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Dell Inc. (NASDAQ:DELL)

June 13, 2012 8:30 am ET

Executives

Robert Williams - Director of Investor Relations

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

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

Jeffrey R. Clarke - Vice Chairman of Operations & Technology

John A. C. Swainson - President of Software Group

Stephen F. Schuckenbrock - President of Dell Services

Bradley R. Anderson - President of Enterprise Solutions

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

Kim Hibler

Cheryl Cook

Analysts

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

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

Kulbinder Garcha - Crédit Suisse AG, Research Division

Shannon S. Cross - Cross Research LLC

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

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

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

Robert Jakobsen - Jyske Bank A/S, Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

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

Maynard Um

Trip Chowdhry - Global Equities Research, LLC

Peter Misek - Jefferies & Company, Inc., Research Division

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Robert Cihra - Evercore Partners Inc., Research Division

Chris Whitmore - Deutsche Bank AG, Research Division

Operator

Ladies and gentlemen, please welcome, Vice President, Investor Relations, Rob Williams.

Robert Williams

Good morning, good morning, and welcome to the 2012 Dell Analyst Meeting. We're going to do things a little bit different today than we have for the last few years. We're going to go with a slightly more informal format. We're going to sit down and have a little bit of a Q&A discussion with Michael and Brian and the rest of the team in each of the sections, and then we're going to allow ample time for Q&A with the audience. In fact, I believe, if I do my math correctly, 2.5 hours of interactive Q&A and time with the audience today. So hopefully, that'll provide you guys with a little bit more of an environment that, I think, is conducive to a good discussion.

We're going to, again, first start with Michael Brian. We'll talk a little bit about our end-to-end solution strategy and our scalable design point as well as the financial model. We'll then take a break and shift gears and move through the Solutions groups with all the Solutions leaders. We'll then take another break and Steve Felice will come up and speak through our go-to-market strategy and how we're really bringing these solutions to life with our sales team and with our customers. So I think it's going to be a great day, and look forward to spending the next 4.5, 5 hours with you, guys.

Next, I'd like to remind you that all statements made during this meeting that relate to future results and events are forward-looking statements that are based on current expectations. Actual results and events could differ materially from those projected in our forward-looking statements because of a number of risks and uncertainties, which are discussed in our cautionary statements and in our SEC filings. We assume no obligation to update our forward-looking statements.

Please also note that we will be referring to non-GAAP financial measures, unless -- including non-GAAP gross margin and operating margins. Unless otherwise noted, references in this meeting to gross margin and operating income refer to non-GAAP numbers. Historical non-GAAP measures are reconciled to the most directly comparable GAAP measures in the web deck distributed here and posted in the Investor Relations section of dell.com. I encourage you to review these

materials. And with that, I'd like to invite Michael and Brian to the stage. Welcome, gentlemen.

Michael S. Dell

Thank you.

Robert Williams

Consistent with the branding that you saw at the beginning of this -- of the meeting here, we've been also very consistent in our strategy. Two years ago, we made a set of commitments to the investment community that included an investment in IP and Solutions, a commitment to grow profit share and a commitment to grow operating income and cash flow. Michael, you updated us on that last year. Michael and Brian, I'd like you guys to provide an update to the audience this morning on our progress in FY '12 on that.

Michael S. Dell

We have been, over the last year, delivering on those commitments. We've executed 8 acquisitions in the last 12 months and really increased the portfolio of IP and the range of solutions and capabilities that we have. We're quite excited about that. We opened 2 new data centers to move customer workloads into our private secure cloud, and we see that as a big part of what we're doing in infrastructure services. We've opened 11 solution centers, and these are centers usually in key financial districts and global kind of -- key business centers where we're essentially having all of our technology there. Customers come for a day. We architect solutions with them. And if you look at the whole Enterprise Solutions and Service business, it grew to almost $19 billion last year. So the portfolio continues to strengthen.

Brian T. Gladden

Yes. Rob, I would say, obviously, we've done a good job on the profit side. And when you think about capturing a bigger piece of the overall profit pool and IT, a great progress, even in an environment where client business was down on revenue, we saw a great expansion in the profit, one of the key elements last year. Enterprise Solutions and Services now makes up almost 50% of our gross margin. We talked about that in the first quarter. And very strong results from an operating income, EPS growth and cash flow from operations, up 39%, did $5.5 billion of cash flow generation last year.

Robert Williams

Great. Along the way, we've really fundamentally retooled the company to focus much more on the solutions model and the delivery of solutions to our customers. I wonder if, Brian, you could cover maybe the quantitative, and Michael, the qualitative aspects of that transformation over the last 4 years or so.

Brian T. Gladden

Yes. The mix of the business clearly has shifted. And even if you go back, look at maybe FY '08 as a baseline for the business, 23% of the revenue coming from Enterprise Solutions and Services. That's now 31%. When you look at the gross margin, it's gone from 40% to 50%. We'll talk today, as we think about FY '16, around how impactful that will be, how much that will really drive the financials for the business over the next 3 years.

Michael S. Dell

And we've greatly increased the engineering capability and the sales solution capability within the company. So today, we have more than 12 R&D centers around the world developing this technology. We have 5,000 patents issued and applied for around the world. We've significantly increased our -- the percent of our spending, 2/3 of our spending, in the Enterprise Solutions area. We have about 6,600 solutions specialists that are able to provide these solutions versus 2,000 back in FY '08. And we've trained these teams and changed their focus from selling products to selling solutions.

Robert Williams

Great, great. As those in the audience and on the web know, we've been committed to this strategy for more than 3 years now and it has been a singular focus of the organization to create a Solutions business that fundamentally changes the operating income profile of the company. But we've also refined that strategy, Michael, over the last 3 years and continue to refine it and fine tune it. Could you share with us where do we currently stand and your vision, not only on the strategy, but also on our competitive advantages?

Michael S. Dell

Yes, so what you really see here is we're focusing on a couple of key areas. You're going to hear about this throughout the day today. The first is really around the virtual cloud infrastructure and this is our service storage, networking business. Brad Anderson's going to talk about this and all the capabilities we have there and that's clearly an important area for us.

The next one is the connected devices or the end-user computing space. You're going to hear Jeff Clarke talk about this and our focus on the whole transition to the virtual client. Our excitement around Windows 8 and how we see this S curve adoption really ticking up in virtual clients. We're very excited about that. You're going to hear about our software strategy and how we're building software solutions that leverage the entire portfolio of products that we already have and build on that strength in areas like systems management and security.

And then you're going to hear about our Services strategy where, today, Dell is a very different company than it was 5 years ago. We have 45,000 people in IT services out of roughly 110,000. And customers are turning to us today for a broad range of solutions, so certainly supporting and managing and deploying their infrastructure, migrating to the cloud, modernizing their applications and processes and then securing and protecting their most valuable data. So you're going to hear, throughout the day, from John Swainson, Brad Anderson, Steve Schuckenbrock, Jeff Clarke, as we kind of go through each of these in a very consistent fashion.

Robert Williams

Great, great. And a big part of that, and Steve and his team will be up to talk about it later, is this concept of a competitive advantage around a scalable design point. And we use a mid-market design point, scalable design point, sometimes interact interchangeably. But could you -- I wondered if you could touch on that a little bit more, particularly as it relates to the commercial market?

Michael S. Dell

Yes, the key point here is that as you think about our industry is constantly in transition from one way of doing things to another. And so as we approach developing these solutions, we do it unencumbered by a legacy of old stuff. So you're not going to hear us talk about acting use Itaniums or Solaris or mainframes. We're going to move customers off of those kinds of architectures onto x86 architecture.

And if you think about where this new solutions get adopted first, it's really in what we're calling this mid-market, which actually is the largest portion of the IT spending pool. And you can architect solutions there that scale very well all the way up to the very largest companies and down to the smallest companies. And so that's really the kind of scalable design point that we focus on.

And what we find is that customers of all sizes are valuing this idea of more automated solutions, where there's quick ROI, they can deploy them easily, and they're not sort of inundated with features and extra things that they don't need or don't value. We hear that from the largest customers. We certainly hear it from the small- to medium-sized customers as well.

Robert Williams

Definitely. I think that we can all kind of look at the big trends that are out there in the industry and that are fundamentally reshaping the IT sector as we move forward: cloud, data explosion, connected devices, et cetera. And I think we kind of all agree that those are the big trends. But we don't really hear that from customers. Customers are asking for solutions to specific problems that they have. And I wondered if you can that just that a little bit, Michael, and Brian, as well, maybe from -- you're interacting with customers all the time, financial services, retail, manufacturing, health care. Talk to us a little bit about what you hear.

Michael S. Dell

Yes, customers aren't buying trends. They're -- what they want are -- they want productivity. They want growth. They want business continuity. They want to solve the problems that they have. So when -- I was on the phone yesterday with a large client that we just won a significant piece of business with and they're expanding globally, they're acquiring other entities around the world. And the other provider that had one or 2 fewer letters in their name was not -- kind of dropped the ball and wasn't able to keep their business running and didn't really have the kind of solutions that they needed that were flexible or agile enough. And so you sort of approach this conversation from the standpoint of what problem are you trying to solve? And how do you get productivity in your business? How do you grow your business? How do you globalize your business?

A lot of customers we talk to have a problem that Dell had. And some of you who come to these meetings for many, many times will know that as we grew in kind of our entrepreneurial expansion, we had many, many different systems all over the company. And we went through a period where we standardize those systems and created one system of record for every major process in the company. There's an enormous number of companies that are going through that. At the same time, they want to modernize, they want to virtualize, they want to put it in the cloud, they want more flexibility.

And so those are the kind of things that they're turning to us for. And this is where we can bring a lot of expertise. Certainly, the trends are all there. The trends are unarguable. But the problems that they want solved more fit into productivity, growth, expansion, how do I protect my intellectual property. Those are the key challenges that we see.

Robert Williams

Right. Brian, we've talked about our strategy with end-to-end solutions for our customers, talked about our competitive advantages and, obviously, a customer point of view on the big macro trends that are out there. How do we bring that together? And kind of think about our financial model as we look out over the next 3.5 years?

Brian T. Gladden

Yes. I believe it's helpful to think about really 2 distinct models here. And the way we've laid it out here, you've got an end-user computing part of the business, more transactional, more of a core part of our business. We're seeing slower growth in that space. I mean, I think that's clear. But this business still is critically important. It generates great cash flow. It pulls through a lot of other key elements of the business where we have great profit pools, whether that's financial services or attached accessories and software into services that attaches a critically important part of that business. That's going to continue to be a critical element and really drives strong cash flow and funds a lot of the growth that we're driving in other parts of the portfolio. We think we can drive that. And we'll talk more about a 5% operating income as a stable level of profitability that we think is very sustainable in that business.

Then you look at the real solutions space and many of the elements we'll spend a lot of time on today. This is a faster growing space. This is a place where the profit pools are bigger. This is a place that's incredibly accretive to the entire portfolio. It is the place that we've made the majority of our investments and we'll continue to do that. We see many proof points of success here. We've grown this quickly. We're to talk about 10% growth rates in this business and strong profitability at a rate above 13%.

So I think if you think about those 2 pieces, really executing and running well in the first part of that portfolio in end-user computing and accessories and third-party software, and then in the Enterprise Solutions and Services, growing very quickly, investing to grow and building out the portfolio. An important way to think about it, different strategies and somewhat different execution models, but both important parts of the overall portfolio.

Robert Williams

Let's break that down into the 2 component parts into a little bit more detail. I can tell you, and as you know from our ongoing discussions with the folks in this audience and others who aren't here today, that a big concern around end-user computing is that this is a secularly challenged business that has a number of competitive challenges as well. And I think there are many in this business that would question, can we really grow that business? Or at what level can it grow? Or maybe even at what level would it contract? And what's the right level of profitability? But I think it's important to also think about why this business, why end-user computing is important to Dell and also important to our customers? And maybe you could talk about a little bit more, Brian?

Brian T. Gladden

Well, yes, we do think it's a different part of our business and we focused, as you know, over the last couple of years on driving a bigger piece of profit share in higher-value segments. For us, that's made the business a profitable engine that's allowed us to invest in other parts of the business. And what we're saying here as we lay out a view of FY '16 is if you just take a 2% growth rate, and I would argue that's less than some of the third parties are calling for client growth over this period of time but probably more than what some of you have modeled as you think about the business, if the market grows faster than this, obviously, we think we can see better revenue growth and probably even better profitability.

But again, this is a 5% operating income priority that we're laying out for this part of the business. And as Jeff will talk about it, if we can grow on that level of profitability, it's a big, big contributor to the business. We've also laid out here a thought that if this business even shrinks, if you see 5% declines in revenue over the next 3 years, we also -- we still could have a business with 5% operating income that generates $2 billion of operating income for the company.

So it's still a very strong contributor, an important part of the portfolio, and as Rob said, contributes a lot to those relationships as we build out our presence and customers, especially in emerging markets, and a place that I think we can continue to run very well.

Michael S. Dell

Yes. And I would just add, I mean, you think about where do the next billion users come from?

Robert Williams

Right.

Michael S. Dell

They come from emerging and developing markets. And when you go to those markets, as we often do, because of the next generation of growth, what you find is that they're very focused on the end-user device as the first point and the other parts of the business come later. And so the client business for us is a foundational business and it's incredibly important for us as kind of the tip of this sphere as we march into the next generation of emerging markets.

Robert Williams

Great, great. Well, Jeff will get into this in a bit and with a little bit more insight into both the desktop, notebook mobility piece of that business, but also the accessory and third-party software piece of that business. But particularly, as it relates to the mobility and desktop piece, Brian, cost is something that you're -- it's a relentless march to make sure that you stay in a world-class cost position.

Brian T. Gladden

Yes.

Robert Williams

And that applies not only to the end-user computing business but really to an entire business, the G&A that exist in our business, all the supply chain efficiencies that we continue to go after that we've achieved over the last several years. Let's talk in a little bit more detail about what we're doing on costs and what that focuses.

Brian T. Gladden

Well, I would say, over the last 3 to 4 years, I mean we've done a pretty good job of getting at a fair amount of cost in the business. That's enabled our competitiveness, especially in the end-user computing business. Today we're talking about a broad cost initiative. We're going to talk about $2 billion over the next 3 years that we believe is a critical element of allowing us to fund a lot of the investments we need to make on the growth side of the business.

So you can see the buckets, these would be consistent with the areas that we've gone after before. We clearly believe there's a next level of cost opportunity. And our teams are now kicking off initiatives that allow us to get at some of these cost supply chain in our services delivery, go-to-market efficiencies and also G&A.

So an important element of broad initiative. We saw some progress in the first quarter even as you think about sequentially, we were down $180 million in OpEx. That allows us to go fund some of the critical activities, invest in the R&D and the Enterprise Solutions and Services elements of driving this forward. So an important effort that I think is just a critical way for us to keep it going.

Robert Williams

Yes. I want to pick up on the last theme, which is basically investing in Enterprise Solutions and Services. We -- this is a heritage of Dell and it's something that we live by every day, is to make sure that we're absolutely being as efficient as possible on costs. And the belief there is, if you do that, you then use those efficiencies to fuel and fund the growth engines of the future. So let's talk about what those growth engines are.

Brian T. Gladden

Yes, we've laid this out in this view over the last couple of analyst meetings. And what we would give you here is a snapshot of the server plus storage plus the networking business. We're going to give you a software view and we're going to give you the Services business. When you put this together, this is a business that we can grow at 10% growth over the entire period.

Robert Williams

And if we could just go to the next slide, please.

Brian T. Gladden

Yes, go to the next slide. So Enterprise Solutions, operating income levels are high and will continue to grow as we scale these businesses. We're saying here today in FY '16 greater than 8% operating income and a $15 billion business with 10% growth over that period of time. When you think about software, really just getting started.

Today, when you look at the run rate of the acquisitions that we have and the assets that are in the portfolio today, about a $400 million business. We're saying with acquisition and organic growth that, that can be a $2 billion business or bigger. Obviously, a strong growth rate and good profitably. That should be higher profitably as we scale and make that a larger business.

And then Services at 6% growth, growing to $10.5 billion. You'll hear about all of these 3 elements. When you put this all together, it's a 10% growth for this whole entire portfolio, and, obviously, a critical part of the strategy of the company as we move forward.

Robert Williams

Good. Now that's very helpful. Acquisitions are an important element of that addition of capabilities around solutions and services and software and networking, storage, et cetera, end-user computing and end point devices. We are relatively new to the idea of acquisitions and the idea of kind of managing a portfolio of acquisitions. But a big question that I get consistently; Brian, I know you get; Michael, you get; Dave gets all the time when he's talking with investors is, how do we think about this? What are our hurdle rates? How are -- what are the KPIs? How do we think about the financial progress of these acquisitions? And so, Brian, maybe you could speak to that in a little bit more detail.

Brian T. Gladden

Well, it's -- over the last, really, 3 to 4 years, have built a process here and had now some great successes. And I think trying to look at the body of work and what we've accomplished, and this goes back to FY '08, really starting with EqualLogic as a starting point for this discussion, 18 acquisitions. We spent over $10 billion on these acquisitions. They've delivered $9 billion of revenue post-acquisition to the company. We see strong growth rates, and really, the strategy really focuses on our ability to take our commercial footprint and grow these acquisitions with their intellectual property very quickly through that model.

You see 90% is a pure average. If you weight that average based on the size of the deals, it's over 40% growth since acquisition. And then, as we've talked about, we have a disciplined process and we have a standard of 15% IRRs as a business case model for every deal we look at. And we track very closely the performance versus that number. And I would tell you that in aggregate, we're delivering 15%. Some are going to be behind. Some are going to be better, some are going to be a lot better. And I think, as you think about that as a portfolio, you want to see it deliver on your critical hurdle rate, and that's what we're doing.

So I think a great sort of base capably that we've built, we've invested in integration capacity. We have over 200 people in the company now, full-time dedicated to integrations. And we think this is a strength that we can continue to execute here. And it will be important to that strategy.

Michael S. Dell

And all these map back to our virtual cloud infrastructure, our connected devices, our software and our services strategy.

Robert Williams

Absolutely, absolutely. There's a method to the process. There's method to the process, for sure. Well, critical to this discussion is capital allocation and distribution of capital to the shareholders. We have been very thoughtful and I've tried to execute a very balanced strategy over the course of the last 3 to 4 years, and I think you see that and what we've done and how we've done that. Yesterday, we announced the first ever dividend for Dell and -- about a 2.7% yield based on the closing price on Monday.

Brian, I wonder if you could talk a little bit about that view on capital allocation? Historically, but more importantly, going forward, how do we think about that balance going forward?

Brian T. Gladden

Well, I would say, historically, as you guys know, I mean, we've made a shift, as you know, over the last 4 to 5 years to move a lot more of our capital into the growth drivers of the company, so investing more in M&A, investing more in CapEx, investing more in R&D that's grown significantly in the company. And you can see that, that reinvestment rate continues to grow and will stay at those levels. That's an important element as we drive the company forward.

But we're going to be disciplined on capital allocation. Today, with the dividend announcement that came out yesterday, we're going to keep a fair amount of capital being returned to shareholders. So we're going to take that from 10% to 30% of free cash flow to 20% to 35%. The dividend level we've talked about is a $0.32 annual dividend. That would equate today to a 2.7% yield on the stock.

And we think that's an important element of returning capital to shareholders. We've talked about this for quite a while and we got a lot of feedback from investors that they would value that. And from a our standpoint, it was just a matter of when is the right time to do that. And we're confident that, that'll be something we can continue to have as a port -- part of the portfolio, and grow as the company grows.

Robert Williams

Well, let's pull that altogether from a financial perspective, Brian, and maybe if you could kind of bring that all into a final thought on the financial model as we go forward.

Brian T. Gladden

Well, yes, I would just bring it back and say as we think about creating shareholder value and our commitment, just give you a little bit of a framework and maybe a few elements of how we're thinking about in a long-term view. Continue with disciplined capital allocation is really a core element of this and the 20% to 35%, a focus at disciplined M&A program will continue to be part of that as we grow the business and especially in Enterprise Solutions and Services.

Looking at the Enterprise Solutions and Services businesses, that should be a $27.5 billion business as we look at FY '16. 10% growth, very high profitability. We're saying over 13% operating income levels.

Robert Williams

Right, right.

Brian T. Gladden

End-user computing. Really stable profitably, over 5% operating income. We think that's critically important. The $2 billion cost program will be important there, but it'll also be important to help fuel some of the investments on the other side, the Enterprise side.

And then, fundamentally, cash flow, generation has historically always been a real strength in the company. And driving cash flow from ops is a -- at a level higher than net income, is something that we think is important and we think we can continue to do.

So if you put that all together, I really feel that this is a model that allows us to draw -- drive strong long-term value creation.

