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Executives

Robert Williams - Director of Investor Relations

Brian T. Gladden - Chief Financial Officer and Senior Vice President

Stephen J. Felice - President, Chief Commercial Officer, President of Global Small & Medium Business and President of Consumer Small & Medium Business

Michael S. Dell - Founder, Chairman and Chief Executive Officer

Analysts

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

Katy Huberty - Morgan Stanley, Research Division

Richard Gardner - Citigroup Inc, Research Division

Louis R. Miscioscia - Collins Stewart LLC, Research Division

Shannon S. Cross - Cross Research LLC

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Keith F. Bachman - BMO Capital Markets U.S.

Kulbinder Garcha - Crédit Suisse AG, Research Division

Maynard J. Um - UBS Investment Bank, Research Division

Brian Marshall - ISI Group Inc., Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Dell (DELL) Q4 2012 Earnings Call February 21, 2012 5:00 PM ET

Operator

Good afternoon, and welcome to the Dell Inc. Fourth Quarter Fiscal Year 2012 Earnings Conference Call. I'd like to inform all participants that this call is being recorded at the request of Dell and this broadcast is a copyrighted property of Dell Inc. Any rebroadcast of this information in whole or in 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. [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, Regina. With me today are Michael Dell, Brian Gladden and Steve Felice.

During Q4, we spoke with many of you about creating a more efficient earnings process. Based on that feedback, we are condensing our prepared comments and expanding our web deck. In Q1, we will add a key topics document. These materials, along with our DellShares VLog, will be distributed well in advance of the call, and I encourage you to review them for additional perspective.

Next, I'd like to remind you that all statements 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 our web deck. We assume no obligation to update our forward-looking statements.

Please also note that we will be referring to non-GAAP financial measures, including non-GAAP gross margins, 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 on 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.

Now, I'll turn it over to Brian.

Brian T. Gladden

Thanks, Rob. The fiscal year 2012 was a strong year with great financial results for Dell. We also made important progress towards our key strategic initiatives. To highlight a few key examples, we continue to enhance our enterprise solutions capabilities by adding important intellectual property from acquired companies like SecureWorks, Compellent and Force10. We improved the cost position, execution and profitability of our client business, building on the success of the past 2 years. We strategically invested in data center capacity and solution center capabilities around the world. And finally, we significantly increased the number of solutions sales specialists and increased our enterprise R&D spending. These investments have helped to reshape our business and will do so over the long term.

For the year, consolidated revenue was $62.1 billion, and we delivered a record $18.6 billion in enterprise solutions and services revenue. This business now represents 30% of revenue and almost 50% of gross margin dollars. Consolidated operating income was 7.1% of revenue for the year, which is right on our long-term target. And cash flow from operations was $5.5 billion, up 39%.

From here, I'll refer to non-GAAP financial measures.

Our full year results were in line with the outlook we provided in our November earnings call. In addition, at the beginning of the year we said we would grow operating income 6% to 12% and revenue 5% to 9%. Despite a challenging macro environment, we delivered 24% operating income growth and 1% growth in revenue.

We had record gross margin dollars, record operating income and record non-GAAP earnings per share of $2.13 per share, which was up 34%. While we're very pleased with our strategic progress and our total year financial results, we did expect to do a bit better. There were a few areas in the fourth quarter that negatively impacted our gross margins, and I want to address those now.

We called out the global hard drive situation as a challenge for the quarter, and while we were effective in shaping demand and pricing for hard drive cost increases, we were impacted by the available mix of drives. We prioritized high-end drives to relationship customers, resulting in a product mix that was less profitable than normal in Consumer and our after point-of-sale hard drive business. Second, we worked through the remaining inventory of our previous-generation phones, primarily impacting our Consumer business. And finally, our Public business growth was impacted by continued weakness in U.S. public spending, which did not improve during the quarter. This resulted in a more significant sequential decline and margin pressure than we would typically see in the business in the fourth quarter. These 3 areas combined negatively impacted us by about $100 million.

Now let's take a closer look at the fourth quarter P&L. Our key performance metrics and additional details are provided for your reference on Pages 8 and 9 in the web deck. We delivered revenue of $16 billion for the quarter, which represents growth of 2% and included a 14th week, which we estimate to be 3 percentage points of added growth. Our gross margins were 21.7%, up 20 basis points year-over-year but down 140 basis points sequentially. Consistent with our views going into the quarter, we effectively managed operating expenses while continuing to fund strategic investments. For the quarter, OpEx declined 10 basis points sequentially to 14.6% of revenue.

Operating income was $1.1 billion or 7.1% of revenue. Interest and other expenses were $24 million, driven by a $45 million gain on the sale of an investment. Our tax rate was 18.4%, driven by an increase in earnings in lower tax jurisdictions and tax benefits that we don't anticipate to repeat in FY '13.

