Dell Achieves 9-Percent Increase in Fiscal Third-Quarter EPS, Driven by Improved Competitiveness, Execution
ROUND ROCK, Texas--(BUSINESS WIRE)-- Dell Inc. (NASDAQ: DELL):
-- Revenue down slightly as global IT spending slows
-- Rigorous cost management drives 11-percent year-over-year reduction in
operating expense dollars
-- Global Consumer business performance improves
Dell fiscal third-quarter earnings improved solidly as a result of disciplined cost management and an improved mix of products and services in a challenging demand environment. Earnings per share increased 9 percent to 37 cents, on revenue of $15.2 billion.
"Our business model adapts quickly to economic changes, even the kind of significant challenge we saw in the third quarter," said Michael Dell, chairman and CEO. "We increased profitability with an improved mix of products and services - more than a third of our revenue and profit now comes from servers, storage, services and software and peripherals - and benefited from initiatives to improve our competiveness, including tight cost controls.
"During previous periods of economic challenge, Dell led in providing customers the technology they want and the value they need, and we're doing it again. We're simplifying IT, reducing costs and maximizing productivity for customers."
Mr. Dell said the company is continuing to focus on five growth areas: Notebooks, Enterprise, Global Consumer, Small and Medium Business and Emerging Countries.
Dell revenue was down 3 percent on unit-shipment growth of 3 percent. Operating income improved 22 percent to $1 billion, or 6.7 percent of revenue, driven by gross margins of 18.8 percent, which benefited from an improved mix of products and services, lower component costs, and continued progress on cost-reduction initiatives announced in April. Operating expenses were 12.1 percent of revenue, an 11-percent decline on a dollar basis from a year ago. The company ended the quarter with 2,200 fewer positions than in Q2, and down 9 percent from one year ago.
"The velocity of Dell's business model typically gives us an early view to demand signals, ahead of competitors," said Brian Gladden, Dell CFO. "This visibility gives us a strategic advantage to quickly adapt our cost structure and approach."
Third Quarter Year to Date
(in millions, except FY09 FY08 Change FY09 FY08 Change
share data)
Revenue $ 15,162 $ 15,646 (3%) $ 47,673 $ 45,144 6%
Operating Income $ 1,015 $ 829 22% $ 2,733 $ 2,664 3%
Net Income $ 727 $ 766 (5%) $ 2,127 $ 2,268 (6%)
EPS $ 0.37 $ 0.34 9% $ 1.06 $ 1.00 6%
References to Dell's unit growth as a multiple of the growth of the industry
exclude Dell, and all growth rates are year-over-year unless otherwise
noted.
Global industry demand in the quarter slowed through October, adversely affecting the company's cash conversion cycle, which ended at negative 25 days, and resulted in negative cash flow from operations of $86 million. As company growth stabilizes, more typical cash generation is expected to resume. Year to date, cash flow from operations was $1.2 billion and the company ended the quarter with $8.9 billion in cash and investments. In the quarter, Dell spent $400 million to buy back 21 million shares.
Revenue for the quarter from outside the U.S. was 48 percent of Dell's total revenue. For the BRIC countries of Brazil, Russia, India and China, revenue increased 20 percent and shipments 43 percent. They accounted for 9 percent of Dell's global revenue.
Global Commercial
Dell's commercial business serves large corporations; public customers comprised of government, education and health care; and Small and Medium Business (SMB).
"We took a measured approach in the third quarter to balancing growth and profitability. By the end of the second quarter, we had seen a slowdown in demand in most customer segments and concentrated our efforts where there was both profit and growth opportunity as we also improved our mix of products and services," Mr. Gladden said. "As a result, global commercial operating income increased to more than 8 percent of revenue as revenue declined 6 percent."
Laptop units were flat as the company transitioned to the new Latitude Series E and Dell Precision laptop product lines, ranging from the lightest ultra-portable in the company's history to the most powerful mobile workstation. Server units declined 4 percent and growth in storage revenue was flat. Enhanced services revenue, which is largely driven by Dell's commercial business, was up 7 percent to $1.4 billion.