Robert Williams

Yes, yes. Well, regardless of whether we're here in Austin talking to a group like this, talking to individual investors at our shareholder meeting or out on the road talking with investors, a common question that we get is, what's the vision for the company over the next 3 to 5 years? Where does Dell want to be? What's that strategy? And I wonder before we go to Q&A, Michael and Brian, let's close on that thought. And maybe you could discuss it again quantitatively, Brian; and Michael, qualitatively. Start with you, Michael.

Michael S. Dell

It's an end-to-end solutions provider in the areas that we talked about. It's cloud and virtual infrastructure. It's the connected end-user device. It's software with a particular focus on systems management security. And then services to help deliver and deploy and manage and protect all those environments because many customers want us to do that, and that's essentially what we're building. You're going to see us increasingly be vertical focused.

Robert Williams

Right.

Michael S. Dell

In our go-to-market, in our customer orientation. We're certainly continuing this shift from products to services to solutions, and always focused on how do we create value for customers.

Robert Williams

Right.

Brian T. Gladden

Yes. Financially, the big picture has to be continued shift in the mix of where we see revenue, but more importantly where the profit of the company comes from. And we're talking here that we should see 60% of our operating income in FY '16 come from the Enterprise Solutions and Services. If you think about that compared to where we were 4 years ago, dramatic shift and, obviously, should drive a much more valuable company and a much more well-positioned company to take advantage of the growth trends that are in our industry. So we feel very good about that, and that's an important element of what we're driving.

Robert Williams

Good. Thanks, Brian. Thanks, Michael.

Well, let's shift gears now and go to the Q&A session. So just raise your hand up and Mike and David will work through the audience and make sure that we get around to everyone.

Let's go ahead and start over here, David. I can't really see who's in the back row there, but we'll start right there.

Question-and-Answer Session

Unknown Analyst

Great. So you've got this goal, and obviously, I know you guys are focusing on Enterprise Solutions and software and that part of the stack, but you've got this goal of doing 5% or greater operating income. And the consumer part of the business, it looks like you're kind of headed in the direction...

Michael S. Dell

Client business.

Unknown Analyst

Client business, sure, okay. So maybe you define it differently, I'm not sure. Maybe you can talk to that.

Michael S. Dell

Client devices will include all manner of end-user devices. So desktop PCs, workstations, notebooks, laptops, tablets, sold to any kind of end-user, whether it's large businesses, small businesses, consumer.

Unknown Analyst

Sure, okay. So how do you get to that level then? It looks like a big majority of that business today is kind of going the other way over the last couple of quarters. Just above 1% profitability as you reported in your segment breakout. How do you get there from where you are today to the 5% goal?

Brian T. Gladden

Just to be clear. When we talk, we actually define end-user computing here more broadly than that even, and we had accessories, third-party software in there. That business today is delivering over 5% operating income in total. So I think you're talking about the consumer business specifically. When you look at that in total, it's actually over that level today, and we would expect to continue that.

Robert Williams

And I think it's important to note that, that business also includes accessories and third-party software, which is a big part of the solution as provided to customers. It -- when you sell an end point device, it pulls along on a lot of accessories. And so that target of 5% is inclusive of those 2.

Michael S. Dell

The displays, peripherals, all the things that we're selling along with our client solutions.

Robert Williams

So it's a commitment, really, to maintaining that level of profitability and growing at, roughly speaking, what the market kind of would gives us.

Michael S. Dell

Yes.

Robert Williams

Okay. All right. Next question. Move -- let's go over to David, just because he's close. David, is that -- is that Mark? Yes, Mark. Hi, Mark.

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

Mark Moskowitz, JPMorgan. You talked in the last conference call about the sales force inefficiencies. Another dynamic we hear about in terms of lot of your nice acquisitions you made in the past 1.5 years or so, is that some of the sales folks, particularly overseas, aren't getting as much support from a service delivery perspective and fulfillment perspective. So can you just kind of give us an update in terms of where you think Dell is in terms to serve all this new value-add solutions customers?

Michael S. Dell

I think it probably depends on the solution. In many cases, the fastest growth has been in the expansion of customer access as we've taken those out. So if you look at KACE or Compellent or EqualLogic, we've been able to expand the reach of those solutions out to customers very, very rapidly. We're continuing to build out our capability in all regions of the world. But certainly, it's not -- we don't have the same capability that we have in the United States in all markets. China, India, these are large markets for us, Western Europe, are large markets. But our capabilities are growing all over the world and I think it's fair to say that we've had a pretty dramatic growth from our acquisitions outside the United States.

Brian, what would you add to that?

Brian T. Gladden

I think the data -- for Compellent, for instance, we just looked at, when we bought the company, there was, I want to say, there are about 30 countries that they were selling into, and within a year of the acquisition closing, I think we're up to 100. So, I mean, we've expanded the offerings really globally. That's one of the key initiatives as part of the early integration plans, and seeing great success there. And I think it's a place that we obviously have more to do, but that's one of the key elements of the integration plans, is really expanding that presence.

Robert Williams

Yes. And I would just point out that the third session this morning, Steve Felice, along with Cheryl Cook and Kim Hibler, will go into quite a bit of detail on go-to-market strategy of the company, really broadly across the regions, customer segments and the solutions that we're trying to bring to those folks. So we'll have a deep discussion on that market. I'm sure we have plenty of opportunity to go a little bit deeper. Okay?

Next question. Let's move over here to Keith, right upfront; and go back there to Kulbinder, you're next.

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

I had a question on the slide for longer-term outlook. Brian, I was wondering if you talk about the ES -- ESS, when you talk about the 10% growth. Can you distill that down a little bit into what you think is the organic growth versus the M&A, kind of like what IBM does? And the second part of the question is on the client business. If you have 5% op income as your target. With declines in the business and mix, presumably tablets is part of that client business, if in fact declines, is it really a 5% op income business? In other words, might ASP pressures creep into that with mix shifting from notebooks to tablets? And sorry, the final part is [indiscernible] costs. You say the majority will be reinvested. Is there any way you can distill that down, what does the majority mean?

Brian T. Gladden

Yes, I'll make it simple. We're not going to give you a breakdown on organic versus inorganic. I mean, when we talk about growth, it's going to include both. We think inorganic is going to be part of that equation as we've always talked about. I think the 5% model, one of the things that we've done over time is we've actually focused that business on key areas where profit pools are better. And as you think about, if that business shrinks, I think that's part of our strategy is to find those places where we can be -- continue to be profitable. And that will continue to be a priority versus growing with the market. We'll trade that off any day to maintain profitability. And I think that's how we're running the business day. And what's your third question, Keith, sorry?

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

[indiscernible]

Brian T. Gladden

Yes, I'm not going to break that out. We'll continue to provide updates as we move forward here. I think a lot of that depends on how the market is and what we see in overall demand. It gives us a little bit of a flex -- there's some flexibility there, as we execute that plan.

Robert Williams

Yes, and then, I was just -- a point I would make there is a big part of the solution strategy is as we move forward, you're really going to see a convergence between servers, storage, networking, software, the services that are provided. And so I think we want to think about it as kind of a combined -- a combined target, and really think about it that way. Because I think over time, the lines are going to blur, and it'll be more of like where is the operating income coming from, so...

Michael S. Dell

Yes. I mean, you think about what's happening with flash and in-memory computing. We've got super high speed flash, PCIe built into our 12th generation servers. The line between what's a server, what's a storage is getting very blurry. And we're building these kind of converged solutions. So at the Dell Storage Forum, earlier this week, Brad showed a new blade chassis and, essentially, you plug in 2 wires. You plug in the network and you plug in the power. And inside that chassis is a superpowerful switch, a complete EqualLogic SAN, and an enormous kind of compute engine and all the software to make it all work, and he'll talk more about that. But one of the big plays for us, certainly, is you're buying a server, we're selling an enormous numbers of servers, what is your server attached to? Your server attaches to a switch. Well, how are you storing your data? Well, you have a SAN. How are you protecting your data? How are you protecting your network? And so we have solutions that kind of pull all this together, from security to the storage to the network to the server. And you'll hear more about our 3-2-1 kind of solution that were doing, SMB, vStart in the commercial space. This is kind of how we're changing the sales motion and capturing more of the available profit pool.

Robert Williams

Thanks, Michael. Kulbinder?

Kulbinder Garcha - Crédit Suisse AG, Research Division

This is Kulbinder Garcha from Credit Suisse. A question really on the growth, organic growth, of just growth of Dell, first off. If I look at your revenue targets for end-user, Enterprise Services and software and take your margin targets, it looks like you're looking for an operating income number of $6.1 billion, plus or minus, in a few years' time. That's about a 4.5% CAGR, which includes acquisitions and cost cutting. So the core organic Dell isn't really growing that much. I'm just wondering, does that reflect just the weak macro, or your concerns over the next 12 months? Is it just very conservative? Or is that just the assets that you're faced with? And then another question for Brian. If the PC business, let's say, is actually a $5 billion revenue number in a few years' time, which probably, let's face it, you could be, there's a chance. What other levers do you have to make sure you do a 5% income number and do that $2 billion of profit that you spoke about? Is it more cost-cutting beyond even what you've got here in the slides?

Brian T. Gladden

Yes, Kulbinder. I would say that the outline we've given you is a base case. And assuming a PC or end-user computing business growth of 2%, that's below what the market's calling today. And if that's better, clearly our business would grow faster, we'd generate more profitability and the model would look more attractive. I think what we're trying to do here is set an expectation around that PC business that takes into account some of the points that you guys bring up consistently. And by taking a conservative view there, Jeff will show you, we're going to run the business to a much more aggressive plan. And if that's the case, you would see significantly higher profitability. But just trying to be realistic there, given the business, and if we can grow 10% on end-user -- on the Enterprise Solutions and Services business, that's transformational and changes the shape of the company over that period of time. In terms of in a downside scenario, clearly, we would execute aggressively on the costs. And we would be having to use some of that costs, I think, in that environment to sort of drive and keep the profitability of the business at reasonable levels and to continue to grow. So I think that's, preparing and executing on a cost-focused structure and the initiatives we talked about today, I think, position us to be ready for that, if it happens. But at the same time, we would intend to reinvest those dollars in growing the Enterprise business in a more normalized scenario.

Robert Williams

Okay. Shift back over here, Shannon?

Shannon S. Cross - Cross Research LLC

I want to get back to the sales question, because clearly that was an issue last quarter and it's really crucial hitting your Enterprise revenue. And I think it's about, based upon this, about half of the cost savings that you're looking at are optimization of the sales force. So you have 6,600 specialists, I think you said. I mean, is that the right number? How do you think about what you need to do from a sales perspective? And I know Steve's going to talk about it, but I'm curious, Michael, from your standpoint. What went wrong? What's going right? And where are you going to be in a couple of years?

Michael S. Dell

Well, Steve is going to give you a view from the company's perspective. We've all been spending a bit of time on this. I think our SMB team has done a great job in this 3-2-1 sales motion. And the way this works, essentially, is we have a reference architecture where, instead of selling a server, we sell 3 servers, 2 switches and 1 EqualLogic storage array. And that's a reference platform that we can build off of. I think what we found in our sales motion is that, if we ask our sales force -- particularly our sales generalists, because we have a total of about a 20,000 sales folks and 6,600 specialists, the rest are generalists. If we ask the generalists to go sell every single thing we have, it's actually very confusing and pretty difficult for them. But if we group these sales motions into logical solutions like 3-2-1, and then you can build a 3-2-1 for SharePoint, 3-2-1 for Exchange, 3-2-1 for Oracle, 3-2-1 for SQL Server, 3-2-1 for virtualization, 3-2-1 for consolidating your data centers, that is a much more understandable approach for our sales teams. And then aligning the specialist into bigger categories so that we're not kind of over-specializing. Steve will talk more about this. And we've also found that we had some parts of our business where there was lots of opportunity, we are growing fast, lots of white space. We didn't have as many resources on those greenfield opportunities. And we had maybe a bit too much where there wasn't as much growth. And so we're moving resources over to where we see the growth opportunities.

Robert Williams

Thanks, Michael. All right. Let's see. Let's move back over here. David? Right here. And then we'll come back to the middle of the room here.

Unknown Analyst

I'd like to follow-up on Shannon's question in terms of how you're compensating sales. Are they compensated on profitability? Are they compensated on -- do they have a quota for some of the newer initiatives? That can be really key to how they behave. So I was hoping you could elaborate on that.

Michael S. Dell

It's a balanced mix of margin and revenue with incentives, certainly around newer things that we want to drive. And apologize, again, for the deferral, but Steve's session is going to focus deeply on this. So let me just ask that we wait on the questions related to sales and go-to-market for Steve because he's going to address those in detail.

Robert Williams

Great. Makes sense, makes sense. All right. Ben?

Unknown Analyst

Just wanted to talk about the Services business a little bit with the operating margin there. And I could be off on this, but there's a lot of traditional PC client services flowing through that number, is that right? So if we have a few tough years of PCs here, like last quarter and maybe some upcoming, is there a chance that, that really high profit part of Services tails off faster than expected, and is that in your estimate for the operating income for Services? And how do you manage that put and take with the PC-related revenue stream in Services, which is very high margin tailing off, and then the lower-margin enterprise stuff with the better growth dynamics ramping up?

Brian T. Gladden

Yes. I think that if you look at the last few quarters, despite challenged client growth, we've continued to grow the support business. It's really driven by a couple of things: good execution on the team, even on the PC side, with better attach rates and very profitability cost execution there. That's an important element that I think we can continue. But also, this Enterprise business has a large support element to it as well. And that's growing very fast. And I think with attach rates growing and that business growing at 10% on the hardware side, that will also be a key driver of growth there. We do have those tied out, and it does reflect sort of the base PC case of that model.

Michael S. Dell

I think also a lot of new offers and new capabilities. So for example, as we have created a broader IT services capability, we've actually been able to charge more market rates for the support services that we offer, which, in effect, means the margins go up on those. We also have new capabilities. So for example, we have ProSupport for data center where a customer will have, let's say, half the assets are Dell -- data center assets, but they may have half that are not Dell. We're providing a complete ProSupport for data center. And another interesting thing is as we acquire these new businesses, many times they don't have the support services or deployment of services revenue that is an enormous opportunity. Oftentimes, it could be as large as the product revenue or larger, if you think about what's going on in client virtualization or in networking or in storage. And so aligning our Services business very closely with our product groups, we're finding all kinds of opportunity to grow that. And of course, we can win those more disproportionately, given it's our IP, it's our product. And the combined effect of that is going to be healthy margins.

Robert Williams

Yes, and we'll have Steve up in about an hour, but I don't want to take too much from him. But there's a big focus on improving profitability in that business and it's not -- it's, obviously, it's about improving attach rates and adding new services in the data center. But it's also about the things that we're doing with security, with how we're managing infrastructure, the things we're doing with applications and business process outsourcing. These are all opportunities where they're relatively small to, in some cases, mid -- medium-sized opportunities today, but they're a big part of the growth engine as we look forward and you project out 3.5, 4 years.

Unknown Analyst

Can I just as a quick clarification? When I do the math on this, by 2016, your operating margin target does look like it's above 7%, right? We should be coming out with something like around the 8% range if we do the math? Is that in the ballpark for the combined EBIT margin for the company?

Brian T. Gladden

Yes, not going to do the math for you. I mean, we've given you the pieces. I think it approximates sort of this 7% GAAP basis target that we've talked about.

Unknown Analyst

GAAP, okay.

Robert Williams

Yes, and don't forget that you've got LTI and some other things to factor in.

All right. Let's go to Toni; and then we will go back to Bill.

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

Toni Sacconaghi from Sanford Bernstein. I have 2 questions. You talked about the belief that if the PC business contracted by 5%, you should be able to hold operating margins. So that contraction would be about $47 billion to $35 billion, as you said, just a decline of about $12 billion. Your consumer business today is about $12 billion. So why wouldn't you consider exiting the piece -- the consumer PC business, given that you stated that you think you should -- you could be able absorb a volume impact like that? Obviously, that would likely be highly accretive if you were able to stabilize margins in the rest of the business, as you suggest. So maybe you could answer that question directly. And Michael, maybe talk more broadly about why Dell needs to be in the consumer business? And then I have a follow-up.

Brian T. Gladden

Maybe let me start and then Michael can jump in. I think you have to balance, Toni. The scale dynamic is still important. So as you think about a shrinking client business, if that's the environment that we're in because of profitability, that's something we're going to have to continue to watch. We want to be at a reasonable scale where we can be in a cost position to compete in all the business that we need to be in. So I don't think you want -- you don't want this business to shrink. You want this business to grow. And if the environment supports that, where we can do that profitably, we want to grow like crazy. And Jeff will show you some plans on that.

Michael S. Dell

Yes. I think that themes you're going to hear about are focus, have the right costs and drive to the profit objectives that we see. If you look at what we've done with XPS, XPS is absolutely a consumer product, higher margins. And we're also seeing adoption of XPS deep into our commercial space. And we've built some of the features that corporations look for in the end-user consumer devices, the "bring your own device" phenomenon, but we're able to do that in a secure way. And so we think there's a way to run that business with a cost focus and target it and ensure that on a overall basis, we get to our profit targets. We're not happy with 1% op income in the consumer business. And so I think you'll see us continue to refine that business as part of overall portfolio and how do we narrow the field of things that we're doing. You'll see us -- we continue to strengthen the XPS portfolio, for example, which is where we think there's a much richer margin pool.

Robert Williams

And we'll speak to the other opportunities that exist there in places like mobility and tablets and virtual client and some of the cloud opportunities that exist around that in Jeff's section. So we think there is some growth engines there that, obviously, are designed to grow, but also potentially could offset in a more of a negative scenario that Brian laid out for you earlier. And those are -- by the way, those are higher-margin businesses, and in some cases significantly higher-margin businesses.

And you had a follow-up, Toni?

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

Yes. One thing you didn't explicitly mention, Brian, was expectations for cash flow. So I think as your plan is laid out, the mix shift from a cash conversion cycle is clearly negative, solutions have not that strong a cash conversion cycle. Consumer PCs have very high cash and very favorable cash conversion cycle. So if you run the math out on modest growth for the company, if the cash conversion cycle is going to decline from mid-30s to maybe high 20s or 30 over the next few years, is it realistic that free cash flow actually exceeds net income? And so maybe help us think through what that math might be. My guess is even at 4% company growth, it's still difficult for free cash flow to be better than net income, So maybe you can comment on how we think about those dynamics.

Brian T. Gladden

Yes. What we've said, cash flow from operations is greater than the net income. That's been the way we've talked about it. As we've modeled it out, Toni, clearly there are some dynamics that affect the cash conversion cycle as these solutions-based elements of the business grow faster. We think over this time frame, over the 3-year period, that's still within a negative 30 kind of range on cash conversion cycle. And we think with that, again, cash flow from operations can be better than net income over that period of time.

Robert Williams

Good. Thanks, Brian.

Bill?

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

Bill Shope, Goldman Sachs. There's going to be, obviously, a lot of debate and continued debate over the various growth scenarios for the end-user computing segment, and I think that's a fair debate. And there'll probably be 0 debate over whether or not the Enterprise Solutions business is a better business fundamentally. And I think we all agree with your strategy in moving towards that arena. With that said, the Enterprise Solutions business, ironically, is probably going to be the most competitive for you guys, or most challenging in terms of technological competition over the next several years and competition in terms of capital going after the acquisitions you need to target. So I wanted to understand how you think about some of the risks there. And then, additionally, we all talk about the secular challenges in PCs, but there are some legitimate questions on some of the secular prospects within the Enterprise, particularly the server business, which you guys are fairly heavily exposed to. We're seeing massive increases in utilization per device. We're seeing some encroaching threats on profitability from white box vendors that arguably could suggest we're seeing some of the same secular questions on servers in 5 years that we're seeing on PCs today. So when you look at all that, that 10% growth target, while it works out nicely on a mix perspective, there are some big question marks around that. So how do you think about the risks there? And if you start to see organic risks to that target, do you just make up for it on the M&A side?

Robert Williams

Hey, Bill, you just stole my second question at Brad later this morning, so -- but anyway, we'll address that. But obviously we've got...

Michael S. Dell

I think those are all the big factors that you outlined. A couple of points about the server market. One is it's -- they're certainly more consolidated than the client business. And we have a leading share in x86 servers. I think you're also seeing that the data center is becoming more compute-centric in the sense that networking is getting virtualized, storage is getting virtualized and you're seeing these converged architectures rather rapidly. Now there is a shift to service providers or hosted cloud-type models, but it's a relatively small portion of the total number of workloads and that's going to take a long time to occur. We actually play in those service providers quite well and we'll be competitive there. Yes, that'll be a competitive space. And we'll provide some of our own way for customers to move there in a way that's profit-accretive to the company. But I think there's a really long tail of these service providers. A lot of them are way too small to be able to try to put up their own infrastructures and so they absolutely turn to us. And I think you'll have an enormous number of organizations that still want to have their own data. They want to protect it themselves. So the big play for us is to use this core strength in the compute engine and extend that out into storage, into networking, into network security, into backup and replication and systems management. And we believe our opportunity to do that is great.

