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

Dell Inc. (NASDAQ:DELL)

F3Q08 Earnings Call

November 29, 2007 4:30 pm ET

Executives

Lynn A. Tyson - Vice President of Investor Relations

Donald J. Carty - Vice Chairman of the Board, Chief Financial Officer

Michael S. Dell - Chairman of the Board, Chief Executive Officer

Stephen F. Schuckenbrock - Senior Vice President, Chief Information Officer, President, Global Services

Analysts

Richard Gardner - Citigroup

Harry Blount - Lehman Brothers

Louis Miscioscia - Cowen & Company

Bill Shope - J.P. Morgan

Toni Sacconaghi - Sanford C. Bernstein

Benjamin Reitzes - UBS

Andrew Neff - Bear Stearns

Kathryn Huberty - Morgan Stanley

Brian Alexander - Raymond James

Operator

Good afternoon and welcome to the Dell Incorporated third quarter fiscal year 2008 earnings conference call and strategy update. (Operator Instructions) I’d like to turn the call over to Mrs. Lynn A. Tyson, Vice President of Investor Relations. Ms. Tyson, you may begin.

Lynn A. Tyson

Thank you, Karen. With me today are Chairman and CEO Michael Dell; Vice Chairman and CFO Don Carty; and President of Global Services and CIO Stephen Schuckenbrock. As most of you know, this will be an extended earnings call and we plan to devote a majority of our time to covering our strategic growth priorities and the initiatives we have in place to enable them.

Don will lead off with a high level review of the quarter. Michael will then focus on our five strategic priorities. Steve will follow with a review of our IT simplification initiatives, and then Don will give an overview of our principles of value creation and capital allocation. We’ll then take Q&A and Michael will wrap up with some closing thoughts.

Our strategy presentation which augments our comments today is at our website at dell.com/investor. I encourage you to read this stack and also to review the new financial scorecards we have created, which will make it easier for you to track our financial and operating performance.

Also, to help you stay current with our company’s priorities, we recently launched our IR blog called Dell Shares, where we have conversations about Dell's performance and strategy, as well as spotlighting key issues. We hope you’ll join us there.

We will host our shareholder meeting here at Dell's headquarters in Round Rock, Texas on December 4th. This event will also be simulcast on dell.com.

Before we turn to the quarter, I would 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 our current expectations. Actual results 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 contained in our press release and on our website.

I would now like to turn the call over to Don.

Donald J. Carty

Thanks, Lynn and thank all of you for joining us this afternoon. First, let me just say that we’re very pleased to finally be doing our conference calls again. I think you’ll find today and in the future the focus of these calls will be on how our growth priorities allow us to drive sustainable profitable growth, which in turn generates strong returns for our shareholders, so let me just start with some brief comments on the quarter.

Firstly, while we would certainly expect and want to do a better job growing revenue and profit and making progress on regaining lost share, we are generally pleased with the progress we made in the quarter, particularly given the challenges that I know you know we’ve had with backlog and supply early in the quarter.

We did generate $15.6 billion in revenue, a 9% increase year over year, and that revenue growth was driven by a 9% increase in units. Operating income was up 13%, contributing to a 26% increase in EPS and perhaps most importantly to us, and I hope to you, is that we generated $1 billion in cash from operations, which drove our cash and investment balance up to $14.6 billion.

When we talk about creating value for our shareholder, cash generation for us is the ultimate litmus test.

In the quarter, our profitability benefited from strength in mobility and a continued favorable component environment and while on a sequential basis, we did show some improvement in operating expenses as a percentage of revenue, it is still considerably higher than we want and than we expect it to be and there is more work to be done. And I’ll talk about that a little later on in the call.

The improvement in profitability was somewhat muted by costs that we are incurring as we restructure to improve productivity and execution, reduce headcount where appropriate, of course invest in infrastructure and key growth priorities.

For example, we incurred $50 million or $0.02 a share related to employee reductions and asset disposals and in addition, we incurred $28 million or $0.01 a share in costs that were related -- continue to be related to our recently completed audit committee investigation.

On the other hand, however, we did in the quarter benefit from a $45 million or $0.02 a share adjustment to our year-to-date effective tax rate, primarily because of a larger-than-expected mix of profits from outside the U.S.

We did not purchase any stock during the quarter, as our buy-back program was as you know voluntarily suspended during the independent review of our audit committee. We are planning to resume our share repurchase program in early December.

As I take you through our product and region performance, you’re going to see that we grew in almost every region, every customer segment, and product category and that’s particularly true in Europe and Asia.

An exception, of course, is the U.S. consumer business where while we feel we are making some very good progress, we continue to be going through considerable transformation. For the quarter, we again lost share year over year and posted a decline in revenue and profitability and Michael is going to cover our consumer business in a little more detail during the strategy portion of the call.

We did see improved growth across all of our regional business segments in the Americas, which I think as you know includes Americas International. Revenue was up 7% year over year as we continued to hold the number one position in the U.S. commercial segment with a 39% share. Revenue from Americas International was up 19%, driven in part by a very healthy 45% increase in Brazil.

In Asia-Pacific and Japan, revenue increased 18% year over year on a 20% jump in units, the fastest growth for this region in three quarters. And as part of that, revenue in India was up 47% year over year and revenue in China increased 22%. APJ also posted a nice increase in operating income year over year.

In EMEA, revenue was up 14% year over year on 13% growth in units, the region’s fastest growth in units in six quarters. And as a part of that, Russia’s revenue grew 72% year over year. Similar to APJ, EMEA’s growth in units accelerated while delivering improved profitability.

You will have noticed that we are again breaking out U.S. consumer. For the quarter, revenue was down 6% year over year and this line will soon expand to global consumer as we further consolidate the global operations of this business.

Turning briefly to product highlights, which we will cover in a bit more detail in the strategy section, server and storage revenue each grew 8% year over year, with server shipments up 7% and our enhanced services grew 7% to $1.4 billion. Desktop PC revenue declined 1% and software and peripherals revenue increased 11%.

At the end of the third quarter, we spent $106 million on acquisitions and shortly after the quarter closed, we completed our $340 million acquisition of ASAP software and we also announced our intent to acquire EqualLogic, the leading provider of iSCSI storage area networks for small and medium business. And two weeks ago, we announced our intent to acquire Everdream, a provider of remote client management software.

Finally, let me turn to our outlook. As you know, we no longer provide guidance but as we undergo tremendous change with our business, we do want to remind you of a few factors that could impact our operating and financial performance. As we mentioned in the press release, we are going to continue to incur one-time costs as we restructure to improve productivity and execution, reduce headcount where appropriate, and invest in infrastructure and acquisitions.

In addition, our near-term results could be adversely impacted by a slower decline in component costs than we saw earlier in the year and a seasonal shift in mix to U.S. consumer and international regions.

Let me stop right there on the quarterly overview and turn it over to Michael.

Michael S. Dell

Thank you, Don. First of all, it’s great to be with you today to discuss where we’re going. For 23 years, Dell has been simplifying and lowering costs for customers while expanding opportunities. The result is that we’ve been the only technology company to scale from $30 billion to $60 billion in five years and we did this primarily through organic growth.

So now we’re planning the next 23 years and beyond. I think this is one of the most exciting phases in our history.

