Dell F3Q08 (Qtr End 11/2/07) Earnings Call Transcript

| About: Dell Inc. (DELL)


F3Q08 Earnings Call

November 29, 2007 4:30 pm ET


Lynn A. Tyson - Vice President of Investor Relations

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

Michael S. Dell - Chairman of the Board, Chief ExecutiveOfficer

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


Richard Gardner - Citigroup

Harry Blount - Lehman Brothers

Louis Miscioscia - Cowen & Company

Bill Shope - J.P. Morgan

Toni Sacconaghi - Sanford C. Bernstein

Benjamin Reitzes - UBS

Andrew Neff - Bear Stearns

Kathryn Huberty - Morgan Stanley

Brian Alexander - Raymond James


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

Lynn A. Tyson

Thank you, Karen. With me today are Chairman and CEO MichaelDell; Vice Chairman and CFO Don Carty; and President of Global Services and CIOStephen Schuckenbrock. As most of you know, this will be an extended earningscall and we plan to devote a majority of our time to covering our strategicgrowth priorities and the initiatives we have in place to enable them.

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

Our strategy presentation which augments our comments todayis at our website at I encourage you to read this stack andalso to review the new financial scorecards we have created, which will make iteasier for you to track our financial and operating performance.

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

We will host our shareholder meeting here at Dell'sheadquarters in Round Rock, Texas on December 4th. This event will also besimulcast on

Before we turn to the quarter, I would like to remind youthat all statements made during this call that relate to future results andevents are forward-looking statements that are based on our currentexpectations. Actual results could differ materially from those projected inthe forward-looking statements because of a number of risks and uncertainties,which are discussed in our annual and quarterly SEC filings and in thecautionary statement contained in our press release and on our website.

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

Donald J. Carty

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Finally, let me turn to our outlook. As you know, we nolonger provide guidance but as we undergo tremendous change with our business,we do want to remind you of a few factors that could impact our operating andfinancial performance. As we mentioned in the press release, we are going tocontinue to incur one-time costs as we restructure to improve productivity andexecution, reduce headcount where appropriate, and invest in infrastructure andacquisitions.

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

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

Michael S. Dell

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

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

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

First, on improving the current business, we now have thestrongest executive leadership team in the industry. As a result, we have newglobal functions for consumer, services, marketing, operations, and IT and arefocused on removing inefficiency and systematically improving productivity.

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

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

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

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

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

First, let’s talk about consumer. There’s a massive growthopportunity in the global consumer business for Dell over the next five yearsand we intend to compete for these customers in every major region in theworld. Our brand leads for a broad base of consumers that consider or connectwith consumer products. We are the leader in brand consideration in the UnitedStates, France, Germany and the U.K. We are very competitive in India, Chinaand Japan, and we’re rapidly growing in Russia.

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

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

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

PC Magazine called our newest gaming notebook: “the M1730takes mobile gaming to new heights”, so whether it’s extreme gaming, exclusivedesign, performance or fresh and cool personal expression, we’re focused ondelivering great products and creating product lust across all of our consumerbrands.

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

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

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

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

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

In notebooks, this is our third priority, we’re seeing atipping point that’s going to change the landscape. Notebooks now outpace thenumber of -- the growth rate for notebooks now outpaces that of desktops by sixtimes and revenue for notebooks is crossing over desktops this year and unitswill cross over late next year.

In three to four years, consumers will purchase as manynotebooks as the commercial sector and consumers will represent 50% of notebookunit volumes. SMB and large business will represent each about 25 -- the other25% respectively.

Notebook sales will also increase in the emerging economieswhere notebook units as a percent of PCs sold will increase from 29% today to36% by the end of 2010. We are focused on reestablishing leadership in mobilitythrough great design and through leading in the transition to new technologies.

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

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

Turning to SMB, you’ve seen us launch Vostro in July. Thisis a dedicated brand for small and medium business. The number of Americansemployed by small businesses with less than 500 employees is nearly the same asthat of America’s large businesses, approximately 56 million people. And over20 million of these people work for companies with fewer than 20 employees.

Only 15% of small and medium businesses have a full-time ITstaff, so by making it easy for them to gain access to our products, boththrough direct online sales and working with our channel partners, there’sgreat potential for SMB sales to make up a substantial portion of our businessover time.

We’re focused on providing small and medium sized businesseswith the simplest, most complete IT solutions. We’re extending our partnerdirect program for small and medium businesses and expanding our offerings intomid-sized businesses. In September, we launched our newest storage area networkarray, the MD3000I, a simplified storage consolidation solution specificallydesigned for small and medium business customers.

iSCSI should reach about 25% of all of the disk storageopportunities sold through enterprise by 2011 and our acquisitions are in linewith our commitment to simplifying IT for customers and changing the economicsof IT for small businesses.