Robert Williams

Okay. Thanks, Bill.

Let's move over to Brian. Brian Alexander.

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

Michael, can you just talk about how important owning the analytic software IP is to your overall in structure data strategy? You've got the hardware stack, but what about software?

Michael S. Dell

I'm going to defer that one for John Swainson. I think, certainly, we have a modest software business and that's an area where we can grow rapidly. We've had some very nice acquisitions that are off to a good start. There are partners for us to work with there. And I think we're not endeavoring to own every part of the solution or all the IP that's out there. There are key places where we can compete, but there also are partners for us to engage with as well.

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

And Brian, on the dividend, can you clarify some of that as coming at the expense of the buyback program? How cannibalistic is it? And how committed are you to raising the dividend perspectively?

Brian T. Gladden

Well, yes, we're not dramatically -- I mean, this is taking the commitment...

Michael S. Dell

We just announced the dividend, and he wants to know how committed we are to...

Brian T. Gladden

It starts with the announcement.

Michael S. Dell

Patience, Grasshopper, patience.

Brian T. Gladden

The cash commitment from a capital allocation standpoint to returning to shareholders goes from 10% to 30% to 20% to 35%. So there is some overlap, clearly, in terms of the cash and it will affect our ability on the buyback over a period of time. We want to grow the dividend as earnings for the company growth. And that's how we're thinking about it. That's how we talked about the program.

Robert Williams

Yes, look, it's important to point out, it's obvious to everyone in this room, but this is an increase in the commitment of capital distribution to shareholders that is lasting and is part of a total return equation that, frankly, many people in this room have been asking for. We've talked with you regularly about it over the course of the last year. We talked with the board about this and with Michael and Brian about it. So this is a commitment to continue to have a very balanced approach and I think you'll see us maintain that balance. And it's a big part of the capital allocation thought process here at the company.

Okay. So, yes?

Robert Jakobsen - Jyske Bank A/S, Research Division

Rob Jakobsen with Baird. As a follow-up there on M&A to Brian. With a dividend, with increased distribution of capital to shareholders, what should we expect as any changes to M&A from a magnitude standpoint, from a timing standpoint? The company's been very acquisitive for the last 3 or 4 years. What should we expect going forward?

Brian T. Gladden

Still a critically important part of the strategy to maintain that program. I think we've been disciplined. I think we're going to continue to do that. And I think we have flexibility and abilities to get that capital to allow us to continue that program. So really no change. That continues to be very important.

Robert Williams

Okay. Is that Steve?

Unknown Analyst

Steve [indiscernible] at UBS. Michael, I was trying to understand the idea that you're going more for the enterprise, competing more in the MCI than in HP in the wheelhouse, but from a midpoint design area. So what are some of the companies that you tend to do well with when you're qualifying accounts and saying this is a place where we can beat these guys? And conversely, do you have a discipline not to go after some deals that might be very profitable, but where you've got a very small chance of beating an IBM?

Michael S. Dell

I think we have different parts of the portfolio, varying degrees of success, depending on the account situations, the size of the account, history. There's all sorts of factors. What we see is that there are places where there's more competition, less competition in places where our solutions are more applicable. So we have more opportunities than we can go after. So it's really a question of prioritizing. As you saw on the slide, the mid-market is the largest portion of the market. Our solutions absolutely scale up to the largest companies in the world. And we've had great success selling client products and x86 products into those companies. When you have an account that is bought into a Cisco networking architecture or the EMC storage architecture, a really big account, there are kind of strategies to eat away at that. But that's a harder thing to go do than to take a bunch of companies that might be 1/5 or 1/10 the size of that and they're -- they see Dell as a trusted partner and we can sell them a complete solution. So reality is, we're not going to abandon any segment. We're going to serve the entire segment, but there are places where we're going to invest more heavily in places where we can grow disproportionately. And I think if you look at our acquisitions, we've really focused on this idea of solutions that scale on helping customers automate their IT more. Even the largest customers tell us that IT is too complicated, and that our industry puts in too many features and they're looking for solutions that abstract some of the complexity and combine things together. So this idea of the converged appliance that I talked about, while you might think of that as something that's great for a company with 10,000 or 50,000 people, actually our customers that have 100,000 and greater, they want that, too. And so we think there are opportunities up and down the line. And the large companies are also very interested in the fact that we're not there to protect the mainframe and we're not there to protect the minicomputers. We've got a very nice practice in application modernization where we're taking these big workloads off of those big mainframes and putting them on x86. So there are opportunities for us up and down the line. But certainly, we're going to invest where we see the best returns.

Robert Williams

Good. I have a hard time seeing there in the back. Let's stay right over here, David, and just -- yes?

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Amit Daryanani, RBC Capital. I just had a question. The 65% investment rate that you guys sustained over the last 3 years, do you expect to maintain that or how does that rate change to achieve the 2016 roadmap? And then, secondly, can you just talk about the $5.5 billion that you generated last year. How much was that actually done in the U.S.? And given the dividend buyback commitment, would you actually have to raise capital to sustain the M&A activity that sounds like you guys want to keep doing?

Brian T. Gladden

I think, as we've said, we're going to have, just as we've done over the last several years, various ways to get at U.S. capital, U.S. liquidity, and that means just going to the market. We still have debt capacity, cost of capital very low. We can continue to do that. We clearly generate today approximately 25% of our cash in the U.S. and that will continue. And I think as the mix of the business changes, that could probably actually go up. So there are -- and we have, at times, ability to access some of that foreign cash with tax planning opportunities. So we feel comfortable in terms of our ability to support all the needs from a cash flow standpoint as we move forward. I think, in general, we've had a fair amount of activity around understanding how we're going to fund these things and build the M&A period around that. And I think all of that's part of a broad sort of cash flow model.

Robert Williams

And the reinvestment rate has changed significantly. The chart that Brian showed kind of looked at a trailing period over a more recent period of years. And you can see that, that average of 65%, is kind of a blend out over the last 4 years.

Brian T. Gladden

Yes, I'm not sure that'll be completely linear and completely at that level. But that's sort of the general range that we would target as we think about what we're doing with that capital.

Robert Williams

Yes, yes.

Okay. Good. Ananda?

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Ananda Baruah of Brean Murray. Michael, when you guys go to mid-market with your solutions, and particularly thinking through the VAR channel, are you able to get the VARs to sell the products as a solution as you're trying to have your sale -- direct sales force do today? And how do you get them to focus on holistic Dell solutions versus point products as they go to their customers? And also, is it to the point you're actually having your sales specialists support the VAR channel in selling the solutions?

Michael S. Dell

We've done a number of things to grow the channel business and it's now on the order of 1/4 to 1/3 of the commercial business depending on the country. And we've essentially created a comp neutrality for our direct teams and the channel so that they're incentivized to partner with the channel. And as we create more of these converged solutions, and certainly the acquisitions that have strengthened the channel program, we now have over 100,000 channel partners, we're seeing very strong take-up of the complete stack. I mean, we're tracking closely, how do we take them from -- we acquired a lot of storage partners with EqualLogic and Compellent. How do we take them into PowerEdge? And how do we take them into our Dell networking portfolio? How do we take them into networking security? We acquired SonicWALL, they had 15,000 partners. How do we take the networking security partners into networking? And how do we take -- they can't all do everything you'd like them to do. But we have a very broad portfolio. I think what the channel is figuring out is that it's not a question of if they're going to have a partnership with Dell. It's a question of when and how. And Dell has a set of solutions, which are broad and comprehensive as brand and pervasiveness that is significant. They're often over-indexed to a certain other company in our space, and so they see this as a diversification. That's absolutely helping us. And we're pretty bullish on our ability to grow that. And certainly, as we have solutions with much higher margins, we're relatively indifferent to how they're sold. We want as many people selling them out there as possible, whether they're in our channel or on our direct teams.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Those 3 years, the growth you see in your mid-market solution business, Enterprise Solutions business, how much of that do you think comes from the channel versus Dell direct?

Michael S. Dell

I think they both can grow. I think we're sort of moving from this idea of, we had a channel program to multi-channel to the channel being kind of deeply integrated in our thinking and it's just part of the sales motion, and it extends the reach of the company quite significantly beyond what our direct sales force does.

Robert Williams

Okay, good.

One last quick question. Aaron?

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

Yes. Aaron Rakers at Stifel, Nicolaus. I want to go back to the operating margin discussion a little bit. I guess what I'm struggling with is the 22%-plus services operating margin. I'd love to get an understanding of where we maybe stand today and what the mix within that looks like given your fiscal 2016 target. And then, additionally, on the software side, looking at the growth rate, I'd be curious of how much pruning you anticipate over your model from the -- what would be 90%, it looks like, give or take, that reflects resold software revenue.

Brian T. Gladden

Yes, the software number that we showed today, that $2 billion, would be Dell-owned IP software.

Michael S. Dell

And the $400 million is also Dell-owned IP, so that the third-party resale we showed within the end-user computing.

Brian T. Gladden

That's right. So the resale that we are doing some pruning on and working profitability up is sitting up in that EUC number that we showed you. As you think about services, clearly, much of the focus in growth and investment has been around building our non-support services. And that will continue to be a faster growing element within that portfolio. As you know, that part of the business would have lower profitability than our support businesses. But we're not going to give you any further breakdown than that.

Robert Williams

And I would just say that, that's been -- that's relatively consistent with the targets that we've talked about over the last year or so as well.

All right. Let's take a break here. The next session will be with our 4 Solutions group leaders. It's going to be the longest session of the morning. So we'll take about 15-minute break and get back here and get started. Thanks.

[Break]

[Presentation]

Robert Williams

All right. Welcome back. I think the F1 video and the work that we're doing with the team is appropriate. F1's coming to Austin, circuit of the Americas, in November. If you haven't gotten your hotel room, Jeff Clarke has got a pool and cabana that he's thinking about renting now. So there might be an opportunity there. Let's go ahead and get started with Jeff on end-user computing. Jeff leads the End-user Computing group as well as our supply chain initiatives.

And Jeff, come on up, let's get started.

That reminds me of the Caddyshack line. It's like pond pool. Pond's good for you.

Jeffrey R. Clarke

I'm probably this group. I'm in the pond.

Robert Williams

Exactly. Me, too. Welcome to the crowd. Jeff, let's get started. Obviously, you heard a few of the questions that Brian and Michael go in end-user computing.

Jeffrey R. Clarke

Yes, it's an optimistic crowd about the business.

Robert Williams

Yes, they're paid to ask the tough questions. So you shared the strategy with us last year. Give us an update.

Jeffrey R. Clarke

I'd be happy to. Linking to what Michael said earlier, when you look at our end-user computing strategy, it really is the same framework that I outlined last year to you all. We introduced the framework. The framework is really built on delivering end-user solutions that help our customers. And it's fundamentally built on 3 core initiatives. The first is strengthening our core PC business. How do we continue to make it more and more and more competitive and continue to win in the PC marketplace? The second one is providing new value. And providing new value in end-to-end solution delivery and specifically looking at opportunities that exist in the third-party software and accessories business that I'll talk about a little bit later.

And the one that I'm most excited about is the new opportunities. We talked about this last year in the mobile space being tablets as well as the opportunities that exist in desktop virtualization.

So when I think about our strategy on a go-forward basis, it's really exciting about strengthening the core business, which we'll talk about how optimistic we should be about that, extending that platform into new value opportunities, and then really diving into the new growth markets that exist in the marketplace today that we have generally not participated in. And it's built on a solid foundation of IP and innovation.

Robert Williams

Jeff, let's just jump straight into the questions on profit profile and growth profile, that seems to be where everybody wants to go.

Jeffrey R. Clarke

There were a few questions on that.

Robert Williams

Yes, there were, weren't they? But so why don't you address that directly, and we'll talk about that.

Jeffrey R. Clarke

I'm much more optimistic than perhaps several of you are about the PC business and the end-user computing business. And to bridge things, Brian talked about a 2% growth earlier this morning. We've modeled that the 2% growth, actually, is no PC revenue growth. And the 2% is actually tied to providing new value and expanding our scopes. Specifically, we believe we can grow the accessories business by $1 billion by FY '16. We think there's an opportunity to grow at least $1 billion in Windows 8 tablets by FY '16. And when I think about desktop virtualization, we think the opportunity we have there with our leadership position, there's an opportunity to grow $1.5 billion of revenue by FY '16 as well. That bridges to the 2% case that Brian mentioned earlier this morning.

I don't think that's satisfactory. I think the PC business will continue to grow. It's clearly in a lull today, which I'm not going to argue that. When I look at the long-term prospect PC penetration rate, the emerging middle class, I think people will buy PCs. It perhaps isn't their first device they buy any longer, but the PC marketplace continues to grow. And we're modeling here, and what I'm running the business by, is an incremental $5 billion of PC revenue by FY '16. That is slightly less than some of the external -- our analysts have about a 4% CAGR over the time frame. But I look at the 5% PC growth combined with the $3.5 billion of new opportunity, it's an attractive business for us. And we're committed to do that and continue to talk to the 5% op inc target as the baseline performance we'll run the business by.

Robert Williams

And if you take that bar chart and break it down into its 2 component parts, the desktop and notebook business, which we report on a -- which we report to you on an elevated basis each quarter and accessories and third-party peripheral business. Let's start with the core PC business. A big part of that, Jeff, is costs, and making sure that -- we were talking with Brian, that you've got to be in a world-class cost position, maintain and enhance that over time.

Jeffrey R. Clarke

Well, I think there's 3 keys to the PC business and it really ties to the $5 billion opportunity. We think the $5 billion opportunity exists in the commercial segment, notebooks and its bias towards emerging markets. So the 3 key components of our -- strengthening the core PC business, center around world-class cost performance and position; investing in the emerging market opportunities that exist in the marketplace; and then lastly, which we've seen tremendous progress on in our XPS businesses and our latitude businesses, is drive premium value products in the marketplace. Let me start with what you referenced, Rob, which was the cost position.

Robert Williams

Yes.

Jeffrey R. Clarke

I think about, I've been in front of you now the 2 previous times, talking about the need to get our client business in a competitive cost position. We've been on this journey for 2.5 years and we've made tremendous progress. That theme of that was fundamentally driving complexity out of our, what used to be "one size fits all" model configured order. We've taken tremendous structural costs out of the PC business.

Much of the financial performance that Brian referenced earlier, that our client business grew in gross margin dollars nearly 40% last year, was because of the structural charges we've made. We've reduced 30% of our platforms. We've reduced the number of components we buy by commodity from 30% to 60%. Half of the unit shift today are fixed offer configurations. That's enabled us to grow ocean shipments 60% year-over-year and drive our ships vast performance, which has the highest customer experience marks in our business, by 40%.

What I find really interesting about that is that journey we started 2.5 years ago, we think is sustainable. To the point of the $2 billion Brian spoke to this morning, I'm confident we have line of sight to $1 billion dollars of that in the core PC business. It's a new area. It's like taking freight consolidation and freight optimization. It's taking advantage of the go west phenomenon in China in the manufacturing network, which is well underway. We shipped our first notebooks out of Chengdu.

There's opportunities to build on the improved quality performance of our products and the warranty reductions that we have seen, driving efficiency in the sales model. And Steve will touch a little bit about that on a go-forward basis, but we look at the opportunities to drive a frictionless order through dell.com, through the entire network, as an opportunity to really drive out structural costs. And we think there's an opportunity, particularly when I look at the competitive set in consumer, to take down our SG&A costs in our consumer business to compete more aggressively across the global basis.

So I leave pretty optimistic about the cost opportunities we have, and very confident we have a case that takes out $1 billion. I think it's fuel to grow the PC business, for the bears in the audience. Then if the market doesn't grow, then certainly we'll use to sustain the margins and keep the business profitable at that 5% threshold.

Robert Williams

Well, playing off the bull/bear there. The bull case is there's growth. There's growth in emerging markets. There's growth in different product categories. So let's look at emerging markets and growth markets.

Jeffrey R. Clarke

Exactly. And I'm very optimistic about the emerging markets opportunities. The middle class is going to more than double in size over the next decade. When I think about PC penetration rate in India and China, and China is 20% and India is 4%, a middle class that doubles, there's more disposable income. Clearly, they're buying smartphones, but they're going to buy PCs, too. When I look how much more affordable a notebook is today in China than it was at the turn of the century, it's 40x more affordable today than it was just 12 years ago. In India, it's 27x more affordable than it was just 12 years ago.

So the opportunities exist to reach a broader audience with more disposable income to sell computers. They're going to buy computers. Again, I'm not suggesting they're not buying smartphones and other types of node devices, but the opportunity for PC growth in the emerging markets is tremendous. It's 85% of the revenue growth in our industry. And we've had tremendous success. Last year alone, we grew in our growth market businesses, that revenue for the client business grew 24%, which was nearly double the marketplace. In China alone, we grew our client revenues by 45%, which, again, was nearly double the industry growth mark -- growth marketplace.

I think what's really interesting on a go-forward basis, this notion of investing, we're investing in our brand. we have a world-class brand, a recognized brand in these BRIC countries. Our customer experience in these countries, in many cases, is best-in-class in the industry. When I look at our customer experience, or NPS scores, in Brazil and China and India in the small- and medium-sized businesses we have, we are an industry leader. And we're going to build on that. And we're going to specifically build a family of a growth market products, notebooks, desktops, all-in-ones that are target for the growth opportunities in that marketplace.

Robert Williams

And last point here is premium value products. It's been something that Steve talked about. You've talked about, Brian. We've all talked about that focus. Give these guys -- give these folks a little bit more.

Jeffrey R. Clarke

Happy to. I think one of the things we all get confused is this low end, and we clearly have walked away from a fairly sizable amount of revenue in the low end of the PC business. But 64% of the units exist above $500, which is about 76% of the entire revenue of the PC industry. So you have the $235 billion in the PC marketplace, 70s -- or 64% of those units exist above $500. That's a good healthy market for us. We're really focusing on that profitable share growth. And in fact, in the premium priced spend, we grew and outgrew the marketplace in 2011. We've taken share in the high-price spend 6 of the last 7 quarters. We actually outgrew the marketplace by 5% last year.

And then the real opportunities to continue to build on world-class products, we're really driving innovation into the product platforms. The 3 that I would call out is the XPS 13. It's been very successful to the point we're outbuilding more production capacity for that product. And it really is a differentiated offering around bring your own device in the marketplace. It is a unbelievably competitive and innovative product. And you get it with Dell ProSupport, Dell Custom Factory Integration and Dell Security Solutions. So it actually addresses the IT professional needs while bringing on the consumerization aspects into the workplace.

Our Latitude product continues to be the most secure corporate notebook on the planet. Whether it's the encryption process that we've put in, whether it's the multi-authentication modes that we deliver with the product or the FIPS level 3 security that is a base offering in the product, it is an unbelievably secure business notebook.

And then I look at the prospects around Windows 8. Unbelievable new potential around innovation, particularly with touch. And with touch we'll enable on a go-forward basis, I get pretty excited.

Robert Williams

Definitely, definitely. Accessories and third-party peripherals is a area of our business and big business for us. It's profitable. And it's probably not well understood by the financial community. So take the same question, what's the growth from profit profile? How do we -- how should we think about that business as we roll out over the next 3.5 years?

Jeffrey R. Clarke

Yes, let me lift the covers off this a little bit. It showed up on the earlier bridge where it's an opportunity of $10 billion out of the $42 million, an opportunity to grow. It's really made up of 5 distinct businesses. One is a reselling of prepackaged software from partners like Microsoft, Citrix, VMWare, many others. And then 4 really accessory business, which center around color laser printers, our client peripheral business, which is bags, batteries, memory, docks, mice, keyboards, things of that nature. It's our display business, so flat panel monitors. And then lastly, enterprise infrastructure, which primarily supports Brad's business, which is power and cooling.

And when I look at the opportunities, we've actually consolidated this business over the past several quarters, and we've aligned it to the product groups. So our peripheral or accessories business here is really aligned building and providing end-to-end solutions and more comprehensive solutions around the hardware that Brad and I produce. It's complementary to the software John's going to build and the services Steve provide. And it really, it's this ecosystem of tightly integrated solutions that allow us to compete in the marketplace.