Earlier this year, I told our team that we needed to do three things to transform the company -- improve our current business, reignite growth, and build for the long term and we’re making progress on all three.

First, on improving the current business, we now have the strongest executive leadership team in the industry. As a result, we have new global functions for consumer, services, marketing, operations, and IT and are focused on removing inefficiency and systematically improving productivity.

In reigniting growth, in consumer you’ve seen us relaunch the Inspiron brand, introduce a new line of XPS notebooks where we expect to recapture share and we’ve launched a new brand called Vostro, the first and only dedicated brand for small business. And we’ve entered the retail channel to reach consumers and small businesses around the world.

In building for the long term to get closer to customers, we’ve opened new plants this year in Brazil, India and Poland. And with our completed acquisitions of Zing, Silverback and ASAP, and our planned acquisitions of EqualLogic and Everdream, you’re seeing us expand our portfolio and position ourselves for longer term growth.

We’re making progress but there is much more to be done.

We’ve identified five big business priorities, each one influenced by the possibilities it creates for IT simplification. Our vision of IT simplification is all about reclaiming time, money and people. Simply put, we want to help our customers reduce the monetary burden of supporting disparate IT assets and unleash the power of innovation. Steve is going to cover more on this in a few minutes.

So what I would like to do is discuss our growth priorities. We are investing in five big business priorities to create long-term value -- consumer, emerging economies, notebooks, SMB, and enterprise, and I’ll cover each in detail.

First, let’s talk about consumer. There’s a massive growth opportunity in the global consumer business for Dell over the next five years and we intend to compete for these customers in every major region in the world. Our brand leads for a broad base of consumers that consider or connect with consumer products. We are the leader in brand consideration in the United States, France, Germany and the U.K. We are very competitive in India, China and Japan, and we’re rapidly growing in Russia.

We are focused on increasing our channels of distribution. For example, we’ve broadly entered the retail channel and expect to have one or two major partners in each of the top 20 countries globally over time.

So with nearly 10,000 stores by year-end, we’ll soon be at about 27% of the top retail doors globally. It’s all about increasing a customer’s opportunity to see, feel and experience Dell products.

This surge in new global consumers want more personalization, more mobility, and more choices on how and where to buy products and that’s exactly what we intend to deliver. In almost every market in the world, our XPS M1330 has won the best of the best awards for thin and light notebooks, or for that matter, in any category of notebooks.

PC Magazine called our newest gaming notebook: “the M1730 takes mobile gaming to new heights”, so whether it’s extreme gaming, exclusive design, performance or fresh and cool personal expression, we’re focused on delivering great products and creating product lust across all of our consumer brands.

So through initiatives like the acquisition of Zing, you’ll see us improve device integration and do more to help consumers customize their content experience. All these changes are about driving a new level of experience in how customers interact with the PCs, enabling consumers to take their personality with them, whether it’s here or around the world.

Now let’s talk about the fast-growing emerging economies. Today, 500,000 people go online every day for the first time in their lives and Asia accounts for 60% of the world’s population and a half-a-billion Internet users.

By 2011, the number of desktops sold in the BRICK countries will outnumber those sold in the U.S. by three-to-two. These users have different needs and different perspectives and they are going to have a huge impact on how all of us do business. So globally, as the levels of education and access to capital increase, so to must access to technology.

We’re positioned to listen and respond to customer needs and opportunities in emerging countries and we’re fostering local relationships in the regions that we serve. In both Brazil and India, we grew revenues at more than 40% and in Russia we grew over 70%. In Asia-Pacific and Japan, we achieved $2 billion in quarterly revenue for the first time in the second quarter and in China, we have a significant opportunity to grow our business there. We intend to have a presence across over 1,000 cities in China versus the roughly 45 cities that we have a presence in today.

So as we expand our retail channel partners across the country, we’re going to penetrate previously untapped areas. And as you can see on the map on the slide, our retail partners are aligned with the growth that we see in all the major regions in the world. Our footprint is growing fast but there is still a lot more that we can do here.

In notebooks, this is our third priority, we’re seeing a tipping point that’s going to change the landscape. Notebooks now outpace the number of -- the growth rate for notebooks now outpaces that of desktops by six times and revenue for notebooks is crossing over desktops this year and units will cross over late next year.

In three to four years, consumers will purchase as many notebooks as the commercial sector and consumers will represent 50% of notebook unit volumes. SMB and large business will represent each about 25 -- the other 25% respectively.

Notebook sales will also increase in the emerging economies where notebook units as a percent of PCs sold will increase from 29% today to 36% by the end of 2010. We are focused on reestablishing leadership in mobility through great design and through leading in the transition to new technologies.

We’ll lead in the next generation of wireless, including WiMAX and 4G. We’re shortening our development cycles and bringing products to market 40% to 50% faster, and as I’ve already mentioned, fantastic reviews on our latest new notebook products. When placed side-by-side against our competitors, our notebooks are second to none in performance, design, quality and simplicity.

Consistently putting our products in customers’ hands so they can get the sense for our products and see and feel the difference is certainly part of our retail strategy and we believe, given a tangible choice, that consumers will choose Dell.

Turning to SMB, you’ve seen us launch Vostro in July. This is a dedicated brand for small and medium business. The number of Americans employed by small businesses with less than 500 employees is nearly the same as that of America’s large businesses, approximately 56 million people. And over 20 million of these people work for companies with fewer than 20 employees.

Only 15% of small and medium businesses have a full-time IT staff, so by making it easy for them to gain access to our products, both through direct online sales and working with our channel partners, there’s great potential for SMB sales to make up a substantial portion of our business over time.

We’re focused on providing small and medium sized businesses with the simplest, most complete IT solutions. We’re extending our partner direct program for small and medium businesses and expanding our offerings into mid-sized businesses. In September, we launched our newest storage area network array, the MD3000I, a simplified storage consolidation solution specifically designed for small and medium business customers.

iSCSI should reach about 25% of all of the disk storage opportunities sold through enterprise by 2011 and our acquisitions are in line with our commitment to simplifying IT for customers and changing the economics of IT for small businesses.

We expect to deliver complete solutions where small and medium business customers can procure IT as a service and in some cases purchase IT in a box. One example of this is our PC tune-up service that combines 32 maintenance tasks into one click. It’s all about being a partner in our customer’s growth and unleashing them from managing IT so they can manage their business.

Finally, our enterprise customers face their own set of challenges. Here to complexity is increasing fast. By 2011, 2 billion people will be online using more than 6 billion devices. Customers are adding more than 700 petabytes of digital data per day and that’s only going to continue to grow exponentially. According to IDC, the amount of information created will surge more than six-fold.

By 2011, the world’s data will be one zettabyte -- that’s 1 trillion gigabytes. That’s a huge amount. It’s actually equal to all the grains of sand on the world’s beaches. So these are large numbers. For Fortune 1000 companies in the last three years, data has grown 413%. Mid-size company growth for storage has been 5,000%.

So these numbers tell us that for both large and small businesses, they desperately need someone to simplify their technology needs and in an environment with more data, more devices and more demands from these customers, this need is only going to grow.

