Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Robert Williams – Head of Investor Relations

Brian T. Gladden – Senior Vice President, Chief Financial Officer

Tom Sweet – Corporate Controller

Analysts

Katy Huberty – Morgan Stanley

Toni Sacconaghi – Sanford Bernstein

Brian Alexander – Raymond James

Maynard Um – Wells Fargo

Shannon Cross – Cross Research

Steve Milunovich – UBS

Kulbinder Garcha – Credit Suisse

Chris Whitmore – Deutsche Bank

Keith Bachman – Bank of Montreal

Ananda Baruah – Brean Capital

Aaron Rakers – Stifel Nicolaus

Bill Shope – Goldman Sachs

Stephen Patel – ISI Group

Dell Inc. (DELL) F1Q14 Earnings Conference Call May 16, 2013 4:45 PM ET

Operator

Good afternoon, and welcome to the Dell Inc., First Quarter Fiscal 2014 Earnings Conference Call. I’d like to inform all participants this call is being recorded at the request of Dell. This 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, Head of Investor Relations. Mr. Williams, you may begin.

Robert Williams

Thanks, McKinsey. With me today are Brian Gladden and Tom Sweet. The web deck is posted to our website in advance of the call and I encourage you to review this and the related materials for additional prospective.

Next, I’d also like to remind you that all statements that are 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 in our press release and web deck. We assume no obligation to update our forward-looking statements.

Note that 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 measures are reconciled to the most directly comparable GAAP measures in the web deck posted in the Investor Relations section at dell.com and in our press release, and 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. Consistent with last quarter, we will not take any questions on the pending transaction to take the company private.

Now, I’ll turn it over to Brian.

Brian T. Gladden

Thanks Rob. As we head into the new fiscal year, we continue to execute our strategy to be the leading provider of end-to-end scalable solutions. Our strategy is differentiated based on our focus on practical innovation, efficient and affordable solutions and our superior customer relationship model.

For the first quarter of fiscal year 2014, we delivered revenue of $14.1 billion, down 2%. The enterprise solutions, services and software business was up 12% to $5.5 billion. Our continued focus on our customers and our ability to meet their needs with differentiated solutions is evident in numerous customer wins that Tom will highlight in the segment section later.

Over the past few years, we’ve acquired many new capabilities in areas like scalable storage solutions, application migration and software. We continue to invest in strategic capabilities additionally, and less than two weeks ago, we announced and closed the acquisition of Enstratius, which improves our end-to-end solutions capabilities by enabling our customers to more effectively manage and integrate their Cloud environments.

I’ll refer to non-GAAP financial measures going forward. Gross margin was $2.9 billion at 20.6% of revenue, which was down 40 basis points sequentially when adjusting for last quarter’s vendor settlements. We continue to face the competitive pricing environment and have aligned our pricing strategy to invest in growth ahead of plan reductions in our cost structure and this has affected our profitability.

We remain focused on pursuing strategic revenue opportunities that will drive long-term profitability and cash flow. SG&A increased 4% and as a percentage of revenue increased 20 basis points sequentially to 14.2%. R&D spending increased 33% and as a percent of revenue increased 10 basis points sequentially to 2.2%. Of note, there were almost $90 million in expenses related to the pending go-private transactions that were excluded from our non-GAAP results.

Operating income was $590 million or 4.2% of revenue. Our non-GAAP tax rate of 28.7% is driven by a greater portion of our business in higher tax jurisdictions during the quarter. Earnings per share were $0.21 declining 51%. Cash used in operations in the quarter was $39 million as the first quarter is typically a seasonal low for cash flow. On a trailing 12 month basis, cash flow from operations was $3.4 billion down 31%. Our cash and investments balance ended at $13.2 billion as we repaid approximately $2 billion in debt during the quarter.

Now let me turn to our operating segment results. As we announced in February, this is the first quarter we’re reporting results under the new segment structure. We’ve aligned our operating segments to our end-to-end solutions portfolio in the Enterprise Solutions Group, Dell Services, Dell Software and End User Computing Group. Enterprise Solutions Group and the End User Computing Group receive revenue from Dell Services to align our reporting structure and drive accountability in each of the respective operating segments.

