Earnings per share were at 21 cents, a whopping 14 cents below the consensus view, while revenue, at $14.07 billion, was above the forecast by about a half-billion dollars.

During a conference call with analysts that wrapped up just a little while ago, Dell management struck a tone of sticking to its strategic guns. With the PC market contracting fast, it has gotten selectively aggressive on pricing in order to try and take share away from rivals like Hewlett-Packard and Lenovo. At the same time, the results show growth in expenses like research and development spending that aren’t exactly helping gross margins.

In short, Dell is starting to act a lot more like the privately held company it expects to be before the summer is over, accountable only to its owners.

In their questions, analysts sought to tease out what details they could about the effect of the proposed go-private transaction on things like employee retention and relationships with key customers. CFO Brian Gladden and head of investor relations Rob Williams shot those questions down.

Here’s a summary of the substance of the conference call (all times are Pacific):

1:46 pm: On hold waiting for the conference call to begin with what sounds like some Vivaldi playing in the background.

And now things are getting under way.

Standard conference call boilerplate from head of investor relations Rob Williams.

Brian Gladden is speaking. “We continue to invest in strategic capabilities.” He’s talking about the acquisition of Entratius, which closed last week.

Gross margin was down 40 basis points sequentially.

“We continue to face a competitive pricing environment … and this has affected our profitability.”

Selling and general costs were up 4 percent.

R&D spending is up 33 percent.

Gladden: There were almost $90 million worth of expenses related to the go-private transaction that were excluded from the non-GAAP figures.

1:54 pm: Tom Sweet is talking about business segments. Here comes the news on server sales that Michael Dell said was going so well.

Servers, Networking and Peripherals saw sales grow by about 10 percent, but sales of storage fell about 10 percent.

Sweet: “Dell powers four out of the top five search engines and 75 percent of the top social media sites worldwide.”

Sweet is covering a few customer wins. And now he’s on to software. Revenue was $295 million and had an operating loss of $85 million. “We remain confident that the Quest acquisition (which was $2.4 billion) will be accretive by FY 2015.

Sweet is talking about End User Computing, a.k.a. the PC segment, and says the environment continues to be competitive. The plan is to try and cut $1 billion out of operating costs by 2015. But customers are “diverting spending to alternative mobile solutions.” Does he mean iPads? Yup.

2:01 pm: Sweet is talking about a big PC win with Marsh and McClennan that has 55,000 seats. “We won despite a key competitor that was a longtime incumbent.” Who? HP maybe?

Question and Answer session is getting underway. First is Katy Huberty from Morgan Stanley. “Can you step back and say if the margin decline is what you expected when you rolled out the more aggressive pricing strategy?”

Gladden: We’ve been talking about this for a few quarters, the need to adjust pricing. There are parts of the business where we are beginning to see some elasticity. Demand has been weaker than expected. These are accounts that we’re gaining that we feel good about their profitability. We feel for the long term we think it’s the right thing to do. If you look at the share dynamics, we did improve our share position in a market that is pretty tough.

A question from Tony Sacconaghi of Sanford Bernstein: Is there a minimum level of profitability that you are willing to sustain in an effort to hold or gain share? Also a question about cost-cutting.

Gladden: Without providing details of specific initiatives, we have continued to take cost out of the business. We are choosing to reinvest those dollars in sales and R&D. I think those things are going on concurrently. (Essentially what he’s saying is that Dell is acting like it’s a private company already.)

As Gladden is speaking I’m looking at the slide presentation. The worst geographically was Asia-Pacific, where sales fell 12 percent year on year. Ouch. Sales in the Americas were up slightly. The BRIC countries fell 17 percent, led by China which fell 24 percent. Super ouch.

Maynard Um: Are customers holding out given the go-private transaction?

Gladden: The customer base has been very supportive of the company. For the conversations I have been a part of they have resulted in many opportunities for the company.

FYI Dell share price update: In after-hours, Dell is trading at $13.37, which is 28 cents below the $13.65 that Michael Dell and Silver Lake have offered shareholders to take it private.