So we look at technology differently than our competitors. They thrive on complexity and their business model depends on it. We see IT differently. Customers want us to make things easy for them, to simplify IT. Instead, we architect for simplification in our products, services, and our operations. This allows customers to get and deploy IT faster, to run IT at a lower total cost and to grow IT smarter. This leaves customers with more budget for innovation and improvements.

And we’re positioning Dell for the long term, tackling complexity head-on. We did this in PCs and now we’re going to do it for IT. Our product development and acquisitions are in line with our strategy of becoming the partner of choice, whether it be PCs, servers, storage, or the services that make it all work together.

Our new 10th generation blade architecture and our new servers were designed on standard technologies with leading power and cooling, and our Dell/EMC storage will continue to grow due to a focus on lowering total costs, and we just announced, of course, our planned acquisition of EqualLogic to simplify storage for small and medium businesses.

We’re working with all the top partners in virtualization -- Medium Ware, Oracle, Citrix, and Microsoft.

And now Steve is going to take you through a little bit more about our strategy for IT simplification.

Stephen F. Schuckenbrock

Thank you very much, Michael and you know, I’ve been here since January and frankly, it completes a 360 degree experience as I once competed against Dell and I’ve been a customer of Dell's several different times and I was a partner of Dell's when I was at EDS. And now, as an employee, I am privileged to have the opportunity to be here.

Dell has created tremendous value in this industry by driving standardization in the infrastructure and in its first 23 years has probably made the biggest impact on driving towards those standards in a way that has really benefited our customers very much.

But now, we sit here looking at how we contemplate the next 23 years, and as we contemplate those next 23 years, we now our customers deserve lower cost, more speed and flexibility, and greater control in their IT budgets, which today are 70% consumed by non-discretionary spend.

Dell has the assets that when joined together with some of the leading trends in our industry, remote infrastructure management and software as a service, will allow us to lead the simplification journey, just as we’ve led the revolution towards standards in the hardware business.

First, a little context; how did IT become so complex? We have to remember that it is still a relatively young industry and it’s now embracing new design criteria towards simplification. The industry has evolved from monolithic and proprietary architectures that have created huge fragmentation as customers manage generations on generations of technology. This is all giving way to X86 as the standard and in fact it’s the only architecture that is now growing in the industry, and it’s not just growing in the web and the collaboration spaces but we’re seeing significant growth in decision support and in the business processing applications in the data centers as well.

The next area that I would highlight is -- the next one is siloed technology stacks where layers of different tools, operating systems, databases, approaches of security and management environments, must be replaced with standard processes and tools and services that lower costs and drive the flexibility and speed that our customers demand.

In essence, you have to design for simplicity and through designing for standards in simplicity, from the hardware all the way through to the services will help our customers drive from that 70% spend in non-discretionary to a much more reasonable 50% kind of a number.

Third, I would highlight that the legacy services companies that have evolved essentially have done a job of masking IT complexity and throwing consultants and expensive systems integration resources at the problem. And in fact, what you can see is based on $1.4 trillion of spend, about 60% of that spend in fact goes to services, or essentially for every $1 you spend on innovation and hardware and software, you spend $3 on consultants to make it all happen.

We believe we can do much better than that by using our hardware and our services, combining them together into what I’ll call technology arbitrage and taking advantage of the world class supply chain capabilities that we’ve demonstrated in our first 23 years.

I mentioned before that Dell has created some significant assets on which to build this simplification agenda from and I’d like to highlight a few of those.

First, I was delighted to see when I came here that we actually have a terrific R&D capability and in fact spend about $500 million a year on R&D. That’s in addition to the billions of dollars spent by partners and alliances that we also have the opportunity to leverage in our business.

In addition, we have a terrific culture that is aligned together from hardware through services to serve our commercial and our consumer customers as effectively as we can. We do not have isolated lines of business that work independently to compete for the dollars that our customers spend.

Second, I would like to highlight our supply chain. Everybody seems to understand a lot about how our supply chain can offer customized products but the ability to integrate hardware, software, embedded services agents in the machine, pre-attach, pre-wire, pre-configure and ship to the customer something that essentially has four cables coming out the back, two power, two network cables, all which can be remotely managed from that platform is a wonderful capability that’s substantially enabled through our world-class supply chain and nobody else can do what we can do in that arena.

From a sales perspective, we have thousands of feet on the street that have direct access to SMB and large customers. Those sales leaders have the ability to take our products and these solutions out to the market, especially as we simplify, standardize, and productize the services that we sell.

In addition to our thousands of sales people that call on our customers every day, we’re also very much embracing and driving the same solutions out to our strategic partners as they drive our solutions to our commercial and consumer customers.

And then finally, I’ll talk about service and support. In the commercial business, we have over 10,000 people and we have about as many again in the consumer business that exist to support our customers every single day. It’s all they do 24 by 7 to make sure that we in fact service our customers’ needs. It’s been substantially a reactive capability in the company but it’s a world class asset with all of the infrastructure required where we can make investments to turn that into a proactive capability to actually anticipate problems and solve things before they cause issues for our customers.

All of this conspires to give us an opportunity to take a different services approach to the market. First, I would like to talk a little bit about the fact that the way services are sold and consumed in the market are different, whether you are talking about small, medium, large or very large global customers. It’s important to note that everything we do has to be globally consistent, whereas at one point our customers that were in the global space demanded consistency around the world now get those same requirements from medium to small customers and we have, as Michael referenced, or Don referenced earlier in the call, we have in fact set up a global services organization driving consistency in all of our offerings and all of our delivery capability.

I would like to first highlight next generation support. We have about a $4 billion business in support services and that $4 billion business continues to grow in a very healthy manner. We do think, as I said, we have the ability to reconstitute our offerings in that space, better align those to the specific ways our customers have told us they want to consume services -- as an example, dedicated capability to support our customers who leverage help desks isolated from the support that we can provide to those customers for their end users. Our customers will have the ability to customize their service experience through this and configure it specifically to the things they need to support their businesses. We will be launching these capabilities in the first quarter of next year.

Client lifecycle services is the next piece that I’d like to highlight. As you look at this area, we just announced our intention to acquire Everdream. That investment will give us a systems management platform that will allow us to remotely manage the client lifecycle all the way from our factories through the retirement of those assets. This will include the moves, the adds, changes, patch management, asset management, and all of those elements in between and it will allow us to increase our value add to our clients and reduce our cost structure at the same time.

I’ll give you an example that another acquisition with ASAP that came with a wonderful capability for license management and our ability to embed that license management functionality into the Everdream platform and offer that as a remote service for our customers will give us world class capability in this space.

Looking at the third piece I’d like to highlight, what we’re calling IT as a service internally. Our small and medium customers, many of which don’t have an IT department whatsoever, tend to have fragmented relationships for services. We believe through the acquisition of Silverback, which allows us to remotely see and manage anything in our customer’s environment with an IP address, and with the planned acquisition of Everdream, we will have remote infrastructure management capability that is second to none.

We believe we will have the leading capability for infrastructure as a service. Again, our focus is enabling these customers to drive their businesses and not to worry about the day-to-day operations of their IT environment, offering them speed, offering them flexibility, and offering them control of their cost structures.

