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Here’s the entire text of the Q&A from Dell’s (ticker: DELL) Q3 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Q&A

Operator

Operator Instructions Your first question comes from the line of Harry Blount with Lehman Brothers.

Q - Harry Blount

Hi, guys, two questions if I might. The first one is on the, if you look at the two basic concerns that investors have had with Dell, the first one has been about our near-term expectations too high and the second one really is about the business model and is the business model broken. Obviously the near-term expectations have been reset here and the performance in the Enterprise suggests the business model's alive and well but obviously the consumer business was a very big disappointment. How long is it going to take to get you guys, get this fixed so that it isn't the drag on business overall?

A - Jim Schneider

Well, Harry, this is Kevin. As you know, our focus as a company has always been on the corporate and the enterprise market. And so if you look at those businesses, they're doing very well and they're doing very well globally with growth in international markets continuing at a very nice pace. For our consumer business, predominantly in the U.S., we went through a correction from Q2 to Q3 and our overall focus and making sure we had a good balance of low-end, mid-range, and high-end and with the launch of our XPS product line are now a little bit better balanced set up coming out of Q3. We are actually still very hopeful and very confident that we can take share, make money at all price points and on all products and make that a very successful business as has been traditionally for Dell.

Q - Harry Blount

The second question relates to the earnings growth. As the guidance you have given, the midpoint of the range suggests 10 to 11% earnings growth which is basically in line with the total expected return of the S&P and I don't think, from an investor perspective, that's really what investors are expecting relative to the S&P. Is this a low point in terms of earnings growth? Do you think you can get it up? What is your long-term sustainable growth rate on earnings?

A - Jim Schneider

Well, we think that in this particular time that this is the appropriate level of growth on the revenue, appropriate level of growth on the earnings side, Harry. And for this, we're giving that guidance out to the Street right now. What will be the long-term growth, we'll have to wait and see but we think at this point in time this is a very healthy growth rate. Leaves the industry in overall profitability and I think that's where we are today.

Q - Harry Blount

Thank you.

Operator

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

Q - Richard Gardner

Good afternoon, thank you. A couple of questions. First of all, the Q4 guidance implies about a 5 to 8% sequential increase in revenue, I know that you said that the extra week has not historically affected your business, but it seems like it would add at least several hundred million dollars, maybe a couple percentage points to the growth sequentially. I guess the question is, number one, why has that not been the case historically and number two, if it does add to the revenue, are you just taking a fairly conservative tack with Q4 guidance? And then the second question for Jim is when you say that margins will contract modestly in Q4 versus Q3, are you talking gross or operating or both? Thank you.

A - Jim Schneider

Let me try to answer both of them. I'll do the last one first. Yes, I think it's more on the op income. We're not talking about gross margins or OpEx, but we think because of the consumer influence. I mean with the consumer business, down year-over-year in this third quarter, we're still going to have a lot of sequential growth in consumer and the op income characteristics are lower as you can see from the numbers and the rest of the business. So can't have a slight drag on op income percent. So it's 8.6 this quarter. We expect it could be slightly lower in Q4. Addressing the question on the extra week, it is kind of a tough one. It's interesting because it's the third 14th week quarter we've had since I've been at Dell and we've never actually talked about it with you guys very much in the past because it's never really been much of a factor. It seems to have gotten a little more press this time. But I'll tell you, the way the thing really works is that if you look at the way corporations buy, you know they're going to buy annually or then it's going to be broken down into quarters. And the fact that we have about three extra selling days this quarter in the first week of February, which is the lowest month of the year, I think it has like zero impact really on our overall relationship business. Now, transactionally, you would think day to day we might get a little bit extra volume but if I think about the growth in the transactional business in the fourth quarter, we get the bulk of that more front-end loaded in the quarter at least up through the holiday season. So the fact that I've got three extra days in February doesn't have much impact on the holiday buying season. So, yes, it's kind of a mix. I actually hope that we can get enough extra revenue to cover the extra OpEx that we have associated with having an extra week because you've got fixed salaries and things like that, so it's kind of a push for us and that's the way it's looked for us historically.

Q - Richard Gardner

Thanks, Jim.

Operator

Your next question comes from the line of Andrew Neff with Bear Stearns.

Q - Andrew Neff

Sure. Two things if I could. One, there's been a lot of talk about your strategy on processors. Could you sort of take us through the thinking regarding, have you given any more thought to expanding beyond Intel and the reasons for staying with Intel? And I guess the second question, just in terms of, as you look at where you are from a cost standpoint, given the slower level of growth, are you interested or planning on taking other steps to address your cost structure?