Earnings per share declined 4% to $0.51 per share. Our cash conversion cycle was a negative 36 days. Days receivable and days of inventory were flat relative to the third quarter. Days payable increased 5 days from the third quarter, primarily driven by the extra week that was in the fourth quarter.

We generated $1.4 billion in cash flow from operations and ended the quarter with $18.2 billion in cash and investments. We repurchased $561 million in stock in the fourth quarter and $2.7 billion or 178 million shares for the year. As we enter the fiscal 2013, we will maintain our disciplined approach to capital management, balancing cash needed for strategic investments and repurchase activities.

Now let's take a look at our lines of business, which you'll find detailed on Pages 13 through 18 of our deck. In the fourth quarter, we had record revenue in our enterprise solutions and services business of $4.9 billion. Dell Services revenue grew 12% to $2.2 billion while improving margins. The total value of new Services contracts signed is $1.9 billion on a trailing 12-month basis, and Services backlog increased 11% to $15.5 billion, led by contracted Services backlog growth of 13%. We're very pleased with the progress of our Services business as we head into FY '13.

Server and networking revenue increased 6%. Total storage declined 13% while Dell-owned IP storage growth accelerated 33% to $463 million, led by continued growth in all of our Dell IP categories including Compellent, which saw over 60% sequential revenue growth.

Our desktop revenue was up 3% while our notebook revenue was up 1%. Premium products gained share year-over-year for the sixth consecutive quarter. Revenue for our software and peripheral business declined 4% for the quarter to $2.6 billion. This continues to be an area where we'll see the effects of pruning the low-margin elements of the portfolio.

Now I'll turn it over to Steve to provide some background on our business unit and regional results.

Stephen J. Felice

Thanks, Brian. I'll turn now to the segment level performance, which is detailed on Pages 20 through 23 of the web deck. Our commercial business approached $13 billion for the quarter, led by the strong performances in Large Enterprise and the Small and Medium business which were up collectively 5%, with sequential op inc growth of 6%.

Large Enterprise saw broad-based growth across both the client and enterprise solutions and services. Our Large Enterprise services revenue increased 18% as we continue to expand our vertical expertise and develop service solutions that are relevant to our customers' business needs. Overall demand continues to be softer in the U.S., but we did see good growth in both EMEA and APJ.

Public revenue was down slightly versus the prior year. Like last quarter, the primary drivers are the continued weakness in the U.S., Public and Western Europe sectors. For U.S. federal, we continue to see the slower spending pattern that we saw in Q3 after the government's fiscal year ended in September. Despite the overall revenue decline though, Services revenue increased 7% and our Dell IP storage revenue was up 32%, so these are good examples of our government customers utilizing Dell solutions to help drive productivity.

Small Medium business saw strong growth across all regions, including the U.S. Enterprise solutions and services performance hit an all-time high during the quarter, generating growth of 18%. SMB also delivered the highest growth in services across all segments at 28%.

The Consumer business delivered 2.7% op inc for the full year, in line with the expectations that we set one year ago but in the fourth quarter, results were mixed. Total revenue and margin weakness was largely concentrated in the U.S. market with a decline of 15%. We continued to see good progress on our high-end Consumer systems as our XPS notebook revenue increased 103% for the full year. So while we're disappointed in Q4 profitability, we're pleased with the overall progress made during fiscal year 2012 as the Consumer business grew op inc by $259 million versus the previous year.

Geographically, we saw 10% growth in our Asia-Pacific region during Q4, including 15% growth in China, while EMEA growth accelerated to 8% despite the challenging macroeconomic background. Growth countries continue to be a key driver as well, growing 8% in Q4 and finishing the year up 12%.

And with that, I'll turn it back over to Brian to discuss our outlook.

Brian T. Gladden

Thanks, Steve. But before we get to the outlook, let me just clarify our cash flow from operations for the quarter was $1.8 billion.

We're committed to executing our strategy and are encouraged by the progress we've made in the fiscal year '12 results. We're shifting the mix of the company's revenues and margin, and our enterprise solutions and services businesses now account for 30% of our revenue, up from 24% 3 years ago. We continue to make the necessary organic and inorganic investments to accelerate this progress. This will be the same play we run in fiscal year '13.

For the next fiscal year, we'll continue to focus on and prioritize operating income and cash flow as we make the necessary investments to reshape the company. We expect earnings per share for fiscal year '13 to exceed the record $2.13 we delivered in fiscal year '12.

We also expect to deliver strong cash flow again, with cash flow from operations exceeding our net income. With our primary objective continuing to be one of reshaping the company for the future, combined with today's more uncertain environment and our continued pruning activities, we're not providing a revenue outlook for the year. We feel this will allow us to focus both externally and internally on our key strategic priorities. We plan to update our longer-term outlook at our analyst meeting in June.