And finally, I would like to highlight infrastructure simplification services. In addition to my responsibility in running services, I also happen to run Dell IT. Our IT organization has done many world class things in the optimization of X86 infrastructure and we meet with customers on a regular basis to tell them how we’ve applied tools like virtualization, how we’ve embraced the best practices around power and cooling and what we can do relative to security, back-up recovery and archiving, et cetera.

Not only will Dell IT become a good services customer, but we intend to externally face all of our pragmatic, practical experiences so that we can help assist our customers with the implementation and to achieve the benefits associated with those technologies.

Let me highlight on the next chart a couple of examples where we have had terrific relationships with our clients. In fact, one of these clients was actually here on an executive briefing today and we’re looking forward to doing more.

The first one really highlights the consumer packaged goods company. In 2004, we had a very small relationship, hardly any at all, and in fact we’ve worked with them with the bundling of services, both client as well as data center or enterprise hardware. We’ve helped them with the deployment to over 20,000 users in a very critical application area to stand up that capability ahead of scheduled, and we’ve helped them reduce their IT costs by 10%, all bringing terrific value to Dell as well, as we’ve seen compounded annual growth in this account, as we’ve looked at total solutions of 152%.

If I turn to the bottom of the chart, this is a global industrial company. This particular business actually had a relationship with one of the traditional systems integrators and as they grew more and more dissatisfied with some of the constraints of that relationship, they turned to us and really challenged to see if we could stand up our capability in 50 days to actually provide support to over 50,000 users in that period of time.

Not only did we do it in 50 days, we actually stood it up ahead of schedule. We have been providing this service to the customer over the last several years and seen increases in our overall business with the customer and tremendous collaboration and for the service levels and the professionalism of our services and our sales and account management organization, we have been named the supplier of the year in a very difficult and demanding customer environment where we now manage over 170,000 workstations.

I would like to conclude by just stating that our services and simplification agenda is going to be built on some basic principles. One, we intend to build best-of-breed services capability, like remote infrastructure management, software as a service, into our products and we expect our products to be advantaged for our services. Brad Anderson, Jeff Clark who run the product development organizations and myself work collaboratively together to make sure we stay true to that principle.

Provide custom factor integration -- I mentioned the advantages of our supply chain before and we intend to exploit those advantages to our maximum benefit and for both Dell Direct and for our partners.

We intend to continue to leverage disruptive technology. We’re very excited about the acquisitions we’re making. They propel us quite a ways down the road towards remote infrastructure management as well as software as a service, and we think that will bring tremendous value to our customers as we help them take complexity out of their environments.

And finally, all of this generates tremendous information and data -- information about their assets, information about their cost structures, information about their businesses and we can apply our insights and expertise with that information to help them drive more costs, flexibility, speed and control into their environments.

Thank you very much and I’ll turn it back to Don.

Donald J. Carty

Thanks, Steve. I’ll try to wrap up quickly so we have a good opportunity for Q&A. Let me just say at the outset that this management team is all about long-term value creation and as I hope all of you know, we have as a core goal at Dell, raise shareholder value by maximizing long-term cash flow.

We believe that this can be achieved by the top five business priorities that Michael talked about and using those priorities to grow our business faster than the industry. Each one of those priorities represents a multi-billion dollar revenue, profit and cash flow opportunity and our current share in each of those areas leaves lots of room for expansion.

We expect to improve profitability through product and service margins, cost reductions, mix and executing against our OpEx productivity plans. Dell will also pursue more global strategic partnerships to improve competitiveness, add new offerings, and reach more customers. And in addition to investing to grow faster than the industry, we are allocating our cash balances and strong cash flow to growth initiatives and we are adding net capacity.

So let me spend just a couple of minutes before we wrap up here on Dell's capital allocation strategy. Pursuing a capital allocation strategy that funds our significant growth opportunities and allows us to invest in stock via share repurchases, Dell has a very strong cash generation model -- $15 billion of cash on the balance sheet today and of course, a very high level of debt capacity.

As I think we’ve highlighted to you in the past, some of that cash of course is needed to manage intra-quarter working capital requirements. Some of that cash is not as easily accessible and cash requirements may change slightly as we grow internationally and grow into new channels.

We will invest in the big five priorities that Michael talked about and in simplifying IT, and we hope to accelerate the growth in those areas with selective and thoughtful and strategic acquisitions.

All that being said, however, we are committed to using our excess cash on investing in our own shares as the board authorizes. We expect to transition our current cash and investments to a lower level than we currently have while at the same time retaining adequate balances to take advantages of growth opportunities which allow us the flexibility that we need.

So let me turn for a moment to OpEx and OpEx discipline. We are here absolutely committed to an OpEx discipline and achieving substantial productivity improvements in our core business.

That being said, OpEx is not a means-to-an-end metric. The company is evolving, it is changing to a more value-added services and product business model and as a result, inevitably the shape of our P&L will change over time as we grow in higher margin, higher OpEx areas like services and like our enterprise business, but also we grow in lower margin and lower OpEx businesses, like retail.

So the shape of our P&L is changing. We are not going to lock ourselves in to very specific percentages of revenue that might better characterize our historical business in the hardware business, but we are at the same time going to be very, very attentive to making sure that we have rigorous OpEx discipline in the company and we are particularly in the core business going to be sure that we get our OpEx back in line with where it should be.

We’re actually pleased with the progress we’ve made in improving that core business productivity. It’s taken time. We told you at the outset we were going to do this very thoughtfully and very methodically. We’ve been doing it while at the same time investing in growth but I can report to you that since the first quarter, our non-frontline headcount has declined by over 5%. That decline is probably a little bit disguised in the quarterly data you are looking at today because while we’ve seen a very nice decline in our non-frontline people, we will see more.

Both the seasonal attributes of our business and our efforts to clear our backlog caused a little bit of an increase in our frontline personnel, so you don’t really see it in our aggregate headcount numbers but we are really quite pleased with the progress we’ve made in the overhead part of the company. More to come, we’re making solid progress in OpEx discipline but at the same time, we’re evolving the business model to a more value-added services and products business.

So let me turn to the value creation principles that are going to guide us going forward. The Dell management team here, as I said, is absolutely committed to creating long-term value and that commitment I think is underscored by the pursuit of a number of principles.

First, we are going to execute strategic priorities to grow faster than the addressable opportunity. And I should say very explicitly that we are rewarding and compensating the executive team of this company to execute those long-term priorities and to drive cash flow.

Secondly, we are going to maximize long-term cash flow. We’ve always focused on driving strong cash flow. It’s the core to creating shareholder value and it’s something that we believe in and I can assure you that the Chairman of the company preaches on almost daily.

And thirdly, we are committed to communicating directly, candidly, and transparently with a focus on that long-term value creation and in my conversation with investors, there is and will continue to be a clear emphasis towards understanding long-term strategy and long-term opportunities.

So that’s our piece of the agenda. We’d like to turn it back to you. I’m going to ask the Operator to intervene so that we can be responsive to questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Richard Gardner with Citigroup.

Richard Gardner - Citigroup

Thank you very much. There was a lot of discussion today about investment. I’m just wondering if you can give us a sense of whether we should expect operating leverage going into calendar ’08, whether we should expect expenses to grow faster or slower than revenue.