A - Michael Dell

Yes, Andy, this is Michael. On the processor question, you probably have seen in the last five or six months we have broad dual core processors to our desktop, workstation, and server platforms across basically the entire line. When you look at server volumes, there basically are three categories, and I'll sort of take them in order of volume. The first and by far and away the largest volume category are the two socket servers like the PowerEdge 2850. And of course those have dual core processors and stack up extremely well to competing products with other dual core processors. The second category is basically entry servers where it's really more of a cost play. And we participate in those products with our PowerEdge 1425, yet it sort of is commonly known that there's not a lot of profit to be earned in that sector of the market and so it's really more of a cost play than a performance play. And then there's the highest end of the market, which is the four socket server, and you've probably seen that just recently we have started delivering our PowerEdge 6850 and PowerEdge 6800 which is a four socket server now with the dual core XEON part. So we think we've closed a lot of the gap and as was mentioned earlier with the 9G generation of servers that we have coming in the first part of next year, we have a number of advancements in those in terms of Intel's next generation of microprocessors in addition to a new memory architecture, new storage architecture, systems management improvements, and so I think also when you look at our enterprise business in the third quarter, we're seeing healthy trends in that business and so we're encouraged that we're doing well there. Having said all that, we have many products in development and we feel we'll continue to be competitive in terms of the products we can offer to the enterprise market.

A - Jim Schneider

And Andy on your cost front, I think that with the growth that we're going to experience this coming quarter, the actions that we've already taken, we think are going to be very helpful in driving efficiency. If you are looking at the P&L, you can see that our margins actually were enhanced, gross margins, so we're in very good shape with the efficiencies of our overall business model, supply chain and manufacturing model, our OpEx was creeping up faster than we wanted and so we've taken some actions and I think you'll see us continue to hold pretty tightly to control those costs in the future and with the growth that we anticipate, even with the guidance we've given, we think that we can manage those costs back into shape.

Q - Andrew Neff

Thank you.

Operator

Your next question comes from the line of Tony Saccanaghi (ph) with Sanford Bernstein.

Q - Tony Saccanaghi

Thank you, I also have two questions. Kevin you alluded to having rejigged the model to drive a better balance that optimizes and I'm quoting here, optimizes profit while providing sustainable top-line growth. Should we be therefore assuming that the revenue guidance you provided this quarter is the sustainable top-line growth that you believe Dell can do going forward? Moreover, do you still feel confident in your $80 billion target which I think even if we pushed out to the later year of your three-to four-year projected range, would imply 13% revenue growth through the end of this fiscal year.

A - Jim Schneider

Well, Tony, on that front we still believe the $80 billion target is achievable. It's strategic goal for us. We think that with our market share in the 18% range on PC units, with less than single digit areas within kind of overall printers worldwide, the storage business, the services business, software and peripherals business, that there's no logical reason why we can't continue to extend our model and grow into that level. However, when you talk about the growth rates, we believe that for this time and for this quarter, the best guidance that we can give you is in the 10 to 11% growth rate and we think that's appropriate for now.

Q - Tony Saccanaghi

Just to clarify, the 80 billion that you think is still achievable, is it still achievable in your original time frame? And if you have moved to a model that does have more sustainable top-line growth, which is what you alluded to, when are we going to reach that level of sustainable top-line growth?

A - Jim Schneider

Well, like I said, 80 billion is the goal that we're going to try to achieve and target our team strategically to go over. No timeline on that for you Tony and right now the guidance that we're giving for the quarter is 10 to 11 and we think we'll have to leave it at that.

Q - Tony Saccanaghi

Okay. And then just on cost initiatives, I would just like to try and get a better understanding on timing. Firstly I'm not sure if you're at liberty to comment about the amount of the work force reductions. I think some simple math would say it was a thousand plus people associated with your one-time charge. But can you comment on when you should start to see the benefit of some of your cost initiatives? Again, I think in your closing remarks you said you are already seeing results in consolidation of consumer and SMB. If we are seeing some of those results, why wouldn't they offset some of the potential OpEx or gross margin weakness that you're expecting in Q4?

A - Jim Schneider

Well, Tony, we've taken action, as we alluded to in terms of a reorganization, in terms of performance management of all of our workforce globally. But your number's not too far off. But I think right now the focus is on executional excellence across all of our systems. We're going to speed up a number of the cost reduction efforts we have going. We're focused on scaling out our overall OpEx structure, which is I think really the place we're focusing on cost improvements and we're doing that through a number of areas and initiatives that I alluded to. And so we're going to have to see how that goes through this quarter but we're pretty confident we've made the right moves.

Q - Tony Saccanaghi

Okay. Thank you.

