Dell Q3FY13 Results


Uploaded by DellVlog on 15.11.2012

Transcript:
Hi. Thanks for joining us today on Dell Shares. I'm Rob Williams. With me today is Brian Gladden,
CFO --
How are you doing, Rob?
-- and Steve Felice, chief commercial officer. Thanks for joining us, guys, to talk a little
bit about the progress on the strategy in the third quarter and what we're seeing out
there with the demand environment, and finish up with a little bit of a view on the outlook.
So, let's start with the strategy, Brian. Give us an update on where we are on the strategy.
Well, you know, Rob, I'd say we continue to make progress on the strategy. This is not
a short term execution to the strategy here. The reality is we're seeing lots of proof
points that we're making progress here. Enterprise solutions and services for the quarter was
up 3 percent, a tough market for that business but I think in almost every case we grew at
the market or faster, and we're seeing good profitability, and it's mixing up the business.
Servers and networking are key for the business, and we were up 11 percent in the quarter,
with some strong progress in DCS and the hyper-scale data centers. Networking continues to grow
very quickly for us with the acquisition of Force10 contributing there.
We've got some great progress this year on acquisitions. So, we've closed six acquisitions
that we've spent a fair amount of capital on that, almost $5 billion, that really begin
to reshape software and our cloud efforts, some services activities there, really contributing
to enterprise solutions and services.
So, I would say some good progress, and we're going to stick to the strategy. Really important
for us to be patient and deliver the results and see the proof points as we move forward
here.
And we added Quest this quarter, a real foundational asset in software.
Critical to the software business and really the platform we'll build off of, yeah.
Yeah. Good, good.
Well, let's talk a little bit about the quarter. Go ahead and give us an update on the third
quarter in your view.
Yeah, no, look, we delivered $13.7 billion on the revenue line, at the lower end of what
we talked about coming out of August, in a relatively tough environment. No question
we saw some challenging macroeconomic environments and really IT demand dynamics as people are
pushing discretionary spending out.
You know, gross margins in general were pretty solid, about flat with where we were if you
adjust for some of the things we had in the second quarter, at 22 percent. We're seeing
some good mix-up from the investments and things we're doing on the enterprises solutions
and services side.
Right, right.
Some pressure I would say in gross margins as you think about the PC business and the
dynamics.
Pretty good execution on cost, op-ex basically down for the quarter sequentially, but we
added significant new investments around the key priorities from a strategy standpoint,
and added a month of the Quest costs for the quarter.
Right, right.
You know $0.39 in terms of earnings per share on a non-GAAP basis, and cash flow I would
say was a very good highlight for the quarter. We generated $1.3 billion of cash flow, continue
to make progress there, improved cash conversion cycle, and are beginning to see some of the
benefits of the new mix of business affecting our cash flow. So, again some progress here
in a challenging environment, and we'll continue to drive forward.
Yeah. One of the areas where we were relatively mixed in terms of our performance was in the
client business. The desktop business did okay, okay against a pretty challenging backdrop,
and the notebook business I'd say was below our expectations.
So, Steve, walk us through your view on that business and what you saw really from a business
point of view, both in the commercial and the consumer businesses.
Well, Rob, it really was a tough environment, and I'd like to go back a little bit to last
quarter, and we started to talk about some of the dynamics we were seeing. And one of
the things we all recognized was there was a buildup across the industry in the channel,
and we pointed that out last quarter, and we expressed some concern that it might take
a while to work that through, and that's exactly what we saw play out this quarter. And it
happened around the world.
You know, I think one of the differences in this economic decline versus previous ones
is that even the emerging markets are affected. You know, we're used to enjoying some pretty
healthy growth rates in the client business in places like China and Brazil, in India
and Russia, and we've seen declines in all of those countries.
A lot of the demand remains in the lower end products, the low priced products. There's
clearly still some effect of tablets moving into the business. You know, we just decided
that it didn't make a lot of sense for us to dive into the low end just to make a unit
number.
So, it puts pressure on the business. We have to make sure that we're winning where we can.
We did see a number of competitive wins this quarter that will help us in the future, some
large wins with large customers, and we are making a lot of progress and getting our coverage
increased and going after more acquisition business across the regions, but it's going
to take a little bit of time because you're doing this in an environment where there's
a lot of deferrals in purchasing and there's just not a lot of strength in a demand environment.
Yeah, definitely. You know, the IDC data for the commercial business globally I think was
about down 10 percent in units, and so we roughly held share against obviously a negative
10 percent decline in the overall market. So, again you've just got to kind of dig in
and continue to execute your strategy and hold onto the principles that you believe
are the right things to do, and I think as we work through the fourth quarter, as we
already alluded to would be a little bit of a challenge, and get into the first half of
next year I think that we see a better demand environment for sure.
Yeah, absolutely. You're right, the desktop business was down globally, but we were basically
holding share.
Right.
Notebooks is where we should have done better, and again that hit across the board.
But, you know, when you have an environment where you have a lot of suppliers chasing
too little demand, you're going to see some increased competitive pressures. And even
in our Latitude end of the business we spent a lot of time defending turf this quarter,
and there is price competition going on because everyone is interested in keeping their inventory
moving. And so, you know, we have to be pretty cautious in this environment, and make sure
that we're sticking with our strategy.