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

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

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

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

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

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

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

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

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

Stephen F.Schuckenbrock

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

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

But now, we sit here looking at how we contemplate the next23 years, and as we contemplate those next 23 years, we now our customersdeserve lower cost, more speed and flexibility, and greater control in their ITbudgets, which today are 70% consumed by non-discretionary spend.

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

First, a little context; how did IT become so complex? Wehave to remember that it is still a relatively young industry and it’s nowembracing new design criteria towards simplification. The industry has evolvedfrom monolithic and proprietary architectures that have created hugefragmentation as customers manage generations on generations of technology.This is all giving way to X86 as the standard and in fact it’s the onlyarchitecture that is now growing in the industry, and it’s not just growing inthe web and the collaboration spaces but we’re seeing significant growth indecision support and in the business processing applications in the datacenters as well.

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

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

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

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

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

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

In addition, we have a terrific culture that is alignedtogether from hardware through services to serve our commercial and ourconsumer customers as effectively as we can. We do not have isolated lines ofbusiness that work independently to compete for the dollars that our customersspend.

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

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

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

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

All of this conspires to give us an opportunity to take adifferent services approach to the market. First, I would like to talk a littlebit about the fact that the way services are sold and consumed in the marketare different, whether you are talking about small, medium, large or very largeglobal customers. It’s important to note that everything we do has to beglobally consistent, whereas at one point our customers that were in the globalspace demanded consistency around the world now get those same requirementsfrom medium to small customers and we have, as Michael referenced, or Donreferenced earlier in the call, we have in fact set up a global servicesorganization driving consistency in all of our offerings and all of ourdelivery capability.

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

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

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

Looking at the third piece I’d like to highlight, what we’recalling IT as a service internally. Our small and medium customers, many ofwhich don’t have an IT department whatsoever, tend to have fragmentedrelationships for services. We believe through the acquisition of Silverback,which allows us to remotely see and manage anything in our customer’senvironment with an IP address, and with the planned acquisition of Everdream,we will have remote infrastructure management capability that is second tonone.

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

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

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

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

The first one really highlights the consumer packaged goodscompany. In 2004, we had a very small relationship, hardly any at all, and infact we’ve worked with them with the bundling of services, both client as wellas data center or enterprise hardware. We’ve helped them with the deployment toover 20,000 users in a very critical application area to stand up thatcapability ahead of scheduled, and we’ve helped them reduce their IT costs by10%, all bringing terrific value to Dell as well, as we’ve seen compoundedannual growth in this account, as we’ve looked at total solutions of 152%.

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

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

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

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

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

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

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

Donald J. Carty

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

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

We expect to improve profitability through product andservice margins, cost reductions, mix and executing against our OpExproductivity plans. Dell will also pursue more global strategic partnerships toimprove competitiveness, add new offerings, and reach more customers. And inaddition to investing to grow faster than the industry, we are allocating ourcash balances and strong cash flow to growth initiatives and we are adding netcapacity.

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

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

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

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

So let me turn for a moment to OpEx and OpEx discipline. Weare here absolutely committed to an OpEx discipline and achieving substantialproductivity improvements in our core business.

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

So the shape of our P&L is changing. We are not going tolock ourselves in to very specific percentages of revenue that might bettercharacterize our historical business in the hardware business, but we are atthe same time going to be very, very attentive to making sure that we haverigorous OpEx discipline in the company and we are particularly in the corebusiness going to be sure that we get our OpEx back in line with where itshould be.

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

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

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

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

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

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

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



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

Richard Gardner -Citigroup

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

And in addition, you talked earlier this year about a net10% reduction in headcount. It looks like so far we’ve achieved a 0% reductionon a net basis. Should we still be thinking about that 10% number or should webe thinking about another target?

Donald J. Carty

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

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

Richard Gardner -Citigroup

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

Donald J. Carty

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

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

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

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

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

Richard Gardner -Citigroup

Thank you.


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

Harry Blount - LehmanBrothers

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

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

Donald J. Carty

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

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

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

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

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

Michael S. Dell

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

Donald J. Carty

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

Michael S. Dell

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

Harry Blount - LehmanBrothers

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

Donald J. Carty

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

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

Harry Blount - LehmanBrothers

All right. Thank you.


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

Louis Miscioscia -Cowen & Company

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

Michael S. Dell

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

Louis Miscioscia -Cowen & Company

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

Michael S. Dell

Don’t have any predictions for you on that.

Donald J. Carty

And I think it’s fair to say at this stage, we don’t seemuch. Our business is increasingly global and with some of the growth rateswe’re seeing in emerging markets, it is hard to know when you are growing at47% or 72% whether anything is slowing in those regions.

