 ) 43
(maturity 90 days or
less), net
Proceeds from debt 1,945 257 2,554 1,748
Repayments of debt (296 ) (50 ) (1,115 ) (62 )
Other - - 2 -
Change in cash from 551 350 676 1,729
financing activities
Effect of exchange rate
changes on cash and cash 35 96 16 187
equivalents
Change in cash and cash 1,195 1,096 2,254 4,443
equivalents
Cash and cash
equivalents at beginning 11,694 11,699 10,635 8,352
of period
Cash and cash
equivalents at end of $ 12,889 $ 12,795 $ 12,889 $ 12,795
period
(1) Prior period amounts have been reclassified to conform to the current year
presentation.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES
The tables on the following pages set forth, for the periods indicated, a reconciliation of non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share (collectively, the "non-GAAP financial measures") to the most comparable GAAP financial measures. These non-GAAP financial measures may not be directly comparable to similarly titled measures reported by other companies. See "Use of Non-GAAP Financial Measures" following the tables for additional information regarding Dell's reasons for including the non-GAAP financial measures and for material limitations with respect to the usefulness of these measures.
DELL INC.
Reconciliation of Non-GAAP Financial Measures
(in millions, except per share data and percentages)
(unaudited)
Three Months Ended % Growth Rates
October July 30, October
29, 30,
2010 2010 2009 Sequential Yr. to
Yr.
GAAP gross margin $ 3,003 $ 2,586 $ 2,233 16 % 34 %
Non-GAAP
adjustments:
Amortization of 71 70 27
intangibles
Severance and 4 14 102
facility actions
Acquisition-related - 1 -
Non-GAAP gross $ 3,078 $ 2,671 $ 2,362 15 % 30 %
margin
GAAP operating $ 1,979 $ 1,841 $ 1,656 7 % 19 %
expenses
Non-GAAP
adjustments:
Amortization of (18 ) (17 ) (13 )
intangibles
Severance and (27 ) (10 ) (21 )
facility actions
Acquisition-related (23 ) (15 ) -
Non-GAAP operating $ 1,911 $ 1,799 $ 1,622 6 % 18 %
expenses
GAAP operating $ 1,024 $ 745 $ 577 37 % 77 %
income
Non-GAAP
adjustments:
Amortization of 89 87 40
intangibles
Severance and 31 24 123
facility actions
Acquisition-related 23 16 -
Non-GAAP operating $ 1,167 $ 872 $ 740 34 % 58 %
income
GAAP net income $ 822 $ 545 $ 337 51 % 144 %
Non-GAAP
adjustments:
Amortization of 89 87 40
intangibles
Severance and 31 24 123
facility actions
Acquisition-related 23 16 -
Other(1) (72 ) - -
Aggregate
adjustment for (18 ) (43 ) (51 )
income taxes
Non-GAAP net Income $ 875 $ 629 $ 449 39 % 95 %
GAAP earnings per $ 0.42 $ 0.28 $ 0.17 50 % 147 %
share - diluted
Non-GAAP
adjustments per 0.03 0.04 0.06
share - diluted
Non-GAAP earnings $ 0.45 $ 0.32 $ 0.23 41 % 96 %
per share - diluted
GAAP Diluted WAS 1,949 1,960 1,966
Percentage of Total
Net Revenue:
GAAP gross margin 19.5 % 16.6 % 17.3 %
Non-GAAP adjustment 0.5 % 0.6 % 1.0 %
Non-GAAP gross 20.0 % 17.2 % 18.3 %
margin
GAAP operating 12.8 % 11.8 % 12.8 %
expenses
Non-GAAP adjustment (0.4 %) (0.2 %) (0.2 %)
Non-GAAP operating 12.4 % 11.6 % 12.6 %
expenses
GAAP operating 6.7 % 4.8 % 4.5 %
income
Non-GAAP adjustment 0.9 % 0.8 % 1.2 %
Non-GAAP operating 7.6 % 5.6 % 5.7 %
income
Note: Percentage growth rates and ratios are calculated based on underlying data
in thousands.
(1) Other for the three months ended October 29, 2010 consists of Dell's receipt
of a $72 million merger termination fee which on a GAAP basis is recorded in
Interest and Other, Net.
DELL INC.
Reconciliation of Non-GAAP Financial Measures
(in millions, except per share data and percentages)
(unaudited)
Nine Months Ended % Growth Rates
October 29, October 30,
2010 2009 Yr. to Yr.
