Q3 2013 Earnings Call Transcript
Transcript Call Date 11/15/2012

Operator: Good afternoon and welcome to the Dell Inc. Third Quarter Fiscal Year 2013 Earnings Conference Call. I'd like to inform all participants this call is being recorded at the request of Dell. This broadcast is the copyrighted property of Dell Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Inc. is prohibited. As a reminder, Dell is also simulcasting this presentation with slides at Later, we will conduct a question-and-answer session.

I'd like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Robert Williams - IR: Thanks, Regina. With me today are Michael Dell, Brian Gladden and Steve Felice. The web deck and our DellShares vLog with Brian and Steve featuring more insights on the quarter are posted to our website in advance to the call. I encourage you to review these materials for additional prospective.

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

Please also note that we will be referring to non-GAAP financial measures, including non-GAAP gross margin, operating expenses, operating income, net income and earnings per share. Historical non-GAAP measures are reconciled to the most directly comparable GAAP measures in the web deck posted in the Investor Relations section of and in our press release, and 8-K filed today. I encourage you to review these documents. Please also note that unless otherwise mentioned, all growth percentages refer to our year-over-year. Now I'd like to turn it over to Brian.

Brian T. Gladden - SVP and CFO: Thanks, Rob. Four years ago this month we embarked on our strategy to deliver end-to-end solutions to our customers with a scalable design point. Since then we've made great strides in executing this strategy and continue to add to our capabilities.

In the third quarter, our enterprise solutions and services business revenue was $4.8 billion, up 3% led by 11% growth in our server and networking business. These businesses which were about $14 billion in FY'08 are now at an annual run rate approaching $20 billion.

Year-to-date, they are on 4% and have generated more than 50% of our non-GAAP gross margin over that period of time. Year-to-date we've added AppAssure, SonicWALL, Wyse, Make, Clerity and Quest bringing enhanced capabilities to a portfolio of software and services that address many of our customers most pressing needs including security, cloud, data backup and protection, systems management and application monetization.

Specifically the addition of Quest software during the quarter provides us with a foundational asset for a software business, which will contribute to a higher mix of solutions with more predictable revenue and margin streams.

While there is no question that we are in challenging global IT demand environment, especially in the core PC business we are fully committed to our strategy. We continue to make key investments to drive our transformation and we're seeing important progress in building a strong enterprise franchise as we move through the year.

Moving to the quarter, we delivered revenue of $13.7 billion, down 11% and at the low end of the revenue range we provided in August. I'll refer to non-GAAP financial measures going forward.

Our gross margin was 22%, down 60 basis points sequentially. As a reminder, gross margins in the second quarter benefited from approximately $70 million or 50 basis points, primarily resulting from a vendor settlement. When you normalize with this benefit the mixed ES&S, it's helping stabilize margins as we see incremental margin pressure in our client business.

We continue to be disciplined in managing our discretionary spend. OpEx dollars were down $20 million sequentially to 15.5% of revenue as we absorbed about $60 million of OpEx associated with Quest and another $90 million of strategic spend in R&D associated with recent acquisitions and organic investments.

Operating income was $886 million or 6.5% of revenue. Earnings per share of $0.39 declined 28%. We generated strong cash flow from operations of $1.3 billion with an ending cash and investments balance of $14.2 billion. Our cash conversion cycle was negative 32 days, improved two days sequentially, driven by better inventory and receivables management.

Our cash flow will continue to benefit from the changes in our business model as we migrate to more software and services-based solutions.

With our solid cash flow and commitment to a strong balance sheet, we've invested $4.7 billion this year to acquire new capabilities and intellectual property. We've paid out 130-month $9 million dividend distribution in the third quarter and including our stock repurchase program, we've returned almost $900 million to shareholders year-to-date.

Turning to our lines of business, our server and networking business grew 11%, representing the 12th consecutive quarter of growth. Servers increased 4%, driven by strong growth in our hyperscale data center solutions business and continued traction with our 12th generation servers. 12G servers now represent two-thirds of our server revenue at ASPs and margins that are premium to our previous generation servers. Collectively, our differentiated intellectual property and solutions has resulted in a growing share position.

Our networking business increased 40% as it continues to benefit from the 12G servers and native 10 gigabyte Ethernet on the motherboard.

During the quarter, we launched our active infrastructure converged offering. This brings together Dell hardware, software and services under a common design architecture that offers customers a robust and easily managed data center infrastructure for applications, virtual desktop infrastructure and cloud deployments. By making these deployments simpler and easier to manage, we are addressing key customer needs in these growing market opportunities.

Dell Storage was down 3% to $378 million in a challenging environment and this was below our expectations. Over the past six months, we have introduced enhancements to the portfolio including new backup recovery and replication solutions, new storage compression and D2 technologies, improved Compellent management software, two new converged data center solutions and NAS capability on the fiber channel. We believe these enhancements position us well where industry demand in this important business segment improves.