As a result, with some of our operating segment revenue will not equal our consolidated non-GAAP results. In addition, there are unallocated costs that remain at a corporate level that our reconciling items between the total segment and consolidated operating income. The reconciliation of all these items to our consolidated results can be found in the tables that are available on the Dell Investor Relations website.

Now, let me turn it over to Tom Sweet, who will take you through our new business segment results.

Tom Sweet

Thanks, Brian. Let me take you through the financial results for each segment and I will also share a few important customer wins. Let’s start with the Enterprise Solutions Group or ESG. This business includes servers, networking, storage and ESG-related peripherals. We continue to see strong growth in ESG of 10% and revenue of $3.1 billion and operating income of $136 million or 4.4% of revenue. Within ESG, our server, networking and enterprise peripheral business delivered revenue of $2.7 billion, which equates to 14% growth.

This was driven by strong growth in our hyper-scale data center servers. In this space Dell Servers power four of the top five search engines and 75% of the top social media sites worldwide.

Our networking business increased 24% on strong Force10 results. This represents the ninth straight quarter of both year-over-year and sequential growth in this business. Dell storage revenue was down 10% to $424 million. We’re focused on continuing to more effectively position the right solutions based on customer needs and optimizing our selling motion to improve revenue momentum. While we have made progress, we have more work to do in this area.

The ESG market is rapidly changing and migrating to converged solutions that blur the lines between traditional product sets. A great example of this was a win with Statoil Norway as our global capabilities in converged solutions displays legacy vendors in each of the traditional product sets.

We are now rolling out a solution that includes Dell branded servers, storage and networking for their new data centers in over 70 locations worldwide. The services business includes a broad range of IT and business services including support and deployment services, infrastructure, cloud, security services, applications and business process services.

This business was up 2% to $2.1 billion. OpEx for this business increased to $317 million or 17.6% of revenue, up from 16.3% of revenue in the first quarter of last year. We have been reshaping this portfolio to focus on more profitable solutions that are aligned to our strategic capabilities and we continue to improve our cost structure.

Within services, support and deployment increased 2% with revenue of $1.2 billion. Enhanced and new solutions such as Pro Support Plus are adding capabilities to our portfolio that focus on proactively improving the performance and stability of critical systems by leveraging our expertise and deep understanding of the customers IT environment. These solutions and strong attach rates have resulted in revenue streams, partially mitigating the downward pressure caused by the decline in EUC hardware sales.

Infrastructure, cloud, and security services were up 11% to $612 million which includes an increase of 20% in our security business. Security continues to be one of the top concerns of our customers and we have continued to develop and deliver new and innovative solutions to accommodate the constantly changing threats. We had a 15% decline in our apps and BPO business driven by a divestiture and select contract expirations as we continue working to improve the profitability of this business.

Our services capabilities combined with our vertical expertise continue to position us well to address the needs of our customers. A great example of this was a win with the UK-based Locala community partnership, a social enterprise that delivers community healthcare to over 400,000 people. Our solution focus on improving the management of patient records and simplifying their IT environment by delivering customized services, hardware and software through a cloud-based solution.

Our software business includes systems management, security software solutions and information management. This business delivered revenue of $295 million in an operating loss of $85 million for the quarter. Consistent with our prior communication and business plan, we remain confident that the Quest acquisition will be accretive in the first quarter of fiscal year 2015 as we invest to grow the business.

We are enhancing our software capabilities and increasing our investment in this business with additional sales capacity in R&D. Software is a glue for many of our end-to-end solutions and it will play an increasingly important role in our competitive differentiation.

Our End-User Computing businesses or EUC includes desktops including thin clients, notebooks including tablets, third-party software and client related peripherals. This business delivered revenue of $8.9 billion, down 9%. Operating income of $224 million was down 65% at 2.5% of revenue. As we discussed last quarter, we are investing and acquiring new customer accounts that will benefit our long-term profitability and cash flow. We continue to expect relatively weak demand in this business and continued market competitiveness.

These dynamics reinforce the importance of our cost out initiatives for EUC, where we are targeting greater than $1 billion in savings by the end of fiscal 2015.

In addition, during the quarter, we increased our investment to improve sales coverage for key areas of the business. The desktop and thin-client business revenue was $3.3 billion, down 2%. The trajectory of the desktop business continues to improve as we maintain a strong position in the traditional desktop space and are seeing good traction with new desktop form factor such as our innovative all-in-one designs.