GAAP gross margin $ 8,105 $ 6,792 19 %
Non-GAAP adjustments:
Amortization of intangibles 209 80
Severance and facility actions 47 181
Acquisition-related 2 -
Non-GAAP gross margin $ 8,363 $ 7,053 19 %
GAAP operating expenses $ 5,817 $ 5,130 13 %
Non-GAAP adjustments:
Amortization of intangibles (55 ) (39 )
Severance and facility actions (65 ) (214 )
Acquisition-related (57 ) -
Other(1) (140 ) -
Non-GAAP operating expenses $ 5,500 $ 4,877 13 %
GAAP operating income $ 2,288 $ 1,662 38 %
Non-GAAP adjustments:
Amortization of intangibles 264 119
Severance and facility actions 112 395
Acquisition-related 59 -
Other(1) 140 -
Non-GAAP operating income $ 2,863 $ 2,176 32 %
GAAP net income $ 1,708 $ 1,099 55 %
Non-GAAP adjustments:
Amortization of intangibles 264 119
Severance and facility actions 112 395
Acquisition-related 59 -
Other(1) 68 -
Aggregate adjustment for income taxes (123 ) (103 )
Non-GAAP net Income $ 2,088 $ 1,510 38 %
GAAP earnings per share - diluted $ 0.87 $ 0.56 55 %
Non-GAAP adjustments per share - 0.19 0.21
diluted
Non-GAAP earnings per share - diluted $ 1.06 $ 0.77 38 %
GAAP Diluted WAS 1,961 1,959
Percentage of Total Net Revenue:
GAAP gross margin 17.7 % 17.9 %
Non-GAAP adjustment 0.6 % 0.7 %
Non-GAAP gross margin 18.3 % 18.6 %
GAAP operating expenses 12.7 % 13.5 %
Non-GAAP adjustment (0.7 %) (0.7 %)
Non-GAAP operating expenses 12.0 % 12.8 %
GAAP operating income 5.0 % 4.4 %
Non-GAAP adjustment 1.3 % 1.3 %
Non-GAAP operating income 6.3 % 5.7 %
Note: Percentage growth rates and ratios are calculated based on underlying
data in thousands.
(1) Other for the nine months ended October 29, 2010 includes amounts for the
$100 million settlement of the SEC investigation and a $40 million settlement
for a securities litigation matter, which are both recorded in operating
expenses, offset by Dell's receipt of a $72 million merger termination fee,
which is recorded in Interest and Other, Net.
USE OF NON-GAAP FINANCIAL MEASURES
Dell provides non-GAAP financial information to investors to supplement GAAP financial information. Dell believes that excluding certain items from Dell's GAAP results allows Dell's management to better understand Dell's consolidated financial performance from period to period and in relationship to the operating results of Dell's segments, as management does not believe that the excluded items are reflective of underlying operating performance. Dell also believes that excluding certain items from Dell's GAAP results allows Dell's management to better project Dell's future consolidated financial performance because Dell's forecasts are developed at a level of detail different than that used to prepare GAAP-based financial measures, and exclude certain amounts pertaining to events that have not yet occurred and are not currently possible to estimate with a reasonable degree of accuracy. Non-GAAP operating income growth as projected for Fiscal 2011, which is a forward looking non-GAAP financial measure, excludes the following items, some of which Dell cannot forecast, thereby preventing Dell from reconciling its projections to GAAP: acquisition related charges, amortization of purchased intangible assets related to acquisitions, severance and facility action costs, a merger termination fee that was received during the third quarter of Fiscal 2011, and amounts for the settlement of the SEC investigation as well as a securities litigation matter that were incurred during the first quarter of Fiscal 2011. The historical non-GAAP financial measures, as defined by Dell, represent the comparable GAAP measures adjusted to exclude these same items. In the future, Dell expects that it may again exclude such items and may incur income and expenses similar to these excluded items, including in connection with any future acquisitions. Accordingly, the exclusion of these items and other similar items in Dell's non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual. Dell believes the non-GAAP financial measures will provide investors with useful information to help them evaluate Dell's operating results and projections. These non-GAAP financial measures facilitate an enhanced understanding of historical results and projections, and enable more meaningful period to period comparisons.
This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for gross margin, operating expenses, operating income, net income, and earnings per share prepared in accordance with GAAP.