A - Jim Schneider

Thank you.

Operator

Your next question comes from the line of Rebecca Runkle with Morgan Stanley.

Q - Rebecca Runkle

Good afternoon. Thank you. A couple of questions. Just first off on printers. Historically, you've provided unit growth and profitability metrics, will you comment on those? And I have a followup.

A - Jim Schneider

Yes. In terms of printers, our total imaging revenues were up 31%. We had tremendous growth really in laser printers, a lot of growth in color lasers. We have now a number two position in total lasers in the United States. And again, we're seeing very strong growth in that product line. Revenues for consumables were up strongly. So the unit growth in the printer business has moderated some. But I think what you're seeing is a real shift to the laser business. So laser business is up in a very big way and we're focusing more on color lasers, which is really not a unit game when you compare it to the inkjet business.

Q - Rebecca Runkle

And profitability overall?

A - Jim Schneider

Rebecca, I'd say that the way we're managing this business has really been to continue to take share rather than focus on profitability right now but I'll tell you in this quarter the consumables revenue growth was so strong that we made a few million dollars this quarter and I think even with more unit growth in the fourth quarter, we'll probably make money; so I think we could very well be at the point where this starts to make more money sort of from the fourth quarter onwards into next year.

Q - Rebecca Runkle

Great. And then just a quickly two things. One, some of my contacts are suggesting that you weren't able to fulfill all of the desktop demand because of chipset, the shortages. Is, how much did that impact the quarter? And your guidance for the fourth quarter? And then can you just comment about what types of services initiatives you're making, are they focused on corporate and enterprise or are they across the board in the consumer as well and just provide some more context?

A - Jim Schneider

Well, there has been a tight chipset market but all I would say is we were able to get what we needed for the quarter and for what we're going to need for Q4, so I'm not sure where the information you're--.

A - Michael Dell

We didn't have any material disruption to supply on chipsets.

Q - Rebecca Runkle

Okay.

A - Jim Schneider

And on the cost side, really is not a cost side, on the service and the support, I think it's a matter for us of building the correct capacity to handle customers' needs, accelerating technologies and technical support arenas, and just refocusing our overall execution within the service and support area. We pride ourselves on having great support, believe that that will be true in the future as well. I think one of the signs of early success is if you look at the most recent CIO survey we commented on in our original talking points, that we were named amongst largest corporations kind of in the world as number one when responding to the question of who offers impeccable customer service. That's pretty telling information and so we believe that one of the prides of the Company of providing great technical support is something we have and we will continue to improve on.

A - Michael Dell

Yes, one of the services that Kevin mentioned and we've actually been piloting this in, in a sort of a beta mode now for a couple of months is the service called Tech Connect. And it's part of a Dell on-call service that we're offering to consumers. And essentially when a user has issues with their machine, a lot of soft errors, spyware, those kinds of things, they can, on the internet, go to Dell.com/remote and they download a small piece of software. When they call us or they're on-line with us they're given a special code that they enter in and it allows with the customer's permission our technical teams to go on that customer's computer and basically fix the problems every step of the way asking the customer for their permission. And we found enormous satisfaction with this tool. Much faster speed to resolution and we think it has great applicability for a number of the, let's say, challenged users out there who we can help solve these problems more quickly.

A - Jim Schneider

Next question, Operator.

Operator

Your next question comes from the line of Laura Conigliaro with Goldman Sachs.

Q - Laura Conigliaro

Yes, a few questions, please. Just three quarters ago, estimates for your growth were quite a bit higher, 18% plus and now you virtually have your growth targets and given that you've always been known for setting aspirational revenue and earnings targets, can we assume that you're changing your approach in order to give yourself more room and therefore have more of an opportunity to exceed targets? In addition, what actually changed so radically to cause this large a difference, that is, virtually having the numbers? Is it all consumer? Because the numbers don't really come out. And then, finally, you, the target numbers you gave for next quarter are for 8.5 to 11.5% top-line growth, and yet Kevin, you referred a couple of times to growth being in the 10, 11% growth range can you possibly explain, how the two mesh?

A - Jim Schneider

Well, Laura, a couple of things. On the overall growth we talked about this quarter the impact being in consumer and also in the UK, we have a very strong position and predominantly that was a public sector shortfall within the UK, which is again one of our largest countries and one of our largest sectors. So that's kind of driven it. I believe that we are correcting overall kind of growth trajectories. We believe that 10, 11% of revenue growth rate is a very healthy growth rate for a company our size and for the time being and for the quarter that's the guidance that I think we're going to give. That's about the best I can do. On the earnings front, yes, the growth rate and the range is a little different from 8 to 13%, which is a little better than the revenue growth rate, which is what we always strive to achieve, better growth rate and profit line.