We're committed to a disciplined capital allocation strategy. This past year, we allocated $2.7 billion to share repurchase, $2.6 billion to acquisitions in our Enterprise portfolio and increased our R&D and CapEx by over 30%, respectively. For fiscal year '13, we plan to allocate 10% to 30% of free cash flow to share repurchase, and we expect to spend approximately $700 million on capital expenses. We anticipate interest and other to average approximately $60 million a quarter and are projecting a full year tax rate between 19% and 21%.

For the first quarter and consistent with what you've heard from others in the industry, we're still seeing some uncertainty around the hard disk supply and pricing. We expect drive mix management to continue to be challenging, but not as impactful as in the fourth quarter. We also anticipate good customer receptivity to the launch of our 12th generation server line, which will occur in the first quarter.

Over the past 3 years, our first quarter revenue has averaged approximately a 4% sequential decline. When normalized for the 14th week, this decline is closer to 7%. We expect our first quarter revenue to be approximately in line with this adjusted historical decline.

Before we take questions, let me close with a few summary points. We remain fully committed to our strategy. Our FY '12 financial results were excellent and we delivered record revenue, op income and earnings per share. There are a few areas we'd like to improve on from our fourth quarter results, and our fourth -- our fiscal year '13 outlook calls for continued mix shift to enterprise solutions and services and a continued commitment to key investments in this area. And finally, we expect to see year-over-year growth in earnings per share.

Now let me turn it over to Rob to get the Q&A started.

Robert Williams

Thanks, Brian. Just a quick reminder to please limit your questions to one, with one follow-up. Regina, can we have the first question?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Toni Sacconaghi with Sanford Bernstein.

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

I have one question and one follow-up, please. I'm still struggling a little bit on the forces at work on gross margin. I would've thought that pruning your software and peripherals portfolio would have helped the margins on a sequential basis in the quarter. I would have thought DRAM pricing, which was down strongly, would have helped margins in the quarter, yet margins were down 140 basis points sequentially on higher volumes, suggesting that x those other factors, maybe they were down 200 basis points. I struggle with, given that Consumer is only 20% of the mix, that hard drives could have that dramatic an impact. So maybe you can go through each of the 3 reasons you cited and attribute or maybe refute the notion that pruning and other components were not of help, but I'm still struggling with why the gross margins were down so much.

Brian T. Gladden

Yes, Tony. I think the points you raised are all correct. I think those are things that would've contributed to positive momentum on gross margins. We clearly talked about coming into the quarter some of the concerns we had around margins. And talking about the 3 items that we raised for hard disks, we had uncertainty coming into the quarter. We had significant inflation that came from the hard disk situation. We did effectively raise prices to offset that. And the teams did a great job of getting supply to support the demand that we had, but we just didn't get the mix of drives that we wanted, and it really forced us to sell lower or less configured, lower-end systems and prevented us from accessing higher-margin, more highly configured systems. That played out across the portfolio, but especially in Consumer. And also I would say within our aftermarket sales of hard disks was in the S&P business. So that's the one dynamic that I think we didn't fully understand coming into the quarter what that mix was going to do to us. On the mobility side, we talked about -- we wrote off previous generation phones. That was about a $25 million impact in the quarter, quarter-on-quarter. And that is something that we would say is behind us now. And then on the Public side, clearly talked about the weakened demand that we saw after the federal year end in the U.S. especially, there was weaker demand. And I would say we saw a bigger sequential decline in that business, which had a mix impact. But also I would say it was a more competitive environment within Public, and in some cases market pricing was more aggressive, and we participated in parts of that and that had an impact as well. So those are 3 big things that I would call out. It's about $100 million, you could say 70 basis points of gross margin. And there were other moving pieces as you look at other commodity prices and other dynamics in the quarter.

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

And then a follow up. You -- at your Analyst Day last year, you articulated a longer-term model 5% to 7% revenue growth. I think x the 53rd week this year, you were about flat. It sounds like given the way that you've given guidance for fiscal '13, you're really not anticipating revenue growth again this year. I was wondering and I realize you're going to address this at your Analyst Day, but if that was truly meant to be longer-term guidance and you seem hesitant to reiterate it, what has fundamentally changed about either the competitive environment or about Dell's approach to the business that makes you less confident about talking about that as a longer-term goal and also obviously, and delivering against it in fiscal '12 and fiscal '13?

Brian T. Gladden

Yes, Tony, we'll give you a much better long-term view as we get into the June meeting. I think clearly, it's a different demand environment and there's more uncertainty as you look at things like Europe, as you look at some of the demand dynamics we've seen over the past year, that's number one. I think in addition to that we've been more aggressive, I think, in pruning. And I think that, to some extent, will continue for some period of time. And by not giving you a real revenue outlook for the year, I think it gives us an ability to make the right decisions for the long term, continue this transformation, make the investments we need and not get so fixated on trying to deliver a specific revenue commitment.

Operator

Our next question comes from the line of Mark Moskowitz with JPMorgan.