The enterprise side of the business performed well in this environment. So, that's a good
indication of where customers are prioritizing their spending, and the fact that we have
these advantaged products and terrific solutions, especially with the broadened portfolio now,
is an indication that customers want to do business with us. They're just pretty limited
in where they can spend their money.
Yeah. You know, and the small and medium business market is a perfect example of that. That
business did relatively well globally, and really well in the enterprise solutions and
services side. So, why don't you start with that?
The SMB business had 15 percent growth in the enterprise solutions and services, and
we saw growth in servers, in networking, in the services side of the business that was
very healthy, mid-teens to over 20 percent in these categories. So, the strategy and
the transformation of the business I think is really manifesting itself with this customer
set, with the small and medium business. Even on the client side we're seeing less of a
decline there because there is a little more health out of that customer set around the
world. So, we're going to continue to invest there, because that's a perfect example of
where the strategy is working and we're going to make sure we're covering it properly.
What about in the large enterprise or the large commercial space and also the government
and state and local government space?
Well, we continue to see fairly significant slowdowns in both areas. In the large enterprise
space it's very clear that customers are deferring purchases. Whether you look at these surveys
that are done independently from CIOs or even our own discussions with customers we don't
really see the pipelines going away, they just keep pushing, they keep pushing out.
In fact, I would say that our pipelines remain as healthy as they've been; it's just a question
of timing as to when budgets are going to get released.
And, of course, in more localized areas like the U.S. where people are trying to understand
things like fiscal cliff and getting the elections out of the way there's clearly a pause in
what's going on.
In the public sector we saw a decline of 11 percent. That is seen around the world in
terms of budget constraints for government spending.
The federal business in the U.S. is a good example where their fiscal year ends in September.
That quarter of spending was pretty healthy actually. But then when we got into October
you could see under no budget approval yet and pauses in trying to figure out where budgets
are going, we saw a big decline.
In Western Europe throughout the year we've seen a pretty big slowdown in government spending.
So, this is going to be an area that I think will remain challenged until we pull ourselves
out of this global economic crisis.
Right.
Now, switching over to the consumer side, you know, obviously big transition from Windows
7 to Windows 8, which really affected, as we just talked about, a lot of that inventory
push-through that just needed to get worked out of the channel, and we've kind of stayed
clear of that for obvious reasons. But we're now there, we've got Windows 8, and I've been
using the product, I know Brian is, Michael is, I know you are. I'm pretty pleased with
what I'm seeing. I know it's going to take a while, particularly on the commercial side,
for these products to get traction, but talk us through what you're hearing about from
customers, both on the commercial and the consumer side.
Well, just earlier this week, I was with quite a few customers, and had a chance to get some
specific feedback, and it is very positive about Windows 8 itself, and the new form factors
that are coming out, and there's great receptivity to Dell's approach to this.
For example, I talked to a lot of customers on the commercial side that were saying, you
know, if we're going to use a tablet, for example, in a more mission critical area or
something where the availability is critical, we need things like a replaceable battery.
And then we talk about the Latitude 10 that has that, and you get terrific reaction to
that. Or the security features that haven't been addressed in some of the competitive
models; very good reaction to that.
The design of our XPS tablet is really being well received. The XPS 12, that form factor
is really unique and customers are -- we saw them using it, and now that you have the great
touch capability with Windows 8 you can really see the power of that kind of a product.
And, of course, on the consumer side the all-in-ones, the XPS 27 all-in-one is getting fantastic
reviews.
Really has got great reviews.
So, reaction from customers, it's very good.
Now, I think we just have to be realistic about this. It's just launched. It's still
early days. There are some limited supplies available across the industry. So, this is
something that's still going to take a while to play itself out, but I'm really encouraged
by what I'm hearing in these early weeks.
Great. Well, thanks for the update on that.
Brian, let's wrap it up here. What's your view on Q4 really? We're wrapping up the year,
and we put out $1.70 as our outlook for EPS for the full year. We're sticking with that
outlook, and that applies about $0.38 for the fourth quarter. So, why don't you just
talk us through the dynamics in the fourth quarter.
Yeah, I think it's to some extent consistent with what we said in August. We're really
not counting on a significant improvement in the environment, some of the things Steve
talked about, clearly challenged demand, and we just expect more of the same as we transition
through the Windows 8 transition and move into next fiscal year.
So, reality, as you think about demand, we're really counting on some sequential improvement
that would be seasonally driven to the 2 to 5 percent range of sequential revenue growth.
In terms of profitability, as you said, you know, we're expecting to be at really what
we said before, so $1.70 or better than $1.70 is really the call.
So, really that's the framework that we're managing through here. Clearly good focus
on costs, and that's going to continue to be a priority for us as we move through the
cycle, and sticking with a strategy, really not changing really our approach in this kind
of an environment.
So, that's really how we're thinking about it to relay finish out the year.
Great. Well, again thanks for joining us today, and thank you for joining us on Dell Shares.
I would remind you that this is just a portion of our total earnings materials. I'll encourage
you to go to the website and review our press release, our earnings materials related to
the conference call, our web deck, et cetera, our GAAP to non-GAAP reconciliations; these
are all important things that as investors and owners of the company you should be interested
in.
So, again thanks again for joining us, and we look forward to your questions and comments.