Dell's portfolio of scalable enterprise products is the strongest in its history, having over the past year expanded both its server and storage products.
The company also introduced four new models of OptiPlex commercial desktop systems. These systems cut power consumption by up to 43 percent, speed serviceability time by more than 40 percent versus Dell's competition and include a portfolio of cloud services that can be toggled on and off as needed.
Reflecting the overall spending slowdown, Americas Commercial had an 8-percent decline in revenue, on a 14 percent decline in units while operating income improved both sequentially and year over year.
Dell's EMEA commercial business had a 5-percent decline in revenue while shipments were essentially the same as a year ago. Actions taken to improve profitability in EMEA resulted in a 62 percent increase in operating income dollars sequentially. This improvement was driven primarily by lower operating expenses and an improved mix of products and services.
In APJ, Dell's commercial business had a 2 percent increase in revenue on a 15 percent increase in shipments and operating income grew by over 60 percent. APJ had success with the launch of Dell's Vostro A Series laptop and desktop systems, specifically designed for businesses, governments and institutions operating on limited budgets in emerging countries.
Global Consumer
Dell's Global Consumer business increased revenue 10 percent over last year on a 32-percent increase in unit shipments - led by continued success in the global retail channel and a more diversified product portfolio. Dell's growth was more than two times the rate of the industry.
Operating income was $112 million or 4 percent of revenue, compared with a loss a year ago. It is the highest level of profitability for this business in 13 quarters. Year to date, operating income margins were 1.7 percent of revenue. The improvement in profitability year-over-year was driven by a 24-percent reduction in operating-expense dollars along with lower product and component costs.
Dell consumer products won 41 awards in the third quarter, led by the selection of the new Inspiron Mini 9 as one of Time Magazine's "Best Inventions of 2008" and CNET's "10 Most Cutting Edge Products of 2008." The Studio Hybrid earned a "Hot Hardware Recommended Award" and the Studio Desktop a CNET "Editor's Choice" award.
Company Outlook
Dell believes that global IT end-user demand will continue to be challenging. Against this backdrop the company will continue to focus on improving competitiveness, lowering costs and improving its mix of products and services to optimize liquidity, profitability and growth. The company will continue to incur costs as it realigns its business to improve competitiveness, reduce headcount in certain areas and invest in infrastructure, growth opportunities and acquisitions.
About Dell
Dell Inc. (NASDAQ: DELL) listens to customers and delivers innovative technology and services they need and value. Uniquely enabled by its direct business model, Dell is a leading global systems and services company and No. 34 on the Fortune 500. For more information, visit www.dell.com, or to communicate directly with Dell via a variety of online channels, go to www.dell.com/dellshares. To get Dell news direct, visit www.dell.com/RSS.
Special Note
Statements in this press release that relate to future results and events (including statements about our future financial and operating performance) are forward-looking statements based on Dell's current expectations. Actual results and events in future periods could differ materially from those projected in these forward-looking statements because of a number of risks and uncertainties, including: general economic, business and industry conditions; our ability to re-establish a cost advantage over our competitors; our ability to generate substantial non-U.S. net revenue; our ability to accurately predict product, customer and geographic sales mix and seasonal sales trends; information technology and manufacturing infrastructure failures; our ability to effectively manage periodic product transitions; disruptions in component or product availability; our reliance on third-party suppliers for quality product components, including reliance on several single-source or limited-source suppliers; our ability to access the capital markets; unfavorable results of legal proceedings; our ability to properly manage the distribution of our products and services; the success of our cost-cutting measures; our ability to effectively hedge our exposure to fluctuations in foreign currency exchange rates and interest rates; counterparty default risks; our ability to obtain licenses to intellectual property developed by others on commercially reasonable and competitive terms; our ability to attract, retain and motivate key personnel; loss of government contracts; expiration of tax holidays or favorable tax rate structures; changing environmental laws; and the effect of armed hostilities, terrorism, natural disasters and public health issues. For a discussion of those and other factors affecting our business and prospects, see Dell's periodic filings with the Securities and Exchange Commission. We assume no obligation to update forward-looking statements.