It's a pretty attractive space. One of the things, if you look at the chart in front of you, 60% of it is in the Accessories business. And when I think about the opportunity to grow this business, it's the following. And someone mentioned earlier, what's the value of the consumer business? Here will be an example. The average notebook user buys $300 worth of accessories in the lifetime of that notebook. The average desktop user buys $600 worth of accessories in the life of that desktop. We capture less than 40% of that opportunity in the marketplace. Our changing our ability to attach more bags, batteries, mice, keyboards, displays on the massive notebook and desktop footprint we have is increased profitability.

And so that's the strategic side of it. We're building Dell-branded products or more Dell-branded products to be more accurate, category champions to drive the performance in those distinct businesses. And we're bringing the same operational discipline that we brought to the client 2.5 years ago to our accessories business. In 2 quarters, we've reduced 30% of the SKUs. We've eliminated 50% of the suppliers. We have improved third-party software margins year-over-year in Q1 by 40%.

And the customer experience is vastly different, said differently improved, in the last several quarters. So people are coming to the site, looking at our accessory business in a much different way, which leads me ultimately to the point, I'm pretty confident in the $1 billion revenue upside by FY '16 in our software and peripherals business.

So people are coming to the site, looking at our accessory business in a much different way, which leads me ultimately to the point, I'm pretty confident in the $1 billion revenue upside by FY '16 in our software and peripherals business. And we can do that by increasing operating margins by 100 basis points.

Robert Williams

Good. Well, that's helpful, Jeff. Let's wrap this section. There's a couple of areas that you're pretty excited about from a growth opportunity standpoint. Let's start with Windows 8.

Jeffrey R. Clarke

When I think about our growth opportunities. It really is around tablets and it's around desktop virtualization. Specifically, the tablets, they've been accepted in the marketplace. Clearly, a fast growth area. A vast majority of the tablets themselves have made their way into consumers' hands. They are in business, without question. What we think is enterprise Windows 8 tablets allows us to solve problems that exist today with a product design for the enterprise. So when I look at being able to manage the device, being able to secure the device, work on things like data loss, compliance, device inventory, we think design for enterprise Windows 8 tablets is a very unique opportunity for Dell, one that we're in a position perform in.

We have a track record with our OptiPlex, our Latitude notebooks, brand servers, the services Steve provides of being able to offer a very differentiated solution in the marketplace. And then wrapped around the mobile device management software that John is going to build and talk about later, we think we're positioned in the enterprise space for success.

And I think Windows 8 is a very exciting opportunity for us. Those products themselves are going to be differentiated from the consumer-oriented products. They're going to be designed for health care. They're going to be designed for the education market, which we really think there's tremendous opportunity.

Robert Williams

Yes. And last point is client virtualization, big opportunity, I see Tarkan Maner on the front row here.

Jeffrey R. Clarke

Front row, right here? He should do this portion.

Robert Williams

We should get him up here to do this, but we'll find another opportunity.

Jeffrey R. Clarke

I hear he grabbed a mic.

Robert Williams

He might take a mic, yes. But it's obviously a big opportunity. It's more than virtualization. It's the back office, it's the back end of that. It's the cloud. It's the connection of the endpoints through the cloud into a private or a hybrid cloud, and it's a big opportunity for us, both on the hardware, the solutions and on the software side.

Jeffrey R. Clarke

Tremendous. One of the things that I think the Wyse acquisition helps us is puts us in a very unique position. One, we're a market leader in thin clients, we're a market leader in desktop virtualization. More importantly, it's taking that footprint of a leader in the thin client and extracting that with the value that John, Brad and Steve can provide in a true end-to-end solution. So when I look at the thin client marketplace, it's a $3 billion market, not very large. But it drags for every $1 of thin client hardware, $5 of servers, storage, service and software behind it. With the integration of this capability, we're now in a position to have access to the other $15 billion and to really grow that marketplace.

I look at the IP that we have acquired. It's differentiated. We talked about in some of the breakout sessions yesterday. But it's also skating where the puck is going, with cloud-based services, the client to the cloud solutions. It really is the opportunity to manage products in a much different way.

And I'm excited about the outlook. And again, we think there's a $1.5 billion revenue opportunity by FY '16 in desktop virtualization.

Robert Williams

Awesome. Thanks, Jeff.

Jeffrey R. Clarke

You're welcome.

Robert Williams

Let's shift to the next piece here and bring up John Swainson, President of our Software business. John?

John, if I do my math correctly, you've been in the industry for 30 years. You've been at Dell for 3 months. So that maybe not a fair question, but give us your assessment of what you found at Dell in your first 3 months here, and how you're thinking about the opportunities that we have and the assets that Dell has?

John A. C. Swainson

Well, I think you've heard already from Jeff and Michael and Brian why software is so important to this evolution that Dell is on. And let me stress again that software at Dell did not start on March 5, when I arrived. Software had been going for a very long time, 10 -- 10 years or even longer, with solutions both developed inside Dell and acquired through M&A over the course of the last decade or so.

My coming is really, I hope, to catalyze the software work that's going on inside the company. I talk about doing software at Dell, not just doing Dell software. I mean, clearly, I'm responsible for a revenue stream. You saw some of that today on Brian's slides. But more importantly, I think I'm here to make sure that software gets effectively used across the business so that then we can really take advantage, not only of the revenue and profit potential that this represents, but also of the enormous ability to glue together our hardware, software and services solutions to create even higher value solutions for customers that are, frankly, stickier, and have higher margins.

So that's, I think, my primary responsibility. We've got lots of stuff going on. You've seen some of it. You're going to see more of it over time. I spent the first couple of months looking at the assets we have, putting an organization in place, formalizing some of the things that hadn't been as formal as they needed to be. And really trying to assess the strategy that we wanted to be on.

Robert Williams

Good. John, a couple of things you mentioned there that caught me, one is IP and the other is leveraging other aspects of Dell's business. Go into a little bit more detail for the audience here on that.

John A. C. Swainson

Well, look, we're not going to stand up an independent software business at Dell. We're going to stand up a business that leverages all the parts of Dell and does it in a way so that 1 plus 1 doesn't equal 2, it equals 5. So as I look at software, the sweet spot for me is -- are things that leverage the end-user computing business and things like mobile device management, which is a huge unmet need in the marketplace. We are arguably the #2 or #3 provider of devices in the marketplace today. We have an opportunity to do what we already do based on our mobile endpoint management business with KACE, which is already a $100 million business, and really expand that to now manage, not just mobile PCs, but also tablets and other forms of devices.

So you'll see more from us in that later in the year, as we really start to take our endpoint management software that's going to be sourced, by the way, from things that we got from Wyse, where they've got a cloud-based solution. Things we got from SonicWALL, which obviously brings security, and in VPN-like solutions and things that KACE does. We're going to be able to provide a holistic solution for customers that allows them to easily manage their mobile devices, whether those happen to be tablets or smartphones or PCs.

Similarly, if we look across what we're doing with services, everything that we do today should have a services component to it. And everything we should do today should leverage our storage business. So we've got this tremendous opportunity, given our market position, #2 or #3 or in some cases, #1 in every business to really attach software into those businesses to provide a better experience for the customers and to build a software business that way.

And so that's why I say on this slide, that when we look at the design tenets, it's not just sort of go and randomly look for software profit pools, it's to find things that advantage Dell's overall business, leveraging our core strengths, provide unique value-added differentiation and focus on margin.

Robert Williams

Michael talked earlier about some of the big macro trends in the industry. And but really from a customer point of view, that end-user use case, are there some that are more relevant for you than others? And maybe you could discuss those for us.

John A. C. Swainson

Yes. I think there is a couple of very interesting things going on in this industry. First of all, I like to thank Rob for the 30 years. It's actually more like 35. And at this point, I am counting down, not counting up. So I appreciate that. Part of the reason that I have stayed so connected to this business is the tremendous rate of change and the tremendous excitement that goes on. I would say that in an exciting year, you have 1 or 2 of these things. We have 3 game-changing technology shifts going on in front of us. And you could argue that I could have added easily social media to this. I could have added the industrialization of the developing -- I could have added lots of other things, but let's just stick on these 3.

We have an explosion of devices. And not just any old devices. Devices that are connected, that IP connected to the network. They're generating information. It's smartphones, but it's also sensor-based devices. It's also smart meters. It's all kinds of things that are generating data. And that data is leading to an absolute explosion of the amount of data that's available and accessible for businesses to use in making better business decisions. That's clearly an opportunity. There's clearly a huge disruption going in the marketplace there, particularly for the mid-market customers who haven't up to this point had access to the tools that allow them to do kind of analytics on their business using that data.

And of course, the third trend that has now been going on a lot that we talk about it sort of very casually is cloud. And cloud is becoming very real. Cloud is now within the point where we're seeing something like 50% or more of our customers are starting to environment -- to virtualize their environment. And at least 60% of them, in the next couple of years, are going to have one or more of their major applications delivered through the cloud. That's an enormous opportunity because it ties back to the need to automate their environments, to secure their environments.

I mean, just think of what these customers are dealing with. They've gone from a world where they have a relatively finite number of servers running a finite number of applications to them to a much larger number of virtual machines running both on-premise and in the cloud. The applications could be anywhere in that continuum. There's a need to secure them, to manage them and to do it in a way that doesn't require sort of human intervention at every step.

It's a great time to be in this business. And I think we're very well-positioned to take advantage of some of these very disruptive trends.

Robert Williams

Michael talked earlier about being unencumbered by legacy. Obviously, this is an opportunity that clearly falls into that category and that description.

John A. C. Swainson

Absolutely.

Robert Williams

Big market out there, but even a bigger profit opportunity.

John A. C. Swainson

Right.

Robert Williams

Let's talk about the market, then break it down into the areas where you want to focus on.

John A. C. Swainson

Sure. So this is a -- the software business is, roughly, a $300 billion business. It breaks into the 3 categories shown on the slide, about $90 billion is system software-related, about $145 billion or so is applications software-related. And about $70 billion or so is application development and deployment middleware. It's -- so there's lots of places for you to go when we're starting at $400 million. And yet, not everyone of these is equal. And I'll talk about that next.

But suffice to say that the reason we're interested in this is while this represents something like 15% or 20% of the industry revenue, it represents much more than that...

Robert Williams

Right.

John A. C. Swainson

...in terms of industry margin, if you do it right. And I think we have an opportunity to do it right. Now I might add that this somewhat understates the opportunity for Dell, because the opportunity is not just to build a $2 billion or $3 billion software business here. It is used to use software to leverage all the other businesses that we're doing.

I made the point before about mobile device management. A great opportunity for us, not just to sell software, but also to enable our tablets, to enable our PCs, to enable a higher value offering for our customers with more stickiness, and frankly, more propensity for customers to buy more of those things in the future.

Robert Williams

Right. Large revenue opportunity, even larger operating income opportunity. Folks in the audience would say that, John, how are you going to do everything? You've got to focus. And that's a question I get. What are you guys are going to focus on? What are the areas where Dell wants to make the concerted effort to succeed?

John A. C. Swainson

Well, of course. And we've put a filter on that $300 million -- $300 billion, looked at it, first of all, through the lens of what are things that are highly synergistic for Dell. Secondly, what are things where there's a disruptive force, or multiple disruptive forces at play in that industry that's going to enable us to enter. Because obviously, there's no point in entering into a mature market where you're basically scrapping over the bones. You want to go into places where there's new and exciting things going on. Clearly, it has to be big enough.

And lastly, there has to be an advantage through our distribution mechanisms, through the Dell channel, there has to be things that we can do that will differentiate us relative to our competition. As we've distilled all that down, we've come to sort of 4 areas that we think are a very natural place.

Now we're not going to do all of these at once. Security and systems management are the 2 that we're already well down the road on. You can see that we've got a number of acquisitions in that space already. Security, we've got a very strong position, both at the edge of the network with SonicWALL, and in the data center from a monitoring and management point of view with SecureWorks. We have the opportunity to fill in between those 2 pieces. And I think you're going to see us do that as our strategy unfolds.

In systems management, there are all these disruptive forces going on with respect to people going to the cloud. People wanting to secure that. And we have an opportunity to build out on what we've done with KACE, the software part of Wyse, AppAssure, our cloud-based backup solution and some of the other acquisitions and products that we've built over the last couple of years to make the management of the physical going to virtual, going to private, going to public cloud environment, to make the management of that process much easier.

Business intelligence, building again off the huge amount of data. And frankly, the relative lack of tools available to anybody other than the very largest customers. So the mid-market is an opportunity to build tools like data warehouse appliances, Quickstart products. And I think potentially, an opportunity for us to leverage our own IP in this space with a view of making it easy, fast, time to value for the customers there.

Lastly, we think, as we look out across the marketplace, there's an application play here, particularly around delivering application functionality in a SaaS model to mid-market customers, maybe S more than M customers...

Robert Williams

Right, right.

John A. C. Swainson

...small than medium, and potentially outside the U.S. first. So there's some opportunities here that we see around the application business that are as yet untapped, particularly as I said outside U.S.

So all of those represent areas for focus. Security and systems management will be really the first 2. And then business intelligence and applications will be over the course of the next 2 or 3 years.

Robert Williams

Great. John, that's a very helpful introduction. And I know that I, as well as the folks in the audience and all our team members, are looking forward to regular updates from you in the coming quarters and years. And so I'm looking forward.

John A. C. Swainson

Great. Thank you.

Robert Williams

All right. Well, let's move on and bring up Steve Schuckenbrock, who heads our Services business. Steve, President of Services.

Steve, a common theme that we've talked about really for the last several years, but obviously throughout the course of the morning so far, is this idea that we try to approach things from a customer point of view and really design solutions based on the endpoint use case and the customer need. You had the opportunity to realign the services organization in Q1 and really realign that organization around that viewpoint. I wonder if you could share that, the thought process there, your rationale, and why you see that as an important change and an opportunity for services.

Stephen F. Schuckenbrock

Well, first, you've got to put into context, why Dell services? What is Dell services here to do? And I would basically say that our primary mission is to help our customers get the maximum utilization and value out of the investments they make with Dell hardware, Dell software, whether it's in the client space or in the data center space.

Second is, is to help customers who may be in old proprietary type architectures migrate from those old propriety bases to more modern technologies, more open x86 kinds of standards, which has been the heritage of Dell from the beginning.

When I look at the buying habits of customers, I find that the days of the old, big megadeals are done. There's very few of those big end-to-end $1 billion deals that existed 10 years ago. And I think that's a good thing, and it certainly plays well for Dell. The buying habits tend to be much more consolidated to support, to deployment, to consulting, to infrastructure and cloud, to applications. And obviously, security being a huge component.

And so we really changed to make sure we could serve, both the customers buying habits, as well as the primary obligation and responsibility we have to drive the maximum value through Dell technology that we possibly can. As a result, we changed the organization. We have now the global support and deployment business. It's growing quite nicely. There is a good conversation about why or how it's growing. And I think Doug Schmitt and his team have done a phenomenal job, both in terms of execution, cost management and driving better attach rates across our core value propositions. But also in bringing innovation to the space.

Now we do deployments very, very remotely now and our ability to do that in a leveraged way brings advantages across our core business and our acquired companies. And multi-vendor support was mentioned before by Michael. ProSupport for data center, where we take on the entire obligation, including the software that run our customer's data centers to provide level 1, level 2 and sometimes level 3 support. And so it's been a pretty dramatic shift that is directly in line with our solutions capability.

When you look at infrastructure and cloud computing, that's everything from consulting, to distributed compute management, to data center management, to cloud. And it's a really comprehensive suite. And it's important that we have those capabilities together because our customers really don't want to stay where they're at. But they also don't have the skill sets, the capability to make the migration to the future technologies as well as we can do for them. And so we partner very closely with our customers and are very selective about which customers we want to do business with that want to take that journey.

From an applications and BPO standpoint, we focus on 3 primary verticals, primarily health care, which has been a traditional strength. Our banking, financial, security and insurance business has been a good and emerging capability for the organization. And then kind of the all other category with a primary focus on manufacturing and distribution. And that really comes off of the strength of the fact that we now outsource all of Dell to Dell. And so off of the tremendous capability from our own Dell IT organization, including the modernization of our infrastructure, all the way through expertise in e-commerce, social media, et cetera, that capability all is brought to bear through our apps and BPO business.

And then security, when we bought SecureWorks, I was impressed that they were monitoring 13 billion hack attempts per day. And that they triaged all of that down to the ones that were really true incidents for our customers, and then they managed to avoid impact or minimize any impact associated with any of those threats, and then inoculate all of the customers against those perceived threats. Now that's 30 billion events per day.

And so the hacking community has gotten much more active, and we have certainly stepped our game up and provide unbelievable capability, both in managing proactively those events, but also helping customers or potential customers who are affected come in and do emergency triage, and usually that winds up with us having a managed relationship. So that's core.

Robert Williams

Right. Steve, last year and into Q1, you consistently grew the Services business in a multiple to the market, improved profitability, increased backlog, signings are very strong and continued to improve throughout the year last year. Talk to us about the performance and the drivers in each of those areas, and where you think it can go.

Stephen F. Schuckenbrock

Well, the business grew nicely. I mean, we're up 8% year-on-year. The back half of last year, I think we're up 11% and 12%, respectively, through the third and fourth quarter. If you look at the first quarter of this year, it's up 4%. So a bit more modest. I think what you're seeing is, one, a bit of a recovery. Because we were relatively flattish in terms of growth in FY '10 -- I'm sorry, FY '11, and FY '12, I think, was a step up. I think, as we look forward, Brian put the numbers up of plus 6%, that's all factored in relative to our support business, our infrastructure, cloud computing and security business, as well as our apps and BPO business.

From a growth standpoint, I think our support business will continue to do quite well. When we look at the opportunities to attach on a best practice basis, there's plenty of upside, just off of the core business that we have within the support space.

Second, when you look at the infrastructure and cloud computing and security business, we expect that business can continue to grow at a premium to the market. And again, focusing on those customers that really need to modernize their infrastructure and move to kind of next-generation end-user computing, next-generation data centers, next-generation compute models around cloud, et cetera.

And then I really think the crown jewel of this, and one of the things that will lead a lot of our growth, is in the application space. Where this capability to help our customers embrace mobility, help our customers migrate their existing -- first rationalize their existing capital applications both at the app level and at the interest level. And then, off of that rationalization, either migrate to x86 and/or cloud or modernize those applications on the journey to x86 or cloud, I think has fantastic financial value to our customers. But in addition to the financial value is terrific value in terms of speed to market, which is probably more important to them, this notion of flexibility and speed, than even the cost savings that they'll be able to achieve.

So that's a fundamental basis of our growth. The basis of our profitability is we did manage cost structures very aggressively last year. And we're just getting started. Frankly, we've got more work to go do. And so I expect that our applications in BPO business and our infrastructure business will continue a very aggressive improvement from a profitability standpoint, while at the same time, the machine that we're using relative to our support and deployment business continues to get better and better through e-support, all the way through some of the more advanced kind of capabilities I mentioned before.

Robert Williams

Right. I think it's broadly understood by everyone in the audience that we're the #1 health care provider for IT on a global basis. We're very, very strong in the United States. But many of the questions that I get from the investment community are, Rob, how can I get a sense of how you have been able to expand into new customer accounts, into new geographies, into new customer verticals? Which was critical to the plan that we laid out roughly 2.5 years ago.

Stephen F. Schuckenbrock

Well, really, last year was very much about getting our core business on the right kind of trajectory from a growth standpoint, as well as from a profit standpoint. And I think the trajectory is right. I think then you look at how can we leverage that core capability to organically improve this business.

Robert Williams

Right.

Stephen F. Schuckenbrock

And then inorganic opportunities come and go, and we'll be very selective about making the right decisions from an inorganic standpoint. From an organic standpoint, the things I look at relative to mix are, what is the percentage of growth that comes from existing customers versus new? And 60% of our signings come from new customers. And so that's a really good and encouraging sign. By the way, that's on the back of 100% renewal of all the business, all of our existing customer business last year that was up for competition that we wanted to retain.

From a new region standpoint, 23% of our signings were outside of the U.S. U.S. had been the traditional stronghold. And so the signings as a percentage of the total are greater than our revenue as a percentage of the total in the apps BPO and in the infrastructure space. And so we're seeing some encouraging uplift in terms of our ability to grow organically. And that momentum continues into this year. And then as we look at new verticals, 40 -- 48% of our signings were in our traditional strengths of government and health care, and 52% of it were in the other categories. And so we're beginning to see the shift outside of those core strengths.

A couple of examples. Towers Watson is a great private cloud implementation, helping them modernize. It was a competitive win, and we moved out of the competitive data centers, standardized on a private cloud, virtualized that infrastructure growth, tremendous savings, and enabled a merger between the old Towers parent business and the Watson Wyatt business.