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

The first question is around just the software strategy, if Michael can weigh in here. You recently created a new business unit with new leadership from the industry, a veteran. Can you just kind of help us understand how we should think about potential mileposts in terms of revenue as well as also the gross margin contribution?

Michael S. Dell

Sure. Software obviously is playing an increasingly important role in the industry. And we've made a number of acquisitions around software, in systems management with KACE and cloud integration with Boomi, and infrastructure virtualization and orchestration with Scalent. And I think you'll see others as well fitting within a very similar framework that we've used in the past. John Swington [ph] is joining the company to lead this group for us. And we see a lot of opportunity in close adjacencies, we've got a lot of success with a number of the acquisitions that have been software-related and believe there is significant opportunity for us to build a big business here. Don't really have any revenue projections for you at this stage but clearly it's a significant opportunity for us, and we're thrilled to have John joining the Dell team.

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

And then a question for Brian or Steve. Just trying to get a sense here in terms of the sales and marketing and the R&D dynamics as we look to 2013. Obviously feels the marketing was a big push this past year, and it definitely supported your enterprise solutions growth, but we -- I just want to get a better sense here as we continue to hear more and more about the non-PC part of the business. Do you guys have the flexibility to maybe pull back on sales and marketing now, maybe to drop some of that to the bottom line, 2013 and then maybe reallocate some of it to R&D to kind of support the software buildout and the other non-PC buildouts?

Stephen J. Felice

Yes, this is Steve. We did do a lot of investing. We had a lot of specialists. We added a lot to our obvious -- our capabilities with some of the acquisitions we've done. And towards the end of this year, we already started to communicate that we felt we had added the investment that we could now grow into that in a productive way. So you will see going forward a return to a more disciplined approach to the investment and to have the OpEx match the revenue. We think we have the resources in place to support some growth, especially in the solutions and enterprise areas and that's really where we focused the investments. So yes, you definitely won't -- you won't see the same kind of growth that you saw last year in the operating expense.

Operator

Our next question comes from the line of Katy Huberty with Morgan Stanley.

Katy Huberty - Morgan Stanley, Research Division

Just given the headwind in the quarter, can you talk about what the industry and Dell in particular are doing to help lighten the blow from HDDs on margins in future quarters? And specifically, the hard disk drive companies have talked about long-term supply agreements, which would guarantee supply at certain capacities and price points. Are these contracts that you've entered into that help manage the situation over the next couple of quarters?

Brian T. Gladden

Yes, Katy, it's -- clearly, I think the teams did a very good job on our side to ensure that we get sufficient numbers of drives and as we talked about, we maybe didn't get what we wanted. There were clearly cost increases that we absorbed. As you think about the quarter, we had an order of magnitude of about $150 million of inflation from hard disk costs, and that was pretty consistent probably with what the market saw. I'm not going to provide specific details of the commitments that we made. I think some of that's probably competitive information. But that sort of dynamic. And our hope is as we look at the situation over the next couple of quarters that this is going to remain a bit challenging probably for the next 2 quarters and begin to ease as we head into the second half. That's how we're thinking about it.

Katy Huberty - Morgan Stanley, Research Division

Okay. And then just a quick follow-up on the EPS guidance. Many of your peers when they guide annually or multiyear, they're assuming some base level of acquisitions. Does your guidance for earnings growth assume that you do some acquisitions through the year, or would those just be incremental EPS if there is?

Brian T. Gladden

Yes, as we've talked to you about outlooks, I mean, we've always given you a combined view that includes everything we would expect to see. And we obviously don't know all of that at this point, but we would intend to include that in the guidance and the outlook we provide.

Operator

Your next question comes from the line of Richard Gardner with Citigroup.

Richard Gardner - Citigroup Inc, Research Division

I'd like to ask more of a product question, and I guess it's probably a question for Michael. But -- it seems like the server industry probably has a little more, in terms of headwinds here. You've got the continued performance increases from Intel and all the people in the industry, virtualization, you've now got server-based flash ramping, we've now had 3 years of very robust upgrade and consolidation activity within the base. And so I'd just being curious to get your outlook for growth for the server industry this year, and whether you believe that Romley will fuel a significant upgrade cycle and why.

Michael S. Dell

Yes, I think what we're seeing is the replacement cycle actually accelerate a bit on servers. And the reason is that the gains in processor and the combination effect of what's going on in I/O and solid-state, flash, the 10-gig Romley, this is all allowing for much more intense virtualization loads. So we're super excited about our 12G server launch, which is coming in the first quarter. Obviously, virtualization is a big deal. We're simplifying systems management, really going after the bigger workloads and accelerating the movement of work from minicomputer and mainframe environments onto our 12G platforms. We also believe that Romley will help us more tightly drive a synergy with our recent Force10 acquisition. And so we've done a lot with flash, with solid-state inside 12G. Stay tuned for the announcements, but we're very excited and believe it's going to be another strong year for server, storage and networking. Remember, we're kind of changing the wholesale from being an individual product to effectively selling the entire data center.