And in addition, you talked earlier this year about a net 10% reduction in headcount. It looks like so far we’ve achieved a 0% reduction on a net basis. Should we still be thinking about that 10% number or should we be thinking about another target?

Donald J. Carty

Let me just say at the outset -- I’m not going to get too specific with you here because as you know, we are not in the guidance business. That being said, I think we -- if we weren’t clear, let me be more clear about the OpEx exercise. We believe we still have a lot of room to move here. You’ll see more of it in the fourth quarter and we are confident that we can run the business, even as it changes, more efficiently on the OpEx side than we have in the last year and I think you’ll see evidence of that pretty promptly.

We’re not moving away from the headcount target. We are attacking the core business with those very objectives in mind and we intend to implement them. That being said, at the same time we’re bringing down the headcount associated with the core business, we expect in a number of areas to have a lot of growth in the business as well and net net, our success -- or I shouldn’t say our success -- the actual level of headcount we’ll see by this time next year will both be a product of the additional efficiency we drive in the business and the additional growth we experience in the business.

Richard Gardner - Citigroup

Don, I know it’s a touchy subject but is there any way you can give us some examples of where you are attacking headcount in the core business and where you see the biggest opportunities there?

Donald J. Carty

Some of it really very fundamental stuff, many companies have done this, I’ve done it in a previous life and a previous incarnation -- that is to simply go through the organization to be sure that our managerial spans and the number of layers between Michael and the frontline people are truly world class and I’ll candidly admit to you that we’re not when we started this exercise.

That’s given us a very substantial improvement but I think it’s also true that we have identified a considerable amount of what I would characterize as low value work -- work that where the investment dollars would have been far better off being spent on something that was far more productive from a profitability and revenue generation point of view, and we’ve done a -- we’re well into the effort of eliminating that low value work.

A third category is a whole series of things that go on in the company that are done less efficiently or are done redundantly around the company. Many of these are simple tasks, administrative tasks, reporting tasks, where you find various pools of employees in various places of the company doing essentially the same task.

And with the pace of growth this company has had, we also find people doing tasks in different ways and with different interpretations of data than you’d want or expect. And in all of those areas, we’ve made some very good progress but we also have a line of site and a lot more opportunity.

Lastly, we have some opportunity I think, and this one always takes a little bit longer, and that is to bring automation to tasks that lend themselves to that. We have more manual work going on in the company than I think we need to and as we set our priorities for IT in the next couple of years, we’re going to be very, very focused on that.

Richard Gardner - Citigroup

Thank you.

Operator

We’ll take our next question from Harry Blount with Lehman Brothers.

Harry Blount - Lehman Brothers

As I look through a lot of these growth initiatives, two things strike me and I’d love your feedback or comments on it. One is that at least at a high level, it looks like a lot of the initiatives in general have lower blended operating margins than perhaps your U.S. business.

And then secondly, as I look at retail specifically and some of the other initiatives, it also looks like the cash conversion cycles, the credits, et cetera might also dampen your historical levels and so I’d love to get some kind of parameters as to how you guys are thinking about that and what’s acceptable and what’s not.

Donald J. Carty

Well, I’ll invite Michael to jump in on this. I think a number of these -- a number of these efforts are going to be higher gross margin and higher OpEx and a number of these initiatives may be lower gross margin but also lower OpEx.

Two good examples of that; emerging markets have a tendency to be lower gross margin markets. They are very fast growing and we can execute in those markets with relatively low OpEx. So we believe we can grow very, very quickly in emerging markets and I think this quarter’s results show that, where we’re under-represented, to be quite frank. If we even began to approximate the market share in these emerging markets as we have in the U.S., there’s a tremendous growth opportunity and we believe that it might be slightly lower gross margin and lower OpEx that we can do so very profitably and very nicely.

Retail is a similar one. Our consumer business has been relatively high gross margin but relatively high OpEx because it’s been a direct business. The retail business will be a lower gross margin but also a lower OpEx business and we believe restoring profitability to our consumer business, aside from all the issues of product and service that Michael talked about, has a lot to do with making sure that we make our OpEx in the direct business as lean as possible and that we find better ways to serve the retailer, which will bring up our gross margin in the retail part of the consumer.

So I think we feel pretty good about those. Those are the lower margin ones. We’ve also got in some of the areas Steve talked about and in the enterprise business, some wonderful opportunities to see fatter gross margins and in some cases, considerably fatter gross margins but on the other hand, probably slightly higher OpEx models. So we’ve got a mix of things and we are trying to get a lot more sophisticated about modeling each of the components of our business so we can aggregate.

So let me turn to the last question you asked, because it’s a particularly sensitive one with us, and that’s cash conversion cycles. I think it’s fair to say that some of these businesses will not have quite as positive a cash conversion cycle as we experienced in our core business, but we haven’t identified one that won’t have a positive cash conversion cycle. So we feel incrementally very, very good about them.

Michael S. Dell

I think what Don’s saying, we haven’t identified one that won’t have a negative cash conversion --

Donald J. Carty

Sorry, a negative cash conversion cycle. I think about positive as cash coming in the door, okay?

Michael S. Dell

It will be cash flow positive. As we reshape the business here with these changes that we’ve been talking about, clearly our intent is to grow cash flow considerably over time. But as Don said, there could be changes in the individual lines as we change the nature of our business fundamentally, adding more intellectual property into our business, growing in some areas where we haven’t been as present that are also fast-growing parts of the overall industry.

Harry Blount - Lehman Brothers

But in short terms of actual quantification, are there particular benchmarks that you guys will find not acceptable in entering the new businesses or the rate at which you’re growing those businesses? I.E., how much dilution would you be willing to take on to enter some new markets on a short-term basis?

Donald J. Carty

Look, we are a long-term focus company but we don’t want to jump into very many businesses at all that will cause us any dilution, and certainly with our cash flow focus, we expect every business to be generating positive cash flows.

What I was characterizing for you is we are going to try to model each piece of each business and model and manage the targets but we expect them all to be positive.

Harry Blount - Lehman Brothers

All right. Thank you.

Operator

We’ll take our next question from Louis Miscioscia from Cowen.

Louis Miscioscia - Cowen & Company

Thank you. Hopefully I’m coming through okay. Maybe if I could start by asking the economy question -- have you at all seen, especially in the Americas or the U.S., a slowdown as we finished up the quarter or maybe even started the following quarter?

Michael S. Dell

There hasn’t been a marked slowdown. I mean, I’d say there’s been some winds of caution in certain financial customers but I’d say demand is pretty good.

Louis Miscioscia - Cowen & Company

Okay, and as you move through the next quarter, any thoughts if it’s starting to change a little bit as obviously conditions out there seem to be in a steady state of flux?

Michael S. Dell

Don’t have any predictions for you on that.

Donald J. Carty

And I think it’s fair to say at this stage, we don’t see much. Our business is increasingly global and with some of the growth rates we’re seeing in emerging markets, it is hard to know when you are growing at 47% or 72% whether anything is slowing in those regions.

We hear a lot of talk as you do about the U.S. economy and where is it going but I think if you looked at our daily orders, it’s pretty tough to see anything terribly concerning in that data yet.

Michael S. Dell

I think if you look at it from a portfolio standpoint, we have our lowest share in the fastest growing part of the opportunity and so yeah, there could be some moving around in various parts of the industry but there’s a lot of upside for us in the places that are growing the fastest.