Q - Laura Conigliaro

So in other words, the 10 to 11% applies to the current quarter and not just to the longer term because it's a little bit different than what you have actually in the slide?

A - Jim Schneider

Excuse me, 9 to 11 is the revenue growth rate my team is telling me here I misspoke and said 10 to 11, 9 to 11 is the revenue growth rate. I think for now Laura that's the guidance we're going to be able to give you for the quarter.

Q - Laura Conigliaro

Okay. Thank you.

A - Jim Schneider

Thank you.

Operator

Your next question comes from the line of Ben Reitzes with UBS.

Q - Ben Reitzes

Thank you, good afternoon. I wanted to know if you have any timeline on the turnaround in consumer and can talk a little bit more about the initiatives that will particularly allow us to track that better? When does the headwind become a tailwind? And then with regard to operating margins, Jim, if you could just clarify, I think we're going to maybe the mid to lower 8s next quarter. When do we go higher and how do we get there? Is, do you still have a goal of getting close to 9? Or do, should we look for that to expand slightly as we go throughout the next year to hit some kind of a goal? Thanks.

A - Jim Schneider

Well, Ben, I'll answer your first section there. The consumer business for Dell, even in what we consider to be a kind of a slower period still is the, somewhere in the three to four times the profitability of any of our nearest competitors. So that's still a very good business for us. And my question is do we want to, how fast we want to grow it as an overall part of our portfolio. What we went about doing and correcting from Q2 into Q3 is getting the mix balanced between low, medium, and high-end products such that we had a healthy balance that we could grow off of into the future. So what we did in Q3 is launch and accelerate the growth of our XPS high-end product line forming computers both through launching XPS products as well as two high-performance notebook XPS products, the 140 and the 170. Those products have been very well accepted into the marketplace. I think we alluded to the fact that quarter on quarter they grew at double the rate of our lower end systems. And so we're very happy with market acceptance. It reminded us the fact that customers actually do want great technology at a great value and so we'll continue to push that strategy forward. We think, therefore, if you look at low, medium, and high and which we'll offer products at all price points, we'll have a good consumer order.

A - Michael Dell

Ben, we also have in our development pipeline for next year a continuing strengthening of the high end of the product line where Dell has historically led and we intend to continue to lead. We're also going to participate of course in the mid-range and in the entry space as well.

Q - Ben Reitzes

Michael, just, the Street kind of is thinking that with easier comps in the second half of next year that's when we should see a turn. I'm just trying to get a direction. It seems like you're doing a lot of things to fix the business, but I mean, are we thinking about it the right way?

A - Michael Dell

Well, I think in response to all these questions we have been giving you the fourth-quarter guidance and I'm not going to give you anything other than the fourth-quarter guidance.

Q - Ben Reitzes

Okay.

A - Michael Dell

So if you want the first-quarter guidance you’ve got to wait for the end of the fourth-quarter call.

Q - Ben Reitzes

Okay. Jim, on the profits, just to move on? Sorry.

A - Jim Schneider

Yes, Ben, you know when we talked about getting the op income up to 9 or better. If you kind of go back to late last year, we peaked at this time at about 8.8. And I think at that time the trending looked like we could go up above. And I think what's kind of changed during this year and I've been talking to all of you all year about this is that we've had a lot more growth outside the U.S., which just has lower op income percentages. It's something we're still working on but we're focused on continuing to grow our share, build our infrastructure out there and I think over time, that's still our target. I think we're pressured a little bit this year by the combination of that higher growth outside the U.S., and then with consumer having a little lower profitability, if we, if we had to sustain the same profitability even what we had last year in consumer op income would have been up another 10 basis points or more. So I think it's partly a mix issue in this quarter and I think kind of going into next year that's still our target, to get back from where we were, but I think we will just have a little bit of that natural pressure this quarter because the strongest revenue growth we're going to have sequentially from Q3 to Q4 here will be outside the U.S. and it will be in consumer.

Q - Ben Reitzes

Okay. Thanks a lot, guys. Appreciate it.

Operator

Your next question comes from the line of Keith Bachman with Banc of America.

Q - Keith Bachman

Hi. A couple things if I could, please. Guys, I'm still not sure on the consumer business. I think the plan is to try to improve the profits as the focus is more on the high end. But clearly that would be a position that's coveted by many. So how does the consumer business, which has 4.5% op income or 4.2% op income if there are other folks coveting that same space how do you really drive improved profitability there? That's the first question.