The services business was down 1% year-over-year and flat sequentially at $2.1 billion and 5% growth in support and deployment and 16% growth in our security business. Our services backlog increased 2% to $15.8 billion. Gross margin percent increased sequentially for the sixth consecutive quarter as we continued to improve our cost structure and focus on higher margin areas of the services landscape.

In absent BPO, we continue to make progress on improving profitability, which is having a short-term impact on our revenue growth. Our Dell software business continues to introduce innovative solutions focusing on security, application, systems management and business intelligence.

For example, we sold more SonicWALL SuperMassive next-generation firewall during the quarter than at any time before. With 96 cores SuperMassive's full deep packet inspection provides the highest level of malware detection and elimination than any firewall in the market. We also updated our security management tool enabling the management of up to 5,000 firewalls from the single console.

Finally Quest vFoglight Storage 2.0, an integrated solution that provides application to disk performance monitoring and enable server and storage teams to jointly resolve virtualization performance issues. These all represent competitively differentiating capabilities we did not have a year ago.

Our third-party software and peripherals revenue was down 11% driven by the contraction of desktop and mobility products. Our desktop and mobility business was down 19%. Our results here were mixed. Our desktop business held share relative to last year, while notebooks lost share and did not perform to our expectations.

We are launching new cloud-based client solutions based on our Wyse IP. Last week we unveiled the Wyse Cloud Client Manager, which gives IT managers the ability to expand beyond the firewall to manage multiple mobile and (indiscernible) devices regardless of the operating system. This provides the customers the ability to more effectively and securely manage BYOD implementations.

Going forward, we are focused on selling client and virtualization solutions in our commercial accounts. We enhanced our focus on our client acquisition business including a simplified pricing strategy and we're driving more than $1 billion in cost-out initiatives specific to the client business.

Now I will turn it over to Steve Felice to give an update on business segment results.

Stephen J. Felice - President, Chief Commercial Officer: Thank you, Brian. Large enterprise revenue was down 8%; enterprise solutions and services grew 5% including 14% growth in servers and networking; operating income was down 170 basis point sequentially to 7.8% of revenue.

Here we saw a reduction in the number of client opportunities as many large commercial customers continue to defer purchases of discretionary IT hardware. We are seeing success in winning new business but given the long-term nature of these opportunities they will not impact revenue in the short-term.

Our public business was down 11%. We did see the expected and the fiscal year ramp for the U.S. federal business, but also as expected we saw a significant contraction spending in October. We continue to see budgetary constraints in Western Europe government spending and global state and local government spending, but despite this we remain disciplined as sequentially we were able to increase gross margin percent and reduce OpEx spend.

Public operating income was down 10 basis points sequentially to 9.2% of revenue. SMB continues to be the most stable customer set for Dell as revenue declined 1%. Similar to large enterprise we saw enterprise solutions and services growth of 15% including 22% growth in services and 16% growth in servers and networking.

Operating income was down 110 basis points sequentially to 10.6% of revenue. This business continues to exemplify the progress of our transformation and despite the macro backdrop, we feel it's important to invest through this macro cycle.

Enterprise solution and services mix has improved for sixth consecutive quarters with expanding margins over that period of time. The consumer business continues to be a challenge with revenue down 23%. The operating loss was $65 million or minus 2.7% of revenue.

Industry growth in this space continues to occur predominantly in the low value and entry level desktop and notebooks, where we've chosen not to participate – and in tablets. With the launch of Windows 8, we have new tablets and convertibles including the XPS 10, XPS 12 and Lattitude 10.

In addition, we have two touch-enabled all-in-one desktops. While it's too early to share specific demand numbers we are encouraged by the initial customer interest in our touch-enabled computing.

With that, I'll turn it back to Brian to discuss our outlook.

Brian T. Gladden - SVP and CFO: Thanks, Steve consistent with our comments last quarter and with what you're hearing from many other technology companies, we continue to see a challenging global macroeconomic and IT spending environment, which is clearly impacting our results. We don't expect that to improve much in the fourth quarter.

For revenue, we expect sequential growth of 2% to 5%. You should also remember that last year's fourth quarter included a 14th week. For the full year, we continue to outlook at least $1.70 in earnings per share on a non-GAAP basis, which works out to at least $0.38 for the fourth quarter. This incorporates the $0.01 to $0.02 dilutive impact from the inclusion of Quest Software to the fourth quarter. We expect our full year non-GAAP tax rate to be approximately 20%.

Before we take questions, let me close with the couple few summary points. We're pleased with the enterprise solutions and services business with a revenue run rate approaching $20 billion growing at roughly mid-single digits and strong profit, this is a business where we'll continue to invest and accelerate our growth.

In end-user computing, we have work to do but are encouraged by early interest in our new Windows 8 touch portfolio and the new opportunities we see in our commercial and consumer businesses. As always, we will be balancing liquidity, profitability, and growth to optimize the Company for long-term success.