Louis Miscioscia - Cowen & Company

And obviously you mentioned the desire and started a new line to focus on small and medium business. Could you tell us what percent of revenue small medium business is currently?

Michael S. Dell

We’ll get back to you on that one. Why don’t we go to the next question and we’ll bring you an answer shortly here.

Louis Miscioscia - Cowen & Company

Okay. Thank you.

Operator

We’ll take our next question from Bill Shope with J.P. Morgan.

Bill Shope - J.P. Morgan

Okay, thanks. Michael, I just want to expand upon a previous question that’s been asked. In particular, your move towards indirect distribution; obviously in the past, you’ve talked in-depth about the inherent cash flow and margin disadvantages of indirect distribution versus direct, particularly from the perspective of inventory management. Can you talk about how Dell is maybe doing things differently from a traditional and direct model and how you are managing some of the inherent difficulties you’ve talked about before?

Michael S. Dell

First point is that we have about a $9 billion channel partner business and a lot of that really grew organically as a number of partners, often very small partners, would contact us and say hey, I’d like to buy your products too and we didn’t really have a great way of distinguishing them from end users and so we sold them products and all of a sudden, we’ve got a $9 billion business.

This is kind of what we’re calling partner direct, where we’re taking the benefits of the direct model and configure-to-order and supply chain logistics and extending that through to the partners. I’m really talking mostly about the commercial piece of the opportunity.

There is a capability that we have in building very small lots -- lots of one, lots of two -- which we can extend through to retail partners so they can automatically replenish on a demand basis and also configure to order in the store for customers who want something other than what’s in the store.

But as Don said, there will be some changes in the cash conversion as the profile of the business changes, but again we think it’s all in the spirit of driving, increasing our cash flow over time.

Bill Shope - J.P. Morgan

Looking at the business beyond that $9 billion, the new channel partners you are signing on, I’d imagine that some of the ones you approached have been concerned about potential conflicts of your direct sales efforts, at least initially. What steps did you have to put in place to minimize the impact or the perception of this conflict and how does that look like it’s going to change going forward?

Michael S. Dell

Well, different from 13 or 14 years ago when we were a much, much smaller company, the distinction and channel conflict issues certainly on the consumer side are much, much less and so all of these partners have kind of welcomed us with open arms and know that we are going to also sell directly to customers. And so we see that as a great opportunity.

On the commercial side, I think there have been somewhat analogous situations where the number of resellers who add a lot of value in just the reselling of hardware is just not all that great, so we are finding among this $9 billion partner direct business that we intend to grow, a large number of partners who really aren’t concerned that Dell also sells direct, realizing that all of our competitors also sell direct in one form or another and they’re really adding value that goes beyond the solutions and services that Dell itself offers, reaching customers in a new way and growing the overall opportunity and many of them are quite excited to have the only full line alternative to our major competitor out there.

Bill Shope - J.P. Morgan

Okay. Thank you.

Operator

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

Toni Sacconaghi - Sanford C. Bernstein

Thank you. Firstly, can you comment on gross margins? It looks like your ASPs were relatively flat. You mentioned that you had a very favorable component environment. Your mix really didn’t change sequentially yet your gross margin fell about 150 basis points sequentially. Can you comment on the forces at work there?

Donald J. Carty

Well, let me take a crack at that. First of all, I don’t think you can do an absolute comparison of [TRU] to [TRU] quarter to quarter. There’s too much mix in the noise.

The deterioration of gross margin -- let me first remind everyone that all of you were pleasantly surprised by just how big our gross margin was in Q2 and as I think to the extent we said anything at that time, and I know we weren’t in a position to say a lot, we benefited very, very nicely from some very, very steep component cost declines in the second quarter. And as I think all of you know, Dell's business model is such that we get the advantage of those very quickly and ahead of some of the competition and the consequence was Q2 was a -- we probably couldn’t move fast enough to be aggressive enough in the marketplace to move our market share as fast as we would have liked, given those gross margins and given our backlog challenge in the second quarter. So I think the second quarter was somewhat inflated.

So you compare second quarter to third quarter, I think you’ve got to look at it through that lens. We did see cost declines in the third quarter but they were much, much, much slower than they were in the second quarter and the first half of the year.

Secondly, we didn’t call them out but we did have some unique costs in the quarter associated with expedite. As we worked our way through this backlog problem, we expedited a lot of components into our operation and that did cost us some margin in the quarter, maybe as much as 30 basis points.

I would also say not only did we not see component declines at the same rate that we saw them in the second quarter, we have some components, and I think you’ve heard this from others in the industry, that are still pretty tight and we’re not seeing much in the way of component cost declines there.

So I think we certainly were not surprised at all with our gross margins. I know it was somewhat less than some of you had forecasted but we were not at all surprised.

The last effect in the third quarter was a little bit of the shift that I talked to earlier about of some business in some slightly lower margin segments, like U.S. consumer which quarter over quarter grew pretty significantly. I know it’s a decline year over year but U.S. consumer was up 17% from the second quarter to the third quarter. When you think of the mix of business, you would expect that to have some effect on gross margin. Given the size of our consumer business, it might be as much as 20 basis points.

Michael S. Dell

Just another comment on this, the component costs typically do come down less in the second half of the year than they do in the first half of the year.

And just coming back to an earlier question that was asked, the small medium business is between roughly 10% to 15% of revenue, depending on the region.

Toni Sacconaghi - Sanford C. Bernstein

And just to follow-up, I mean if component costs still came down and I appreciate some modest shift to U.S. consumers, were your ASPs down? I mean, the implication would be your ASPs would have to have been down recently substantially because components were coming down and your ASPs held firm, then I’m not sure why your gross margins would be down sequentially, even allowing for both the mix and the expediting side.

Donald J. Carty

On average, they were pretty flat but again, there’s a lot of mix in there.

Toni Sacconaghi - Sanford C. Bernstein

Switching to another topic, you mentioned that you were striving for a more optimal balance between growth, profitability and liquidity. When you imply you’re striving for a better balance, it means you want to do better on some things and not as well on others. What are you saying there in terms of the trade-off? So you’re looking for more growth and less profitability? What’s the better balance you’re trying to achieve?

Donald J. Carty

The better balance is more growth and more profitability. There’s no doubt about that.

Toni Sacconaghi - Sanford C. Bernstein

So it’s not a balance -- you’d like to try and do both together and I guess the question is, is that ultimately really realistic given that you have principally a variable cost business? So if you had a high fixed cost business, then driving a lot of growth would necessarily lead to a lot more profitability. Historically over the last two years when you’ve tried to press on a growth lever, it’s actually negatively impacted your gross margin, so what’s different about how you are going to manage that balance over the next year-and-a-half than how that’s been over the last year-and-a-half?

Donald J. Carty

Let me just say that I think embedded in all our comments is a strategy -- I hope the last 90 minutes has shed some light on some strategies that are other than just price and volume. There’s a lot going on in the business today.

We clearly recognize we haven’t run our core business as efficiently and as effectively as we can and should, so we’re putting a lot of effort into that. But we are also trying to drive through the strategies that Michael and Steve have talked about, what we see as some incremental, highly profitable opportunities.