2:11 pm: Question from Steve Milunovich from UBS. He’s asking about changes in sales model on PCs that’s expected as Dell goes private.

Gladden: I wouldn’t say our strategy has changed at all. We’ve adjusted our pricing accordingly and expanded our offerings across the portfolio. This is not a new strategy or business model for us. It’s adjusting tactics given where the market is going.

Question from Credit Suisse: In terms of pursuit of new PC customers, have you put the investments in that you need to or is there more effort to come through?

Gladden: Basically says the strategy hasn’t changed.

Question from Deutsche Bank, asking about servers and the storage business. Servers are good but he says storage doesn’t seem to be getting good attach rates.

Gladden: With servers, we’re winning in the marketing. And when you look at density-optimized servers, we’re winning. We feel good about the server business. You don’t see us trading price for growth there.

About storage. We feel like that business is growing with the market. It’s shrinking with the market. That is not what we’d like to see, obviously. We’re working on it. We’ve added commercial resources over the the last 18 months. We feel positioned to out perform the market.

Question from Keith Bachmann at BMO: How might the M&A strategy differ if the go-private transaction happens? Also about employee retention during the transaction.

Rob Williams: No answer to the first question.

Gladden: Attrition has been about normal for us.

Another question: Does the PC market get softer or better over the next four to six quarters?

Gladden: There are multiple dynamics playing out. There’s a lot driving a refresh cycle. We see improvements in corporate and SMB segments. But we see consumer and government, not so good. Windows 8 has not been the catalyst to growth that we hoped it would be. (That’s a big admission.) You look at recent external data, and we would expect to see over the next few quarters declines in PC demand. We’re trying to run the business based on that.

2:22 pm: Can you update us on the peformance of Quest in the quarter?

Gladden: It’s progressing as expected. We expect it to be accretive in the first fiscal quarter of next year. (Or a year from now.)

Question from Bill Shope of Goldman Sachs, about the PC pricing reductions: Which accounts are the ones that get the discounts? Where do you draw the line on profit vs. market share?

Gladden: We know where long-term strategic accounts are. In many cases those are accounts we’ve had before and have walked away from. I think we’ve been selective. There are clearly some unit volume opportunities where we can sell a lot of units, but they don’t create any profit benefits.

2:29 pm: One last question, this one on support and deployment revenue, which was up.

Tom Sweet: We’re happy with the attach rate there. The team has seen some good things with support products. We’ve been able to keep the attach rate relatively high. Despite downward pressure, it will be a good business.

Gladden: We think that’s a good business on the enterprise side, too.

And that ends the call. Thanks for tuning in!

Earnings on a per-share basis were 21 cents on sales of $14.07 billion. That’s versus a pre-leak consensus of 35 cents on sales of $13.5 billion. Sales were obviously better than expected, but profits were substantially lower.

On a year-over-year basis, sales fell 2 percent. Profits on a non-GAAP basis fell 51 percent. The fall was led by end-user-computing, Dell’s mainstream PC business. Sales there fell 9 percent, and the unit’s operating margin fell 65 percent. That’s where the pain point is.

Enterprise sales grew by about 10 percent to $3.1 billion. Services revenue grew to about 2 percent. Software sales were $295 million but that unit ran at an operating loss.

Here’s Dell’s original announcement:

Dell Reports Fiscal Year 2014 First Quarter Financial Results

Revenue of $14.1 billion
Enterprise Solutions, Services and Software revenue up 12 percent
GAAP earnings of $0.07 per share; non-GAAP earnings of $0.21 per share

ROUND ROCK, Texas–(BUSINESS WIRE)–

Dell today announced fiscal 2014 first quarter results, with revenue of $14.1 billion, as the company grew revenue from Enterprise Solutions, Services and Software 12 percent year over year to $5.5 billion, or 8 percent growth, excluding the acquisition of Quest Software. Pricing adjustments that affected gross margins and continued acquisition-related costs in the quarter resulted in GAAP earnings of $0.07 per share and non-GAAP earnings of $0.21 per share.