Now, let me turn it over to Rob.

Robert Williams - IR: Thanks Brian. Just quick reminder to limit your questions to one with one follow-up. Regina, can we have the first question.

Transcript Call Date 11/15/2012

Operator: Scott Craig, Bank of America.

Scott Craig - Bank of America: Can you guys maybe walk us through the consumer business? The operating profit there was obviously challenged this quarter, and I know you guys have been more selective recently, but can you maybe give us your thoughts on restructuring that business or maybe walking away from more business there? Then my second question goes around the large enterprise side and what sort of margin pressure are we seeing there on the PC business?

Brian T. Gladden - SVP and CFO: Scott, I'll start on consumer and Steve can jump in. Clearly, in consumers it's been a more challenging environment. Emerging markets have slowed. They have moved to lower value products. We also saw in the quarter expected channel dynamics around the Windows 8 launch. I would say we are sticking to our focus on mid-to-high value segments of that business, and not really chasing the lower end of that space. We said last quarter that we didn't think that consumer market will improve until after the Windows 8 launch and then definitely we have seen that. So we are committed to the strategy here. We understand the importance of the business and the importance of scale that comes with that, and as we've talked about and Jeff Clark talked about this summer, we continue to focus on cost reductions that are important to stay competitive here. So, let me see if he can give a couple of comments.

Jeffrey W. Clarke - Vice Chairman and President, Global Operations and End User Computing Solutions: Yeah, I totally agree with Brian. We don't see a need to change from the strategy. We certainly see a few things that happened in the last quarter that we don't really believe are sustainable changes. For example, unlike some of the prior declines in the economy, we saw a bigger decline in emerging markets and that's different from the past. China being in negative growth, India being in negative growth, Brazil being in negative growth, we don't think that's going to stay that way. We do believe that that's relatively short-term, although we don't know exactly when it's going to pull out, but we do already see signs that China is doing better. We also think that there was earnings pressure because of this transition to Windows 8. That's another thing that we think will ease itself out. But as you may recall, we thought that after – in last quarter's earnings discussion, we thought the industry inventory was high and that it would take some working out and especially that's exacerbated by Windows 8. So we think there is some certain short-term things that will not continue. We certainly do see a challenging environment in Europe and so we don't see that improving very much. But we're hopeful that the emerging markets will start to show some recovery.

Brian T. Gladden - SVP and CFO: Yes. Scott, on the large enterprise, I would say, clearly some pressure on the client side, we saw some nice growth in enterprise solutions and services, they grew at 5%. We saw 14% growth in servers and networking in that space and this is clearly a place where we're seeing commercial customers defer discretionary spending in this sort of environment. That's clearly something that we've seen work its way through. Not clear that there is going to be – I mean there continues to be a big opportunity around the Windows 7 refresh that's not completed yet and that's still out there and we expect that to continue as we head into next year.

Jeffrey W. Clarke - Vice Chairman and President, Global Operations and End User Computing Solutions: On the client side, we saw in the industry unit growth down about 9% in the commercial space. So you're just seeing some additional competitive behavior. While we're staying committed to the strategy, we're also going to defend our turf here. So I think we are in good shape with our customers and we're showing that in cross-selling ability, because we are selling a lot of servers and networking and services into the space. So we have a healthy relationship with the customers and we view this more just normal macro competitive environment.

Operator: Bill Shope, Goldman Sachs.

Bill Shope - Goldman Sachs: Can you comment more specifically on the drivers of the client margin pressure overall and how we should think about that going forward? I believe you just said that you wanted to defend your turf that was part of the reason you saw some margin pressure on the client in the enterprise business. Does that signal somewhat of a change in strategy to where you are sort of drawing a line in the sand in terms of how much market share you're willing to give up specifically in the enterprise category?

Stephen J. Felice - President, Chief Commercial Officer: Well, I think we're not changing the strategy. We're focused on profit share here. There clearly are some places where we're going to defend our turf and important parts of our business enterprise for us is critically important and we've shown that we can grow in that space. When you look at client margins, I mean one thing obviously we have the vendor settlement impact in the business that affected the second quarter and gave us a benefit in the second quarter that for us gives us a little bit of a challenge quarter-on-quarter, when you look at gross margins. But it's clear there has been clients pricing pressure as a result of the competitive dynamics in a weaker demand environment. That's something that we expect probably will continue for a period here.

Bill Shope - Goldman Sachs: I guess as a follow-up to that. Can you give us an update on component pricing trends and how you're thinking about that as we closeout the year?

Stephen J. Felice - President, Chief Commercial Officer: Yeah, components generally have been about as we expected as we sort of heated up coming into the year, it's basically what we've seen. We had some moderate deflation in the quarter, I would say not what it would have been in historical deflation, but basically what we would have expected coming in. Then we're expecting more or less the same situation as you head through the fourth quarter.