Richard Gardner - Citigroup Inc, Research Division

The follow-up, Michael, is that growth rates in servers have obviously decelerated dramatically during fiscal '12 and entering the fourth quarter in particular. Should we expect to see growth for the server business in particular reaccelerate?

Michael S. Dell

You're talking about unit growth?

Richard Gardner - Citigroup Inc, Research Division

Revenue growth.

Michael S. Dell

Yes. I think the product cycle will certainly be healthy for growth, and there are always value shifts that go on among the various ingredients. Overall, the Enterprise business is doing quite well. We're seeing a lot of growth in storage. We had, in the quarter, 60% sequential growth in Compellent. Overall, our Dell IP storage was up 33% year-over-year and 19% sequentially.

Stephen J. Felice

Yes, and I'll just add. We've kind of put the long at mid to high single-digits and up around 10% most to this year at a consolidated level for the company. And with Romley coming in Q1, I think that you've got a reasonably nice setup as we enter the first half of the year. So still remains to be seen, but a lot of performance improvement that Michael called out.

Operator

Your next question comes from the line of Lou Miscioscia with Collins Stewart.

Louis R. Miscioscia - Collins Stewart LLC, Research Division

If we look at your first quarter revenue guidance and let's just assume even though I know you're not giving full year guidance that you're around flat year-over-year, others in the industry have talked about global IT growth of let's say 3% to 4%. So let's say you end up being about flat, could we assume then -- could be -- we would like to understand how much that you are putting out that, that delta, if you're seeing the industry that way, is actually that 3% or 4% growth that the industry is getting that you're not?

Brian T. Gladden

Well I mean, obviously, we're not going to give you a longer-term revenue view today. I think as you think about the first quarter, I mean, we're just naturally calling the historical sequential first quarter versus fourth quarter dynamics adjusted for the 14th week. Yes, I think what I would say is as you look at the revenue dynamics and how we see demand for the year, I think the first half is going to be probably more challenging than second half, and we would expect demand to be a bit better as we move throughout the year. So -- and I think you could think about it that way, Lou.

Louis R. Miscioscia - Collins Stewart LLC, Research Division

And then a quick follow-up in storage area, obviously, it seems like you all have started to do real well. Maybe just give us your thoughts on the competitive dynamics in the sense of who do you think you might be taking share from, because obviously it seems like you're growing faster than the market.

Michael S. Dell

It's a pretty competitive market. We have -- we've seen great growth in SMB. Obviously, we have a strong channel there. There's obviously some rebalancing as we position Compellent more to the higher end. But the whole thing, as you said, 33% growth year-over-year is strong. We're -- 93% of our revenue now is our own IP, so we're pretty much through the transition and believe we can grow this business quite nicely. But it is a competitive environment. Obviously, having a full portfolio of servers, storage, networking, services and increasingly software is very helpful in many of the opportunities that we find.

Operator

Your next question comes from the line of Shannon Cross with Cross Research.

Shannon S. Cross - Cross Research LLC

My first question is can you just provide some more color on end demands? The geographic vertical basis, anything you can give us in terms of what you're hearing from your customers. And then possibly talk a bit about the linearity that you saw during the quarter.

Brian T. Gladden

Yes, I'll give you a little bit of the numbers, Shannon, and then Steve can give you some, maybe, insight into what he's seeing in the market place. As you think about regionally in the quarter, obviously Asia-Pacific was the fastest growing market. We were up 10%, EMEA was up 8%, which is clearly faster than the market, and then Americas driven by the U.S. was down and down 3%. For the total year, APJ was up 15%, EMEA was up 4% and Americas was down 4%. So that's the regional dynamics. I think when you look at the product lines or the segment performance, clearly on the corporate side between Large Enterprise and SMB, we saw solid growth and year-over-year was up 6% for SMB and up 5% for Large Enterprise, and both of those were up mid single-digits for the year. So those are the fundamental numbers. Maybe Steve can give you some color.

Stephen J. Felice

Well, there's not a lot to add there. The -- in Europe, I would say, we are seeing some definite growth ahead of what appears to be market conditions, so I'm really pleased with what's going on in Europe. It's a good case where if we run the strategy right, we're gaining both unit share and revenue share while our profit is accretive, both on a percentage basis and a dollar growth basis, so that's really a strong story. In Asia, we're also seeing some similar dynamics. So it really is limited to a few sectors like the U.S. federal or some of the larger government entities in Western Europe where we see the biggest headwinds. On the Consumer side, we're seeing pretty healthy growth in most parts of the world. The hard drive rebalancing did get in the way in the U.S. So we probably could've grown more but to add a little color to this, when we get the mix of drives, we have a series of customers that have a set contract with us that has a certain configuration. And we fill that -- those demands -- that need first. So it's really the transactional side of the business and even part of Tony's question, Consumer is completely transactional but we have a lot of business within our small business and our large corporate, even pieces of that, that are more transactional. In other words, it's really demand that comes in that day where it's not under a contract. That's where we had to shape the drives, and we would normally sell a higher mix of capacity into those if we had access to that. And that's what impacted both the Consumer business from a demand and a margin basis in the U.S. As a good example, we don't want to put a 350-gig drive on an XPS computer because it's going to have a bad experience for the customer. So it limited our ability of what mix we could sell. So that impacted demand a little bit, and I think we'll see that continue to improve as each quarter goes by where we have more visibility to the mix of the drives we're going to be seeing.