A - Jim Schneider

Keith, I think we drive improved profitability there the same way we do it in every other customer segment. If you look at our overall competitive front and we've, obviously as you have, assessed our top three competitors, their operating income in the entire business is somewhere between 2 and 3%. So our consumer business, which is one of our least intensive businesses, makes more money as a percent than any of the others across all their businesses. So it's pretty clear to us if that's the case that we have a sizeable advantage in the consumer space and so the model's very healthy, and the only issue is how fast do we grow it and where do we grow it? And we spent Q3 in the process of getting the mix and balance between high, medium, and low set. We think that's done. We also have spent the quarter in worrying how we would manage overall operating expenses to have more sustainability in the growth. And I think you'll see if you watch our product moves this quarter that we will continue to drive growth in the consumer at all points and we'll have a very healthy Q4 for consumer.

Q - Keith Bachman

So just if I could clarify that for a second. Is, would you expect improved profitability in the U.S. consumer then as a result of that mix.

A - Jim Schneider

Our goal is to drive profit dollars. And so I think that's where you'll want to focus.

Q - Keith Bachman

Okay. The follow-on on Jim, your comment was on the extra week which you indicated was in effect only three days, did I hear that correctly.

A - Jim Schneider

Yes, three, we take this in terms of selling days, you take the holidays and look at what you really have. To us it ends up being really about three selling days.

Q - Keith Bachman

So three selling days over last year, or sequentially?

A - Jim Schneider

Sequentially.

Q - Keith Bachman

And Jim when was the last time that you had a 14-week Q4?

A - Jim Schneider

I think four years ago and then another four years or so before that. So it's, I've been here nine years and this is my third one, so--.

Q - Keith Bachman

And your opinion is it's not going to really do that much for revenues.

A - Jim Schneider

Well, we've gone back and looked at this thing historically and it's really a bit hard to tell. I think intuitively you guys look at it and you say, well, it has to have some uplift and I'd say the same but when we actually look at relationship type selling, which is still the bigger part of our business, the way business works and customers buy or public institutions, you, it hasn't translated into like a lot of extra revenue because it's not the way the selling cycles work. So I think you'd have to more look at the transactional side of the business and say, yes, the day-to-day run rate business surely must have a little bit extra revenue from that. But then again, like I said, a lot of the transactional business this quarter is more front-end loaded, before the holidays are even then post-holidays where people take their money and buy things after Christmas but I tell you February's our worst month of the year. So having a few extra days there, I agree it should have some uplift a bit because it needs to to cover the OpEx.

Q - Keith Bachman

And Jim thanks for that clarification. Would you anticipate, are there going to be more charges in the upcoming quarter?

A - Jim Schneider

I don't anticipate it. I've only done this one other time again in my nine years, so I'd rather go like another nine years or so. But--.

Q - Keith Bachman

Okay. Thanks very much.

Operator

Your next question comes from the line of Richard Farmer with Merrill Lynch.

Q - Richard Farmer

Thank you. Two questions, please. In the printing business, do you think that the consumables revenue is turning out to be lower over time for the printers that you're bundling in for free with PCs versus the printers that you're selling stand-alone not bundled with PCs?

A - Michael Dell

We don't think, we know, yes, we don't think about those things, we know because we sell them directly to the user and we know exactly how many cartridges they buy, so we know, we know the answer to that question and the answer is yes. Bundled printers have lower consumables than non-bundled printers.

Q - Richard Farmer

Does that imply that you will do less of that bundling going forward versus the stand-alone?

A - Michael Dell

Yes. Well, I think it implies that we would do less than we have in the past but I think we'll still use that as part of the portfolio of things that we offer value to customers. It has been a successful promotion in the consumer business and there might have been times when we over used it but I think we'll still have it in some moderation.

A - Jim Schneider

I think the other thing that we are doing is finding that bundling higher-performing printers, so now the new all in one or color related photo related printers have also an accretive impact. So not only is it just, do you bundle it or not, that's clearly one question. But secondly what do you bundle? And those higher value products actually when they bundle are still used a bit.

Q - Richard Farmer

Okay. Thank you. And then the second question if I may. On the flat panel TV business, I wonder if you might just elaborate on your results there. How that performed relative to your expectations and whether or not that can explain any of the consumer shortfall or is that still just too small to be a factor?

A - Jim Schneider

Yes, I'd say that the TV product line is really too small to have much of a factor. We did launch several new products in Q3, they are very nice products. We'd be happy to take your order right now if you'd like to buy one, there's a 50-inch, 37, a 50-inch plasma, 37, 32 inch LCDs, and so those product lines will, I think, continue to be reasonably successful for us, it's a fairly nice product category. Pricing has been quite aggressive there, as you know. But I don't think it had much to do with the shortfall.