“We made progress in building our enterprise solutions capabilities in the first quarter and are confident in our strategy to be the leading provider of end-to-end scalable solutions,” said Brian Gladden, Dell chief financial officer. “In addition, we have taken actions to improve our competitive position in key areas of the business, especially in end-user computing, and it has affected profitability. We’ll also continue to make important investments to support our strategy and drive long-term profitability.”

Results

Revenue in the quarter was $14.1 billion, a 2 percent decrease from the previous year.

GAAP operating income for the quarter was $226 million, or 1.6 percent of revenue. Non-GAAP operating income was $590 million, or 4.2 percent of revenue.

GAAP earnings per share in the quarter was 7 cents, down 81 percent from the previous year; non-GAAP EPS was 21 cents, down 51 percent.

Cash used in operations in the quarter was $39 million. On a trailing, 12-month basis, Dell has generated $3.4 billion in cash flow. Dell ended the quarter with $13.2 billion in cash and investments.

 
Information about Dell’s use of non-GAAP financial information is provided under “Non-GAAP Financial Measures” below. Non-GAAP financial information excludes amortization of purchased intangibles, severance and facility-actions, acquisition-related charges, costs incurred in Fiscal 2014 related to Dell’s proposed merger, and other items. All comparisons in this press release are year over year unless otherwise noted.

Operating Segments Summary:
As previously announced, Dell has realigned its global operating segments to its end-to-end solutions portfolio in the Enterprise Solutions Group, Dell Services, Dell Software Group, and End User Computing Group.

Enterprise Solutions Group revenue was $3.1 billion, a 10 percent increase. Operating income for the quarter was $136 million, a 71 percent increase. Dell server and networking revenue increased 16 percent as the company gained share in the calendar first quarter. Dell networking continued to deliver strong growth, with a 24 percent revenue increase, including a 46 percent growth in the company’s Force10 business. Dell storage revenue declined 10 percent.

Dell Services revenue grew 2 percent to $2.1 billion driven by an 11 percent increase in revenue for infrastructure, cloud and security services. Support and deployment revenue increased 2 percent and applications and business process services declined 15 percent. Operating income was $370 million, a 10 percent increase.

Dell Software revenue was $295 million, resulting in an operating loss. Dell enhanced its software capabilities during the quarter, investing in additional sales capability and research and development. Consistent with the company’s business strategy when it acquired Quest Software, this business is on track to be accretive to earnings in the first quarter of fiscal year 2015.

End User Computing revenue was $8.9 billion in the quarter, a 9 percent decrease. Operating income for the quarter was $224 million, a 65 percent decrease. Dell desktop and thin-client revenue declined 2 percent, mobility revenue declined 16 percent, and software from third parties and peripherals revenue declined 6 percent.

Company Outlook:
Given the company’s announcement on Feb. 5 of a definitive merger agreement to take Dell private, the company is not providing an outlook for the fiscal 2014 second quarter.

First off, Dell has moved up the date of its report. Originally set for May 21, the results will come after markets close in New York today and a conference call with analysts will start at 1:45 pm PT.

The reason for the change likely has a lot to do with the fact that Dell is probably going to report another miss on its consensus numbers. Analysts polled by Thomson Financial expect Dell to report a 35 cent per-share profit on sales of $13.5 billion. But as The Wall Street Journal reported Monday, Dell expects to announce profits of about 20 cents on $14 billion in sales, a huge bottom-line miss.

It’s difficult to expect much else. Despite all the efforts made in recent years to nudge Dell in the direction of becoming a more enterprise-focused company via acquisitions in the areas of cloud computing, software and services, Dell still derives about 70 percent of its sales, give or take, from consumer or commercial PCs or PC-related accessories like monitors. And as we all know, PC sales are plummeting at a historic rate.

That’s not to say there aren’t potential bright spots. CEO Michael Dell has been crowing about the company’s success in server sales and has described market share losses by rival Hewlett-Packard as “staggering.”

