|Read Chairman and CEO Michael Dell’s annual letter to customers, partners, shareholders and colleagues. |
To Our Customers, Partners, Shareholders and Colleagues:
Throughout our history, Dell has operated in the midst of tremendous change, and this proved to be the case in fiscal 2007. As we continue to play a significant role in the evolution of technology and business, our company has become known for responding rapidly, and often leading the change ourselves.
After a period of challenges, we are once again driving growth. Our business of selling high-quality products to our customers remains strong. Last year, Dell shipped more units — 39.1 million — than we did in our first 16 years of existence. We also generated $57 billion in revenue and delivered earnings per share of $1.14 for the year.
Nevertheless, we recently have not met the standards we set for ourselves and our investors. Our business operates in a very competitive environment, and for the first time in many years, we began to lose share, while our growth slowed and our profitability declined. Consumers told us that the customer experience we were providing them, once the benchmark for the industry, had started to slip.
We recognized these problems and became determined to correct them. Our goal, though, was not merely to find short-term solutions, but to transform Dell and reclaim our position as the most trusted technology partner in the industry.
That process is well underway in our fiscal year 2008. Earlier this year we assembled a new Executive Leadership Team, mixing experienced Dell veterans with accomplished technology and business leaders from outside the company who bring a fresh perspective. I believe this is one of the most impressive groups of leaders at any technology company. Together, we have started retooling the company, focusing on three key areas: improving our core business, reigniting global growth and building for the future.
Improving Our Core Business
Improving our core business began by simplifying our internal organization to make it easier for Dell to listen to customers and respond to them. We have already begun stripping away layers of management across the company and are deploying people to positions where they will add more value for our customers. In engineering, to offer just one example, we will devote more to the critical areas of design and intellectual property. These actions will help us improve profitability, in part, by lowering our operating expenses while adding focus to solving our customers' most persistent IT challenges.
As we considered the best way to organize ourselves to reach customers, we also have thought about how we could strengthen our business model. For most of our history, the direct model has been an integral part of Dell’s success and will continue to be the foundation of our business going forward. Since the close of fiscal 2007, we began building on that success, combining the revolutionary direct customer model with new distribution channels. The evolution in our business model allows us to reach additional consumers and small businesses through value-added resellers and retail partners such as Staples and Wal-Mart in the Americas, Gome in China, Carphone Warehouse in the U.K. and Japan’s Bic Camera.
Responding to customers quickly is also important to us. We have reexamined our entire design process to improve our speed-to-market so that we can get the products that customers want in their hands even more quickly than we do today. This process has led to some significant changes in the way we run our business. We have established a global operations center in Singapore to run our supply chain, product design, manufacturing and support operations so that they serve the interests of the customer.
The most critical test with customers, however, is finding better ways to respond to them when they need help. Customer service and support teams are the key to resolving customer issues the first time. We have added thousands of new support team members in all regions, trained them to fix a broader range of complex issues, and launched DellConnect, a remote diagnostic tool that has so far delivered nearly 8 million sessions with a 93 percent satisfaction rate. While we’ve improved in many industry customer satisfaction rankings, we will continue to strive to make our customer service the best in the industry.
We believe that improving the core business can occur while also ambitiously pursuing growth. The five biggest growth opportunities for Dell include emerging markets, consumers, laptop computers, enterprise systems, and small and medium businesses.
The most significant development for our industry over the next decade will be the arrival of one billion new computer users, most of them coming from Asia, Latin America and Eastern Europe. For Dell, this represents an enormous growth opportunity. We are eager to deliver technology to these new customers outside of the United States. To help us harness this growth opportunity, we have focused on building facilities and locating manufacturing capacity close to our customers. For example, we’ve opened a new manufacturing center in India, and have plans to open another in Poland, to go along with increased capacity for existing plants in Brazil and China.
We are also designing new products expressly aimed at our global customers. In March, we released the EC280 desktop for first-time computer users in China, where our products are available in more than 2,000 cities. Our plan is to continue to look for opportunities to customize products and services for our diverse and growing customer base.
Of course, in every part of the world, Dell’s growth will continue to be fueled by our innovative products and services. For example, we believe the customer migration to laptops is accelerating, and Dell intends to continue to be a leader in this space, constantly improving and upgrading our product line. In June, we introduced our new family of Inspiron laptops featuring, for the first time, personalized color options and improved mobile broadband. Our Latitude line of commercial laptops continues to set the standard for quality, compatibility, battery life, charge time and service options.
At the highest end of the market, we continue to introduce superior products. A good example is the XPS M1330, one of the world’s thinnest 13.3 inch laptops. Our high-end performance XPS systems continue to earn industry-leading accolades, including multiple mentions in PC World’s “Best Products of 2007,” PC Magazine’s editor’s choice awards and the “Best of CES Innovations 2007.” And our acquisition of Alienware has added high-performance, high-quality PC products to our portfolio that carries tremendous brand appeal with consumers and creative business professionals.