Mobility revenue of $3.6 billion was down 16% as demand in the space continues to be pressured by customers diverting spending to alternative mobile solutions. We are encouraged by the industry-based enhancements coming to the notebook touch ecosystem and we will bring new and innovative solutions to the market to enhance our position in this space. We are seeing a good ramp in our tablet based solutions led by our Latitude 10 business focus tablet. Our third-party software in EUC peripherals delivered revenue of $2 billion, down 6%.

A great example of our ability to deliver differentiated solutions to our customers is a recently awarded $60 million client refresh with Marsh & McLennan. We were able to offer a broad array of EUC solution between our Latitude notebooks, OptiPlex desktops as well as precision workstations and XPS systems for higher end-users. Our warranty, product quality, value and partnership were all key points of differentiation. We will be rolling out these solutions to 55,000 end users globally displacing a key competitor that was a long time incumbent.

Before I turn it back to Rob, I want to remind everyone that consistent with last quarter, given our pending merger agreement, we will not be providing an outlook.

Now I will turn it back to Rob to be in Q&A.

Robert Williams

Thanks, Tom. Please limit your questions to one with no follow-ups. McKinsey, can we have the first question?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer portion of today’s call. (Operator Instructions) We’ll take our first question from Katy Huberty with Morgan Stanley.

Katy Huberty – Morgan Stanley

Hi thanks, good afternoon. Given the significant change in profitability, can you just take a step back and talk about whether the margin deterioration this quarter is what you expected when you rolled out a more aggressive pricing strategy and if it was what you expected? Can you just go into a more detail around what it is, you’re trying to accomplish, given that segment operating income dollars were almost cut in half and it doesn’t drive top line growth? Thanks.

Brian T. Gladden

Yeah, Katy, I would say we’ve been talking about this for a couple of quarters about our need to adjust pricing. We did that. You saw some of that last quarter, it was affected by the settlements that we had as well and it wasn’t quite as apparent in the P&L. But clearly we’ve been focused on this for a while. I think there are parts of the business where we are beginning to see some elasticity.

Demand has been I would say weaker than we expected as we headed into the year. And I think the reality is in many cases these are accounts that we’re gaining that we feel very good about the long-term profitability and the impact on our cash flow over time. So while we may not see that showing up there is a positive in the P&L in the short-term, we think for the long-term it’s the right thing to do to get ourselves back in price position to scale the business.

And I think as you look at the share dynamics that played out in the first quarter, we actually did improve our position on a share basis in a market that’s pretty tough. So really conscious effort to position the business and something we’ve been working on for a few quarters now.

Operator

We’ll take our next question from Toni Sacconaghi with Sanford Bernstein.

Toni Sacconaghi – Sanford Bernstein

Hi, yes thank you. I just wanted to follow-up on that. Is there a minimum acceptable level of profitability in the end-user computing group that you are willing to just staying on an ongoing basis in your effort to hold or gain share. And related to that, you talked about making investments in advance to your cost cutting. I think a year ago at your Analyst Day, you talked about this cost cutting. Given that you’ve started to be more price aggressive, why have you not been able to undertake any of this cost cutting to date, what’s holding you back and wouldn’t it make a lot more sense to be doing the cost cutting and more aggressive pricing concurrently?

Brian T. Gladden

Yeah, Toni, that wouldn’t – without providing the details of the specific initiatives, I wouldn’t say we haven’t executed on the cost initiatives. I think we have continued to take cost out of the business. We are just choosing consciously to reinvest those dollars in sales resources and R&D resources in the software business, things that we’ve talked about over time being important to the future of the company. So I think those things are going on concurrently and in this time right now, we have chosen to reinvest those savings that we’re driving as part of that initiative and important investments for the future of the company. That’s just what we’ve decided to do.

In terms of profitability, I assume you’re talking about the EUC business. Look, I think we’re not managing that business for one quarter at a time and I think there is a network effect to the impact of what we do there and the scale of that business and the customer relationships that we gain. We are clearly focused on cost in that business in this environment. We have been focused on gaining and improving the growth of that business and gaining share. We’ve been able to do that. And as we execute on cost and continue to execute the strategy there, we are confident that will be an important part of the portfolio but not focused on a 90-day target relative to the profitability of that business.