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

Michael S. Dell

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

Louis Miscioscia -Cowen & Company

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

Michael S. Dell

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

Louis Miscioscia -Cowen & Company

Okay. Thank you.


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

Bill Shope - J.P.Morgan

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

Michael S. Dell

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

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

There is a capability that we have in building very smalllots -- lots of one, lots of two -- which we can extend through to retailpartners so they can automatically replenish on a demand basis and alsoconfigure to order in the store for customers who want something other thanwhat’s in the store.

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

Bill Shope - J.P.Morgan

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

Michael S. Dell

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

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

Bill Shope - J.P.Morgan

Okay. Thank you.


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

Toni Sacconaghi -Sanford C. Bernstein

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

Donald J. Carty

Well, let me take a crack at that. First of all, I don’tthink you can do an absolute comparison of [TRU] to [TRU] quarter to quarter.There’s too much mix in the noise.

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

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

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

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

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

The last effect in the third quarter was a little bit of theshift that I talked to earlier about of some business in some slightly lowermargin segments, like U.S. consumer which quarter over quarter grew prettysignificantly. I know it’s a decline year over year but U.S. consumer was up17% from the second quarter to the third quarter. When you think of the mix ofbusiness, you would expect that to have some effect on gross margin. Given thesize of our consumer business, it might be as much as 20 basis points.

Michael S. Dell

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

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

Toni Sacconaghi - SanfordC. Bernstein

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

Donald J. Carty

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

Toni Sacconaghi -Sanford C. Bernstein

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

Donald J. Carty

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

Toni Sacconaghi -Sanford C. Bernstein

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

Donald J. Carty

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

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

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

Toni Sacconaghi -Sanford C. Bernstein

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

Donald J. Carty

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

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

EqualLogic, ASAP, all of the acquisitions have brought uspeople. Some of the new efforts that Steve referred to are going to bydefinition drive new human resources. It’s probably quite different humanresource because it’s not the same skillset that we are downsizing but I don’twant to for a minute create the impression that we are walking away fromimproving the efficiency of the core business.

Toni Sacconaghi -Sanford C. Bernstein

Thank you.


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

Benjamin Reitzes -UBS

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

Michael S. Dell

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

Benjamin Reitzes -UBS

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

Donald J. Carty

Let me just make an observation about that. If you look atthe acquisitions we’ve announced thus far, these don’t represent hugeopportunity for inorganic growth. In each and I think every case, theyrepresent an acquisition that we think as we look into the future will enable alot more organic growth. In other words, we’re acquiring nucleuses of thingsthat we need strategically to accelerate growth which we’ve been targeting inany case.

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

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

Benjamin Reitzes -UBS

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

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

Donald J. Carty

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

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

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

Benjamin Reitzes -UBS

Okay. Thank you very much.


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

Andrew Neff - BearStearns

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

I guess one example is the EqualLogic acquisition. You don’thave a history of doing these -- actually, you do have a history of one ofthese. How do we know how these are going? Can you provide some transparency asthey are going on?

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

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

Donald J. Carty

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

Andrew Neff - BearStearns

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

Donald J. Carty

Well, it is a generic statement.

Michael S. Dell

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

Donald J. Carty

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

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

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

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

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

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

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

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

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


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

Kathryn Huberty -Morgan Stanley

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

Donald J. Carty

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

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

Kathryn Huberty -Morgan Stanley

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

Donald J. Carty

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

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

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

Kathryn Huberty -Morgan Stanley

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

Donald J. Carty

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

Kathryn Huberty -Morgan Stanley

Okay, great. Thanks.


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

Brian Alexander -Raymond James

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

Michael S. Dell

You know, I would say we’re at the early stages of this. Wehave Staples, Wal-Mart, Sam’s Club in the U.S. In Europe, we have CarphoneWarehouse and Carrefour. In APJ, we have GOME in China, the largest consumerelectronics retailer, Courts in Singapore, [High Mart] in Korea, Bic Camera andSoftmap in Japan, and in Latin America we have again Wal-Mart and Sam’s. Ithink you could expect to see a number of additional ones in the biggestcountries in the world.

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

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

Donald J. Carty

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

I think it’s fair to say that given the retail response, wecould probably be in more doors than Michael’s even described if we weren’ttrying to be sure we do it right.

Brian Alexander -Raymond James

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

I guess I ask the question because I think one of your majorcompetitors, who might be two-and-a-half to three times your size in thatsegment, is achieving several hundred basis points of profit. I’m justwondering -- is that something you think you could achieve over the next fewyears?

Donald J. Carty

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


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

Michael S. Dell

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

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

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

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

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


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

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