The non-GAAP financial measures for the periods indicated in the tables above reflect adjustments related to the following items:
-- Acquisition-related charges are expensed as incurred and consist
primarily of retention payments, integration costs, bankers' fees, legal
fees, and consulting fees. Retention payments include stock-based
compensation and cash incentives awarded to employees, which are
recognized over the vesting period. Integration costs include
incremental business costs that are directly attributable to the
acquisition of Perot Systems during the fourth quarter of Fiscal 2010
and are being incurred during the integration period. These costs
primarily include IT costs related to the integration of IT systems and
processes, costs related to the integration of Perot Systems employees,
costs related to full-time employees who are working on the integration,
and consulting expenses. Acquisition-related charges are inconsistent in
amount and are significantly impacted by the timing and nature of
acquisitions. Therefore, although Dell may incur these types of expenses
in connection with future acquisitions, Dell believes eliminating
acquisition related charges for purposes of calculating the non-GAAP
financial measures facilitates a more meaningful evaluation of Dell's
current operating performance and comparisons to Dell's past operating
performance.
-- Amortization of purchased intangible assets consists primarily of
amortization of customer relationships, customer lists, acquired
technology, trade names, and non-compete covenants purchased in
connection with business acquisitions. Dell incurs charges relating to
the amortization of these intangibles, and those charges are included in
Dell's GAAP financial statements. Amortization charges for Dell's
purchased intangible assets are inconsistent in amount and are
significantly impacted by the timing and magnitude of Dell's
acquisitions. Consequently, Dell excludes these charges for purposes of
calculating the non-GAAP financial measures to facilitate a more
meaningful evaluation of Dell's current operating performance and
comparisons to Dell's past operating performance.
-- Severance and facility action costs primarily relate to facilities
charges including accelerated depreciation and severance and benefits
for employees terminated pursuant to actions taken as part of a
comprehensive review of costs, including certain employee cost synergies
realized through our strategic acquisitions. Management measures the
performance of Dell excluding the effects of severance and facility
action costs and has been, for recent quarters, providing the effects to
investors to supplement GAAP financial information. Dell excludes these
severance and facility action costs for purposes of calculating the
non-GAAP financial measures because it believes that these historical
costs do not reflect expected future operating expenses and do not
contribute to a meaningful evaluation of Dell's current operating
performance or comparisons to Dell's past operating performance.
-- Dell also adjusts its GAAP results for certain fees and settlements.
During the third quarter of Fiscal 2011, Dell received $72 million from
3PAR Inc ("3PAR") for 3PAR's termination of its merger agreement with
Dell. For the first quarter of Fiscal 2011, Dell recorded a $100 million
settlement amount for the SEC investigation into certain of Dell's
accounting and financial matters, which was initiated in 2005. Also
during the first quarter of Fiscal 2011, Dell incurred $40 million for a
securities litigation class action lawsuit that was filed against Dell
during Fiscal 2007. Dell is excluding these fees and settlements from
the operating results of the first nine months of Fiscal 2011 for the
purpose of calculating the non-GAAP financial measures because it
believes these fees and settlements are outside Dell's ordinary course
of business and do not contribute to a meaningful evaluation of Dell's
current operating performance.
-- The aggregate adjustment for income taxes is the estimated combined
income tax effect for the adjustments mentioned above. The tax effects
are determined based on the jurisdictions where the adjustments were
incurred.
There are limitations to the use of non-GAAP financial measures. Other companies, including companies in Dell's industry, may calculate the non-GAAP financial measures differently than Dell does, limiting the usefulness of those measures for comparative purposes. In addition, items such as amortization of purchased intangible assets represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in the non-GAAP financial measures and such measures, therefore, do not reflect the full economic effect of such loss. Lastly, items such as severance and facility action costs and acquisition expenses that are excluded from the non-GAAP financial measures can have a material impact on earnings. Dell's management compensates for the foregoing limitations by relying primarily on Dell's GAAP results and using non-GAAP financial measures only supplementally or for projections when comparable GAAP measures are not available. Non-GAAP financial measures are not an alternative to GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis when available. Dell provides detailed reconciliations of each historical non-GAAP financial measure to its most directly comparable GAAP measure within the financial information included with this press release and in other written materials that include such non-GAAP historical financial measures, and Dell encourages investors to review the reconciliations in conjunction with the presentation of any historical non-GAAP financial measures.
Source: Dell
Released November 18, 2010