Operator

We will take our next question from Brian Alexander with Raymond James.

Brian Alexander – Raymond James

Thanks. I guess following up on pricing, Brian, maybe just talk about why Dell has embraced such an abrupt change in pricing strategy in the client business in the last two quarters. What’s really caused such a sharp change in management’s thinking? And related to that, how much of this is self inflicted to retain customers during this period of uncertainty and how much of this would you say is market driven.

Brian T. Gladden

I think it’s hard to separate this two, Brian. As you think about how market dynamics play out, clearly there are parts of the business, segments of the business where we are being more aggressive and we recognize that places where we have a strong foothold or historically have had a strong foothold can ultimately build on those relationships and benefit the entire portfolio of solutions. Those are places where clearly we’d like to be a bit more aggressive and have over the last couple of quarters. I wouldn’t say this has been a abrupt change clearly recognizing as demand weakened over the course of the last year. We’ve recognized the need to stop shrinking at a rate faster than the market and we’ve made those adjustments over the course of a few different quarters here and have seen the impact of that. Improve in terms of growth rates and at the same time, impact short-term profitability for sure.

Operator

We’ll take our next question from Maynard Um with Wells Fargo.

Maynard Um – Wells Fargo

Hi thank you. Can you talk about your customer engagements and how those discussions are going in light of everything that’s happening? How much of your time is being spend explaining kind of what’s happening and are customers showing any indication of potentially holding out or lengthened sales cycles just to wait and see what happens. Thanks.

Brian T. Gladden

Yeah Maynard, I think in general the customer base has been very supportive of the company and long-term relationships, the quality of our solutions, the new solutions we are adding to the portfolio have really carried those relationships and not to say there aren’t some areas where we’ve seen questions and we have had to spend time with customers. We’ve looked at it as a chance to spend more time with our customers and to make sure they’re comfortable with the strategy of the company and where we are taking it. And I would say for those conversations that I have been part of, those have been very good conversations that in many cases have resulted in more opportunities for the company.

Operator

We will take our next question from Shannon Cross with Cross Research.

Shannon Cross – Cross Research

Thank you very much. Could you talk more about your increased investment in sales and distribution in key regions and segments?

Brian T. Gladden

This isn’t new Shannon. We have been adding resources in the sales model really over the last couple of years and some of that was adding specialist capability around key technologies that we’ve been adding to the portfolio and doing that organically, but also many of the acquisitions obviously have brought capability from a commercial standpoint with them. That’s been one primary focus.

I think the other is some specific regions and sub-segments to the market where we’ve got strong capability. And where we’ve seen good progress in terms of building out and adding sales people, we have not hesitated to add more. And tracking the progress and productivity of those sales resources making sure they’re delivering and bringing new business to the company and really taking advantage of places where we have strength has been the focus.

Clearly the acquisition of Quest in the software business has brought significant sales capacity to the company and that’s been one big area. And as you know and we’ve talked about a lot, the mid market is a place where we have focused and added resources as well.

Operator

We’ll take our next question from Steve Milunovich with UBS.

Steve Milunovich – UBS

Thank you. Back to the end-user pricing question, could you give a sense of how much of a strategic change this is because in the proxy materials, one of your consultant suggested shifting from a margin to a margin dollar, more commodity driven strategy and obviously we’ve seen some of that.

Michael Dell has indicated apparently that he is going to kind of endorse that approach and shift. So, on the scale from 0% which is no change to 100%, which is a complete change. Are you kind of tweaking things now or do you feel like this is really taken into the full extent that we are likely to see over time in terms of going after more of a low end strategy?

Brian T. Gladden

Yeah, look Steve I wouldn’t say our strategy has changed really at all. I think tactically we’ve recognized the need to be competitive. We’ve adjusted our pricing appropriately. We are expanding our offerings across the portfolio of really offerings at high price bands or higher value products, mid value products, lower value products to play in key markets around the world as we’ve done over time. And I think you’ll continue to see us do that. It’s not a – this is not a new strategy. This is not a new business model for us. I would say its adjusting tactics given what the markets doing and really where we need to be in the portfolio.

Tom Sweet

Yeah, Steve, I would say that – I think it’s fair to say that when you think about our portfolio of customers, the vast majority of those being commercial customers on a global basis. As we’ve talked through our and made decisions to increase our focus on those customers, there is acquisition business that you engage in.