Then, of course, there’s the ongoing saga of Dell’s quest to go private in a $24.4 billion buyout transaction with Silver Lake Partners. Carl Icahn and Southeastern Management, which between them control about 13 percent of Dell shares, are opposed and this week made their own counter-offer, and then nominated a slate of directors to replace Dell’s current board. Icahn has made no secret that he’d like to send Michael Dell packing. The special committee of Dell’s board overseeing the buyout process has asked the Icahn camp for more information.

Certainly there will be questions for management about all of it, though the answers from Dell management will probably be some variation of “no comment.”

Dell is expected to report revenue of roughly $14 billion, and earnings, excluding some expenses, of 20 cents a share for the company’s just ended fiscal first quarter, according to the person briefed on the financial results.

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Taking to CNBC’s airwaves in another one of his candid phoned-in afternoon rants (the last was an epic 28-minute on-air slugfest with hedge fund investor Bill Ackman in January) with host Scott Wapner during the closing half hour or so of the network’s “Fast Money Halftime Report” show, Icahn revealed that on Monday he will nominate a slate of 12 new directors and, if successful, he’ll see to it that Michael Dell doesn’t remain CEO. “He will not be running the company,” Icahn said.

“It’s not that I have anything against [Michael] Dell. I’m sure he’s a very nice guy,” Icahn said. “But it’s a new world out there.”

Icahn has had a busy day on the Dell front. First he reported in a filing with the U.S. Securities and Exchange Commission that his stake in Dell amounts to 4.52 percent. He also joined Southeastern Asset Management, Dell’s largest outside shareholder, in making a joint bid for the company. (The Wall Street Journal’s Moneybeat has the full text of the joint Icahn-Southeastern letter to Dell’s board here.)

The special committee of Dell’s board has in the last several minutes issued a statement saying it is “carefully reviewing” the Icahn-Southeastern offer.

“Mr. Icahn and Southeastern have outlined a potential leveraged recapitalization transaction that they want the Dell Board either to recommend at this time or to consider if the existing going-private transaction is rejected by Dell shareholders. They have also proposed replacing the Board with a slate of new directors who they say would approve such a transaction. Consistent with the Special Committee’s goal of achieving the best possible outcome for all shareholders, we and our advisors are carefully reviewing the potential transaction to assess the potential risks and rewards to the public shareholders.”

In his televised jeremiad, Icahn blasted Dell’s board and said that Dell shareholders will “literally get screwed” by the $24.4 billion Michael Dell/Silver Lake offer to take the company private in a leveraged buyout. His offer, he said, would leave existing shareholders with a publicly traded stub that would allow them to make more money than the $13.65 per share Dell and Silver Lake have offered.

Below, two video highlights. The second one focuses more on Wapner’s fascination with Icahn’s opinion of the legendary Wall Street short-seller Jim Chanos, who has previously publicly stated that he has been shorting Dell shares. “I’ve made a lot of money going against Chanos,” Icahn said.

Of course it goes without saying that all the attention on Dell caused the shares to trade upward during the half hour or so that Icahn was on CNBC. Ahead of 1 pm ET, Dell shares were trading as high as $13.51, or up more than 1 percent. After Icahn hung up (and apparently called BloombergTV to make a similar on-air speech), its price settled back down. Here’s a screen grab I took of Dell’s share price via Yahoo Finance.

Courtesy 2K Games

When you think of mobile games, you probably think of titles like Angry Birds, Temple Run or Fruit Ninja — not the sort of micromanaging strategy games for which Sid Meier is best known.

And yet the creator of the hit Civilization franchise and his company, Firaxis Games (owned by Take-Two Interactive), are moving more troops into mobile after testing the waters with ported games like Pirates! and Civilization Revolution. Rather than just producing, Meier himself was one of three programmers on a new mobile-first Firaxis game, Ace Patrol.

Although the WWI dogfighting game — scheduled to launch on May 9 — will be iOS-only, Meier acknowledged that “there’s certainly a logic into looking into other platforms and seeing what the possibilities are.” He caught up with AllThingsD on the phone recently to talk about how he sees the changing landscape of games.