Shannon S. Cross - Cross Research LLC

Okay, great. And then Michael, if you could just talk a little bit about your thoughts on the opportunities for ARM, both on the server side as well as notebooks and tablets.

Michael S. Dell

I think with Windows 8, obviously there is great excitement, particularly in the corporate space for us and the addition of both capacitive touch capability, integrating that in with the software and the ARM processor. Pretty excited about Windows 8 and the effect that'll have on demand. First with Consumer but then falling pretty rapidly, there's a pretty strong appetite for a Windows tablet in enterprise, with the security and compatibility that customers kind of expect. On the server side, we've been experimenting with ARM now for, I'd say it's more than one year. The challenge is really in the software stack. It's maturing, there's the LAMP stack which is the obvious place to start. Competition isn't standing still there, and more competition there is certainly a good thing. And there's -- some interesting opportunities emerging, but I think x86 still has an enormous lead in that space.

Operator

Your next question comes from the line of Bill Shope with Goldman Sachs.

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Can you give us a bit more color into what you're seeing in terms of competitive pricing? I know you said you saw some competitive pricing in the Public segment but outside of that, what are you seeing? And are most of your competitors attempting to pass along HDD costs as well, or are there still some companies that are just hyper focused on share gain?

Brian T. Gladden

We haven't seen a substantial change in behavior over the last few quarters. There's pockets of aggressiveness, but I wouldn't call it broad-based. There is one concern that we've expressed over the last couple of quarters where some of our competitors have been long in inventory, and so we've seen older models get somewhat aggressive and we've had to back off and let that flush its way through. We saw a little bit of that this quarter. I know we've been able to successfully pass through the hard drive cost increases, and we still feel like we're in a good competitive position. So I'd say in general, that's probably happening across-the-board.

Operator

Your next question comes from the line of Aaron Rakers with Stifel, Nicolaus.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

I wanted to dive a little bit more in the model again. Most of the questions have been asked. But just simplistically, as we look at the year, you guys have basically come in slightly above your long-term target operating margin of 8% non-GAAP. Underpinning the $2.13 estimate plus for the full year, are you assuming that you're at or above that level again for fiscal 2013? I'm trying to dictate between operational -- OpEx management versus ongoing share repurchase and what you're factoring in.

Brian T. Gladden

Yes, I mean, to be fully transparent, I mean, I think as you look at the buyback that we've done this past year and head into next year, the impact to the FY '12 share repurchases is about $0.06 of EPS benefit. You guys can do the math in terms of 10% to 30% buyback on a cash flow generation number for this coming year and figure that out. I think we've given you a sense for tax rate being about the same year-over-year, and we've given you interest and other. So I think you can kind of get back to a view of how we're thinking about the operational performance of the business and I think that's about it.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay, fair enough. And then the follow-up question for me would be on the storage side, obviously, you're burning through, and I would assume that you're pretty much all the way through the legacy EMC business. Compellent being up 60% sequentially, it seems to imply that you have what looks to be ongoing anemic growth, if you will, in your legacy EqualLogic business. I think there's been some transitions that you've worked through. Can you touch a little bit on EqualLogic specifically within that category?

Brian T. Gladden

Yes, I would say EqualLogic, actually, sequentially picked up nicely, and we had double-digit growth there. And we had strong -- we had good growth year-over-year as well in EqualLogic. So it picked up, but we talked about some of the challenges during the summer and even after the third quarter. I think for the most part, we launched a whole new set of products in the third quarter, and we're now in the process of upgrading all of those -- moving to those new products. So it actually feels pretty good.

Operator

Your next question comes from the line of Keith Bachman with Bank of Montréal.

Keith F. Bachman - BMO Capital Markets U.S.

Brian, for you if I could. On gross margins, your gross margin if I net out that $100 million force, we're still down about 70 basis points sequentially to -- call it the mid-22s. If I think about your comments to previous questions, is that the right benchmark as we look to the April -- potential April gross margins? And if you could just talk a little bit about, will margins be flat, down or up at least directionally and what the forces are that persist there, because HDDs will be there, you've already commented on that, but I'm just trying to understand the benchmark relative to say, the mid-22s that you report in January versus what you might have in April.