And as Brian alluded to earlier, you think it’s absolutely the right thing to do for the long-term. But these are accounts that you have to go out and take it different tax and pricing strategy with them and that’s often to provide an entry level into that account. And so I think you’re seeing a little bit of that in the P&L.

Operator

We will take our next question from Kulbinder Garcha with Credit Suisse.

Kulbinder Garcha – Credit Suisse

Thank you. Brian, a couple of kind of follow-ups and everything is being offered today. One of them is just on the End User Computing side, I take the point managing the business for the next 90 days and that’s kind of quite clear. I guess intend to this pursue of new customers, can you speak about where we are in that process. Have you put the investments in sales pricing or otherwise you need to all is that significant more amount of effort to come through that’s kind of one question.

And the second is just the broad level, given the uncertainty that’s going on at Dell over the last few months, I understand the sales cycle may not lengthen, but what financial impact would you say is having on ideal results or and how you’re managing the business from a cost perspective? I’m trying to understand with the margins you’re producing overall, now they are lower. Do we seen for sometime, and some of that market, but some of that I think it has to be down to what’s been going on with Dell. So any kind of insight there you can provide would be helpful?

Brian T. Gladden

Yeah, I’ll try to answer the second part first Kulbinder. We haven’t changed the way we’re running the business. The strategy for the company has endured and I would say we continue to adapt that strategy given the market conditions and things that we learn as we go. But we have made no changes to the strategy and how we’re running the company as a result of this process. I think that’s clear.

And I would say it’s very difficult to quantify what impact the process that we are going to has had on the results of the company, we did callout incremental costs that we are incurring, the transaction costs that we’ve excluded from our non-GAAP reporting but clearly there is a chance to spend more time with customers and some level of customer just uncertainty that we’re working our way through. That said we feel like we’ve done a good job with that during this period.

In terms of the EUC business and where we are positioned and where we are in that, I think that we’ve made a cautious decision here to improve the competitiveness and specifically the pricing. We’ve got a lot of ongoing work around the productivity and cost structure of that business that will continue to allow us to be competitive there. And, I don’t think this is something that we think about as an initiative. I think it’s really how we run the business and quarter-to-quarter manage the market conditions and the demand environment that we’re in.

Tom Sweet

I would also offer that acquiring new customers and continuing to build that acquisition pipeline is an ongoing and continual effort. It’s just not a one quarter or two quarter effort, you build the acquisition pipeline, you continue to acquire new customers and you migrate those customers up to your business model and your other [laps]. So, I think that process continues.

Brian T. Gladden

And to some extent, I mean, we over some period of time as we were driving the business had, in some ways lost that ability to do the acquisition investments that we really needed. So, we’ve had obviously some success there and we’re getting a lot of very positive feedback from customers as we get back into that part of our business.

Operator

We’ll take our next question from Chris Whitmore with Deutsche Bank.

Chris Whitmore – Deutsche Bank

Thanks very much. Brian, I wanted ask about servers and whether or not you see a similar type of opportunity to drive some elasticity of demand around pricing servers a bit more aggressively and related to that and then the whole strategy of attaching incremental products to that base. I’m curious to understand what’s happening in storage, doesn’t seem like you are getting that attached to the installed base that you had hoped for in storage particularly with the DELL brand of the IP. Can you talk a little bit about that as well? Thanks a lot.

Brian T. Gladden

Yeah, Chris. Clearly the server business has had a nice run and this for us is the ninth consecutive quarter of solid growth there. The 12th generation servers that we launched about a year ago have contributed very nicely to the ramp in that business. They have as we’ve talked about before helped us improve our average selling price and that business moved to higher end work loads within the server space, and that’s all been part of very strong progress and we think we’re winning in the marketplace as a result of the technology and how we’re positioned with that product.

In addition, when you look at density optimized servers that as well contributed to the growth in this business. We see that as an important part of our offering and continue to make investments there. So the server business is in a good spot and we feel good about the technology and it’s not really a place where you see us trading at the low end for price for growth there. I think we’re growing on the basis of the technology.

The storage business I think a little bit different discussion, we feel like that business is growing about in line with the market, it’s shrinking at the market – the market is shrinking and we’re seeing that from the data that we see in the market right now. I would say that’s not what we’d like to see obviously and that’s not acceptable to us.