Consolidated statements of income, financial position and cash flows follow.
Dell, Latitude, OptiPlex, PowerEdge and Dell Precision 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)
(unaudited)
Three Months Ended % Growth Rates
October 31, August 1, November 2,
2008 2008 2007 Sequential Yr. to Yr.
Net revenue $ 15,162 $ 16,434 $ 15,646 (8%) (3%)
Cost of revenue 12,309 13,607 12,758 (10%) (4%)
Gross margin 2,853 2,827 2,888 1% (1%)
Selling, general 1,671 1,840 1,900 (9%) (12%)
and administrative
Research,
development and 167 168 159 (1%) 5%
engineering
Total operating 1,838 2,008 2,059 (8%) (11%)
expenses
Operating income 1,015 819 829 24% 22%
Investment and (6) 18 107 (132%) (105%)
other income, net
Income before 1,009 837 936 21% 8%
income taxes
Income tax 282 221 170 28% 66%
provision
Net income $ 727 $ 616 $ 766 18% (5%)
Earnings per common
share:
Basic $ 0.37 $ 0.31 $ 0.34 19% 9%
Diluted $ 0.37 $ 0.31 $ 0.34 19% 9%
Weighted average
shares outstanding:
Basic 1,953 1,991 2,236 (2%) (13%)
Diluted 1,957 1,999 2,266 (2%) (14%)
Percentage of Total
Net Revenue:
Gross margin 18.8% 17.2% 18.5%
Selling, general 11.0% 11.2% 12.2%
and administrative
Total research and 1.1% 1.0% 1.0%
development
Operating expenses 12.1% 12.2% 13.2%
Operating income 6.7% 5.0% 5.3%
Income before 6.7% 5.1% 6.0%
income taxes
Net income 4.8% 3.7% 4.9%
Income tax rate 28.0% 26.4% 18.2%
Net Revenue by
Product Category:
Desktop PCs $ 4,083 $ 4,928 $ 4,754 (17%) (14%)
Mobility 4,849 4,871 4,729 (0%) 3%
Software and 2,586 2,790 2,533 (7%) 2%
Peripherals
Servers and 1,573 1,702 1,651 (8%) (5%)
Networking
Services 1,449 1,462 1,355 (1%) 7%
Storage 622 681 624 (9%) (0%)
Percentage of Total
Net Revenue:
Desktop PCs 27% 30% 30%
Mobility 32% 30% 30%
Software and 17% 17% 16%
Peripherals
Servers and 10% 10% 11%
Networking
Services 10% 9% 9%
Storage 4% 4% 4%
Net Revenue by
Geographic Region:
Americas Commercial $ 7,229 $ 8,096 $ 7,834 (11%) (8%)
EMEA Commercial 3,272 3,503 3,448 (7%) (5%)
Asia Pacific - 1,818 2,054 1,790 (11%) 2%
Japan Commercial
Global Consumer 2,843 2,781 2,574 2% 10%
Consolidated net $ 15,162 $ 16,434 $ 15,646 (8%) (3%)
revenue
Percentage of Total
Net Revenue:
Americas Commercial 48% 49% 50%
EMEA Commercial 21% 21% 22%
Asia Pacific - 12% 13% 11%
Japan Commercial
Global Consumer 19% 17% 17%
Consolidated
Operating Income
Americas Commercial $ 763 $ 700 $ 663
EMEA Commercial 116 72 211
Asia Pacific - 123 157 76
Japan Commercial
Global Consumer 112 (5) (24)
Consolidated
segment operating 1,114 924 926
income
Stock-based
compensation (73) (78) (97)
expense
Amortization of (26) (27)
intangible assets
Consolidated 1,015 819 $ 829
operating income
Note: Percentage growth rates and ratios are calculated based on underlying data
in thousands.