Operator: Toni Sacconaghi, Sanford Bernstein.

Toni Sacconaghi - Sanford Bernstein: I wanted to revisit the client question. I appreciate the fact that the market is very difficult, but it's clear that you are losing overall client share and even if we back out consumer certainly on the mobility side, you were down in the 20s on the corporate side for mobility. So it's clear that Dell's losing share. If we think about that impact on the business, we've seen the consumer business key scale as a result and you're starting to see pressure on margins, when you lowered your guidance for this year, I think that was largely the reflection of the fact that you've descaled not that your gross margins have gone down, but that you have descaled. So against that backdrop, why wouldn't you tilt the balance or do something a little more radical here going forward? What I mean by that is why not be a little bit more aggressive and give up some gross margins to preserve volumes so you don't run that descaling risk that we are starting to see signs of? Or why is there not a more – a stronger focus on and a very deliberate and material focus on taking out cost?

Stephen J. Felice - President, Chief Commercial Officer: Look, Toni, I think there are – I mean, the effort around cost is clearly a priority for us. We think we are in a position right now where our scale is competitive. Given the size of the business, but also the higher value elements of our business, the fact that the buy that we have with our supply base tends to be a higher-end buy given our commercial mix, we think it positions us well from a scale standpoint. Clearly, we are not going to go and shift their overall strategy in this sort of an environment. We think that this is more of a short-term macroeconomic set of dynamics that we're facing that as it works its way through we'll see PC demand improve. As that improves, you'll see the scale return. So that's really how we are thinking about it. Tony, we did have some good wins on longer-term client buys in the quarter. As I said in my comments, you won't see them in the current quarter but we had better wins than we have seen in a while. So I think we are starting to get some of this business back over the longer term. The other thing I'll point out is that I'll go back to the emerging market point because that had a bigger effect than we have seen in the past. These are areas where we have a really strong position with customers and we really do believe it was more short term or I should say macro-oriented, whether it's short term or not depends on how they pull out of it, but we did not lose customers but we did see a big slowdown in their purchases. We are working on a few things to get more competitive and to make things simpler for our customers, we have introduced a dramatically simplified pricing strategy in the U.S. just in the past week or so. I think as people go on to and look on the commercial side, you'll see that where it's very easy to determine where our pricing is across any of the businesses. We're also aggressively continuing to work on the $1 billion cost-out in the client area and we believe we're making good progress there, and that it will enable us to play in a broader range of price bands next year. So we hear you on some of these things and we are intending to go after a broader part of the market. But we want to do it under the same strategy and being profitable, delivering value. We're not just going to go after the low price bands if we don't see a value proposition where it's sustainable with customers.

Toni Sacconaghi - Sanford Bernstein: If I could use my follow-up just to continue that discussion. If I look over the last several quarters, last 10 – 8 to 10 quarters, Dell has been growing up 5 to 10 points slower than the market on the client side. So even if client growth does return, and I understand the cyclical points and pressures that the business is under, even if it returns and it's a low single-digit business, that still suggests low single on the unit side, that still suggests if your relative share position is going to be the same that you're going to be down in unit terms and then there maybe pricing pressure on top of that. So how do you think about that equation going forward? Is it – do you think that market growth will be higher or what substantially is going to change in terms of your relative share on a go-forward basis to what we've seen over the last five or eight quarters?

Brian T. Gladden - SVP and CFO: Yes, Tony, I don't think we are in a position to make a call on overall PC demand as we move forward. I do think that the position of our business, the strength of our commercial franchise in the client space as well as the broader portfolio, they continue to be important assets for us and they are well positioned. We think we can – as you know there is a whole set of life cycle profits that really come from having those customer relationships and the profitability that drives across the support business and our SMB business in our financing. So it's important that we drive that part of our business where we can capture that value and maintain a strong share position and it really does help the other parts of the portfolio. So that's I think what you'll see is continue to focus on.

Jeffrey W. Clarke - Vice Chairman and President, Global Operations and End User Computing Solutions: Yes, if I could just add a little bit on the product side, clearly we're starting to see a lot of receptivity to virtualize clients and that drives a more profitable client business for us, but it also has a big drag-on effect on the enterprise and so with the addition of Wyse, we're seeing really good progress out of that and the synergies it has with the rest of our business. We also are starting to see a lot of receptivity to the way we've approached the tablet market from a commercial perspective and we're the meeting with lots of customers who continue to say their needing to prioritize security and manageability as they try to rollout tablets in their environment and specifically products like the Latitude 10 that has things like security built into it with a smartcard feature and even something like a replaceable battery, these are things that are resonating well on the commercial side. So those opportunities are going to broaden that commercial business for us and that should help us get back to growth.

Operator: Steve Milunovich, UBS.