We’ve got some things from an execution standpoint in that business that we are working on. We’re confident in the portfolio. We’ve added commercial resources over the last really 18 months in this business and we feel like we’re positioned to actually outperform the market. Again, there is some execution things we’re working through and we expect to see that as we move forward.

Operator

We will take our next question from Keith Bachman with Bank of Montreal.

Keith Bachman – Bank of Montreal

Hi guys. Number one, Brian, can you talk a little bit about how your M&A strategy might differ if this transaction goes through versus would not? How might the incremental debt make you think about conducting M&A? And just a clarification to add on to that, can you talk about what your employee retention has been during this time of uncertainty, shall we say over the last few months why this deal has been contemplated?

Robert Williams

Hi Keith, this is Rob. I appreciate your questions and your answers, but given the current situation in the pending transaction, really not going to comment on that or any of the materials information that’s related to the transaction. So you’re welcome to take another crack at another question and you can drop back in the queue and we’ll come back to you.

Keith Bachman – Bank of Montreal

How about just employee retention over the last three months Rob, can you address that as employees sticking on Board?

Brian T. Gladden

Yeah, Keith, it’s Brian. I would say attrition has been about normal course.

Keith Bachman – Bank of Montreal

Okay.

Brian T. Gladden

So we’ve haven’t seen unusual attrition.

Keith Bachman – Bank of Montreal

Okay, that’s it from me.

Robert Williams

Thanks Keith.

Operator

We’ll take our next question from Ananda Baruah with Brean Capital.

Ananda Baruah – Brean Capital

Hi, good afternoon guys. Thanks for taking the question. Brian, I was wondering if we could just get your thoughts on I guess PC market over the next four to six quarters, you think you get softer, you think you get stronger. And if it were to get, I guess meaningfully softer from here would that move you to reconsider the pricing strategy that you’ve sort of employed the last couple of quarters? Thanks.

Brian T. Gladden

Yeah, look I think it’s a good question and it’s one we spent a lot of time debating and talking about – there are multiple dynamics playing out. I think you continue to see a Win 7 on the commercial side of the business. It’s driving a refresh cycle. But at the same time and I would say even recently we’re seeing improved demand on the corporate and SMB markets.

But if you look at consumer, you look at government; you look at federal those have been rather challenged. And it’s some of the things we’ve been talking about over the last few quarters where you have competing devices in some cases. Windows 8 has been from our standpoint, not necessarily the catalyst to drive accelerated growth that we had hoped it would be.

We are encouraged by what’s going to play out with new chip sets and some of the work that is going on within the windows ecosystem to hopefully over the next few months create some catalysts. But you look at the recent external data from any of the third party sources, we would expect to continue to see over the next few quarters year-over-year declines in PC demand and I think that we are trying to run the business based on that and be in a position where we are in this thing for the long term and we position the business for success for the long term.

Ananda Baruah – Brean Capital

Got it, thanks a lot.

Operator

We will take our next question from Aaron Rakers with Stifel.

Aaron Rakers – Stifel Nicolaus

Yeah thanks for taking the question. Just real quickly on your software, your new software segment group, last quarter you talked about Quest actually performing better than your initial plan of $180 million to $200 million. Can you update us on the performance of Quest in the quarter and then also how do we to think about the profitability in that segment with the negative 29% operating margin this quarter?

Brian T. Gladden

Look, I think it is progressing as we expected and as we said in the talking points we expect to be accretive to the company in the first quarter, next fiscal year. That was the plan we talked about when we announced the acquisition and we are tracking towards that.

I think the plan that we put together for that business with John Swainson clearly does have incremental investment as we look at adding R&D resources as we look at more sales capacity in that business and it has got to grow into the cost structure that we have in the software business, that is the way we are thinking about it. I would say we are tracking to that and the team is making good progress there and we still feel good about this. Now the operating loss from the quarter, that sort of what we had expected as we put this business together and really got it started up. So we feel good about it.

Operator

We’ll take our next question from Bill Shope with Goldman Sachs.

Bill Shope – Goldman Sachs

Okay thanks guys. Wanted to get some color on how you are targeting these pricing actions we’ve been discussing. Can you give us perhaps an example of how you determine which accounts are strategic enough for aggressive client pricing at least pricing that’s beyond the norm in terms of discounting? And in what areas you maybe more focused on profit preservation? I’m just trying to figure out where you draw the line so to speak in terms of profit versus market share focus.