Q - Richard Farmer

Thank you.

Operator

Your next question comes from the line of Bill Shope with J.P. Morgan.

Q - Bill Shope

Okay, great. Thanks. Last quarter you noted that component prices weren't necessarily coming down on an optimal rate or at least not coming down as fast as they had historically. And clearly if we look at the past when you've had some of these operational hiccups, particularly when your relative growth rate came down for several quarters, the component price environment, at least the firming component price environment, has been highly correlated with those events. So did this, did the firming of component prices persist for you guys in the October quarter? And if so, how should we think about a potential improvement in your unit growth rate as component prices begin to come down at a more rapid pace going forward?

A - Jim Schneider

I think the component costs declines in the last quarter here were fairly moderate. We talked about that coming into the last quarter and pretty much played out that way. And we actually, with the unit growth being relatively strong in the industry, I think we're expecting to have a component cost environment again. That's very similar in Q4 to Q3. Unless demand softens in some way, I think it's pretty much more of the same. And of course if costs come down faster, it's better for us, but we'll just have to manage with what we have. But I expect it to be very similar.

Q - Bill Shope

Okay. And then just an expansion of the question previously on bundling printers. You had done that quite aggressively in the early part of the year and clearly you've moved somewhat away from that strategy for various reasons. But I would imagine if you stopped bundling free printers or excessively discounted printers with the consumer PC that makes the overall price less attractive for the consumer and my question is does that have any impact, any elastic impacts on demand potentially explaining some of the weakness in consumer? And if so, how do you make up for that? You have to obviously pull from other component sides or price more aggressively on the list price and how do you make up for the fact that you can't, or you're not going to bundle printers as aggressively going forward.

A - Jim Schneider

Well, I'll let you in on a little secret. The promo of bundling of printers is not our best promo to drive volume. So having that maybe out or using a different type of bundling strategy with the printers is not necessarily going to change the overall trajectory in the units, so it really had nothing to do with the overall consumer business per se. What we have concluded, though, is that there are better ways to make more money and get those printing products out into the customer basis and that is through doing some bundling through both bundling of low-end but also of the new photo all in one inkjets and that drives better customer value and it does drive a better consumable take rate. So we're learning a lit bit more about how we do that and I don't think you'll see bundling stopped but I don't think you'll see us utilize that as the only tool.

Q - Bill Shope

Okay. Great. Thank you.

Operator

Your next question comes from the line of Steve Fortuna with Prudential Equity Group.

Q - Steve Fortuna

Just actually four short questions. First one is, Jim, on the component side and in relation to the last question you said about the same in Q4 as Q3, can you quantify what you think the bill of materials declined in Q3, is it 30 or 40 basis points per week? Historical is 50. Second question is, if we do assume that operating margins over the course of fiscal '07 do migrate back up to the high 8s, seems likely that we're going to get higher gross margins because of obviously more focus on the balance of products as well as higher margin emerging growth areas but probably higher operating costs so in other words I would assume you'd see higher GMs but then higher OpEx and that would be the way you'd get to higher operating margins using that kind of methodology. And maybe you could confirm or deny that. And the third thing would be on, I get a lot of questions from in the business about the fact they believe that your economic advantage on the mobile side with notebooks, vis-a-vis HP, is not nearly as strong as it is on the desktop side. Maybe you could clarify that while everybody here is listening. And then lastly, and I promise this is the last one, you're probably not going to answer it. But I am assuming we are looking at a growth haircut this quarter in your guidance because of the ongoing restructuring which will likely last a few quarters. How much of a growth haircut do we think we're incurring here as you guys try to get the ship righted.

A - Jim Schneider

Let me get started on those, Steven. If I missed something, just tell me. But, yes, the cost reductions last quarter were probably in the 30 kind of basis point a week. So if you're looking at I don't know 4% or so for the quarter, that was probably about it, the way we do it. Kind of like for like for the quarter. And that's what it looks to me like it's shaping up for Q4. Now, again we've had quarters like this, but it's probably the lowest reductions, maybe in the last couple of years, both Q3 and in Q4. So we do have that to deal with. The op income thing. It's a little harder to talk about it because part of this depends on what revenue growth rates we have but we're pushing pretty hard. I mean it was part of the cost reductions and even in the charge with some of the workforce alignment. I think we believe that you have OpEx this quarter at 10 points, we know it has to be lower than that. So I think there things that we can do, with revenue growth we still have some OpEx growth to work with and still take it down as a percent of revenue so I think it's really a balance between really margin and OpEx. I wouldn't look to any one and say this is where we're going to be able to improve our income, but I will tell you that our goal is to get OpEx down below 10 points or revenue though. So that's an improvement area and then it really depends on pricing pressures and what we can do with margins.