Brian T. Gladden

Yes, I think, Keith, we probably said about as much as what we're going to say. I mean, we're not going to provide margin level guidance. I mean I think the things we talked about, for the most part, we feel like we've got our arms around. Clearly, the mobility is not going to be an issue going forward. The hard disk situation should get better as we move throughout the first half of the year, and maybe that's about as all we're going to give you at this point.

Keith F. Bachman - BMO Capital Markets U.S.

Okay, Brian. Can I at least just push on that? Is there opportunities for improvement or we should just think of those forces persisting in the April quarter at least such that gross margins would be flattish?

Brian T. Gladden

Well look, I think if you look at it over a multiple-quarter dynamics here, I mean, we're growing the enterprise business much faster, and that is a higher-margin part of the business and we should, over a series of quarters, see expansion of gross margins because of that. We've been talking about that for a while, and we can start to show you -- actually, that's happening. And that's the primary driver. I think you'll have some lumpiness with other issues in any given quarter.

Operator

Your next question comes from the line of Kulbinder Garcha with Credit Suisse.

Kulbinder Garcha - Crédit Suisse AG, Research Division

I just have a clarification. I think Steve, you mentioned OpEx wouldn't grow at the same level going forward for the next year. Could OpEx actually come down for any reason? Or do you -- is Dell in the stage -- or maybe this is for Michael as well, or you have to invest just to execute on this enterprise strategy? And then on the issue of gross margins going forward, has anything changed in the pricing environment on the server side for all going forward? I think you benefited just from a beneficial mix shift in servers over the last year. I'm trying to see if there's any risk around that. And then finally after seeing them on the comments about this, then in terms of lower-margin businesses you want to prune, is there a dollar number you can help us think about? Is it $5 billion? Is it $1 billion? Any kind of range. I'm trying to think about how much that might hamper Dell's ability to grow revenues not just for the next year, but for the next 2 or 3 years.

Brian T. Gladden

Kulbinder, it's Brian. I'll kick it off on the OpEx. I mean, I think there will be places clearly where we continue to invest. We've been investing in solutions and services and adding solutions headcount in both the R&D side as well as sales specialists. We'll continue to do that. We will continue to invest in the acquisitions that we've done and in those acquisitions that we do going forward to build out capabilities there. I think there are still opportunities to reduce OpEx in other parts of the business, and I think you've seen us do that as we've looked at a weaker demand environment over the last couple of quarters. So I think it will be a blend, but we're not going to hesitate to make the investments we need to make to drive this strategy. That's a big part of what we're doing to transform the company. Steve, you want to...

Stephen J. Felice

Well, that's exactly right. The key thing is that we're starting to see the productivity benefits of the investments we made. And I think if you look at the year in balance, we clearly did the right thing in investing in the business. That's what's driving the higher margins is our ability to sell a higher mix and a higher solution set. So now we're just saying that we've got a more productive set of capabilities and we can scale it better. But as Brian said, we want to continue to invest in the business. So as long as the demand environment allows it, we'll continue to add investments.

Brian T. Gladden

Yes. On your server margin question, I think we've done a nice job of changing the mix of where we play in the server business and moving to a more highly configured, higher-end workloads within that space. I think that's driven a nice expansion of margins within the server business. We think that, that will continue with our 12th generation products, we'll continue to do that. So we feel pretty good about the overall sustainability of the profitability in the server business. And what was your third question, Kulbinder?

Kulbinder Garcha - Crédit Suisse AG, Research Division

Oh, sorry, on the pruning of businesses, just in terms of what's left, is that like a $5 billion number in revenue terms at annual basis, is it $1 billion? I'm just trying to get a sense of how much more pruning Dell has left realistically. And after even for the next year, I'm thinking over the next couple of years in terms of how much that might hamper your revenue growth.

Brian T. Gladden

Well, I would say without giving you specifics that we're through the majority of this. We told you about $3 billion this past year was what we were working our way through and that's still a good number. It would be a smaller number as we move forward. And primarily focused in the S&P business is the primary element that we move forward with.

Operator

Your next question comes from the line of Maynard Um with UBS.

Maynard J. Um - UBS Investment Bank, Research Division

Can you just talk about how you're measuring the R&D and sales and marketing investments that you've made over the last year into the businesses? What metrics, in particular, you're looking at and how that's tracking so far relative to your original expectations?

Brian T. Gladden

Well, I think we've done -- we've really bifurcated the way we think about OpEx and clearly have begun to look at some of these product lines relative to competitive benchmarks. If you think about the storage business, you think about where we are on enterprise in total. And we've basically set some targets around the right levels of investment. Clearly, those teams have commitments around growth, they have commitments around the product portfolio and launching new products. But I think we've got a real sense for what's required to be successful in these kinds of businesses, and we're committed to get there. And I think at the same point, we're going to be tough in other parts of the business whether it's in G&A or other less profitable parts of the business in terms of investment. And that's how we can fund those things.

Maynard J. Um - UBS Investment Bank, Research Division

Well, I guess specifically to the specialists that you hired, how are you measuring those guys and how's that, in particular, tracking?