Steve Milunovich - UBS: First, a clarification. You said that as your business shifts toward software and services, it improves cash flow. You'd previously said that as you move away from the client business to the enterprise business that actually could kind of hurt your cash conversion cycle. Could you just clarify that comment?

Brian T. Gladden - SVP and CFO: There are big parts of the software and some elements of the services business where it's a cash upfront business. The deferred revenue balance as you've watched it over the last several quarters has continued to grow for us. That has, obviously, contributed cash flow in that model, and as that becomes bigger with Quest and some other key assets in the portfolio, that's going to be good thing for us.

Steve Milunovich - UBS: On the enterprise side, certainly one talks to your competitors, they're pretty dismissive of Dell on the enterprise. You are showing some good early results. What are they missing? Where do you think you differentiate versus traditional competitors? I know you've talked about a flatter and cheaper architecture, but maybe you could talk a little bit about some of the architectural approaches and markets that are bit different from what your traditional vendor – competitors are doing?

Michael S. Dell - Chairman and CEO: Well, we hope that they continue to take that approach to that not understanding what we're doing, point out that this is roughly a $20 billion business and growing pretty nicely. If you look at x86 servers, which are really the core of that business for us, we have achieved leading share in North America and we were the only company among the top three to grow in every region of the world in that space. We are really innovating in the enterprise without having to protect a legacy of new range and mainframe products. We believe that's a highly differentiated approach, and the combination of what we are doing in networking, storage and the ability to combine those and manage those, I believe is resonating very well with our customers. So you saw last quarter servers and networking grew 11% year-over-year, and particularly a lot of success with our 12th generation PowerEdge, which is sort of the crown jewel of portfolio. We have beat our competitors to market and in the highest volume category, we have really outdone our competitors here in terms of the capabilities of those products. For example, we have a product right in the core of this product line that has 63% more storage capacity than our principal competitors. So you think about applications like Hadoop, Big Data, SharePoint, Exchange all the growth in hosting activity and cloud activity that's going on with things like OpenStack Dell is incredibly well positioned to serve those customers. In fact, our DCS server business grew 126% year-over-year, which is markedly faster than overall market. So I think we are very well positioned in the enterprise. Our services portfolio is very well aligned to help customers transition from those legacy architecture to x86.

Operator: Ben Reitzes, Barclays.

Ben Reitzes - Barclays: Maybe for Michael and Brian, on your Analyst Day you guys are one of the first companies to kind of put out some realistic numbers for PC growth and then you said there could be a downside scenario of negative 5%. Does the performance in this quarter and what you're seeing into the next kind of change that view? Does it mean that we're at the negative 5% and that's what it should be? Just is there any other thoughts around that long-term growth rate and should we assume that it is hitting that worst-case scenario now and could be negative 5% for a long time, any perspective?

Brian T. Gladden - SVP and CFO: Yeah, Ben, I think you have to look at it over a longer window of time. The reality is I mean we're in a pretty noisy market in terms of the transition of the operating system, in terms of the inventory dynamics that are playing out there as well as the macro. If you take a look at the industry over a longer period of time, there still are some significant positive trends that I think bring us back. It's difficult in this sort of an environment to make a call around the long-term dynamics of the client business.

Ben Reitzes - Barclays: Then just as a follow-up. With regard to your guidance, 2% to 5% growth, it looks like almost $500 million in revenue. I kind of get $100 million from Quest. Can you just tell us where you get the growth sequentially? Is that normal seasonality or is there something else that should pick up that we should key on?

Brian T. Gladden - SVP and CFO: Yeah, I mean it's generally the normal seasonality and the consumer mix that you would expect to see around the holiday season that drives fourth quarter to be bigger than the third quarter. Quest, for us, should be actually more than that. It should be approaching $180 million, $200 million of sequential revenue and then you have the seasonal impact of the consumer business.

Operator: Maynard Um, Wells Fargo.

Maynard Um - Wells Fargo: Just the first question is a clarification just on the gross margins, last quarter you talked about in your 10-Q any potential vendor change in sales program impacting you. Was there anything that happened this quarter that impacted your gross margins and then I have a follow-up?

Brian T. Gladden - SVP and CFO: Nothing material.

Maynard Um - Wells Fargo: Then just on the storage side, I was wondering if you could just be, maybe little bit more specific if this is a function of the macro, something in the competitive environment or maybe an impact from our server improvements? Then if you could just remind us where the EMC business is now? Has that pretty much reached levels where that won't be declining going forward?

Brian T. Gladden - SVP and CFO: Storage was down 3% year-over-year, which is likely in line with market growth. We have a number of enhancements to the portfolio and I think another important element here is that the line that separate servers and storage is really blurring. We have a large customer that we've now installed over an extra byte of storage for their cloud and it's one of the most recognized companies in the world. But that extra byte of storage is all contained within Dell servers. So none of it shows up in our storage revenue and as I mentioned earlier, we have a server that has two use server that supports 38 terabytes of storage. You will note that that's right in the heart of the midrange storage capacities. By the end of this month that same server will be available with 50 terabytes of storage. So the lines here are really blurring with converged infrastructure and our overall enterprise server storage, networking business is kind of growing in the mid-single digits and I think well-positioned.