So it’s more a balance of effort in the company to achieve both greater revenue and greater profitability at the same time. And we like to think we have more management levers than simply price.

Toni Sacconaghi - Sanford C. Bernstein

Final question, just a clarification; you mentioned that your management principles are to communicate directly and candidly, so I would like a direct and candid answer to this question, which is you had mentioned on May 1st that you would take down headcount net 10% within a year. Are you still committed to that or are you saying that because of your priorities for growth, that you are not committed to delivering that?

Donald J. Carty

We are still driving to exactly that number, with the caveat I just mentioned. We have since that time acquired a number of companies, all of which had employees. We’ve developed some new strategies to grow some incremental business that we didn’t contemplate growing at that time.

But as far as our core business, we are still driving directly towards that. But I don’t want that to be interpreted that you’ll necessarily wake up on April 1st of 2008 and you’ll be able to take whatever number we had the year before, subtract 10% from it and get the headcount we will have. That’s not the case.

EqualLogic, ASAP, all of the acquisitions have brought us people. Some of the new efforts that Steve referred to are going to by definition drive new human resources. It’s probably quite different human resource because it’s not the same skillset that we are downsizing but I don’t want to for a minute create the impression that we are walking away from improving the efficiency of the core business.

Toni Sacconaghi - Sanford C. Bernstein

Thank you.

Operator

We’ll take our next question from Ben Reitzes from UBS.

Benjamin Reitzes - UBS

Good afternoon. Thanks. A couple of things; Michael, with regard to growth, after the January quarter the comps get a lot tougher for the company. You have EqualLogic coming in and perhaps some other acquisitions that are smaller and what not, but after the January quarter where there’s really a comp anomaly going on for very easy compare, how should we think of growth at the company? Should we think that you are generally in an acceleration mode, given your strategy? And should we assume that growth is coming mostly organic or inorganic? And then I have a follow-up.

Michael S. Dell

Well, you know, we don’t provide guidance. We’re focused on creating value over a long period of time. We’ve outlined our five priorities, which we think will enable us to grow faster than the industry and we want to optimize cash flow from operations over time.

Benjamin Reitzes - UBS

Willing to talk though in general about the mix of inorganic and organic? I mean, we have a lot of -- obviously you did organic, as you said most of the time and now, when we watch IBM or some of your other competitors who matured, it’s often half or whatever. It’s just trying to get a feel for what you can do organically and how much you may acquire in the future and it doesn’t sound like you are willing to --

Donald J. Carty

Let me just make an observation about that. If you look at the acquisitions we’ve announced thus far, these don’t represent huge opportunity for inorganic growth. In each and I think every case, they represent an acquisition that we think as we look into the future will enable a lot more organic growth. In other words, we’re acquiring nucleuses of things that we need strategically to accelerate growth which we’ve been targeting in any case.

Steve’s been with the company for a year working on growing our services businesses. By bringing these two or three elements into his portfolio, he believes he can accelerate it more quickly because he can bring more function to customers faster.

But the revenues that those businesses had when we acquired them are [rounding errors] so it’s not organic growth. It’s more the acquisition -- think about it as the acquisition of intellectual property or capability that is going to we think enable more organic growth.

Benjamin Reitzes - UBS

Got it. And then just with regard to cash flow, there’s just a lot of confusion it seems out there with some pretty huge assumptions for what you could have bought back heading into this call. Numbers being thrown around and in Dell's history, a few years ago you were buying on a $500 million pace in terms of buy-backs and it was very predictable. Every quarter you could count on Dell giving guidance and doing a ratable share repurchase. Then you kind of stepped it up to $1 billion range and $1 billion plus even on a few occasions.

Michael and Don, just to set the record straight, is there a way we can think about it, given that heading into this call there was such huge expectations potentially for what you could buy back? And are we looking at a few years ago where it’s $500 million a quarter? Or what is the best parallel to where we are in the history? Is it $1 billion a quarter type strength you have or is it more or less? How can we think about that on the buy-back front?

Donald J. Carty

Let me just start by saying that no one is sorrier than we are that we have become less predictable about stock buy-back, I can assure you. So it’s not been a very happy year for us, just as it hasn’t been for others of our investors that would have liked to have seen us more active.

Let me just say that capital allocation decisions are decisions that management can have a view of and recommend to our board but really those decisions ultimately will be made by our board and we like our board to be the first to hear about management’s recommendations, so we are probably not going to get a whole lot more specific on this call, except to reiterate what I said earlier -- that we recognize we have a lot more cash on our balance sheet than we believe to be ideal.

I think at this early point that’s all I can say.

Benjamin Reitzes - UBS

Okay. Thank you very much.

Operator

We’ll take our next question from Andrew Neff with Bear Stearns.

Andrew Neff - Bear Stearns

I understand your focus on not giving guidance but can you give us a sense about -- I guess I’m concerned about the execution side. How do we know how you are doing? What benchmarks -- you’ve talked about different areas in broad terms. How can we measure how you are doing?

I guess one example is the EqualLogic acquisition. You don’t have a history of doing these -- actually, you do have a history of one of these. How do we know how these are going? Can you provide some transparency as they are going on?

And I guess just along those lines, are you -- where is the resource internally to feed a high growth situation like that when you are shrinking other parts of the business? How do you maintain the focus and how do you retain people like that who are about to go public, for example?

So I guess the two questions are; one is what milestone, since you’re not going to give guidance, can we measure how you’re doing? And two, on the single case of EqualLogic, in terms of [management of that], it’s not something you’ve done before. Who is going to do that?

Donald J. Carty

Both good questions. You know, you folks and our investors in general will obviously be the judge of our performance but Michael said a number of things that are important. He said that we believe we can position the company to grow faster than the industry so if we are not growing faster than the industry, we’re not doing as well as we advertised.

Andrew Neff - Bear Stearns

Which industry is that? I mean, you’re in multiple different areas, so that’s what I’m asking, just to say -- that’s a very generic statement.

Donald J. Carty

Well, it is a generic statement.

Michael S. Dell

Andy, I think you can look at the different parts of the industry that we compete in and you can measure us part by part and decide, and we’ll be the first ones to tell you that we’re not happy with our growth rate as it is today, either in absolute terms or relative to the industry.

Donald J. Carty

We also said I think during the course of the call that we see opportunities to enhance the company’s profitability, so growing faster, getting more profitable and continuing to run a business that is very focused on growing cash very quickly. So those are three barometers right there and I think like any company that -- by the way, we also have talked about five priorities where we said we were going to accomplish something. I think you and all our investors have the right to say a year from now how did you do on those five barometers?

I mean, if we are setting out to do those things, you’ve got a right to ask that. That’s the way we’re measuring and rewarding our own executive team so we would be completely aligned with you measuring us in that way.

Let me turn to the trickier question, which has to do with these acquisitions and both our ability to integrate them and so on. First of all, because they are largely the kind of acquisitions that we talked about, it’s unlikely that you are going to see us be reporting separately on very small company acquisitions, particularly when we are integrating them into the fabric of our business.

But a couple of things are true; one is that Steve has articulated that a couple of these acquisitions are pretty key to him growing the services business, so if we did these acquisitions and the service business doesn’t grow pretty well, then we probably haven’t done a very good job of exploiting those.