CC BY-SA 2.0 Antonio Fucito

Sid Meier: The very early console games were very simple, twitchy hand-eye coordination games. And then, over time, strategy became okay to do on console. I think we’re going to go through a similar evolution with mobile, where initially the games are pretty casual and simple, but that’s not because of any restrictions in the platform or anything, it’s just that the market is gonna evolve and the audience is gonna evolve. There’s definitely a role for more strategy-oriented games on mobile.

And do you think that’ll go mainstream, or will that be a niche audience?

I think [strategy] is probably not going to be the predominant genre on mobile, but it will grow in the same way it has grown in the PC market and the console market. In a lot of ways, it’s more suitable to mobile than console because, on mobile, you could potentially be distracted, so you want a game that’s played at the player’s pace, and not at a pace that’s driven by the game itself — something you can start and stop, and put away for a while.

What about multiplayer? Depending on whom you ask, the future of multiplayer games could be asynchronous and turn-based, or all about playing live, either in the same room or on different devices anywhere in the world. Do you have a dog in the fight?

Since our game is turn-based, we chose to support two of those modes. One is the asynchronous mode, where you can have 10 games going on at the same time with 10 different people. The other mode, which we’re calling “hot-pad” mode, is where you’re playing on the same machine with the same player. Real-time multiplayer is suited to another type of game. I’m playing a lot of World of Tanks right now, and that works really well as a real-time multiplayer game. It might not work so well on mobile, where you might get a phone call, or maybe you’re traveling and you can’t guarantee that you’re going to be able to hang around until the end of the game.

What did you learn from the experience of heading up such a small team on Ace Patrol? Do you think you will do the same thing in mobile again?

I’ve enjoyed the small-team aspect — fewer meetings, and more time to actually work on the game. And I’ve learned really to kind of appreciate some of the unique features of the mobile platform: The touchscreen, the gestures, the swiping, the pinching. That tactile interaction between the player and the game really connects you more closely with what’s happening on the screen. We’re very impressed with just the raw horsepower of the platform. For a flight game, it’s fun to have a 3-D world to fly through … we actually weren’t sure whether we could do that when we started. Also, [we've learned] how many of our core strategy game elements that we’ve used on other platforms seem to work fairly well on iOS.

And that’s interesting because not all games are as mobile-friendly as others. Will Firaxis be doing more with turn-based games on mobile?

I think it works very well, yes. There are certainly some real-time games that work just fine. But the turn-based games that we’ve done, whether it’s Haunted Hollow or Ace Patrol or XCOM, later this summer, just all seem to be a natural fit for the mobile platforms. Is it part of our future? I think the answer is pretty assuredly yes. But we’re not giving up on PCs. They’re our bread and butter, and the new consoles are very interesting, but we definitely see mobile as a significant part of our future going forward.

What do you think about what Microsoft is doing with Windows? Obviously, they have the legacy title for being the home of PC gaming, and yet, in some ways, they’re making their main OS a lot more like a mobile operating system.

That’s a very interesting development. The PC market is splitting into tablet PCs and the traditional desktop PCs. These games that we’re doing cross over really nicely into tablet PCs or any kind of mobile format. That’s another reason why we’re looking really seriously at this market. I’m not sure what’s happening in the PC market, whether it’s going to go toward tablet or continue to be really strong in desktop. It’ll be interesting to see how it plays out.

The new details about the decision to name Krzanich as the successor to retiring CEO Paul Otellini emerged in a brief report by CNBC’s Jon Fortt (video below) after he talked with Chairman Andy Bryant, who led the board’s search.

The joint pitch initially threw the board for a bit of a loop if only because it’s a highly unusual — and, one would presume, risky — move, in so delicate a matter as CEO succession at one of the world’s most influential tech companies. While the conclusion, at least as far as Krzanich goes, certainly appears to have been a predictable one — every Intel CEO since Andy Grove has been COO first — outsiders were still in the running until the very end.