A - Michael Dell

I mean on notebooks, Steve, you asked about that. Notebook units were up 38%. This was a 13th consecutive quarter where notebooks grew more than 25%. We think we have a very strong product line here and a strong advantage. And we just introduced new 14-inch XPS product, the XPS M170 continues to win pretty much every time it goes into a competition it comes out with an award. So we have got a very, very strong product line. We're gearing up for a whole new generation of latitudes starting early next year. So this is obviously where we're investing heavily on the client side because we see a lot of growth here and the margins, operating margins, here are very healthy.

Q - Steve Fortuna

Michael from an economic advantage standpoint in terms of the cost of goods, bill of materials, advantage you guys have as well as obviously the channel. There's no difference there between desktop and notebook you're still touching the box you're still buying materials on an order basis versus a build to forecast. So there is no difference between economics between a Dell notebook vis-a-vis a Hewlett notebook and a Dell desktop vis-a-vis a Hewlett desktop, is that correct?

A - Michael Dell

Well, that would not really equate to what we know of their profitability. So I think you'd be missing something there because those products are quite nicely profitable for us. They're certainly more profitable than desktops. So you'd be missing something in the P&L there somewhere.

Q - Steve Fortuna

Yes.

A - Jim Schneider

Steve, the other thing you've got with that is you can certainly weigh cost position in terms of just bill of materials and the kind of bare bones you've got a number of other cost elements that go into that equation, but then you've also got product mix. And so when you combine all of those, we're very happy that we've got an excellent cost position. It may be slightly different than the desktop business, may be slightly less. In terms of just a bare bones cost effort. But there's a lot more that goes into the profitability of a product line than just the bill of material costs.

A - Michael Dell

Yes, I think there are number of things that go on in notebooks. For one, you have a whole array of things that gets sold along with the notebook, which are unique and often, are really always sold by the channel. In our case, of course, we're the channel, so we have an opportunity to sell all of those and those carry fairly attractive margins. So when you add all these things up plus the warranties and everything, what you have is a very attractive business that continues to grow. Again, 38% unit growth. So we're continuing to invest heavily in notebooks. And I think you'll see leadership from Dell in terms of the next generation of performance in mobile computing.

Q - Steve Fortuna

And then lastly, is there some haircuts that we're getting. I know you are not going to quantify it, that's fine. But I'm assuming that the guidance of 9 to 11 incorporates some haircut resulting from ongoing restructuring at the Company.

A - Jim Schneider

No, I think Steve what we've done has given you what we think is a good growth rate for the Company at our size 50 to 60 billion growing at that 9 to 11% growth rate we think's appropriate and that's what we can give you for now.

Q - Steve Fortuna

Thanks very much.

Operator

Your next question comes from the line of Brian Alexander with Raymond James.

Q - Brian Alexander

Just want to take one more stab at the revenue growth for the fourth quarter. Historically, your international business has been seasonally strong, it's been the fourth quarter. It's growing more than 2X the rate of your Americas business. So with that increasing as a percentage of the total and with faster growth there, and with your public sector declining as a percentage of total and that's been a drag on growth I'm just trying to understand, why are you guiding to decelerating top-line growth on a year-over-year basis in the fourth quarter?

A - Jim Schneider

Well, you do, as you correctly stated you've got a number of kind of puts and takes of parts of the business that kind of trail off and some that maybe even trail off in terms of TRU, some that peaked up and so w look at that in terms of the balance of our over all-business. We looked at what we thought was a healthy growth rate for our company to set our targets and our guidance for and really, Brian, all I can tell you is that this kind of 9 to 11% growth rate we think is acceptable for a Company of our size, for the market that we're in, and for the direction we can give you today.

Q - Brian Alexander

Just a quick followup on the UK. Can you just talk a little bit about how much that contributed to the shortfall versus your original guidance by my math it seems like maybe the UK was up mid-single digits year-over-year, is that correct? And could you just talk about whether you think the weakness you saw there was market driven or more company specific. Thank you.

A - Jim Schneider

Yes, it's actually a mix there, Brian, because the UK business was still up, more of a stronger single digit but it's a mix of the home and small business markets are actually quite good. The public market, which is strong for us in this quarter, was quite a bit short. And in fact that's even when you see, no one's asked so far but when you look at some of the profitability even, and we've talked about this a lot with you in the past. We're very big in the UK, it has a market share similar to the U.S. And with that part of the business being very profitable and kind of dropping off, our UK profitability was much lower than normal so that really had the impact on EMEA. But some parts of the market actually are quite good, the small business and the consumer part in the UK was good. So it really is more one part of the market.