DELL INC.
Condensed Consolidated Statement of Operations and Related Financial Highlights
(in millions, except per share data)
(unaudited)
Nine Months Ended % Growth Rates
October 31, November 2,
2008 2007 Yr. to Yr.
Net revenue $ 47,673 $ 45,144 6%
Cost of revenue 39,028 36,467 7%
Gross margin 8,645 8,677 (0%)
Selling, general and administrative 5,423 5,557 (2%)
Research and Development:
Research, development and engineering 487 456 7%
In-process research and development 2 - N/A
Total research and development 489 456 7%
Total operating expenses 5,912 6,013 (2%)
Operating income 2,733 2,664 3%
Investment and other income, net 137 281 (51%)
Income before income taxes 2,870 2,945 (3%)
Income tax provision 743 677 10%
Net income $ 2,127 $ 2,268 (6%)
Earnings per common share:
Basic $ 1.07 $ 1.01 6%
Diluted $ 1.06 $ 1.00 6%
Weighted average shares outstanding:
Basic 1,993 2,236 (11%)
Diluted 1,998 2,262 (12%)
Percentage of Total Net Revenue:
Gross margin 18.1% 19.2%
Selling, general and administrative 11.4% 12.3%
Total research and development 1.0% 1.0%
Operating expenses 12.4% 13.3%
Operating income 5.7% 5.9%
Income before income taxes 6.0% 6.5%
Net income 4.5% 5.0%
Income tax rate 25.9% 23.0%
Net Revenue by Product Category:
Desktop PCs $ 13,712 $ 14,713 (7%)
Mobility 14,624 12,610 16%
Software and Peripherals 8,116 7,254 12%
Servers and Networking 4,928 4,862 1%
Services 4,359 3,919 11%
Storage 1,934 1,786 8%
Percentage of Total Net Revenue:
Desktop PCs 29% 32%
Mobility 31% 28%
Software and Peripherals 17% 16%
Servers and Networking 10% 11%
Services 9% 9%
Storage 4% 4%
Net Revenue by Geographic Region:
Americas Commercial $ 22,623 $ 22,765 (1%)
EMEA Commercial 10,581 9,927 7%
Asia Pacific - Japan Commercial 5,896 5,262 12%
Global Consumer 8,573 7,190 19%
Consolidated net revenue $ 47,673 $ 45,144
Percentage of Total Net Revenue:
Americas Commercial 48% 50%
EMEA Commercial 22% 22%
Asia Pacific - Japan Commercial 12% 12%
Global Consumer 18% 16%
Consolidated Operating Income
Americas Commercial $ 2,051 $ 2,064
EMEA Commercial 409 695
Asia Pacific - Japan Commercial 411 304
Global Consumer 142 (1)
Consolidated segment operating 3,013 3,062
income
Stock-based compensation expense (201) (398)
In-process research and development (2) -
Amortization of intangible assets (77) -
Consolidated operating income $ 2,733 $ 2,664
Note: Percentage growth rates and ratios are calculated based on underlying data
in thousands.
DELL INC.