Maynard Um - Wells Fargo: EMC piece?

Michael S. Dell - Chairman and CEO: Our EMC is de minimis.

Operator: Shannon Cross, Cross Research.

Shannon Cross - Cross Research: I wanted to ask first about the public business, just what are you're hearing from governments? You noted slowdown in October in the U.S. So how should we think about what the federal government in the U.S. is doing as we move towards this fiscal cliff? Then just in general, I'm curious as to what there has been any signs of improvement maybe in China or Europe or if it just remains relatively muted?

Stephen J. Felice - President, Chief Commercial Officer: Well, I think in the U.S. we're in the same position everybody else is. We are waiting for decisions to be made and it will affect public budgets, but right now with the uncertainty that's remaining there is not a lot of budget available. So as soon as the September month ended and they got their approved budget that's spending out of the way, it shut down quite a bit. So until there is clarification, it's hard to predict where that's going to go. Western Europe, we continue to see weakness in the public sector, as you would expect, with their debt crisis going on there and that one also does not show any near-term signs of improvement. The rest of it is (probably) Asia does show some signs of recovery, although as I pointed out earlier, it's been one of the biggest changes I think from previous financial economic downturns is a fact that you saw BRIC countries slowdown as much. So while it's stabilizing and coming back, it's still below what would be a normal expected growth rate. So I do think again looking at what's going on in China, for example, that we would expect that economy to return and that we could see improvements but we're not sure exactly when.

Shannon Cross - Cross Research: Then as a follow-up, I'm curious from a capital structure perspective or at least from the use of cash perspective, given the stock is under pressure after hours, obviously it's been under pressure for quite a while, is there any thought to be more aggressive with share repurchase at these levels? Or how are you thinking about the cash balance that you're holding, given some of the changes I guess that have occurred in the marketplace?

Brian T. Gladden - SVP and CFO: I would just reiterate what we said this summer that we are committed to deliver – to return between 20% and 35% of our free cash flow to shareholders. We are going to be pretty disciplined about that. We're over that on a year-to-date basis and on a rolling 12 months—trailing 12 months basis. As you know, we did a substantial amount of acquisitions this year, $4.7 billion and we are going to continue to manage to that in a disciplined way.

Operator: Jim Suva, Citigroup.

Jim Suva - Citigroup: When we look at the tablets out there, the industry looks likes that there was some pretty aggressive pricing going on not only from some of the Asia companies, but some of the other ones also. Can you make profitable money in the tablet sector and is it comparable to your PC margins or higher or lower because the concern maybe that the tablet industry may structurally be in the pertinent shift to the lower comparability?

Brian T. Gladden - SVP and CFO: Well, our focus on tablets has primarily been in the commercial side and the feature set that is required there matches up with a richer configuration and we do think that there is a profit stream there. It also has a life cycle profitability attached to it in terms of services agreements and other add-ons that we think is attractive to us. So we continue to hear a lot of noise from CIOs about having to deal with the added cost and complexity of not having a standards based product as a tablet. So we're pretty encouraged by the reaction to the Latitude 10, and we do see this as a profitable product in the commercial space.

Jim Suva - Citigroup: Then my follow-up on the stock buyback question is, if you're going above that in the first half of the year with your stock buyback and if I read the cash flow statement correctly, it looks like you did not buy back stock this quarter. Maybe I misread that. Would that further show for this quarter you pretty much exhausted your capital for your stock buyback or (took the) stock under pressure I guess was a little surprising that you didn't take advantage of that?

Brian T. Gladden - SVP and CFO: Yeah, I would just again reiterate the commitments that we have and the fact that we are – from a year-to-date standpoint, and we look at it over a longer period of time, some quarters will be above the range, some quarters will be below. The reality is, as you know, we had a large acquisition in the quarter $2.4 billion and year-to-date we're ahead of the commitment.

Operator: Katy Huberty, Morgan Stanley.

Katy Huberty - Morgan Stanley: How do you gain confidence that the acquired storage businesses aren't losing moments given the growth rates are now closer to the market that you're no longer taking share? Is that where some of the $90 million of investments in acquired businesses, is that where some of that's going?

Michael S. Dell - Chairman and CEO: Well look I think there are definitely opportunities to improve some of those businesses the pipeline is pretty healthy when I look at the demand. What we also see is we're growing fast in the part of the product line that has a pretty long tail of revenue. So pretty encouraged with what we see there, and we're just introducing a whole range of new products this week in fact at our Dell Storage Forum in Paris. So I think we're in reasonably good position there. We have been adding sales capacity and investment in the sales specialist to be able to drive that business further, but it's definitely an area, where we're going to be looking for higher growth rates.