7-Eleven, when we look at that business, it's really exciting. It leverages some of our new capabilities in social media. It works with them to change the experience for their guests, as they come into the stores and the quality of service that they experience in the stores. And it's everything from service desk, for everything associated with operating the store, the applications involved in driving a social media capability, and then extending the relationship that they have from the store to the social experience that they have with their guests.

And so 2 examples of the kind of capabilities that we're enabling for customers.

Robert Williams

Good. Steve, you've been asked to lead the cloud initiative and broadly across the organization, but specifically, in services. And we get a lot of questions on where is Dell today on its cloud initiative and what are the things that you're trying to create, broadly across organization, as I mentioned, but also in services. Let's start with the broad piece, first.

Stephen F. Schuckenbrock

I mean, cloud is a little word with, like, 5 million definitions at this point. And so you kind of step back and look at, let's not get confused by the noise. Let's talk about what really matters inside of our business and to our customers. And in reality, cloud touches everything from Brad's business in the enablement of the most super scaled cloud capability, all the way down to the 3-2-1 capabilities that Michael referenced before, those can be miniature private cloud kinds of implementation. And so depending on your definition, there's clearly a big business there, as we drive more and more converged architecture and cloud enablement, both private, as well as super public.

When you look at the opportunity to orchestrate all of that capability, as John talked about before, it is a more complex experience for our customers. And the management tools to be able to go see the continuum of processing capability across your entire workload is going to require new tooling and new types of software. So clearly, John's got a big responsibility relative to cloud. Our Wyse acquisition and all the work that Jeff referenced before is an enormous responsibility as we drive this virtualized client world and really capitalize on some of the trends of mobility and this consumerization to make sure that we provide a user experience for our commercial customers through kind of this complexity that is occurring on the massive proliferation of new devices. There's no question that services has a big role in this. And I'll talk about that in just a few seconds.

But in the end, across all of those dimensions is security. And the #1 thing our customers continue to talk about is, how do I make sure I have a secured experience? And so in all of the activities that we pursue, we're assuming in the fundamental design and architecture that security is at the foundation of all of the efforts.

Robert Williams

And maybe you could just take that down to the, specifically, to the services element of this.

Stephen F. Schuckenbrock

Well, from a services standpoint, again, you can take a 3-2-1 implementation in a small business. You could take a vCloud implementation, which is converged architecture in medium to larger businesses. You had the ability to set up public -- I mean, sorry, private clouds within their firewalls on an enterprise-class basis. So when I look at those private cloud implementations. I mean secured. I mean clouds that come with SLAs. And those SLAs really actually give them the confidence that they're not going to experience some of the issues that they've experienced in some of the other public cloud kinds of situations. Because they're now beginning to run core business applications.

A great example of this is Gratifón in Panama. They're essentially running their entire business on Dell's public cloud. It is realtime operational. And there's nothing short of enterprise-class execution that would be acceptable to them.

We do have the ability to have managed private clouds in our data centers. And we do that for multiple different customers. And I can talk about those in a bit more detail maybe in the Q&A process. And we now have a public cloud capability. Based on the vCloud architecture, you'll see other architectures within that capably as we go forward.

But the ability to manage the customer's workloads, whether it's in their data centers, whether it's in our data centers, or whether it's in our public or private instances, I think is a really core differentiation that we've got to stake our claim to. And that's going to be in great partnership with John.

Robert Williams

Great. And earlier, Brian introduced a base goal for the Services business of $10.5 billion. Talk to us about your view on that? How do we get there? What are the core elements? What do we need to add to achieve that goal over the next 3.5 years?

Stephen F. Schuckenbrock

Well, look, I think the goal is -- it's out there. There's no question that I have a lot of confidence in that goal. I believe that it sets a minimum threshold of what I think this business has the capability to do. And if I look across all of the different elements of growth in this space, no question, the cloud is a big factor relative to that. No question that end-user computing and managing the complexity across the proliferation of devices is a huge element in that. No question that our footprint is not as big as it needs to be in APJ and EMEA and in the emerging growth markets. There's no question that we are not providing enough services capability relative to the total hardware base that we pursue.

So the notion of life cycle services, our enhanced capabilities around support and deployment will move us into proactive management. So we're anticipating problems on behalf of customers, and we're driving through that anticipation, improving the customer experience. I think all of those conspire to give me great confidence in the growth. And as I said before, I expect the profitability to grow faster than the revenue.

Robert Williams

Great, Steve. Good overview. Appreciate that.

Let's shift, bring up Brad Anderson, President of Enterprise Solutions Business.

Bradley R. Anderson

Thank you, Rob.

Robert Williams

Brad, welcome.

Bradley R. Anderson

Thank you.

Robert Williams

Again, this idea of customer perspective and competitive advantage is extremely important for the company. And I know you have a point of view on that. And I'd like you to start by sharing that point of view with the audience today.

Bradley R. Anderson

Well, I think, Michael, and others kind of spoke about it. I mean, with all these trends going on, we are really kind of taking it from the customer's perspective. And when you boil it down to what problems we're solving, it's really helping customers build agile and efficient IT operations. It's helping to make sense of their data and moving it to insight. I think you had some of that in the breakout last night. And it's kind of empowering the productivity of the end user.

And so when we design solutions around that, we're really kind of designing it around Dell's strengths. And it really kind of starts with end-to-end. And to solve the problem more holistically than rather address a portion of it.

Robert Williams

Right.

Bradley R. Anderson

And so we're looking across that within my space, across servers, storage and networking, but extending into the things that John's doing on software, Steve is doing on services and, obviously, in the VDI case, the other way, with what Jeff's doing and Tarkan on the thin client role.

We're also looking at this notion of better together. It's not just enough that servers, storage and networking and others are participating, but we're really looking at designing new capabilities and interactions between those products that really kind of change how things are done.

For example, our Force10 networking is optimized for our EqualLogic storage. It's optimized for our Compellent storage. Michael talked about this new blade enclosure, where we have now taken Force10 technology and moved it into our blade enclosure. So we're really kind of changing the types of products we're making, so again, they're much more holistic.

We talked about the scale of the design point. Customers don't want to be paying for more than they can consume at a point, and they want to kind of grow their solutions as their businesses grow. And then this notion of disruptive is hugely important. I mean, we have the opportunity to be a very different kind of enterprise player, not necessarily focused on the things that others have done, but to really, to take advantage of these trends and where our customers -- and in evolving customer business models.

Robert Williams

Right.

Bradley R. Anderson

And then maybe lastly, we've got to be true to our roots. And that is cost effective, open. We recognize that most of our customer's environments are heterogeneous. And this notion of simplicity driving automation is well received by customers of all sizes.

Robert Williams

Right. Brad, if I think about each of the difference solutions businesses and opportunities, end user computing software services, enterprise solutions. I think it's fair to say that your business is one that we started the soonest on and we're furthest along on the journey. Obviously, we still have a lot of work to do.

My question is, walk the audience through really what's changed in this business over the last 4 years or so, and give them a sense on how we built that business out.

Bradley R. Anderson

Well, I think you have a graphic up here. It's been a busy time for the enterprise business across all our lines of business, server, storage and networking, and it doesn't really stop there because we talked about our relationships with services. Steve spilled out the -- our sales capability. And so when you look at the buildout, we're a very different kind of enterprise company than we were only 4 years ago. And it's both organic and inorganic. It's both Dell IP, but it's also partner-based IP.

If you look at our server business, that's been mostly organic. We've built a $1 billion business in our data center customer solutions business. And we've continued to expand that. If you look at our storage business, it's really a combination of both. But we've done 5 acquisitions, starting with EqualLogic. And then most recently, with Compellent and AppAssure. Every one of those with the exception of AppAssure, we have doubled the engineering organization after we bought those.

And so we're not only buying leading technology there, it's a catalyst for us to kind of drive those business even more aggressively and our progress. And then if you look at networking, it's really a little bit of all 3. We got organic. We got inorganic with this Force10 acquisition. But our partners play a very important role there. And so it's really a combination.

And I think the way I kind of judge the success of this is kind of the quality of the wins we see. We routinely now see large workload and application rollouts, data center redesigns, where it's made up of our 12th generation servers, Compellent and EqualLogic storage, Force10 networking and now additions like SonicWALL for security. They are much richer wins now than we've ever had before and it's on a quite routine basis.

Robert Williams

Good, good. Well, let's take it now down to the LOB view, if you will, and start with servers. Clearly, a big opportunity there. It's a large business. It continues to grow. We've got a differentiated product portfolio. And there's some things that we want to do. I might have Bill Shope just re-ask his question.

But the big question that I get from everyone is, is this is another area where there are some challenges from competitive pressures. And how do you continue to grow this business in light of what's happening with virtualization, with white box and with public cloud providers?

Bradley R. Anderson

Well, it sounds like Bill's question. First of all, virtualization has been a tailwind rather than a headwind. I know it's been forecasted to be a headwind. But we're already seeing in 12G richer average unit prices, and we're seeing richer gross margins per unit on a dollar basis. So it's very much following the trend that we have seen in our past generation. So that's been a good news event.

In terms of white box, within the server space as a whole, the white box participation has been pretty constant at 8% to 10% for about the last 15 years. If you look in the hyper scale, it's a little bit different. It's about 20%, but it's pretty stable. If we look at our hyper scale business, our DCS, we are well above $1 billion, and we're growing at double digits. In fact, if you look at our ASPs, they have grown at 25% compounded over the last 3 years and they're 3x to 4x more than the Tier 2, which really kind of makes the point where those customers -- those customers, they still want added value other than just the lowest cost one use server out there. They want world-class integration, they want innovation, they want global services, and they're willing to pay for it.

Now if you look at the broader business, we think there's a lot of growth opportunity there not limited to the hyper-scale. I mean, I think the keys to that is, we got to continue to execute as we have done in the past around our server transitions. We've been first to market on 11G, we were first market on the 12th generation. And so we've got to execute that transformation -- transition.

Secondly, that 12th generation is so differentiated, it's going to allow us to participate in some spaces we haven't participated in and some workloads. And so we think that's super attractive. Then, when we combine that with leveraging the other activities across Dell like converge, cloud, VDI, a big source of growth.

And then, lastly, there are still geographies, like Europe and even emerging markets, where we still have opportunities to participate in much faster growth rates or underpenetrated areas. So we're pretty excited.

Robert Williams

Let's move to storage. We've built out a Dell storage portfolio that started with PowerConnect several years ago, but we added iSCSI [indiscernible] SANs, we've added Fibre Channel SANs on the horizon being implemented into the portfolio today and moving forward up to scale on NAS, data dedupe and compression, recent addition of data protection and backup to the cloud with AppAssure.

The components are there. And the question from the investment community is, okay, you guys have it, how do we compete against those big tier players that are out there and have been doing it for a longer period of time than Dell?

Bradley R. Anderson

Yes. So great question. I mean, on Monday, I had the opportunity to be in Boston. We had our Dell Storage Forum, in which we had 350 customers and about 400 channel partners. Obviously, all focused on storage, but not limited to the storage. And got a lot of feedback. And the feedback is, they love the products. They love the technology. And in fact, most of those customers, as well as those channel partners, were selling many of those platforms that you're alluding to that we got to compete against.

And they made a choice. And they made a choice because they really like the value proposition. The technology, in fact, when you look at the amount of intelligence, automation, it's, in most cases, beyond where those legacy architectures are. And because they were grounds up, developed in that fashion, they have ability to handle innovation in a way that the legacy ones are kind of struggling with. They love the ease of use. They love the business model because there've been nickeled and dimed and every time there's a technology transition, they kind of got to re-up their storage investment to take advantage of it. We don't do that.

And so the feedback I got strongly was, we're on the right track. Now what they want is we need to go faster. And so the areas that we're really focused on is -- most of our investments have been on block. And so we have opportunities to go faster in file. We've introduced the fluid file system, which is based on Exanet and do PowerVault and do EqualLogic. I think we announced yesterday, it'd be in Compellent. And so we'll be shipping Compellent here very shortly. We have opportunities to go faster there. We're driving now much many of the other attributes like deduplication across these platforms. We want to continue to do that. We are working aggressively to get AppAssure. So we have a next-generation backup native if you are in enclosures.

And then the other things that I think are absolutely key is much like what we talked about even on servers and some of the others, is to make storage a part of everything we do. It's again, it's, as John moves into BI, the richest data sets are in the BI decision-support area. Big opportunity to participate. In cloud, as smaller customers and others use the cloud as a storage, big opportunity to partner with Steve.

So we see a lot as we look at our forward-looking investments, storage can be pretty much a part of every one of those. And that's a fantastic opportunity. we're increasing our go-to-market capabilities on that. We're not as far as along on servers, on storage, but we're growing that capability. So we really feel like we got upside there.

And then the other strong message I got from the users, in particular, is that, hey, we really like this notion where Dell, you're not shy about kind of disrupting things.

Robert Williams

Right.

Bradley R. Anderson

And so we think there's some pretty exciting trends with memory-based storage, where we have talked about the use of flash. We invested in a company called RNA. So we think we have some pretty innovative ideas to take advantage of flash.

But then there's emerging, another emerging storage technology called be VSAN, where you're going to see it very much at the high end, where many of the cloud providers are looking at it, maybe a more cost-effective way to do DAS and then at the very low end.

And so we think there's other disruptions that we can participate and drive that they are very well suited to the Dell model.

Robert Williams

Well, disruption is a good seg into networking. If you've got all these products, you've got to connect them, and there's a lot changing in the connections in the fabric...

Bradley R. Anderson

There is.

Robert Williams

...in the data center, and also out in the campus. And we had a healthy and growing campus and client switching business. And we added to that with Force10, just over a year ago, actually, and we'll be in our first full quarter of Force10 in Q2. So let's switch gears there.

Bradley R. Anderson

Okay. Networking -- so networking, obviously, we've been in it on the campus and branches you alluded to with PowerConnect. And PowerConnect was even kind of used as a data center implementation for smaller companies. Force10 gives us a completely different capably. And so we are very much focused on the data center. And so when you think about all our strategies that we've been talking about, enterprise strategies, are data center focused. And so it's really important to be in the networking business. So the networking business is really a hugely important enabling business for much of what we're doing here.

And the thing we had to keep in perspective is, today, we have like a 2% share. So our strategy is not trying to out-Cisco Cisco to get to 10%, 20%, 30%, 40% of share, we're at 2%. And it's a great enabling business. It has very healthy gross margins and double-digit operating margins. And so the first thing we want to do is make it part of every business we're in. Every time we sell a PowerEdge server, which got native 10 gig down, what are you connecting to? All our storage devices are 10 gigabit. What are you connected to? And so it's a enabling business to everything we do, and if we want to drive real end-to-end performance, we need a network. And then when you think about things like converge that Michael spoke to, it is supercritical.

Secondly, that whole sector is going to dramatically change. And so Force10 is a fantastic technology because it has leading 10 and 40 gig top-of-rack capabilities, but it was already leaning into the flattening of the network. And so when you look at products like the Z9000, the distributed core, that is the kind of technologies that the web providers are even adopting today as they flatten the network.

And then, lastly, we want to participate even more aggressively in the disruption because we think software-defined networks will have to emerge. Because today, the network is too much physical and everything else in the data center is going virtual, and we're going to participate.

Just briefly on the campus side, we found that when we bought Force10, our campus business, our PowerConnect skyrocketed. And I think this last quarter, we grew 46% year-over-year. It just added more and more credibility to what we're doing. That area is going through a lot of changes of its own in which where campus and branch, the networks that connects to the data center is moving from a wired to a wireless. And so we want to participate in there as well. The partners will be very important in our strategy there.

But then, again, software-defined networks are going to be a very important in how you manage that fabric in connecting all those mobile endpoints. And then when you look at what Jeff's doing and Tarkan did on VDI, we really think we have a fair number of clients and mobile clients that we think is a big leverage point and is an opportunity again to inflect here. If we inflect just a little, this could be a hugely accretive part to our business.

Robert Williams

Yes. Michael talked at the beginning of the meeting about the idea of converged data centers. And it's, obviously, a big part of -- it's really not about LOBs. It's not about products. It's about the convergence of the solution broadly across a number of different areas, security, software...

Bradley R. Anderson

Yes.

Robert Williams

...the lines of business, et cetera.

How does that all fit in for you, kind of bring it back together, specifically, as it relates to your target of $15 billion for your revenue?

Bradley R. Anderson

Yes. I mean, I think the way I think about it is, we're trying to build a very different enterprise company than others around there and really leverage our strengths here. And that again, I think is end-to-end, and to design things much more holistically and really take advantage of this better together, where the components are optimized to each other rather than just kind of interoperable.

And so what Michael shared with you was our next-generation convergence solution. And this will be one of many that you'll see going forward that kind of epitomizes the kind of company we're trying to build. And so what you kind of see from this graphic here, is we took a M1000e, the most power and cooling efficient blade chassis there is in the industry, we now have the ability to plug quarter height, 2 socket blades. So now it's the most compute dense configuration in the industry. We have integrated our Force10 40 gigabit switch, the first 40 gigabit switch in a blade enclosure in the industry.

And then, on Monday, we announced kind of the latest piece of this, it is a full EqualLogic, really a PS4100, 4110. Full enterprise capability. All the software that runs on EqualLogic runs on this device. So if you look at all the converged solutions out there, first thing is storage is not part of it. Storage is typically external. And the ones who have put some storage in, it's been typically DAS, and it's not been enterprise class. This is true enterprise class.

And then you wrap this all around with a common chassis management console that also takes advantage of all our management strategy where you can plug into OpenView, you can plug into vCenter, you can plug into all the other frameworks out there. So we are not locking you into saying, hey, I got to go adopt your management framework, top to bottom, to really take advantage of converge.

I think this is just an example of the kind of company we want to build, which will be very different enterprise player.

Robert Williams

Great. Thanks, Brad. Thanks for that overview and thanks to the rest of the members of the panel here.

Let's go ahead and open it up to Q&A with the audience.

Robert Williams

And so, let's start with Maynard.

Maynard Um

Maynard Um, Wells Fargo. 2 questions. What's the risk of the new offerings, like cloud services and desktop virtualizations, to the traditional client server storage businesses, and what have you embedded into the outlook? And the second question, Steve, you talked about your revenue targets. How do we think about the operating margins? Given mix, I think Pro was running a 7% operating margin. Can you just talk about the trends there, excluding the hardware support?

Stephen F. Schuckenbrock

You want me to take it from client or services?

John A. C. Swainson

No, go ahead.

Stephen F. Schuckenbrock

As I said, when I look at the thin client opportunity in user computing, the impact, what we see is customers moving some workloads towards this different computing model, alternative computing. I look at the size of that market opportunity, it's -- grows to $3 billion on the thin client harbor side against $235 billion of notebooks and desktops. I'm not thinking it's a large cannibalization. That said, we're going to continue to invest and differentiate in our notebooks and desktops for the commercial side. And if you haven't heard consistently enough from us, all-in on end-to-end solutions for alternative computing models, which I actually think will, over time, extrapolate into the consumer business and be a disruptor long term.

John A. C. Swainson

In terms of the margins in the services business, we're not going to get into the specifics at a LOB level of what the individual margins are. I will tell you that as a goal, every one of the lines of business that I talked about should be accretive to Dell's commercial business. And I think that we will achieve that.

Robert Williams

Good. Thanks.

Just keep it right here. Mark.

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

Mark Moskowitz, JPMorgan. Two questions, one for John and one for Jeff. John, my question is related around kind of 2 parts here. You've had a really good track record in the industry, also being very disciplined and patient in your acquisitive approach. As you now are only here for a few months here at Dell, do think there's a need to maybe be a little more accelerated in terms of the acquisition strategy around the software business just given -- just because there aren't that many assets left and there's a lot of big players out there who could maybe go scoop up those assets as well. The other part of the question is, how do you see the recurring revenue component of the software business evolving over time at Dell? Will it be so much of the softer industry in terms of around 50% recurring?

John A. C. Swainson

Let's answer the second one first. I mean, as you know, Mark, that's a function of the maturity of the solutions. And to some extent, that's going to depend on whether we end up acquiring sort of anchor tenants with more mature portfolios or end up buying sort of a string of pearls and have less mature portfolios. In any case, I mean, the endpoint will be the same. It just takes longer to get there. There's a sense of urgency. I mean, you saw the numbers that Brian portrayed up there, underlying that, there are assumptions about how we do M&A. I can assure you that there's more than one path to get there. There's more than 2 paths to get there. So we're not going to be constrained by sort of a critical path through the marketplace that says we have to buy this and then that. That's not the way the market works anyway. We have defined a pretty broad set of areas of interest. We're investing in those areas of interest. We're going to invest organically and we're going to try and fill that in. Whether that's through a larger, rather than smaller transaction, remains to be seen just based on the opportunity. We'll remain disciplined in that. We're not going to chase valuations. We're going to look for great quality assets that can benefit from coming through our distribution capability and that we can ultimately integrate into a platform. And we're not going to pay kind of premium prices for it.