Also a key selling point, though there are as yet no particulars about this, was Krzanich and James’ vision for pursuing the mobile market where Intel is as yet not participating significantly. Expect more noise on that subject once the pair starts their new jobs after May 16.

Intel, which supplies chips for most of the world’s PCs, has been grappling with a stark decline in PC sales. Data released last week by two research firms fed pessimism; one of the steepest year-on-year drops in global PC shipments was read as another sign that the growing use of smartphones and tablets is sapping demand for desktops and laptops.

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The partnership with HP is noteworthy because this is the first time the Leap motion controller will be integrated into computers. The San Francisco-based startup already has plans to sell the Leap as a standalone device for $80. In January, Leap Motion also announced a deal to bundle its sensor with some Asus notebooks and PCs.

“When we first introduced the product, we knew the peripheral was great, because you could take your existing Mac or PC and transform it into a gesture-based machine,” said Michael Zagorsek, vice president of marketing at Leap Motion, in an interview with AllThingsD. “But we felt the future of motion control was being in as many devices as possible, and this partnership with HP is a step in that direction.”

The deal has the potential to be beneficial to both parties. As the world’s market leader in the PC sector, HP can get Leap in front of people at a larger scale. Meanwhile, Leap’s technology can help HP differentiate itself from its competitors. In fact, Zagorsek said that HP first approached them about bringing Leap to its products.

The companies did not share details about specific devices or release dates at this time, but did say that select HP products bundled with the Leap motion controller will start shipping this summer. Then they will launch laptops and PCs embedded with the technology. All Leap-enabled HP devices will also come preloaded with Airspace, Leap Motion’s application store.

As for what’s next, Zagorsek said the company really wants to concentrate on the PC and laptop market for now and is talking with other computer manufacturers, but mobile devices are definitely part of the strategy.

“Obviously, the world is going mobile, so smartphones and tablets are on our road map,” he said. “We want to make sure we’re in as many places as makes sense.”

Intel shares have traded lower since last Thursday, when the market research firms IDC and Gartner said they had tracked one of the largest year-on-year declines in sales of personal computers since records have been kept. Intel is the largest supplier of microprocessors to PC manufacturers like Hewlett-Packard, Dell and Apple, and it’s hard to see how much good news it can possibly bring to the table today.

Analysts are expecting Intel to report a profit of 41 cents per share on sales of $12.6 billion, and missing either would be seen as more or less proving that the PC market is in a state of permanent decline. So would a weak outlook for the current quarter, for which analysts currently expect earnings of 40 cents on $12.9 billion in sales.

There are other aspects to Intel’s business. It has a healthy data center business selling chips for use in servers, but out of more than $53 billion in sales last year, $34 billion, or more than 61 percent, was in its “client,” or PC, unit, while the data center group accounted for about $10.7 billion.

In the past, Intel executives have quarreled with the analyst firms, and said it was seeing more promising conditions in emerging markets. Indeed, in prior years there has been a disconnect between the dour pronouncements of Gartner and IDC and the peppier market conditions that Intel would later describe in its financial results in places like Brazil, Indonesia and Russia. In more recent quarters, the differences between their views have narrowed.

Aside from PCs, Intel has some new ideas that it hopes will kick its data center business into a higher gear. And it certainly has higher hopes about selling more chips for use in phones and tablets, but as yet they’re only hopes. It also plans to launch a TV product later this year.

Aside from the numbers, expect some questions — and maybe even some answers, but probably nothing conclusive yet — about the search for a replacement for CEO Paul Otellini. The smart money says the choice will be an internal one (here’s a rundown on the contenders), though there’s a slim chance that Intel’s board might be in the mood to surprise everyone and name an outsider. But don’t bet any money you can’t afford to lose on that.

Microsoft has yet to formally define the software project. But Windows Blue is expected to mark a major change in the company’s development methodology, replacing major launches of products every several years with frequent updates of features in operating software and applications such as Office.