Katy Huberty - Morgan Stanley: Then on gross margins, Quest should drive a nice boost sequentially. Is there any reason that the October quarter, Brian, was in a trough in gross margins over the longer term? Is there any risk that PC volumes and pricing would offset the Quest benefit?

Brian T. Gladden - SVP and CFO: Yes, Quest helps and clearly the faster growth on the enterprise side with higher gross margins is a good thing that over time will continue to push gross margins up. I think in the next quarter, I'd highlight two challenges, one is just mixes. You have a bigger consumer business that typically plays out in the fourth quarter, and there is some pricing pressure on the client business side. So we'll manage through that, but there are some good macro trends that are driving margins up over time.

Operator: Mark Moskowitz, JPMorgan.

Mark Moskowitz - JPMorgan: Michael or Steve, I'm just trying to get a sense here in terms of the enterprise growth. How much of that is related to customers who are new to Dell and they look to your PC business kind as a loss leader. I'm just trying to understand the value of retaining the PC business longer-term and these newer customers driving the enterprise growth aren't buying your PCs liking the PC business.

Stephen J. Felice - President, Chief Commercial Officer: Well for several reasons. First of all, we continue to see a need with the trend and technology to have an end-to-end solution. When you think about the trends that are going on in bring-your-own-device and virtualized desktops and cloud computing all of these things leave Dell as a trusted advisor with a lot of customers to give them a solution from end-to-end. We also have a nice cash business with our client, there is lot of benefits to it and our commercial client business drives very healthy profitability. On the enterprise side, you could see from the server performance that we are taking share. We are gaining new customers, we are gaining them around the world, we are now number one in Asia and that's because we're winning new customers in China. Michael talked about our leadership position in the U.S. in particular I talked about the strong growth in the SMB market. We grew enterprise quite a bit there, we resonate really well with those customers and they have a little better wherewithal to spend money right now. So I think we performed really well there. So this is also the SMB is also a customer set that does look to Dell as a trusted advisor across all the products. So we have great cross-selling opportunities in that customer set. So we think this portfolio is important.

Mark Moskowitz - JPMorgan: Then, Brian, can you give us some minor sight in terms of the incremental R&D investments required going forward. Should we think about R&D growth been in the mid-teens year-over-year for the next couple of quarters? Or is it going to be an inflection point then?

Brian T. Gladden - SVP and CFO: No. It's going to continue to be place where you will see growth, especially around these enterprise businesses. I think much of what we have done is incrementally invest in R&D in acquired assets and building out the intellectual property that we have acquired. So that's going to continue to be very important. As a company, we are running at 1.8% of revenue now, significantly up from where we were even a year ago. So it's an important trend that will continue for us. We will be increasing R&D.

Operator: Keith Bachman, Bank of Montreal.

Keith Bachman - Bank of Montreal: My first question is on services. The support business is growing nicely due to better attach, yet if I look at infrastructure applications and BPO, it seems that that business is growing well below market growth rates. So I was wondering why and what's the action plan to improve growth in those areas. I have follow-up, please.

Brian T. Gladden - SVP and CFO: Keith, I mean you've seen as we've talked about over the last few quarters pretty strong growth in terms of new signings and much of that's around IT outsourcing and absent BPO. What's going on in the business is we are intentionally pruning some legacy accounts that from our standpoint aren't necessarily long-term strategic accounts for us. That has improved profitability significantly. It has been very conscious and thoughtful, and I think you will see as those new signings begin to kick in over the next few quarters here that those businesses will begin to show some nice growth.

Robert Williams - IR: That's led by the way to sixth consecutive quarters of increasing margins.

Brian T. Gladden - SVP and CFO: Yeah, it's helping services margins overall, too.

Keith Bachman - Bank of Montreal: Well, then my follow-up I want to stay with this subject if I can is, Brain, can you give a little more color on what the growth trajectory here in this business is and within that context you've been acquiring a good deal of IP on transaction-related businesses, but is there a thought here to investing more in this business as well including non-organic sources?

Brian T. Gladden - SVP and CFO: Yeah, I think we've been – obviously, as we built out and built around the (Pro) platform, we've added some things to that portfolio that are executing well. SecureWorks is a great security services business that's been growing very, very well and has been a great acquisition. We've added some new intellectual property around application modernization this year with Make and Clerity. So I think you'll see us try and focus on differentiated IP that we can add to the services portfolio and grow higher margin parts of that business.

Michael S. Dell - Chairman and CEO: Keith, whether it's in infrastructure, cloud security or absent BPO, the team at Dell services is really focused on next-gen services solutions, still in the (blank as a services) as an example, and so as a result of that, they are continuing to fine tune the model to make sure that they have got the right cost structure in place and the right people and tools and technologies in place. So they are very comfortable with where they are positioned right now and feel very comfortable with their pipeline. They are just doing some things that they feel are right, absolutely right strategy on a go forward basis, and it's showing up in the P&L, not necessarily at the revenue line right now.