For small business leaders, we recently introduced Vostro, an ecosystem of products, tools, support and resources exclusively designed for small businesses. Vostro expands our role as a provider of solutions to small businesses. The technology is simple and easy to set up right out of the box. It allows small businesses to focus on their customers, rather than worrying about their technology. We also launched the MD3000i, a simplified storage consolidation solution designed specifically for small and medium businesses that are challenged with storing and managing exponentially growing data.
The heart of our business is serving large commercial and institutional customers. In fact, Dell sells more computers to businesses than any other company in the world. Part of our success is our ability to deliver the enterprise technology these large organizations need, including servers, storage and services. A growing area in Dell’s enterprise business is server virtualization. We are helping organizations take advantage of this technology to easily grow and maintain their operations more efficiently.
Dell’s new Data Center Solutions Division is addressing the unique needs of hyper-scale data centers for businesses that rely on enterprise computing solutions. Our team has the ability to create a truly differentiated product, because it designs unique servers and services tailored to each customer’s specific requirements.
In services — currently about a $6 billion annual business — our primary strategy is to support the commercial-class products we provide. Dell Professional Services are changing the way customers think about designing, deploying and maintaining their IT infrastructures. And Dell’s Managed Life Cycle Services team is focused on creating the next generation of support services, such as remote management, diagnostics and problem resolution.
We continue to grow our business organically and are forming partnerships and making selective acquisitions for the additional technology and people that will help accelerate our progress. Dell’s planned acquisition of ASAP Software and its completed acquisition of Silverback Technologies are early examples.
In all these efforts, listening to customers remains our touchstone. We want our customers to walk our hallways every day via their direct feedback. We are doing more of it through increasingly innovative ways. Our blog www.Direct2Dell.com and our customer idea engine www.IdeaStorm.com along with our online community forums have become great sources for new ways to listen and engage. Listening through these forums has resulted in our offering flash-based drives on corporate laptops and delivering personalized systems with custom color and automated services options. These ideas were driven, in part, by customers who offered their ideas to us directly.
Building for the Future
As it has been for the past 23 years, our focus today is on creating long-term value for shareholders.
One of the most important opportunities before us is harnessing our unique ability to simplify information technology. Today, enterprises of all sizes are hampered by the sheer complexity of IT. We are responding to this problem by focusing on removing complexity and building different kinds of Dell services that will help customers spend more time on innovating and growing their businesses and less time on managing their IT infrastructures. IT will be less about technology and more about the business value it provides. IT simplification is becoming an organizing principle for Dell.
Our ability to see opportunities for IT simplification can also contribute to one of the most significant challenges facing our entire industry: how to create energy-efficient, environmentally friendly IT infrastructures. We strive to be one of the greenest technology companies on the planet. Today, Dell ranks at the top of our industry in GreenPeace’s industry report card on policies, practices and take-back programs. We are pleased with this achievement, but we view it as a beginning, not an end. During fiscal 2007, we committed to eliminating all brominated flame retardants (BFRs) and polyvinyl chloride (PVC) in Dell systems by 2009. We also are the first major computer manufacturer to commit to neutralizing the carbon impact of our worldwide operations. And we’ve been encouraged by our response to the Plant a Tree for Me campaign that helps consumers offset the carbon emitted from systems. As a result, we launched Plant a Forest for Me for our corporate customers. Our free global recycling program is on track to recover more than 275 million pounds of used computer equipment by the end of fiscal 2008.
These projects, which are focused on offering simpler, more energy efficient technology, will be with us for years to come. We believe they will be critical components to both growing our business and making Dell a model for corporate leadership.
The Audit Committee of our Board of Directors has completed its independent investigation into certain accounting and financial reporting matters. As a result of accounting errors and irregularities identified in that investigation and in additional reviews conducted by management, we restated our financial statements relating to fiscal 2003, 2004, 2005, 2006 and the first quarter of fiscal 2007. We encourage you to read our SEC filings for restatement details.
We are disappointed that these errors and irregularities occurred. But we also believe that the rigorous examination of our accounting and finance processes, along with the remedial actions taken and planned, have made and will continue to make Dell a far stronger company and provide a solid foundation on which to move the business forward and focus our energy on serving our customers. And we have a renewed focus on achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity.
The technology business is full of opportunity and change. I believe that Dell is on the brink of one of the most exciting periods in our history. The past year has given us the opportunity to question every assumption about our business. We continue to do that vigorously. The result is that we are emerging stronger, more innovative and more ambitious than we have ever been. These are precisely the qualities Dell will use to thrive in the coming era of a truly global technology market.
Since our modest beginnings 23 years ago, we have led the transformation in how organizations and consumers purchase technology. Today we are in the midst of reinventing the way the world uses IT — and the way we will interact with our customers. No other company has the capabilities of Dell to take on this challenge and make it affordable, which is why I remain excited about the opportunities we will create. I am proud to be leading our company and I thank you for your continued support.
Chairman and CEO
|Financial Data Table|
|Gross Margin||9,516||9,891|| -4%|
|Operating Income||3,070||4,382|| -30%|
|Diluted EPS||1.14||1.47|| -22%|
|Cash Flow Per Share||1.75||1.94|| -10%|
|Cash and Investments||12,445||11,756|| 6%|
All data except per share data and share data is in $M