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The world’s third-largest maker of PCs is looking to less-developed markets even as it faces buyout offers from founder Michael Dell and potential rival bidders. The efforts to take the technology giant private have cast uncertainty over its future direction, but a buyout shouldn’t affect the company’s plans to increase investment in Asia and other developing economies, said Peter Marrs, Dell’s executive director for Asia Pacific end-user computing sales.

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In an open letter to the special committee of Dell’s board of directors overseeing the go-private process, Southeastern argued that the company failed to make an adequate case that shareholders should accept the $13.65-per-share offer made in February. The firm also said that the go-shop process managed by the committee resulted in what it calls “an inadequate outcome.”

It’s no surprise that Southeastern is arguing against the buyout proposal. It’s somewhere in the neighborhood of $800 million to $1 billion underwater on Dell shares, having made a long bet starting in 2005 at a time when the stock was trading mostly between $30 and $40 a share. It has no choice but to argue against a buyout that would force it to take a bath.

But, as the proxy statement released last month clearly shows, it was Southeastern that first lobbied Michael Dell to consider going private in the first place.

Southeastern makes one clear point: The buyout offer is taking advantage of a moment when Dell shares are trading at a pretty low point relative to its history, and the board had authorized share buybacks at an average of $15.25, much higher than the $13.65 buyout offer:

“The same Board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments. We believe the Board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.”

Southeastern also appeared to throw its weight behind two competing proposals from the private equity firm Blackstone and the activist investor Carl Icahn.

It also questioned the wisdom of going private at all. “The proxy statement does not contain any sound reasoning for why, at this stage in the transformation, the company needs to be taken private,” the firm said.

Here’s the original letter:

MEMPHIS, Tenn., April 9, 2013 /PRNewswire via COMTEX/ — Southeastern Asset Management, Inc., the largest outside shareholder of Dell Inc. DELL +0.07% , today released an open letter to the Special Committee of the Dell Board of Directors and addressed Dell’s preliminary proxy statement.

The question now is whether Southeastern casts its lot with Blackstone, the private equity firm that has expressed an interest in offering $14.25 a share for at least part of the company, or Carl Icahn, the activist investor who wants to buy as much as 58 percent of it.

The full text of the letter is as follows:

April 9, 2013 Special Committee of the Board of Directors Dell Inc. One Dell Way Round Rock, TX 78682 Attention: Alexander Mandl

RE: Dell Inc. Proxy Statement

Dear Members of the Special Committee:

As the beneficial owner of 8.4% of Dell Inc.’s outstanding shares, we are writing today to express our views regarding the Company’s proxy statement. It is our position that the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake buyout offer. In addition, we believe that the Special Committee conducted a process that resulted in an inadequate outcome.

According to the proxy statement, Mr. Dell notified the Board of his intention to take the Company private in August 2012. The proxy statement clearly shows that, in their review, the Special Committee and Board of Directors reached conclusions that stand in stark contrast to views held by the Board prior to August 2012. While the Special Committee may have worked diligently and was assisted by credible and reliable professionals, even a good process — without the exercise of proper business judgment — can result in a bad transaction.

The Proxy Reveals a Robust Process Leading to an Inadequate Result

Over the last two years, under a Board authorized program, the Company has repurchased 224,000,000 shares for $3.4 billion at an average price of over $15.25 per share. The same Board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments. We believe the Board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.

Furthermore, the proxy statement and the analysis performed by the Special Committee focus disproportionately on the End User Computing (EUC) business while giving little attention to the Enterprise Storage and Services (ESS) business. Southeastern’s in-depth analysis indicates that at the completion of the Company’s transformation to ESS, Dell’s future owners should realize valuation multiples significantly higher than those reflected in the current offer price.