Maynard Um

And then my other question for Jeff. Just in terms of how we should think about the evolution of tablet at Dell. You mentioned earlier the XPS success, and how you're building out incremental production capacity, it does sound like it's doing quite well in the market, but it did take about 4 years to kind of catch-up with Apple. Will it take a similar time, in terms of 3 to 4 years, for your tablet business to catch up with Apple as well, is the question?

Jeffrey R. Clarke

That's a really good question. I hope we catch up. Catching up to Apple would be a lofty goal. Apple's playing, you know far better than I, that it was oriented. Our play is going to be a differentiated solution for the enterprise. It's going to be a subset of the overall tablet marketplace. Do I think it's reasonable to think that we should have a tablet share or tablet position that's commensurate with our corporate notebooks today? Absolutely. That's our target. We will attack it with 2 different brands, our Latitude brand and XPS brand. Our XPS brand will bring Steve's services and capabilities to differentiate it from a consumerization point of view. And then we will build a set of purpose-built tablets with the Latitude brand targeted for education, for the financial market, for the health care market that really is unique to those requirements.

Robert Williams

Good. Thanks, Mark.

Okay, David, let's go over there. Kulbinder.

Kulbinder Garcha - Crédit Suisse AG, Research Division

It's Kulbinder from Credit Suisse again. A question -- a couple of questions for Jeff. On the client business, can you speak about where we are on the various supply-chain initiatives? I think this time last year you said that by the end of this year, you'd have 50% on pre-config, 70% ocean shipping, 80% standardized configurations. Have we seen most of that? And then, what are the further cost initiatives you have to take $1 billion of this business? Could you specify them? And then a question I have on tablets. If by fiscal year '16, you're at $1 billion of revenue, maybe that's 2 million units. That's basically, maybe at that time, a tablet market share of less than 1%. My question is, why even bother?

Jeffrey R. Clarke

Let me go in order. So I thought I covered the progress we've made on the supply-chain side and the cost initiatives, I've spoken about the for the past couple of years. We have over 50% of the unit shipping today are predetermined configurations. So well past the marks that we've set. We have over 70% of our manufacturing done through contract manufacturing. So we've changed the fixed cost and variable cost nature of our manufacturing model. We are now approaching industry level, or industry-leading levels of the percent of our product in some businesses on the ocean. Our ocean shipments year-over-year grew 60%. We've created a new capability around ships faster, ability to take an order today, it ships tomorrow, that business grew 40% year-over-year, as I thought I mentioned. And that business, ships fast, drives a greater customer experience or a greater customer acceptance with our product portfolio. We still see a opportunity, which I should tried to speak to, that, that continuation -- that, that continues, and we can build upon that. Building upon it means we're going to look at, increasingly in the manufacturing or supply-chain side, freight becomes a greater component of the cost of goods sold to manufacturing and deliver the product. There's optimization opportunities, consolidation opportunities. We're driving very aggressively in Go-West in China, where there's opportunities there that I mentioned. We just shipped our first notebooks out of Chengdu a little over a month ago. We have opportunities around more complexity reduction. I don't think we're done reducing the complexity of the portfolio of products. We can continue to see benefit from that in the simplification to our Salesforce, how to position and sell our products, which will drive subsequent SG&A opportunities. We still touch too many orders in Dell. Well, the more we make that frictionless, the more cost we extract out of our infrastructure. And I think those are sources of opportunity for us to ultimately deliver on this $1 billion of incremental cost and the structure of how we conduct the client business. And I'm pretty optimistic that our line of sight, the work we've done for the past 2.5 years, we actually achieved 3 years of cost reduction in 2 years as we exited last year. We continue to see that moving forward. And we also have made tremendous progress in the warranty costs, i.e. the quality of our products is vastly improved and we're seeing a benefit from there. So I think that was the first part of your question. The second part was tablets, is that correct?

Kulbinder Garcha - Crédit Suisse AG, Research Division

Correct, correct. It was based on your earlier share number or your earlier number...

Jeffrey R. Clarke

I'll let you do the math. From a 0 space to $1 billion of incremental revenue with a audience that doesn't think the PC business grows that much, I think that's a reasonable number to put on the board. I can tell you the internal target's a little better than that. It would be commensurate with our Latitude share in corporate notebooks.

Robert Williams

Good. Thanks, Jeff.

Let's see, let's shift around. Shannon?

Shannon S. Cross - Cross Research LLC

A question for -- Shannon Cross, Cross Research. A question for Jeff and Brad. How are you thinking about ARM versus Intel within client and the data center? Just curious about the benefits, timing of the -- benefits and timing for those benefits. And how do you think Dell is going to leverage ARM technology across its product sets? And I'm also very curious if you've heard request from many customers for ARM-based technology within the data center at this point.

Bradley R. Anderson

Let me start here. A couple of weeks ago, we made an announcement where we are shipping what we call our copper systems, that's in our DCS, which are ARM-based. And those are not, if you will, for revenue. But those are to enable the ecosystem. We have had ARM systems in our labs since 2009. We are -- we shipped micro servers and low-power servers today. We're pretty bullish. Now the ecosystem has to build out. And so you're seeing a lot of energy in our part to build out that ecosystem. We have customers today where we are shipping systems to -- for ARM-based systems to, for them to do development work, because we do see interest. Right now, on a per core basis, the performance of ARM to, if you will, Intel-based technologies is probably about 25%. But when you see, when we get 64-bit and beyond, it's not unbelievable to see that being North of 50% here in a generation or 2. So when you're about 1/10 of the cost and a fraction of the power, it begins to open up some pretty interesting use cases, and that's where we already see early interest from our customers and we are working, put that ecosystem in place because, obviously, it's most exciting to us if it's a volume play, rather than a very point solution.

Stephen F. Schuckenbrock

I'll add to that. You asked this question last year, didn't you? It's the same one. I, again, have a similar answer. What better time to be designing products and looking at innovation than right now as you have Intel trying to figure out how to make its products more power efficient while you have ARM cores coming up and performing. So what have is probably more choice than we've ever had in the industry to drive different interpretations of form in the marketplace. Brad said we've been looking at ARM for a long time. We have. We actually, in Wyse, have ARM products shipping today. We've had ARM product in the lab for a long time. When I look at what's going to happen in the collision between 4 and 7 watts and the types of tablets and notebooks and all of the ones that we're going to be able to build over the next couple of years, it's great to have choices. And we'll have more choices over the next 5 years than we've had in the previous decade.

Robert Williams

One thing is for certain, there's never a dull moment in technology. That's for sure.

Okay. Next question. David, we'll go to the far side, over there.

Trip Chowdhry - Global Equities Research, LLC

Trip Chowdhry with Global Equities Research. I have a question on the market environment and I was wondering how you can react to that. Windows 7 launch versus Windows 8 launch. If you look at the market conditions then and now, Microsoft product is priced at $1.49; apple OS $19.90, down from $29; chrome OS is free. In that situation, how do you see this market dynamics playing out for Dell? Second, if you look at the distribution channel, we have Microsoft opening their stores, and all the computers that are sold through Microsoft stores have no blogware. That has no driver, that has been a very bad experience for the users. Now if you look at the same computers being sold at Best Buy, at another store, they are loaded with blogware and you pay $80 or so to remove them. So in the situation where you have a very pristine, very good operating system and otherwise experience out of Microsoft stores, versus other channels, and the blogware is injected into the PC, either through a distributor channel or through the OEM. So how do you plan to control the user experience on 2 fronts? Number one, the pricing dynamics I mentioned; and number two, the channel through Microsoft store, which in a way may have some sort of a conflict with other channels. Any thoughts?

Jeffrey R. Clarke

Let me see if I can wade through that one. First of all, I would answer and try to reinforce. The opportunities with Windows 8, I think, are quite attractive. When I look at the type of products, and forget timing, I look at the type of products that are always on, always connected, improved battery performance, improved overall performance, driving consistency in the management stack and security stack, particularly around our commercial products, from small devices to larger devices, it's quite promising in the ability to actually tie in to John's software stack around mobile device management, notebooks and tablets and other types of devices in the Microsoft ecosystem with Windows 8, I think is an opportunity to differentiate, particularly with our emphasis around the commercial marketplaces, I think touch is an exciting new way to use a computer. Whether that's an all-in-one large flat panel, whether that's physically how you use a tablet today, or, for that matter, the clamshell. We're going to see innovation and movement of the platform around that and the ability, actually, to drive ASPs to a certain degree. That technology costs money. If you want touch, you're going to pay for it. So I think, I look at the Windows 8 landscape as a pretty exciting opportunity. Windows 7, look, when I look at our business customers, roughly 35% of our business customers have migrated from previous versions of Windows to Windows 7, still a long way to go. Windows 7 is still the fastest ramping operating system in Microsoft's timeline. I'll let you talk to them about pricing. The pricing is a industry cost that we work through. What we do in our factories, in our loads, we actually remove the bloat, where we put on what we think customers want. So when I look at the product leaving our facilities for our business customers, our XPS product, as we look to clean up that front of screen performance and experience, we've seen a tremendous improvement in the customer experience. Part of what we're seeing is our ability to meet those customer needs and changing that. We will continue to do that.

Anybody else?

Robert Williams

Thanks, Jeff. I think that got it.

Let's see. Keith?

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

I have 2 questions, please. Going back to the tablets for a second. When you talk about $1 billion revenues versus 33 billion in clients, you're talking about 3% of your revenues are going to be driven from tablets. So I'm trying to understand what that suggests. Are you suggesting that the tablet adoption won't be prolific in corporates? Or are you going to see share? And if that mix is wrong, that is, say, tablets is a bigger number, what is the margin implication that would fall out from that? Then I have a follow-up question, please.

Jeffrey R. Clarke

Sure. I probably don't have an overly sophisticated answer for you. There's little upside in this room to commit to a revenue number on tablets that doesn't exist today in Windows 8. I think it's pretty base case. I'm certainly driving at a much greater business than that. Again, I will point back, when you look at our presence in the commercial notebook space, there's no reason to believe we can't have a similar share of commercial tablets.

Robert Williams

Your follow-up...

Jeffrey R. Clarke

I think that will be larger than $1 billion, but the $1 billion is a number on the board.

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

Okay. And if you think about what the margin profile of the vendors out there, if tablets does become a richer mix, is that neutral, negative or helpful in terms of the margin profile?

Jeffrey R. Clarke

I think margin tablets have the potential to be as strong in the commercial space as our Latitude products. When we bundle ProSupport, CFI, we put a security stack around them, we address the needs of businesses today that are partially being met in a much more comprehensive way with a full MDM stack and they get a set of services Steve is building, customers will pay for that value add, it's been our experience. There's no reason to believe that margin profile for business tablets won't be similar to a business notebook.

John A. C. Swainson

Yes. Let me reiterate that point. I mean, just take the XPS 13 as an example. Brand-new product in the marketplace. Very appealing to the customer. We announced, for the first time in the consumer space, business-class services with those -- with that launch, including ProSupport, which is an upgraded user experience and service level. We have a 70% attach rate of ProSupport on XPS 13. And so it gives you an example of the consumer devices can absolutely pull business-class services with them.

Jeffrey R. Clarke

Well, I think, then you had the Accessories business, you sell a bag with it. You sell a keyboard with it. That accessory business is a drag and a source of improved margins.

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

Well, Steve, my follow-up is actually for you in terms of mix for services. I think about 60% of services is support today. Can you talk about how you see that mix changing for your '16 profile or CY '15, FY '16, and talk about how that mix profile changes and/or any offsets or improvement of margins that you anticipate on a like-for-like to help offset some of the mix challenges?

Stephen F. Schuckenbrock

Well, you've heard the conversation relative to the growth in Brad's business as well as in Jeff's business. And not only the charts Brian put up, but their own words around that, we expect to continue to grow the support business at a premium to their hardware unit growth rates. And we think we've got upside to be able to continue to do that. We expect to grow each of the other 3 businesses faster than we grow the support business. And so the mix will shift. But as I said before, I think the profit profile of each of those businesses may not be accretive to the overall services margins because the support business is as strong as it is, but will be accretive to the overall commercial business margins.

Jeffrey R. Clarke

If you look at every successful large software business, they get, on average, 10% of their revenue from a support model. So I think you will, in addition to that, see software support being layered into that. And furthermore, if you look at some of our enterprise-class competitors, they see at least a 1-for-1 attach rate and sometimes even a 2- or 3-for-1 attach rate on enterprise services to enterprise software. And I think you're going to see some of that as well.

Stephen F. Schuckenbrock

Yes. So we have -- our support business is an incredible asset, not only is it a great business in and of itself, but it serves customers in 142 different countries in 60 different languages. And is a delivery model that is leveragable into our other services businesses. And so I think you'll see the efficiency of that model bring value outside of the core -- the historical core definition of support and deployment.

Robert Williams

Thanks, Keith.

Next question. Amit.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Amit Daryanani, RBC Capital. Just go back to the Windows 8 for a minute. Can you just talk about -- do you think the PC ecosystem in its entirety will have a scale advantage versus Apple? And if they don't, would that product, the Windows 8 tablet, be actually priced at a premium to Apple and you may run the same scenario you did with android devices? And then, secondly, maybe to ask Brad on the flash side, could you just maybe dig in a little bit more on the RNA acquisition that you guys talked about? And then broadly, when you see the flash markets play out, do you think it's going to be more of a PCI SSD-based market or more on all flash array side? And what does Dell have on each of those segments?

Jeffrey R. Clarke

Well, I think the net of your question is 365 million PCs provides a lot of scale. The PC OEMs are going to build tablets. I look at our own scale on the supply chain side. We buy 50 million screens, a lot of memory, a lot of batteries for our notebooks, it's the same stack-up. When I think about what goes into the tablet, the key is the mechanical form, the battery, the LCD stack-up. I think we're in a good position to scale with the new Windows 8 in the marketplace. You'll see a lot of momentum and excitement behind Windows 8 in touch and tablets. I've been very clear that our focus is not the consumer side of that. It is to the BYOD side of those devices that make their way in the business as well as the commercial tablet. And we'll use the scale of our company and our buy to make sure those products are very competitive.

Bradley R. Anderson

On the flash question, so RNA is a company we purchased last year. I mean, the challenge with -- the excitement we see on flash is, again, to kind of drive the full application performance. And so if you look at flash in a storage domain, you have the challenge of the interconnect to the compute. And so if you're only a storage player, it's kind of hard to go solve that challenge. When you look at flash from the compute side, you have the challenge where you have the high availability that you have by having your storage in a shared external SAN. And so it makes it very difficult to kind of solve that and really get application performance if you're only working on one side of that. So you see a lot of storage providers and even companies are trying to do all flash arrays, trying to solve that is going to be very difficult. And so, in fact, you don't see solutions that provides both the high availability as well as the performance. What RNA provides for us is a capability, since we have the compute side and the storage side, where we can then have high availability solutions. I'm very sure, you can write the cache rather than have to go complete right through that really drive through application performance, but then have all the high availability and coherency across multiple compute devices. And so we can really implement it in a fundamentally different way. Your other question is, you're going to see different implementations out there. What we're really driving is, we want the flash to be as close to the processing bus as possible because we're taking latency out of the equation. And then we also want to drive, if you will, standard form factor, because we would like see flash pervasive. Today, you're seeing flash kind of used in the 1%, 2%, 3% cases, where people are looking at performance. We're always much more excited about things that have a much more pervasive footprint. So we are also driving standard form factors around PCIe, even our Express Flash and our 12th generation servers, is like just in the hard drive. It's front accessible. It's hot pluggable. All the experiences that customers want, you're going to see those kind of implementations. And then on the storage side, I think there's going to be a couple of different architectures out there. You're going to see it -- you're going to see us implement it architecturally such that when people look at their data, typically, only about 15% of the data that they're utilizing is what is called hot data. Data that's they're constantly accessing. The rest is cold. And some of it is never accessed. We want to implement it in a cost-effective way where flash can be a viable solution for that 15% data tier to drive, again, performance pervasively.

Robert Williams

Thanks, Brad.

Okay. Let's see, David. Let's have Peter?

Peter Misek - Jefferies & Company, Inc., Research Division

Peter Misek, Jefferies. Just on the cloud offering. You guys have a big presence in the SMB market, true leadership there. But we're starting to see new entrants for cloud offerings, telcos, software vendors, et cetera. Can you help us understand the cloud strategy there, both on-premise, private, public? And really, how you see that evolving in differentiated versus those competitors?

Bradley R. Anderson

Yes. First, we absolutely do have a great brand and history with the SMB market and the media market that goes up fairly sizably. When you look at the cloud offerings, being able to bring the technology core to the private clouds inside of their data centers, as we're doing with 3-2-1, is a phenomenal offering. And we can wrap that offering with a remote managed experience so that we actually manage that infrastructure as a private cloud on their behalf. Second is, is you look at the public cloud offerings, there's going to be -- this is a brand-new, relatively immature space, and there should be no surprise with all of the hype around it that there's a lot of entrants in that space. I do think one of the things that is occurring with small, medium businesses is globalization. I mean, they actually, even though they're a small business, they do work in multiple different cities, multiple different countries, and they're beginning to experience the complexities associated with, how do I manage my IT infrastructure in all of the places that I want to do business? And I think a global company like Dell with the core technology capability that can support them both on-premise, in our data centers, both public and private, does bring a certain differentiation to them. You wrap that with the support expense that is ranked #1 in that segment, historically, across our hardware business and will be extended across our cloud business, I think that's viable. We will continue to pursue, as John alluded before, on what types of applications, both our own IP, as well as partners' IP, best serve that core market of ours. And so you will see us do things along that continuum as well. I think that's kind of just a net summary. I will tell you that the offering we have out in the marketplace today is off to a good start with very little marketing and very little kind of sales effort against it up to this point. We're really just kind of -- just put it out into the marketplace. It's a sandbox, public cloud, $999, a single SKU, get all the server storage, network capability. Where Gratifon is a good example, using that capability, launching applications in one day. And we're seeing that kind of service experience really resonating quite well. And we're well over 100 customers. And we will soon get an online experience in front of that, where customers can self-provision as well as self-manage all that infrastructure.

Robert Williams

Thank you. All right. Thanks, Peter.

Toni?

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

Toni Sacconaghi from Sanford Bernstein. Jeff, I have one for you; and Brad, one for you. Jeff, maybe you could first just clarify in your forecast of 2% revenue growth for the client business. What do you see in for ASPs on a go-forward basis? And then more broadly, if we take a step back, gross margins for several of the PC vendors, including you, have gone up over the last couple of years. And the competitive environment, I think, from a pricing perspective has been pretty benign. I think the component environment has been extremely favorable. We saw some reversal of that this past quarter, you talked about incremental price competition on the earnings call. You've talked about DRAM likely going up rather than falling at 20%, 30%, 40% rates. You see it potentially being flat to up over the course of this year. So if you think about that as the 5-plus percent operating margin that you've kind of got in PCs over the last couple of years, and that you think you can hold, what makes you confident that we didn't go through a period of sort of unusually favorable circumstances and that the real margin, base case operating margin, is more like 3% or 4%. And the incremental price competition plus less favorable components are really going to take you back down to Earth on that?

Jeffrey R. Clarke

Fair question. We've -- the first part of your question is, we modeled the historical ASP declines in both notebooks, commercial and consumer, and the geographic mix of where the growth comes from in our economic model. So when you look at the history, you apply it on a go-forward basis, there are some pretty standard curves that apply. So the revenue that we talked about, which, by the way, on the PC side, and the 2% case, was 0 PC revenue growth. So it's really staying up and treading water, if you will, at the current revenue projection. I think the real question you asked is, can we sustain those margins? Is 5% really the case? We all know component costs ebb and flow, you hit it right, memory prices, and LCD prices for that matter, are going up, although they're being deferred or delayed as we see the implications of what's happening in the marketplace. We see stabilization around the hard drive pricing back to normal type of trajectory. And we see structural cost commodities coming down as well. But those are all the ebbs and flows of the cost of goods sold and the materials that we use. It's why I really highlighted, Toni, the $1 billion that we have to go take out in running the business. We have to go continue to find to compete in what will be a competitive marketplace, another $1 billion on top of all the differences in the component cost. I look at what we can do in the supply chain, what we can do in how we reach our customers on the sales and marketing side -- excuse me, the sales and marketing side, the G&A side, some fundamental ways to run the business different. I'm optimistic that we have line of sight to maintain that 5% operating income target taking out the structural cost and probably one of the more optimistic ones on the PC market in general, it's going to grow. Clearly, where it's growing is in emerging markets, which put a compression on margins and ASPs. That said, even in our Q1 performance, I believe, the team called out, our commercial products performed quite well. Our commercial-branded client products continue to perform well in the industry. And I think Michael mentioned it, or maybe it was Steve mentioned it earlier, even things like our ProSupport attach rate continues to improve, or increase. Our Accessories business around our commercial notebooks and desktops continues to grow. So those are great offsets to what's happening in the marketplace. So we'll continue to grow and drive that. I think the plan that I laid out around category champions, branded product for our Accessories businesses is an opportunity and to get a greater share of wallet. So I look at the ecosystem, by and large, is the notebook and the desktop gives us an opportunity to sell a display, a mouse, a bag, a battery upgrade, which we still see as offsets to some of the changes or challenges in the marketplace. Does that help?