EqualLogic, you know, we’re in the storage business. EqualLogic is an extension of the fact that we’re already in the storage business. If EqualLogic was a good acquisition, you’d expect us to do well in growing our footprint in the storage business and growing it pretty quickly here.

So I think there are some barometers. If you understand and we’re candid and transparent about why we acquired these things, you may not be able to follow each of them as individual entities but you ought to be able to follow the piece of our business that we said we were acquiring to support and grow.

You also touched on an important subject, and that is integration and retention of key personnel. On the latter point, let me just say that we don’t do an acquisition where we believe that people are important, are an important part of that acquisition where we don’t spend a lot of money and a lot of time and a lot of effort figuring out a retention program. So we are not naïve about that at all. In many cases, we understand that there are some really key people that we are acquiring as part of this acquisition. Hopefully we’re acquiring some intellectual property but often it’s just as important to acquire the people that originally architected that intellectual property and we’ve been very focused on that.

As to integration, also a fair question, given that Dell hasn’t done a lot of acquisitions, how well are we doing to do on integrating these companies into Dell? And I can only say to you that while the company does not have a great history of it, within our management team here we have a tremendously diverse group of people that have come to Dell from many places but some of them have come from most of the acquisitive companies in America. So we are not without management talent that understands acquisition and integration.

We are, as any company that has embarked on a slightly different direction, spending a lot of time thinking about how you do this, what’s the world class approach to acquisition integration and what can we learn from other companies, or from people in the company that come from other companies. So we are building our own roadmap here but at least to date, our acquisitions [have been a size] that the integration risk is not like combining two [inaudible] or something.

Operator

We’ll take our next question from Kathryn Huberty with Morgan Stanley.

Kathryn Huberty - Morgan Stanley

Thanks. How much cash do you need to carry on the balance sheet to execute the turnaround and provide an appropriate safety net? And then I have a quick follow-up.

Donald J. Carty

So you’re saying if I tell you that number and you subtract it from 14.8, you’ll know what our stock buy-back program is going to look like?

I can’t really answer that question. Historically, we’ve talked about $10 billion but we haven’t revisited that for some time and we will, as part of any recommendation we make to the board, we will be revisiting it but I don’t have an answer to that anymore than I do the question of what is our stock buy-back plan.

Kathryn Huberty - Morgan Stanley

Well then, a quick follow-up; last year you did a strategic restructuring around the geographic units with the new Singapore facilities and I was under the impression that that perhaps gave you some incremental access to cash for acquisitions and repurchases. Is that not the right way to think about it and it’s really the U.S. cash balance that you can use?

Donald J. Carty

No, you shouldn’t make any assumptions. I did say during the course of my comments that some of our cash is a little more difficult to access for some purposes than others. And let me just say that the global principal tax structure that we put in place as a consequence of [IRS regulations] some of you are absolutely familiar with is no longer particularly favorable for solving some of that foreign cash question.

That’s not to say that there aren’t a number of other opportunities for us to think through and of course, when you’ve got cash overseas, you’ve obviously got a balance sheet that could withstand some debt if that’s the way you needed to do it.

We’ve got a lot of options here. Again, we’re not finished exploring all of them but I don’t seen any major constraint in coming to a determination about what the Board needs to think through with respect to any kind of stock repurchase program that’s associated with cash being trapped in any way.

Kathryn Huberty - Morgan Stanley

Do you think you’ll have a better sense for cash use and debt appetite by the analyst day in April?

Donald J. Carty

By April? Yes, I think you’ll know a lot more about this subject by April.

Kathryn Huberty - Morgan Stanley

Okay, great. Thanks.

Operator

We’ll now take our final question from Brian Alexander with Raymond James.

Brian Alexander - Raymond James

Thanks. Michael, could you just comment qualitatively on how the retail partnerships are going? You’ve had Wal-Mart in place for several months. I think you’ve been in China since early October. How are they going? What are some of the good experiences? What are some of the lessons learned or unforeseen challenges you face?

Michael S. Dell

You know, I would say we’re at the early stages of this. We have Staples, Wal-Mart, Sam’s Club in the U.S. In Europe, we have Carphone Warehouse and Carrefour. In APJ, we have GOME in China, the largest consumer electronics retailer, Courts in Singapore, [High Mart] in Korea, Bic Camera and Softmap in Japan, and in Latin America we have again Wal-Mart and Sam’s. I think you could expect to see a number of additional ones in the biggest countries in the world.

So far, it’s gone quite well and the partners have embraced us in a strong way. As an example of this, if you were a Staples customer or you live in a region where Staples is over the Thanksgiving holiday and you got their circular that they were sending out, the entire front cover of the circular was Dell products -- Dell printers, Dell ink, Dell toner, Dell desktops, Dell notebooks -- there were no other products represented on the front cover of the Staples catalog.

We worked to find a kind of win-win with these partners where there’s a significant commitment by the partners to drive a considerable portion of the share of their sales of these kinds of products, so we’re pleased with the way it started.

Donald J. Carty

I think it’s fair to characterize our reception by the retail trade as very, very positive. We’ve been going at it in a careful, measured way because as all of you would anticipate, there are some processes and some infrastructure issues that are different for Dell. And as we accommodate those, we don’t want to mess up any of these relationships so we are going at it fairly methodically.

I think it’s fair to say that given the retail response, we could probably be in more doors than Michael’s even described if we weren’t trying to be sure we do it right.

Brian Alexander - Raymond James

Maybe just to follow up; quantitatively, Don or Michael, how much has the retail expansion helped or more likely hurt your consumer P&L at this point? How do you see the expansion of retail impacting your operating margins longer term and what kind of scale do you need to get there?

I guess I ask the question because I think one of your major competitors, who might be two-and-a-half to three times your size in that segment, is achieving several hundred basis points of profit. I’m just wondering -- is that something you think you could achieve over the next few years?

Donald J. Carty

We would not be getting into any space if we didn’t think we could be every bit as profitable as any competitor. As I said, it’s not an over -- I don’t want to imply that’s an overnight thing. We’ve got a lot of work to do on the consumer side of our business -- a lot of challenges in front of us but we absolutely would expect that we can drive any business we run to profitability levels that are competitive.

Operator

We’ll now turn the call over to Mr. Dell for closing remarks.

Michael S. Dell

All right, we want to thank you for joining us today and for your time. You’re our owners and our partners and we appreciate your commitment.

We’re making some nice progress in improving our current business, driving for growth and investing in the key initiatives that we believe will drive sustained performance. Our goal is simple -- we want to grow faster than the industry, drive cash flow and create value over the long-term and I believe our five big priorities of consumer, emerging markets, notebooks, SMB and enterprise are the right choices for us to get there.

There’s more work to be done and our results will not be completely linear but that’s the case when you’re making long-term decisions and positioning a company like Dell for future growth.

Finally, I believe that our vision of IT simplification can unleash the power of innovation in customer environments large and small. We have a strong team and a great set of assets from which to build and more than ample opportunities to grow our business over time.

We look forward to talking with you again soon. Thank you.

Operator

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

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

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

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

Source: Dell F3Q08 (Qtr End 11/2/07) Earnings Call Transcript
This Transcript
All Transcripts