Keith Bachman - Bank of Montreal: How long does it take to filter out the deals, Brian, I didn't hear is that part. Is this another one, two quarters, three quarters?

Brian T. Gladden - SVP and CFO: I think they will continue to do it. You will start to see the benefit at some of the signings kind of rolling into the business as you get through next year, probably the middle of next year.

Michael S. Dell - Chairman and CEO: They are being a bit more careful about how they start to book – to bring those signings on and so, again, you've got good consistent level of signings on a 10 and 12-month basis. That's been consistently just below $2 billion. So that should began to filter into the business.

Jeffrey W. Clarke - Vice Chairman and President, Global Operations and End User Computing Solutions: A comment related to some customer feedback, the silver lining in a bad economic situation that has everybody really examine their cost structures and I feel like we're hitting an inflection point where you hear CIOs and I've heard many of them specifically say I've got to get off of my proprietary environment. I've got to get off the mainframe. These are comments we never use to hear and we are so well-positioned without having a legacy profit stream from those proprietary environments to meet the needs of customers wanting to move and that's why we're getting apps monetization capabilities so we can help drive that transition.

Operator: Peter Misek, Jeffries & Company

Peter Misek - Jeffries & Co: You exhibit a lot of confidence in your commentary that this current downturn is more of a short-term downturn. Can you give us any data points post the October close or any comforted (indiscernible) that this is short-term and this isn't a longer term malaise, we had a double-dip recession in Europe. We have a bit of mess politically in Congress right now. Any kind of dynamics would be great in terms of that then I have a quick follow-up.

Brian T. Gladden - SVP and CFO: I can't really give you any fourth quarter color, but some of the things we talked about clearly and we're really talking about the client business. You see what's happened with the inventory dynamics. We see what happens – what's happened here with the Windows 8 operating system transition. I mean those are clearly impacts that we would see working their way through the system over the next quarter or so. So don't expect a lot of improvement in macroeconomy and probably don't expect a lot of the fundamental PC demand dynamics to improve over the next quarter, but that will – that element will work its way through.

Peter Misek - Jeffries & Co: As we look at and you mentioned in your commentary as well, as you look at the macro environment, I want to understand a little bit in terms of component strategies managing inventory. Can you give us any color on how we're looking in terms of – we know what the channel inventory is, you've annunciated that, any ability to give us some detail on what Dell's raw material or purchase commitment inventory looks like, not necessarily on the PC side, but more in terms of some of the other hardware? There seems to be some nice component pricing that's coming down, I am wondering if Dell has been able to take advantage of that.

Brian T. Gladden - SVP and CFO: I think it's one of the strengths of our efficient supply chain and short cycle times as they're getting access to those opportunities. We've done a good job with that. As you've seen over the last quarter at least that we've taken inventory levels down. So we think that gives us a chance to take advantage of those opportunities and we've done some of that.

Operator: Kulbinder Garcha, Credit Suisse.

Kulbinder Garcha - Credit Suisse: Brian, a question for you just on the cost base really. With margins having gradually come down for multiple quarters now at the gross and I guess operating level. Is there anything more radical you guys have considered? Are there any disposals you can do, small or large, or just taking more of a stringent view of the cost base, if this is a prolonged downturn (of this) sustainable pressure on margins in the client businesses you have to be more actioned going forward? Is that under consideration or is it just $1 billion in the client business you've mentioned so far?

Brian T. Gladden - SVP and CFO: No, look, I think we're doing a couple of things. Clearly, we've managed discretionary spending with a specific focus on G&A over the last several quarters here and if you look at the OpEx trend that we have had this year, I mean, it has been fairly well managed as in many cases we have added a lot of investment in the key priority areas for the business. So that will continue. We just think that's clearly something we've to do in this environment and the right thing to do. Jeff Clarke this summer talked about a broader $2 billion initiative, $1 billion of that is in the client space, some of that will be in COGS, some of it will be in OpEx and then there's another $1 billion that we're going after in other parts of the business. So those are broad initiatives that affect the underlying structure of the business and allow us to drive efficiency and productivity across the business. You will see that sort of play out over the next couple of years and we'll talk more about that as it sort of works its way through the system.

Kulbinder Garcha - Credit Suisse: Just to be clear, Brian, none of this $2 billion potential in saving however it might come in the P&L has really impacted you, has really benefit you guys yet, is that correct?

Brian T. Gladden - SVP and CFO: That's generally right. I mean we've started some of the activities, but it's been more aggressive management of discretionary spending in the short term.

Operator: I'll now turn the call over to Mr. Williams for closing remarks.

Robert Williams - IR: No closing remarks. Thanks a lot and we look forward to chatting with you.

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