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

Brad, if I could just ask you a question. If I just try and do the reality check on the enterprise growth rate going forward, I think a couple of analyst days, you had put up a forecast that was more aggressive for the enterprise growth, it had an implied CAGR of high-teens. If I look at the market data you put up, servers growth at 3%, according to the market data you put up, storage growth at 5%. I look at your last 5 years in enterprise and you've only grew about 8%, one out of the last 5 years. So when I put all those things together, again, you sort of ask the reality check question of is 10% really a realistic goal? And how do you get comfort with that in light of all the things that I just mentioned?

Bradley R. Anderson

Yes. I mean, I think a couple of things. One is, let's kind of go through the LOBs. So servers, we are planning to grow at a multiple of the market. We think to achieve that, we've got to participate in these broader initiatives. We've got to participate much greater in a set of workloads that we have not in the past. I think things like BI, again, will be hugely important. We are very optimistic with VDI, the Wyse Technology. If the customer is relying on capability, we win those deals almost every time. And in -- historically, those are really rich deals, as Tarkan can tell, those were not Dell deals. And so we see a big upside there in those opportunities. We have not participated in blades or converged broad. We now have gone from not participating to what I think we have a highly differentiated offering, the only one in the market, it also includes storage in that. And with John coming aboard, I just see that continuing to go better. On storage, we've been in the business of purging. The growth rates are suppressed by the fact that we just jettisoned about $1.2 billion of EMC revenue. And so if you look at the storage growth rates minus EMC, we're consistently up in the mid-20% growth rates. And so -- and which is accretive in the mid-market. Obviously, EMC is growing there, but the overall market, that is a multiple, almost 2x what the storage mid-market rate. And then if you look on networking, we can just almost ignore the market growth rate because our position is so small. Last quarter alone, our power connect, which is our campus branch, grew 42% year-over-year. Our Force10 grew 69% sequentially quarter-over-quarter. We don't have a year-over-year to compare within Dell. And so we see way above market growth rate opportunities on networking, significantly above on storage, and then we think we can do better than base market growth rate because most of the base market has ASPs declining and our early data already on the 12th generation with Romley, we're not seeing that.

Robert Williams

Thanks, Toni.

Let's take one more question before we go to break here. Sure.

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Jayson Noland. Just a follow-up there, Brad, in enterprise. If -- you mentioned software-defined networking a few times. If you can talk about that opportunity, the investment Dell can make, and do you see that as something that could be disruptive in the medium-term?

Bradley R. Anderson

Well, the -- so what software-defined network is, for those -- and it goes by a lot of different names. Some of it, you'll hear as software-defined network. Others, you'll hear about it as OpenFlow and the initiatives around that. You'll also hear it as a programmable network. And then the excitement about that is networking is largely physical. And so, today, workloads are increasingly virtual. And people want to be able to move workloads. And they don't want to have to do anything to physically remap their network to having -- connecting the workload with the data. And so there are technologies out there that, basically, virtualizes the network. And so that's a huge game changer. It allows you to manage it very differently. In fact, it separates the data plane from the management plane, so that the data plane is really easy and that management is much more simpler and can be managed more centrally rather than at every individual node. It's very early. But the exciting thing is you look at, again, the hyper-scales, which are really kind of redefining what data centers look like, they are already implementing this to degrees. They're re-architecting the physical topology of their network. But the way they manage it is fundamentally differently. We are investing -- we're a member of the OpenFlow Forum. We are participating in that. We are designing our designs kind of looking forward, the Z9000 distributed core is a good example of it. We are doing things that make things OpenFlow enabled. There's an ecosystem out there as well. There's companies like Nicira and Big Switch and others. We are investing to see more of those kind of companies come forth because we are absolutely convinced that this transformation has to happen because it's absolutely fundamental for the progress, i.e. virtualized data center, a cloud data center requires for those models. And it won't happen overnight because -- but I think there's a certain inevitability about this because there's just too much energy around virtualizing everything else that I don't think the network can hang back.

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

You mentioned a couple of startups there. Do you Dell partnering with companies? Or do you want own IP?

Bradley R. Anderson

Well, we want to partner here because the thing here is, we want as broad and rich ecosystem supporting this as possible. We want the critical mass to shift to get this trend going -- moving more quickly. At some point, having IP will be important. But the biggest thing here is getting the shift to occur.

Robert Williams

Thanks, Jayson. Brad, Steve, John, Jeff. Thank you very much.

We're going to take a break and we'll be back in about 15 minutes.

[Break]

[Presentation]

Operator

Ladies and gentlemen, please welcome, President, Chief Commercial Officer, Steve Felice.

Stephen J. Felice

Good morning. I have the privilege of running this last session. We changed the name of it. It's now called, "Steve is going to talk about this." I hope I'll get to a lot of your questions.

I'm going to start off by addressing a few of the questions that I've been getting, the primary questions over the last couple of months. And then I'm going to have some colleagues join me. We're going to talk about some of the growth opportunities that are facing us and where we're really focusing.

So first, let's talk about the first question I keep getting, which is, okay, you've been in this role now a few months and you're out in the field, what are you hearing from customers? What are you hearing about how it relates to Dell's strategy? And I have had a great opportunity to visit many, many customers, thousands, literally, around the world. And I've had some great interactions with them. And I feel really good about how our strategy resonates with these customers.

This whole concept of the scalable design point is a big deal because it really does relate to efficiency, effectiveness, agility. And especially in this economic market, this is a time where customers really want to hear that story. And there was a question earlier that related to, well, which customers that resonate with? Well, the ones that resonates with best are the ones that are open to change.

So it's true that when we go into a customer that's got a very entrenched position in deep proprietary architectures and they're not interested in moving, it's a tough sale. But once the crack is set, once there's an opening about, maybe I should do things a little bit differently, maybe I should embrace open systems more, this is wide open territory for us.

And a lot of the products that we've designed and the acquisitions that we've made really epitomize this concept of scaling. Because I think some people have the impression that, well, these offerings are just set for mid-market. But we have plenty of cases where these products are moving across the customer set.

And I'm meeting with customers that are Fortune 500s, they're universities, they're hospitals, they're small businesses. And we have lots of examples. For example, let's talk about KACE. KACE originally was built to focus on a mid-market set of customers. And certainly, that was the predominance of the revenue stream. But now, we have Virginia Community College with 30,000 nodes. We have NASA with 100,000 nodes using KACE for systems management. Boomi, originally designed at the mid-market, and that's where most of the revenue was from. Now we're using it inside of Dell to connect our applications as we migrate into more cloud-based applications ourselves. And we have Oneworld Alliance as a customer, the largest affiliation of reservation systems using Boomi to connect them.

We talk about building block servers and we talk about the scale of 3-2-1 for the Medium business. And then we also talked about building the most sophisticated data centers for eBay using building blocks servers, now running all their transactions.

So I think of the scalable design point as aspirational for the larger enterprises. This is where they want to go. Their biggest question is, how do I get there? And the services that we have now is a great addition to the portfolio. Because you think about apps modernization, for example, this is a way to help them get there. So the strategy resonates. We feel very good about it, we're not changing that. We're committed to it. And all I'm hearing in the last few months is a validation of that from customers.

Now, related to that and the second question I get, and probably most questions I got last night have to do with, okay, well then, what's the issue with go-to-market? Why did we say we had sales execution issues? And so I want to talk about that. And I'll say upfront right way, it's difficult have that conversation, where you're trying not to share what I would call really sensitive, competitive information. But we're trying to be as transparent as possible about this.

So I think I'll talk to you about this the way I've been talking in town halls over the last few months. And I've had lots of them, as we get this workforce positioned for high growth. What we talked about is the tremendous change that's occurred over this company over the past few years.

We talked about the fact that about 5 years ago, 2/3 of activity, 2/3 of revenue was a pure PC. And now several years later, with a much larger revenue base, 50% of this revenue is not a PC. It's servers, it's networking, it's storage, it's systems management, it's security and all those services that wrap around it. That's a major change for our people. Customers value this. We've seen margins go up substantially over the last couple of years, it resonates well. But it's a difficult selling motion for our employees.

On top of that, we've changed the organization several times as we've adopted and moved to the new strategy. And I'll talk about that migration in a little bit. But we've had several organization changes, one very significant one in the beginning of this year.

And then on top of that, we've acquired a lot of businesses. And we've increased the portfolio of what we sell dramatically. Now our salespeople love that. They love being able to have a broader conversation with the customer. But when you put all these things together, it's pretty complex. And we implement this in a pretty accelerated fashion and some things have not been optimized. And I'd say one of the biggest challenges about doing it in a -- right now, is that you -- it's not like you have economic tailwinds, so you also have to be very precise in what you're doing. Because if you miss the mark on anything, there's not a lot of tailwinds in market growth to kind of make up for some of those errors.

So we uncovered several things over this past quarter that we're rapidly fixing. And I think everyone is aligned on what we determined and how to fix it. For example, as we were mobilizing the workforce to address a lot of the customer demand in the pipeline, we found ourselves allocating too much resource to too few of the opportunities in the pipeline.

In other words, there's a lot of white space that we weren't properly covering. So we left the acquisition of new customers uncovered in too much of a significant way, both in terms of specific customer sets and certain geographies.

We also created a number of specialists. As you saw from Michael's discussion, 6,600 specialists. Well, we're learning about how to best utilize them. And the best way I can describe this is we had found some cases where our sales calls with the customer were involving way too many resources. It's kind of a natural thing. You have networking, you have storage, you have services, you have compute and a lot of the specialists were basically directed to participate in all these opportunities. Well, we learned that it's not necessary to have everyone involved in every opportunity. There are many cases where a storage specialist is perfectly able to cover the networking needs so you don't also need to bring the networking specialist in.

So we found a lot of that. And once again, that resulted in inefficiency in terms of too many people involved in opportunities.

And the last thing we determined was that as we've acquired all these companies, we've been ramping them very quickly and very successfully, as Brian pointed out, achieving the internal rate of return that we're looking for. But we found ourselves focusing too much separately on the individual pipelines of these businesses rather than optimizing the ability to wrap them around our anchor products.

Now the end result of all this is a delayed sales cycle. Because as I said in the earnings call, our pipelines are healthy, and they are. This is a question of how do you wrap your arms around getting out to all of them in an efficient and effective way and getting them close. So we've been taking a lot of action here. We've moved hundreds of resources already to different geographies, different markets, different customer sets. We have more to do there. We probably have to reposition a couple thousand people out of this 20,000 that we've talked about. But we're well on our way there. We've simplified the messaging quite a bit.

We've really done a very effective job of taking on too many messages, boiling them down into a core set of key messages and getting them out to our sales force. And we've also spent a lot of time on these, what I'll call them, anchor bundles. So taking the anchor products of Dell, the core products of Dell, and wrapping the new acquisitions and the new services around them so that you can have a more comprehensive conversation with the customer. All of these things are in full flight. They're going well. I believe we'll continue to see progress. I got a lot of questions on how long is this going to take, and I believe it'll take the full year to get all this in place, but it's not a back-ended thing. We're making progress as each week and each month goes by.

Now let me go to the third topic, which is to talk about, tell us more about this go-to-market organization that we've moved to. And I think it's good to put this in perspective of the several changes we've made over the last 3 or 4 years.

For the longest time in the company's history, we were managing the business on more of a regional, classic regional basis with the Americas and Europe and Asia. And then a few years ago, we went to these global organizations around major customer sets, consumers, Small, Medium business, Public, Large Enterprise. Now I'd like to think of it as getting to the best of both worlds. The regional organizations give you a much better insight on how to compete locally.

The customer segment structure has really been fundamental to us developing a more vertical approach to the business. And I think it's really thrown out great benefits. Some of that you heard yesterday when you heard Frank Muehleman talk about how we've applied technology to healthcare or education or government. Or Bill Rodrigues in his session with the Services team, talking about how to develop specific solutions around finance, for example. And then, of course, you've heard repeatedly about how we've developed specific solutions for SMBs. And over the years since forming that structure, we learned what a powerful representation we had with SMBs.

So I think that's been really transformational for us. Now we want the best of both worlds. We have broadened our LOBs, we now have 4 of them with Enterprise and software and Services and end-user computing. We wanted to simplify how those 4 organizations interact with go-to-market. In other words, don't have them have to negotiate separately with different go-to-market organizations, it becomes extremely complex. So we created one go-to-market organization, integrated all the marketing capabilities, and now we're still focused on those 4 customer segments, but within a country focus.

So within China, we look at consumers, Small, Medium business, Public, Large Enterprise, within the U.S., within Germany, within France. This is where the competition really happens. This is where you can vary the offerings to fit the competitive situation. We've tested this when we did the original combination of consumer and SMB, and it had great benefits. And so you will see us continue to roll in this method. And what that means is, we have what we refer to as country playbooks, that basically look at these 4 LOB offerings, the 4 types of customer sets, and what's the best way to optimize our performance there.

That enables us to focus on these growth initiatives that we're going to start moving into this conversation on. We want to talk about 3 of them. I'm going to start with the first one, which has to do with emerging countries. And then we'll invite some colleagues up to talk about Medium business, mid-market and Enterprise Solutions.

Now Dell has been investing in emerging countries for quite some time. Really, when I look back, I know Michael was off to Japan, I think, within a year of forming the company. But I think about over the last 10 years is when we really intensified our focus on emerging countries.

And it's really showed in our results. It's now 28% of our revenue. Last year, we had 12% growth in the emerging countries, and specifically in BRIC, 15% growth. You can see that Brazil, China and India now comprise nearly $9 billion of business out of our total portfolio.

But what's really important is that our brand recognition in the emerging countries is outstanding. The other benefits we have about emerging countries is they're not laden with legacy architectures. These are companies that are starting from scratch and they're starting with new technology, banks in China that start with x86 servers. So when we go into these environments and we talk about open standards and scalable computing, it resonates really well. That's why IDC reported last quarter that in Brazil, we're #1 in servers across every segment, whether it's SMB or Public or Large Enterprise. And we have a terrific position in a number of countries around the world. We're #1 or #2 in India, in China, in Brazil, and there's other countries that we're starting to focus on. For example, we're now #1 in Poland, and this is a country that is starting to have a sizable spend on IT and a sizable GDP growth. So we've now increased our focus to another 10 countries that we're applying these same principles to.

And when I talk about these principles, here's a couple of examples of what it takes to be successful here. This is not an overnight, put a sales force in and they just start selling Dell's products. If you really want to have good profitable growth in these countries, it's a combination of adding capability, recognizing the local needs of the market, building a strong set of government relations, adding infrastructure, and even in some cases, really, focusing your marketing campaigns.

India's a great example where it was the beginning of the whole take-your-own-path campaign that turned into a global campaign aimed at SMBs. It started in India. So these investments take time, but we know they work. They've paid off for us. There's an inflection point where you might go for 4, 5 years of this investment and steady growth, and then all of a sudden, the growth takes off. And we saw that in India and we saw that in China.

So emerging countries, as Jeff pointed out, is really going to be the fastest area of growth. We keep talking about the percentage of growth, but in absolute values, it's going to dwarf the developed part of the world. The middle class alone will be sizably bigger than the middle class within the developed world. And the growth rates are really stunning when you look forward. And that's why Jeff is so optimistic about the PC business, as am I, because the adoption rates are low and this is a natural progression for them. So we see great opportunity there.

But the other point I will make is that these countries are growing in a pretty sophisticated manner, and we're seeing a lot of storage and server and networking growth in these markets as well.

And now, we want to talk about these other 2 areas of growth. So I'm going to invite Cheryl Cook and Kim Hibler up to the stage to join me.

Okay. So for those of you who have not met Cheryl or Kim, Kim runs our North America SMB business and Cheryl is the global leader of our Enterprise Solutions. So she is the one that's leading the Enterprise sales with all the specialists. So you may have some -- a lot of questions when we get to the Q&A about that.

But let's starts with Kim and talk about SMB more. And Kim, what I'd really like you to talk more about is this whole mid-market focus, scalable design point. Talk about how that resonates with these customers.

Kim Hibler

I'd be happy to. It's estimated that between 60% and 80% of all the jobs -- new jobs created, come from Small and Medium businesses. And so one of the things we've really found about focusing on Small and Medium businesses is that trusted advisor piece is really important. So many of the companies start off small and then grow. And it's great for us from the standpoint of the scalable approach that we have with them. We really start off focusing as a trusted advisor. And you've heard today about resources that go out and talk to the customers. We have AEs that support their -- account executives that support these customers, and they build long-term relationships with the customers.

And what that means for the customer, overall, is that they really get a chance to interface with resources at Dell, but really understand some of the industry solutions that can help them grow. I think one of the things that resonates most, Steve, with Small and Medium business customers, is that it's really focused on implementing to their needs and their solutions based on simplicity, and also having open architecture, different capabilities and offerings for them.

One of the things that we're also seeing is that it's really important for us to help them understand how these relationships can grow their businesses.

Stephen J. Felice

Yes. I think the fact that we have a direct relationship with these customers is a real form of differentiation. So we have a very healthy channel, but there are many SMBs that love having that personal connection with the manufacturer.

Why don't we talk about narrowing the focus here to a subsegment of SMBs. We've been very, very active with entrepreneurs. In fact, just a few days from now, we'll be in India with 200 of the leading women entrepreneurs at the Dell Women's Entrepreneurial Network Forum. Talk about why we're focused on entrepreneurs specifically.

Kim Hibler

I'm happy to. I love working with entrepreneurs. And it's a real simple conversation to start working with our entrepreneurs because it's in our DNA, and we believe that we can really help them understand. And as you heard in earlier presentations, because we utilize the capabilities and technologies that we offer, it's a really great conversation to have with them.

It's estimated that about 30% of all entrepreneurs start their businesses with credit cards. And so we've developed some solutions around financing that can help them get started very simply around -- announcement we had last week around innovation credit line for customers, $100 million invested into entrepreneurs. We also do a number of things around leasing to help entrepreneurs get started.

But we really believe that the entrepreneurs are leading in the Small Medium businesses and will be the gazelles that will help us grow overall. And so not only do we have the Dell Women's Entrepreneur Network or the Women Network. And Last night here in Austin, we awarded our social innovation challenge to students, that started off with over 1,700 students. And then last night was a grand award ceremony where we recognized 5 student teams that are doing social innovation. And now they'll work will Dell really closely. And we'll partner with them through both technologies, through an award for their project, but also through mentorship.

We find that entrepreneurs are very loyal. And they grow in to be Small and Medium businesses that really stick with us and understand our technologies.

Stephen J. Felice

Yes, when you dissect the Small and Medium business, you find that the vast majority of employment increase comes from the entrepreneurs subsegment of this. So as we increase that loyalty, we just grow right with them.

Kim Hibler

Yes. And they have a really strong network with one another. And so they share that amongst their entrepreneur networks also.

Stephen J. Felice

Yes. I've been amazed by that because we have a lot of events with entrepreneurs and it's amazing who they attract. And they become sort of our best references. So this has been a great movement for us.

Let's talk a little bit more about solutions and how solutions play within SMB.

Kim Hibler

The solutions space, in SMB, it's really a lot of fun. I have the opportunity to engage the sales organizations with customers all over. And one of the things I find is that the customers are really interested in the solutions. We had some exceptional growth last year in both Services and our Enterprise organizations.

But one of the things that also happens is the customers are very quick to adopt the new technologies. So we talk a lot about Wise and the brand new implementation of Wise. We start of trying to get the teams going with this and they grab onto it really quickly. And now it's getting to be where we get orders very quickly, as soon after we announce integrations.

But back to kind of some examples around our solutions offerings for customers. Because we have this trusted advisor approach with customers, it's really easy for us to have conversations with them. And so we started a program called Pre-Flight when we were focused on EqualLogic and how we can improve the customer relationship. And by offering Pre-Flight to a customer, meaning we would pick up the phone, we would have a conversation with them well before we even deployed anything and as their equipment was getting ready to arrive, and we were able to improve the customer's experience greatly.