Brian T. Gladden

Yeah I mean I’ll give you a couple of thoughts Bill. I think we know where long-term strategic accounts are that where we can really leverage the relationship and being in as a – the leader on the client side, creates nice pull through in other parts of the portfolio. In many cases those are places that we’ve been before and had that business and in some – in many ways over the last couple of years walked away. So I would say those are obvious places that we know we can actually create a nice network effect for us and sell the broader set of solutions as well including the services.

So I think we’ve been somewhat selective and try to focus in that part of business. There are clearly unit volume opportunities in places like consumer through indirect channels where we could sell a lot of units. But those don’t really create for us any other profit or cash flow benefits. And therefore, we’re going to prioritize accounts where we can get that broader network benefit.

Bill Shope – Goldman Sachs

Thank you.

Operator

I’ll take our next question from [Abhey Mamba with Mizuho Securities].

Unidentified Analyst

Yeah, thanks. Brian, you talked about cost and demand for PCs doing well. Can you touch upon, is there a risk of it falling-off into few quarters as people have migrated auto win seven and part of that can you also talk about desktop virtualization, what are you seeing in the market for that and what are you’re expectations for that given your thin client business.

Brian T. Gladden

Well, I think the data would suggest there is still a significant win seven refresh opportunity over the next year really until XP is sort of retired and we look at that in our discussions with customers. In many cases, they’ve pushed those decisions out and they’re sort of catching up now and have to get that done in the next year.

Beyond that obviously, it becomes a broader opportunity around touch and how that plays out in the corporate customer base, whether its tablets or whether it’s the next generation Windows 8 kinds of devices. So, again, its really up to us to create that opportunity and that ecosystem to drive that growth going forward with great products and great technology there, but I think that’s clearly something we’re watching and it was for us as we headed into the new budget year for corporate customers, something we expect to see was some of that Windows 7 were account to happen and we’re starting to see some of that.

Unidentified Analyst

And desktop virtualization?

Brian T. Gladden

Yeah. Desktop virtualization continues to be a space that is I think of high interest to our customers in some parts of their business and there is a lot of customers that are looking at desktop virtualization for key subsets of their workforce where the work fits into that kind of a model, very few customers looking at broad companywide desktop virtualization kinds of implementation. So, we’re seeing good demand there, device business is performing well for us and important part o our offering as you think about broader End-user Computing devices.

Tom Sweet

I think we’re also happy with the pull through from the life devices into our ESG business in terms of our server and data center business. So we have seen good attach and good connectivity between those two product lines.

Brian T. Gladden

Great. Thanks and just we want to be respectful, Brocade has a call starting in just a few minutes. So McKinsey, let’s take one more question.

Operator

We will now take our final question from Brian Marshall with ISI Group.

Stephen Patel – ISI Group

Thanks. This is Stephen Patel calling in for Brian. First question on your support and deployment revenue was up a little bit in the quarter and if you have any thoughts on how sustainable that is in light of the decline in PC units and whether we’ve been continue seeing increased attach rates going forward? Thanks.

Tom Sweet

Brian, its Tom. I would tell you that we’re happy with the attach rate and the SRUs we’ve been able to drive off of that services business. The team has done a great job of creating sort of new and innovative offers like the ProSupport Plus and some of the other types of products that we’re rolling out.

And as a result of that, we’ve been able to keep the attach rate relatively high and pretty happy with sort of the pricing that goes with that. So despite some pressure from the downward units, the unit volume it’s been a good business for us and I think we continue to believe or will continue to be a good business.

Brian T. Gladden

And we’re also seeing good growth on support and deployment on the enterprise side of the business.

Stephen Patel – ISI Group

Yeah.

Brian T. Gladden

And nice attach rates there. So we think there is opportunities to continue to grow that business even going forward.

Stephen Patel – ISI Group

Thanks.

Brian T. Gladden

McKinsey?

Tom Sweet

And we believe that wrapped it up.

Operator

This concludes today’s conference call. We appreciate your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Dell's CEO Discusses F1Q14 Results - Earnings Call Transcript
This Transcript
All Transcripts