- Revenue down slightly as global IT spending slows
- Rigorous cost management drives 11-percent year-over-year reduction in operating expense dollars
- Global Consumer business performance improves

Dell fiscal third-quarter earnings improved solidly as a result of disciplined cost management and an improved mix of products and services in a challenging demand environment. Earnings per share increased 9 percent to 37 cents, on revenue of $15.2 billion.

“Our business model adapts quickly to economic changes, even the kind of significant challenge we saw in the third quarter,” said Michael Dell, chairman and CEO. “We increased profitability with an improved mix of products and services – more than a third of our revenue and profit now comes from servers, storage, services and software and peripherals – and benefited from initiatives to improve our competiveness, including tight cost controls.

“During previous periods of economic challenge, Dell led in providing customers the technology they want and the value they need, and we’re doing it again. We're simplifying IT, reducing costs and maximizing productivity for customers.”

Mr. Dell said the company is continuing to focus on five growth areas: Notebooks, Enterprise, Global Consumer, Small and Medium Business and Emerging Countries.

Dell revenue was down 3 percent on unit-shipment growth of 3 percent. Operating income improved 22 percent to $1 billion, or 6.7 percent of revenue, driven by gross margins of 18.8 percent, which benefited from an improved mix of products and services, lower component costs, and continued progress on cost-reduction initiatives announced in April. Operating expenses were 12.1 percent of revenue, an 11-percent decline on a dollar basis from a year ago. The company ended the quarter with 2,200 fewer positions than in Q2, and down 9 percent from one year ago.

“The velocity of Dell’s business model typically gives us an early view to demand signals, ahead of competitors,” said Brian Gladden, Dell CFO. “This visibility gives us a strategic advantage to quickly adapt our cost structure and approach.”

Third Quarter Year to Date (in millions, except share data) FY09 FY08 Change FY09 FY08 Change

Revenue $15,162 $15,646 (3%) $47,673 $45,144 6%
Operating Income $1,015 $829 22% $2,733 $2,664 3%
Net Income $727 $766 (5%) $2,127 $2,268 (6%)
EPS $0.37 $0.34 9% $1.06 $1.00 6%

References to Dell’s unit growth as a multiple of the growth of the industry exclude Dell, and all growth rates are year-over-year unless otherwise noted.

Global industry demand in the quarter slowed through October, adversely affecting the company’s cash conversion cycle, which ended at negative 25 days, and resulted in negative cash flow from operations of $86 million. As company growth stabilizes, more typical cash generation is expected to resume. Year to date, cash flow from operations was $1.2 billion and the company ended the quarter with $8.9 billion in cash and investments. In the quarter, Dell spent $400 million to buy back 21 million shares.

Revenue for the quarter from outside the U.S. was 48 percent of Dell’s total revenue. For the BRIC countries of Brazil, Russia, India and China, revenue increased 20 percent and shipments 43 percent. They accounted for 9 percent of Dell’s global revenue.

Global Commercial
Dell’s commercial business serves large corporations; public customers comprised of government, education and health care; and Small and Medium Business (SMB).

“We took a measured approach in the third quarter to balancing growth and profitability. By the end of the second quarter, we had seen a slowdown in demand in most customer segments and concentrated our efforts where there was both profit and growth opportunity as we also improved our mix of products and services,” Mr. Gladden said. “As a result, global commercial operating income increased to more than 8 percent of revenue as revenue declined 6 percent.”

Laptop units were flat as the company transitioned to the new Latitude Series E and Dell Precision laptop product lines, ranging from the lightest ultra-portable in the company’s history to the most powerful mobile workstation. Server units declined 4 percent and growth in storage revenue was flat. Enhanced services revenue, which is largely driven by Dell’s commercial business, was up 7 percent to $1.4 billion.

Dell’s portfolio of scalable enterprise products is the strongest in its history, having over the past year expanded both its server and storage products.

The company also introduced four new models of OptiPlex commercial desktop systems. These systems cut power consumption by up to 43 percent, speed serviceability time by more than 40 percent versus Dell’s competition and include a portfolio of cloud services that can be toggled on and off as needed.

Reflecting the overall spending slowdown, Americas Commercial had an 8-percent decline in revenue, on a 14 percent decline in units while operating income improved both sequentially and year over year.

Dell’s EMEA commercial business had a 5-percent decline in revenue while shipments were essentially the same as a year ago. Actions taken to improve profitability in EMEA resulted in a 62 percent increase in operating income dollars sequentially. This improvement was driven primarily by lower operating expenses and an improved mix of products and services.

In APJ, Dell’s commercial business had a 2 percent increase in revenue on a 15 percent increase in shipments and operating income grew by over 60 percent. APJ had success with the launch of Dell’s Vostro A Series laptop and desktop systems, specifically designed for businesses, governments and institutions operating on limited budgets in emerging countries.

Global Consumer
Dell’s Global Consumer business increased revenue 10 percent over last year on a 32-percent increase in unit shipments – led by continued success in the global retail channel and a more diversified product portfolio. Dell’s growth was more than two times the rate of the industry.

Operating income was $112 million or 4 percent of revenue, compared with a loss a year ago. It is the highest level of profitability for this business in 13 quarters. Year to date, operating income margins were 1.7 percent of revenue. The improvement in profitability year-over-year was driven by a 24-percent reduction in operating-expense dollars along with lower product and component costs.

Dell consumer products won 41 awards in the third quarter, led by the selection of the new Inspiron Mini 9 as one of Time Magazine’s “Best Inventions of 2008” and CNET’s “10 Most Cutting Edge Products of 2008.” The Studio Hybrid earned a “Hot Hardware Recommended Award” and the Studio Desktop a CNET “Editor’s Choice” award.

Company Outlook
Dell believes that global IT end-user demand will continue to be challenging. Against this backdrop the company will continue to focus on improving competitiveness, lowering costs and improving its mix of products and services to optimize liquidity, profitability and growth. The company will continue to incur costs as it realigns its business to improve competitiveness, reduce headcount in certain areas and invest in infrastructure, growth opportunities and acquisitions.