We've also found that where we have Services people engaged with the team, the Net Promoter Score of customer experience goes up 15%.

And then finally, we found that where we have that relationship with the C-level executives in the accounts, our share of wallet significantly increases. So it goes back to, once again, just having that trusted advisor relationship with our customers.

Stephen J. Felice

Yes. The growth in solutions within SMB has been terrific. Now let's -- Cheryl, let's expand this solutions discussion and talk about how Enterprise Solutions are doing overall in the business.

Cheryl Cook

Yes, absolutely. Thank you. Well, as Steve commented, and we said earlier, we're really building out our capabilities not just from our portfolio and the assets and the IP that we're developing and acquiring, but also in our go-to-market capabilities around just making sure that we put the right expertise and the best acumen in front of our customers so that we can help solve their business problems with our increasingly expanded portfolio.

So we've talked about sales specialization, and Brad spoke about some of our new leading-edge servers and our 12G launch. But we've really had a phenomenal time-to-market advantage around bringing that new capability to market. And what we've done is been able to position some of the new capabilities with the 10Gbe embedded delivery of the 12G server around our 3-2-1 sales motion. I think Steve spoke to it, or Michael did earlier, around where we can broaden the opportunity to show the breadth of our capabilities in solving and solution not just with servers, but inclusive of switches, as well as the storage to do that.

We have our vStart initiatives, which is really where we're bringing to bear the tried and true tested and certified capabilities of really implementing virtualized data centers and virtualized workloads that we can prove to a customer, has already been tested through the hundreds of thousands of deployments that we've done. And we can within a rack, really put server, storage and networking, as well as the management software there, and can show small, medium and large implementations of where we've done virtualized workloads to really satisfy their needs.

And then as we really look into our storage specialists and capabilities, we are absolutely competing with some standalone pure-play providers out there. But we're really bringing a position of strength from our EqualLogic market-leading position we have there, and showing the innovation in the way we're approaching storage and some of the capabilities we have with our fluid data architecture, the dynamic tiering capability and thin-provisioning.

And we really fundamentally think that we're showing a leading position around helping companies realize their virtualized aspirations. And these storage specialists can really team with our generalists and account executives to help broaden the overall data center solution and architecture, but also if it grows into a data backup and recovery architecture, where they need the expertise and the talent to really help us position that more effectively.

And then we also have networking. Some of these resources certainly have come to us through acquisition, but we've also been hiring and building out the capability from within the industry to really go drive the capability to broaden the offering for our customers as we do that.

This week, I know Brad spoke to, and I was also at our Storage Forum in Boston on Monday. And it was a fabulous example of really bringing the converged infrastructure, which we know is a growing trend of market. We launched our first ever storage blade at that event, but really had the opportunity to speak to both customers and partners around the implementation of where are we now, within an enclosure and a blade chassis, have compute, storage and networking, all managed and co-residing in this implementation.

And we spoke about the channel and how the channel helps us with go-to-market as well. We have a pretty broad ecosystem of some storage partners that came to us through our Compellent and EqualLogic acquisition. But even at that event, when I addressed the room, most of the audience, we had about 350 channel partners present at this forum, 75% of those partners in that room were already certified on our server capabilities, 48% of those in that room were certified in our systems management offerings and capabilities, and 40% of that room were also cross-certified in our networking capabilities.

So we're finding that the ecosystem of our partners are really general infrastructure providers anyway. They can add tremendous value to us as we team with both our specialists that we're bringing to market on a direct basis, as well as the channel partners.

Stephen J. Felice

So related to all this, and we get a lot of questions, I got some even at the break about, how do we manage all this? Talk a little bit about the governance process, the management system.

Cheryl Cook

Right. So Steve commented about just the complexity and how we're trying to keep simplification while we're balancing the right level of expertise and acumen really at the right opportunity. And what we have found is that we're driving better governance around just pipeline opportunities, both in net new customers, how do we ensure that we have some of our specialists driving accretive or white space coverage, as well as just training with our generalists on how to qualify better so that we don't necessarily have to have a single expert or a technical resource from our specialist community on every opportunity.

So we've got cross domain, if you will, or solution architects deployed in the field that can speak to servers, storage, as well as networking. And we're running just our implementation from a business management system around pipeline inspection. We're driving pipeline metrics and measures, if you will, across both participation of our specialists, but as well as our core generalist team. We're also driving net new buyers and net new customer acquisition, and really driving our messaging and our sales motions to be more simple.

So we're looking at some of our specialists and how to broaden the aperture of the resources that they're positioning. For example, I think we gave in our storage sales force, you can't really configure a nice complex SAN storage deployment without configuring the switch, and we don't need to bring the bare networking resources to help us do that. So we're absolutely driving that, as well as kind of the converged infrastructure motion that really touches server, storage and networking as well.

Stephen J. Felice

Yes. I think the most important thing, and Cheryl, you've added a lot to this since coming on in the beginning of this quarter into this role, is putting this in a standardized way globally, rather than having too many different ways of measuring this effectiveness. So I think that's helping us sort through some of the discussion points we talked about in this transformation and how to get more efficient.

Cheryl Cook

Well, we've had a lot of learning. And you spoke to kind of we're in a common global coverage deployment right now. So we can look at what's working and best practices for us in either Public sector or in Small and Medium Business, and leveraging those capabilities on where we've competed most effectively against the competition, and really deploy and implement those globally.

So we are seeing the leverage, we are able to really capitalize on the best practice sharing where we are seeing and implemented more consistently.

Stephen J. Felice

That's great. So one last thing. Why don't you talk about broader solutions. Kim talked about the SMB-oriented solutions. Talk about how some of these solutions are scaling up to larger customers.

Cheryl Cook

Yes, well, this is -- I'll just share a success story with you. And I know there was a video run at the beginning of this segment on really where we're bringing to life kind of, I think, the best expression of where we're vertically focused, and we have resources and expertise that are really trying to be as intimately aware and versed in our customers' verticals, as well as just the technical capabilities and expertise that we have.

And this example is really TGen, who does just some phenomenal work and research around pediatric cancer. And as the video showed, this Neuroblastoma is just a life-threatening, critical illness that is really devastating to these young children. And what we've been able to do is really just collaborate and innovate with TGen and with our customers on how we could really bring to bear some of the capabilities and expertise, both on the technical advances and performance that our 12G servers have brought to bear with its improvements in speed, both from the chip, but also from the implementation of high-performance clusters. We brought our high-performance computing experts. So we have some phenomenal Ph.D. capability around the certain kind of complex solutions to bear to really drive that, an implementation that's leveraging on-premise, high-performance computing, as well as cloud capabilities from a Dell cloud.

And what we've been able to really deliver is when our high-performance computing experts, who happen to be Ph.D.s and microbiologists, as well as HPC experts teaming with the researchers and scientists here, we've been able to take what once was a 12- to 14-day process on diagnosing the appropriate treatment for these poor children who are suffering from this cancer, down to about a 5-day process. And we've achieved that through a combination of the technical advances and performance, as I said, really optimized tuning of the application environment, and teaming with partners that really are bringing new search capabilities to bear.

So we've taken that to about a 5-day process where there's a day of prep for the test for the material. There's under a day now in sequencing the genome. And we're really probably on the forefront of what's the first implementation of personalized genome trial right now. So under a day in doing the sequencing of the genome, there's a day involved of kind of pulling it together, and then they convene the tumor board. And because it's now shared and collaborative in a cloud, you can actually get access of 12 to 15 different doctors, different physicians, all bringing their best capabilities and brain power to bear to arrive at what's the best prescribed treatment for these children.

So just a phenomenal example of just marrying expertise of vertical capabilities, both high-performance computing expertise and, certainly, the technology, to be able to deliver revolutionary capabilities and offer just genuine capabilities. So these poor children, every minute matters in their diagnosis. So to be able to carve out that kind of time to treatment is really, really meaningful.

So this is a healthcare example in life sciences on where we've really teamed both with our experts that understand that vertical, but we also are really seeing our high-performance computing business and presence just really grow. We were just recognized, we just clipped up to #2 in the market, just behind IBM, as measured by number of nodes deployed in HPC. And we're doing phenomenal work, like right here in Austin at University of Texas Advanced Computing Research Center. TAC is right here. Also with the federal government around National Center for Atmospheric Research at UC, Boulder. Certainly, this one, Rolls-Royce is a manufacturing example. And then we're also involved in collaborating with oil and gas.

So we're seeing a lot of opportunities that really are lending itself to the high-performance capabilities of not just the technology and the server, but also our researchers to help work it.

Stephen J. Felice

Yes. And this also ends up being a great story inside the company because our employees really rally around taking the solutions and applying them to such really important social issues. So this healthcare growth for us has really been a positive morale booster for the entire company.

So hopefully, you got a sense for a few things. One is we're very comfortable with the new go-to-market organization. We think it's the right one to match with the lines of business. We think we've diagnosed the issues and are putting in place the fixes to get more efficient in managing through the pipeline and getting it closed. And you've heard about 3 major areas of growth that we're very excited about between emerging markets, mid-market expansion and Enterprise Solutions.

So with that, I'll invite Rob up, and we'll go to questions.

Robert Williams

Great. Thanks, guys. That was really helpful.

All right. Let's go ahead and get started. Brian [ph]?

Unknown Analyst

Steve, just talk about how the account executives and specialists are compensated, and whether you're planning any changes there. And so in light of the sales execution issues, and how does the timing of fixing this affect the timing of Enterprise-focused acquisitions for the balance of the year?

Stephen J. Felice

Our people are generally compensated on a combination of revenue and margin, and then special incentives for strategic products. The only thing I would say about the future changes is we always look to simplify. I think we just learn over time that the more complex you make it, the less benefit you get out of it. So nothing substantial, but we'll just keep looking to make it as simple to our -- for our people to understand as possible.

Robert Williams

Next question. Go over here.

Robert Cihra - Evercore Partners Inc., Research Division

Rob Cihra, Evercore Partners. Two questions, I guess. One, you showed the slide on emerging markets growth and, obviously, you're targeting emerging markets, like everyone, which is smart, obviously. But with emerging markets come stronger emerging market competitors who seem to be willing to use price to a greater degree, growing faster than you but maybe targeting half your margins. So do you feel like you can continue to focus on profit share versus share? And then, separately -- well, I have one follow-up.

Stephen J. Felice

Well, the advantage, I think, we have in emerging markets is the broadness of our portfolio. So if this were just a PC discussion, then yes, we would probably face the similar dynamics. But we can go way beyond that. Brazil is a great example where we have this #1 position in servers. India is another terrific example where we invested in services and our brand, and really became known as a top-tier brand. And customers, even in emerging countries, are willing to pay a premium for a top-tier brand. So there are ways to differentiate yourself. And we've been pretty disciplined in saying, we're not going to get caught up into a unit share battle, that this is more about revenue growth and profit growth. And we've seen that over the years in the emerging countries. We've had very good profitable growth, for example, over the years in China and throughout Asia and in Latin America. And now, even in Eastern Europe, as we're growing there, we're seeing profitable growth.

Robert Williams

Yes, okay.

Sorry. You had a follow-up, Rob?

Robert Cihra - Evercore Partners Inc., Research Division

Yes, if that's all right. Just separate to that, just the big theme on the Enterprise side is converged systems. And I'm curious, I guess, if you look at what Dell is doing now from a positive standpoint in converged systems, going back a couple of years ago when the topic came up with Cisco, you launched UCS and that sort of thing, your view back then was sort of more skeptical. So I guess, I'm just curious what you're doing now that's positive versus what you thought was more of a proprietary throwback a couple of years ago.

Stephen J. Felice

You want to take that one, Cheryl?

Robert Cihra - Evercore Partners Inc., Research Division

And I guess it's kind of, is it really converged or is it bundled or is it both?

Cheryl Cook

Yes. Well, when you talk about Cisco and what they've done, you have to complement them on really being focused around the UCS mission, which is selling a proposition really around management. So they're talking about how to manage that interface. When you really look at what we demonstrated in Boston with a single enclosure to be able to simplify both the management and serviceability, and how dense we've been able to bring that implementation, I think it's going to have broad applicability for multiple workloads on how to really go drive that virtualized expression in the data centers. So I think the trend is certainly continuing. Customers are looking for ways to simplify the operation, as well as management of it. And we're continued to be committed to an open platform and an open set of APIs and open standard software to be able to go drive that. And I think we're going to continue to be able to capitalize on that.

Stephen J. Felice

This is why the management software layer is so important in this discussion and why John's role in the company is important, because it's a great conversation to have with a customer that's using UCS. And I remember just having one not too long ago, just a few weeks ago, where they're talking about considering it and then we start throwing out, well, here's the alternative in an open system. So you could have our infrastructure perform the same capability, but now we're talking about 1/6 the footprint, 1/4 the power consumption and 1/5 the price. Well, if you're talking to the right leaders in the company, that perks them up. In this case, they're coming to visit now and they put their other decision on hold. So as we build these software management layers on top of these converged hardware infrastructure so that the manageability is simpler, it's going to be a very compelling alternative.

Robert Williams

Right back here. Oh, sorry. Questions?

Unknown Analyst

I wanted to ask about Romley, what you're hearing from customers around Romley. Do you think it drives upgrades in existing systems and infrastructure? And if so, to what extent is that pulling along storage and networking as a bundle versus piecemeal upgrade activity? Like what are customers telling you?

Stephen J. Felice

Well, why don't we go both -- why don't you talk about it in general; and then you talk about it from the perspective of the SMB.

Cheryl Cook

I would say it'd be application workload dependent, right? So if you're constrained and you need the upgrade for performance reasons or you're in the midst of a refresh cycle already that economically, from a timing perspective, that made sense, we really drive it more to what's the outcome and what's the application environment. Certainly, if you're looking at the whole experience and performance levels, that may certainly include storage opportunity. Much of what we see customers driving for right now is really simplification. I think the good work we've all done on driving virtualization around the server and the compute platform has just created all this level of complexity around the shared pools of storage and now, networking constraints. So it's really creating this need, which is more around simplification and how to operate it more cost effectively than really just a speed bump, if you will, in performance around the platform.

Kim Hibler

I would say the same for Small and Medium businesses. As Cheryl said, their major focus is how they can simplify things, and speed is really important to them.

Robert Williams

Maynard? Thanks, Chris.

Chris Whitmore - Deutsche Bank AG, Research Division

I just want to go back to the question on the comp structure, your comp on revenues and margins. How do you get the sales force to -- or how does a salesperson decide what they're going to sell? So if -- to the point that you made about why it's in the acquisition, everybody is going to go and try and sell that. So it's a brand-new opportunity, it's a revenue opportunity, it's a margin opportunity and that can ramp up. They can hit their quotas. But does that come at the expense, then, of the other parts of the businesses because they're focused on the new acquisitions? Can you just talk a little bit about how salespeople are really pushed to sort of sell different things and how they decide that?

Stephen J. Felice

Sure. We have a number of methods aimed at that. For example, when we acquire a company, we put in special incentives for at least the first year on that product because it is usually a smaller revenue stream and you want to get the intention on it. So we always have a special incentive on a new acquisition. We also provide our salespeople with the recommended mix that -- as part of their quota, so what we're expecting them to sell. And we have great tools now in place with using salesforce.com, for example, where we measure the pipeline build and the pipeline health, all the way down to the individual. And we have management systems in place with the -- with their frontline managers to ensure that the mix is occurring. So it's a combination. It's not all about the money. I think sometimes you get over-indexed on everything solved by the comp plan. A lot of it has to do with your management systems that you have and the guidance and targeting that you put out. So we measure this on a regular basis, and we hold the teams accountable to generate a certain mix of business.

Cheryl Cook

The other thing I would offer there, too, is really just training. So as we build out more robust capabilities around our strategic focus areas, Wise is a great example, is a phenomenal opportunity to drive an ROI on the client side, but creates opportunity for the Enterprise infrastructure. So the method with which we can go to the sales rep and say, you're able to achieve your margin objective, because this is the right end-to-end solution, but we do the training and positioning on why the tether better together really drive that. It's pretty easy for us to correlate. So we're constantly working on training and messaging so that they can appreciate the affinity or opportunity sale around the broadening of the portfolio.

Kim Hibler

I think also, too, when you look at the smallest customer that we engage with from a Small, Medium business perspective, it's really great to be able to offer them solutions. And so in a lot of cases, the salespeople are really excited about the new capabilities that they have. So it's a generation, a way to generate a conversation and get it started. And particularly, you heard earlier that when you look at how we compensate, it's mutual to the channel. And so in a lot of the cases, with some of our acquisitions, there's been a lot of channel business at the same time, and it just creates another opportunity for us to have a conversation with the customer and engage with them.

Robert Williams

Thanks, Kim.

Questions? Okay. Sure.

Unknown Analyst

This is a question for Steve and maybe Kim as well. So you're getting quite a bit of revenue and margin benefit from acquisitions you're making and mix shift to Enterprise Solutions services. Yet the last 2 quarters, we've seen pretty decent hit to operating income. I think last quarter in particular, there was a 27% drop year-over-year on only a 4% revenue decrease. So it doesn't feel like sales execution, per se, is the biggest issue, but maybe you can talk about what's driving the decrease. If it's more outside of sales execution, obviously, there's things to do in sales execution, but can you help me understand it? Because it doesn't feel to me like it's sales execution. And then maybe Kim can talk about it as well, because I think in your segment, Kim, EBIT was down $74 million year-over-year. So just what you're seeing and what's happening there?

Stephen J. Felice

Well, yes, I don't really think it's sales execution, either.

Cheryl Cook

Me neither.

Stephen J. Felice

I think at Dell, we have a history of trying to focus on things we can specifically control and put that at the forefront. So for one thing, it's there's no surprise that there are economic headwinds and there is too much supply chasing too few demands. So in the very short term, there are competitive pressures out there, and we see that. And we see it more in the transactional side of the business. So the Enterprise business remains healthy in both its profitability and its growth. So that's why we talk favorably about that, because it has. But the consumer business, for example, had a pretty substantial decline in profitability. And this is where we saw the greatest level of pressure from what we think is still too much inventory sitting in the channel, combined with an economic slowdown that we saw in across the world. So I think we still feel good about the areas we're strategically focused on or growing and we're making progress there, but there are some headwinds that we're doing that in.

Robert Williams

Yes. And I would say that if you think about it at a broader level, the way that we're thinking about the business is consistent and sustained performance. We had a fantastic year last year with operating income performance. And what we want to do is continue to improve that. And you're not going to have a quarter-on-quarter and year-over-year increase in operating income in every instance, especially against what were some pretty, pretty outstanding improvements last year. So we're at a point here where we can build a base and continue to improve from here.

Stephen J. Felice

Yes. We shouldn't get too fixated on one quarter. And the SMB business, I think, is a great example where we're talking about some fluctuations in profitability, but it's around the range of 10% to 12% op inc. This is a fantastic business.

Robert Williams

Right, right.

Stephen J. Felice

And it may vary a little bit, but it's still an extremely healthy business for us, and it's growing.

Robert Williams

Okay. Well, good. Let's go ahead and wrap up. I'd like to wrap things up where we started this morning, and really talk about the strategy and leave you with 3 key thoughts that I think are very, very important.

First and foremost, this entire management team is absolutely committed to the strategy of fundamentally changing this business and providing value to customers in a very differentiated way. And I can assure you that we're all fully invested and we intend to succeed in what we've set out to do over the course of the past 3 years.

Second, I can tell you that the solutions groups that are represented on this slide, as well as the sales and marketing organization that is represented on the stage right here and all the people that they work with across the organization are delivering end-to-end solutions with a really differentiated point of view, a real customer point of view that's built around a scalable design point. And there is a steadfast and resolute focus on making sure that we execute and succeed, and do the right things in the business.

And finally, I would say that financially, we absolutely have a focus on running our core business well, delivering appropriate levels of cash flow and growth, and creating the fuel that funds the future growth opportunities for this industry -- and for this company, sorry. And obviously, in the Enterprise Solutions and Services businesses and the software businesses, these are businesses that we can grow quickly. They provide accretive growth margins. They provide accretive operating margins. And we absolutely are committed to delivering an appropriate distribution of capital to shareholders in a balanced way.

And so I appreciate the time that you've all taken over the course of the last day or so here in Austin. We're going to do, as I mentioned at the beginning of the day, we're going to do something a little bit different with the lunch today than what we did last year. We'll have lunch outside. It will be relatively simple, things that you can eat on one plate. Next door, there are all of our executives that were here today, as well as the majority of executives that were present at the panel discussions last night, will be available in an informal format. So you can move around and mingle and bring up additional thoughts and questions that you have with our executives.

So again, thank you very much for your attendance today, and we look forward to continue to update you on our progress over the course of the coming quarters and years.

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