Brian T. Gladden

Yes, we have a series of key performance indicators and for competitive reasons, I'm not going to share the details of them. But we can measure how much growth we're getting in the way we define a solution. We can measure the pipeline that's generated, that our multiline of business for example. We can measure where we've added services content to the sale. We can look at the revenue productivity per specialist. So we've got a number of metrics that we're pretty maniacally focused on. And so we know how we're progressing here, and that's why I said earlier I'm pleased with the improvement in productivity as we go into this new year.

Maynard J. Um - UBS Investment Bank, Research Division

Got it. And then just lastly on the services business. Can you just talk about what the big growth drivers are there and whether you think you're sufficiently scaled in that business?

Brian T. Gladden

Yes, I think it's really across-the-board. I mean, we've shared some of the progress we've made in new contracts on the non-support side of that business. But I think we've also made progress with the patch rates on support. And overall, really across-the-board, some nice growth. In terms of scale, I think that's the place that you'll see us continue to invest to support that business. It's clearly one of the strategic priorities for us.

Operator

Your next question comes from the line of Brian Marshall with ISI.

Brian Marshall - ISI Group Inc., Research Division

If you look at your storage business, obviously Dell-owned IP storage has been doing extremely well, but we haven't seen much growth in that business as the third-party reseller comes down, so we've kind of been hovering $500 million in revs for -- on a quarterly basis for quite some time. It seems to me that still, commodity hardware represents a majority of the company's revenue and that's been the case for obviously the past couple of years as we really try to move the strategic revenue sources. Can you discuss a little bit about how this is -- how we're going to see some of the trends that we've seen in storage and your networking as well as your Software business going forward as we transition to more Dell-owned IP and stop the resell of third party? And then the follow-up question is could you give us the unit number as well?

Brian T. Gladden

Yes, Brian. Just on the third-party storage, on the total year, that was down about 64%. We still have some more work to do there as you move into the first quarter. It was down in the fourth quarter 83%, and there's still a fair amount from a comparison standpoint in prior-year first quarter results. So as we head into the second half of the year, we're pretty comfortable that we'll be completely through that probably even into the second quarter, and we'll have overall storage business begin to move forward in a growth mode. As you think about that model, it's really almost the same exact framework we would expect to see in the networking business. And as that gets to a scale that's larger, we'll begin to give you a little more visibility to that and probably in the Analyst Meeting as well.

Michael S. Dell

Yes, Brian. I would just add that the focus is clearly on continuing to add Dell Intellectual Property that we think is disruptive and that can provide real value for our customers. So if you look at this past year, there's a lot of clear indications of that in SecureWorks, in Compellent and in some of the other acquisitions that we made, Force10 and then the integration of things like Ocarina, an excellent add into our storage portfolio. So yes, no question that we're going to continue to be in the end-user computing business for the foreseeable future and a long time to come, and it's a great business to be in, if we can grow it appropriately and attach the services and kind of drive that business appropriately, so that's kind of how we're thinking about it.

Brian Marshall - ISI Group Inc., Research Division

Sure, understood. And the unit number, if possible?

Michael S. Dell

I don't think we disclose units anymore. We've moved off of that about one year ago.

Operator

Our final question will come from the line of Brian Alexander with Raymond James.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Brian, based on the information you've given on buybacks and other income and tax rate, et cetera, it's still possible to drive EPS growth without driving growth in operating income. So it's still not clear to me whether you expect to drive operating income growth in fiscal '13. And I'm still confused as to why you aren't specifically discussing an op income growth objective for the year whereas last year you did?

Brian T. Gladden

Well, we spent some time benchmarking and looked at peer companies and what they do, and we were really the only company out there providing operating income outlook, so we decided to be consistent with other companies, so that's why we moved to EPS. I think your math is right. I think given everything we see right now as we head into the year, that's the number that we're calling. And I think as we move throughout the year and things become a little bit more certain around the demand environment, around where we are in the investments we need to make, we'll obviously give you little more clarity on that. But we do think we can grow earnings per share and that's our focus.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

All right. Just maybe one final follow-up, if I could. In terms of capital allocation, you talked about buybacks at 10% to 30% of cash flow. You talked about CapEx for the year. Can you say whether Dell is more seriously considering the issuance of a dividend? And if not, what are the key arguments against the dividend as you talk about this option with your board, given the company is generating a lot of cash? It's pretty consistent, and you're sitting on a large pile of cash as well.

Brian T. Gladden

Yes, I think we talked about this last quarter in a specific question. I would just say that the one big area of uncertainty that we obviously have to manage through, and this is something we think about and talk about from time to time with the board, is really around U.S. liquidity and access to capital in the U.S. And as that gets clearer, I think we would obviously be in a position to talk more about that. But that's probably the biggest thing that we think through as we consider that alternative, Brian.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating and you may now disconnect.

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