Condensed Consolidated Statement of Financial Position and Related Financial
Highlights
(in millions, except for "Ratios" and "Other information")
(unaudited)
October 31, August 1, November 2,
2008 2008 2007(2)
Assets:
Current assets:
Cash and cash equivalents $ 7,910 $ 8,623 $ 12,236
Short-term investments 662 410 369
Accounts receivable, net 5,532 6,451 6,156
Financing receivables, net 1,526 1,629 1,560
Inventories, net 1,109 1,104 1,102
Other 4,795 3,559 2,925
Total current assets 21,534 21,776 24,348
Property, plant and equipment, net 2,458 2,588 2,631
Investments 374 501 1,980
Long-term financing receivables, net 435 348 389
Goodwill 1,743 1,753 204
Purchased intangible assets, net 750 781 69
Other non-current assets 523 660 759
Total assets $ 27,817 $ 28,407 $ 30,380
Liabilities and Equity:
Current liabilities:
Short-term debt $ 266 $ 129 $ 266
Accounts payable 9,475 11,215 11,411
Accrued and other 4,108 4,271 4,268
Short-term deferred service revenue 2,572 2,572 2,386
Total current liabilities 16,421 18,187 18,331
Long-term debt 1,851 1,840 392
Long-term deferred service revenue 3,001 3,117 2,635
Other non-current liabilities 2,385 2,357 2,077
Total liabilities 23,658 25,501 23,435
Redeemable common stock - 83 101
Stockholders' equity 4,159 2,823 6,844
Total liabilities and equity $ 27,817 $ 28,407 $ 30,380
Ratios:
Days of sales outstanding (1) 36 38 38
Days supply in inventory 8 7 8
Days in accounts payable 69 74 81
Cash conversion cycle (25) (29) (35)
Other Information:
Regular headcount (approximate) 77,700 79,300 81,900
Temporary headcount 3,100 3,700 7,200
Total headcount 80,800 83,000 89,100
Average total revenue/unit (approximate) $ 1,440 $ 1,420 $ 1,520
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 31,
2008, August 1, 2008, and November 2, 2007, DSO and days of customer
shipments not yet recognized were 33 and 3 days, 35 and 3 days and 35 and 3,
respectively.
(2)Prior period amounts have been revised to reflect a reclassification
between short-term and long-term deferred service revenue.
DELL INC.
Condensed Consolidated Statements of Cashflows
(in millions, unaudited)
Three Months Ended Nine Months Ended
October 31, November 2, October 31, November 2,
2008 2007 2008 2007
Cash flows from operating
activities:
Net income $ 727 $ 766 $ 2,127 $ 2,268
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and 194 153 575 424
amortization
Stock-based compensation 73 97 201 291
Effects of exchange rate
changes on monetary assets
and liabilities (3) 9 (113) 40
denominated in foreign
currencies
Deferred income taxes 228 (25) 209 (86)
Other 52 48 137 64
Changes in operating assets
and liabilities, net of
effects from acquisitions:
Accounts receivable 230 (748) (162) (1,313)
Financing receivables (47) (66) (28) (184)
Inventories (12) (126) 65 (437)
Other assets (175) (370) (648) (278)
Accounts payable (1,664) 785 (1,992) 899
Deferred service revenue 19 350 424 790
Accrued and other 292 125 370 274
liabilities
Change in cash from (86) 998 1,165 2,752
operating activities
Cash flows from investing
activities:
Investments:
Purchases (362) (323) (1,150) (2,088)
Maturities and sales 282 618 2,034 2,745
Capital expenditures (137) (172) (401) (636)
Proceeds from sale of - - 44 -
facility and land
Acquisition of business, - (87) (165) (106)
net of cash received
Change in cash from (217) 36 362 (85)
investing activities
Cash flows from financing
activities:
Repurchase of common stock (415) (1) (2,866) (1)
Issuance of common stock 11 - 79 21
under employee plans
Issuance (payment) of 153 (60) 253 (100)
commercial paper, net
Proceeds from issuance of - 13 1,519 38
debt
Repayments of debt (14) (16) (237) (45)
Other - (6) - 1
Change in cash from (265) (70) (1,252) (86)
financing activities
Effect of exchange rate
changes on cash and cash (145) 68 (129) 109
equivalents
Change in cash and cash (713) 1,032 146 2,690
equivalents
Cash and cash equivalents at 8,623 11,204 7,764 9,546
beginning of period
Cash and cash equivalents at $ 7,910 $ 12,236 $ 7,910 $ 12,236
end of period
Source: Dell Inc.
Released November 20, 2008