A - Michael Dell

And notebooks were good in the UK, too, they go 40%.

A - Jim Schneider

I was going to just to add to that though, Brian, one other thing just because so many questions about Q4 is there are so many moving pieces now. Even though we talked about federal business in the past, not being as strong, the federal business in Q3 was actually quite good and made all our targets and we're also really big in the education business, so we've not talked about that being off. But the whole public business, the combination of the federal business and all the educational business declines a lot in Q4. So when you look at it sequentially you have several hundred million dollars of revenue declines there. Consumer goes up several hundred million. Europe goes up a few hundred million, you balance all those out, and we're guiding to actually quite a bit of revenue growth. So it's like if any one of those moving pieces changes a bit, that's kind of your difference in growth rates.

Great. Operator, we have time for one more.

Operator

Yes, sir, and we'll take our final question from the line of Richard Chu with SG Cowen.

Q - Richard Chu

Yes. Good afternoon. Let me try perhaps another variation of a question that's been asked. Versus 6 to 12 months ago, do you see competition having an incrementally better value proposition taken as a whole, or, are the changes that you're grappling with due to the internal execution issues or top-line execution issues? Internal execution issues on the cost side or top-line upfill issues? And on the upfill question, is there any way that you can give us a sense of metrics on progress on, on driving improved commercial ops? And I have just a quick follow-on to that.

A - Jim Schneider

Well, Richard, I think as we look at the business and we look at our model and comparative advantages, we make improvements in that model at all points and all time and all the geographies and if you look at this quarter we had excellent growth outside the U.S. We had very good growth in very unique markets that we're targeting, enterprise particularly, server storage, notebooks. So we're having great success in a number of areas. We didn't do as well in a couple of spots and we've shared those with you. But I don't think it's fundamentally due to a big shift in the overall competitive frame. We didn't do as well as we talked in Q2 as we think we could have. Made some adjustments in Q3 and we're further making those adjustments and we think that as they come to play, that the benefits of the model for customers and for cost will play out like it has the last 10 years.

Q - Richard Chu

Kevin, just to clarify what you said. You don't think it is a big shift at competition, but do you see even a marginal shift in the ability of competition to offer a marginally better value proposition.

A - Jim Schneider

Well, I think you have to ask yourself what the marginally better competition really, we were talking a little earlier today about someone asking about kind of the low end price points and somebody mentioned a competitor that would be selling a notebook this holiday season for $399 and so we talked about that. Well, we offer 399 notebooks today and in fact the notion of a $199 desktop we're looking at our files was available to customers back in 2002. So the notion of low price points is something we lived with all along. That's not a new phenomenon and we have been able to compete very aggressively to sell a good balance of low end, medium, and high that's going to be true in the future. But we probably didn't do that as well as we could over the last several years and I think we're just getting back into that sweet spot of our overall model and as we do we're very comfortable that the model's fundamental strategic advantages will remain intact.

Q - Richard Chu

Could you comment on progress for an upsell?

A - Jim Schneider

I'm not exactly sure what you mean by upsell. What I can tell you is that our TRUs, our total revenues per unit quarter on quarter increased 3% Richard. That's a bit abnormal in terms of the quarter on quarter growth rate of that particular metric. That tells us that we're making headway into the product categories and the product mix that we really want to. And so we're quite comfortable that that's a good trajectory for us. As Jim talked, it will probably trail off a bit in Q4 as we accelerate into markets that have fundamentally lower TRUs. But that also has enhanced services and software and peripheral elements that are growing very, very nicely. And so, yes, the upsell I think's working well. 36% growth in services, 25% growth in software and peripherals. That's pretty good.

Q - Richard Chu

And finally with respect to the growth rates. 9 to 11%, you have said numerous times that is your best appropriate number for this quarter. Do you think that that is a transient kind of a phase that you're going through? I guess the question in my mind is I assume you are not suggesting that 9 to 11% is the appropriate sustainable multiyear growth rate with Dell or, or is it?

A - Jim Schneider

Richard, about all I can do is give you the same answer as everybody else. For this particular time this quarter and the guidance we're giving you, we think that is an appropriate growth rate, healthy for a company our size.

Q - Richard Chu

For this quarter.

A - Jim Schneider

Yes, for this quarter. We'll just have to talk more about the future in the future. Tune in next time.

Q - Richard Chu

Okay. Thank you.

Jim Schneider, Chief Financial Officer

That's where we are. Thank you very much. Operator, thank you. And we thank you all for joining us on the call. We look forward to talking with you throughout the quarter and have a great weekend.

Operator

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

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