It is not about the PC. It is not about the PC. It is not about the PC …

Management has repeatedly highlighted the ESS business on previous earnings calls and provided estimates that show that ESS will account for 35% of the Company’s fiscal 2014 estimated revenue and 58% of its fiscal 2014 estimated Non-GAAP operating income (OI). Because the 58% of Dell’s 2014 estimated Non-GAAP OI attributable to ESS is worth a much higher multiple than the 42% of Company profits tied to the EUC segment, the ESS business, Dell’s cash and Dell Financial Services (DFS) are worth far more than half of total corporate value (see Table 1).

Yet, in all the analytical work and the voluminous proxy statement, EUC and PC are referenced hundreds of times more frequently than ESS. This is a stark contrast to the Company’s prior emphasis on the emerging value of ESS. Given this change in public positioning, Dell’s shareholders should question why the Board is suddenly focused on EUC, and not on ESS — which was previously believed to be the future of the business.

In addition, the Board’s approach of initially limiting the potential acquirers to private equity firms that would allow Mr. Dell to have majority ownership of the Company and remain as CEO narrowed the potential bidders materially and contributed to the Board’s approval of a transaction at a price that undervalues the Company.

In fact, within the proxy statement, virtually every justification of the $13.65 per share price is based on a premium to market at the time of the analysis. Such an approach is misleading when it is based on a price at the low end of the trading range over the last 15 years. Instead, any valuation analyses should have compared the $13.65 offer price to the net asset value of the Company. Additionally, the valuation analysis should have focused on an appropriate multiple of the Company’s free cash flow per share, more than half of which is from the growing ESS business, plus the net cash on the balance sheet and the value of DFS.

The Special Committee Gave Limited Consideration to Shareholder Friendly Alternatives

In our February 8, 2013, letter to the Board, we stated that we would have been prepared to support a leveraged recapitalization and suggested it could have been done in the form of a $12 per share special dividend, a Dutch auction or another structure that would have allowed shareholders an opportunity to participate in Dell’s future. Despite the viability of such a transaction, the proxy statement shows that the Board and Special Committee spent little time researching a leveraged recapitalization. The lengthy proxy statement only discusses the “pros” and “cons” of a leveraged recapitalization on a handful of pages and in only a cursory manner. The proxy statement also does not provide any real analysis or give any attention to solutions that would have either allowed shareholders to receive a large special dividend or to remain shareholders of a company with a smaller share base. It appears that neither the Board nor the Special Committee aggressively pursued the leveraged recapitalization idea because senior management preferred a go-private transaction.

In addition, as widely reported, management spent over $13 billion on acquisitions of non-PC businesses which benefit from the very same cloud and mobility trends that are negatively impacting the PC business. Long-term owners such as Southeastern have supported Dell in its transformation into an enterprise solutions company, but are not being given the opportunity to participate in the return on that $13 billion investment.

On January 29, 2013, Southeastern sought a meeting with the Special Committee in response to market leaks regarding a reported go-private transaction. In that meeting, we asked the Special Committee why giving shareholders a choice, through some form of cash/stock election, would not be preferable, and in fact fairer, for those shareholders who want to participate in the Company’s upside. Dell’s proxy statement answers that question: quoting from page 38, “Mr. Dell and Silver Lake were not interested in pursuing a transaction such as the one proposed by Southeastern in which public stockholders would retain an interest in the Company.”

The Proxy Statement Contains No Justification to Take Dell Private

The proxy statement does not contain any sound reasoning for why, at this stage in the transformation, the Company needs to be taken private. In the entire proxy statement, we found only one page (page 82) devoted to Mr. Dell’s plans for the Company following the transaction. That single page is consistent with the Company’s prior public statements, and nothing about these plans requires that the Company be private.

In fact, in an interview with ZDNet two weeks ago, John Swainson, head of Dell’s software unit, essentially confirmed that it doesn’t matter whether Dell is public or private. He said, “the corporate structure of Dell doesn’t make a difference on how customers interact with our products or how we develop or sell them.” We note that many companies, including IBM, were able to successfully transform their businesses as public companies. In addition, BCG, an advisor to the Special Committee stated that “many of the ‘take-private’ value levers could (in principle) be applicable to [Dell] as a public company.”

The proxy statement reveals that the Board had become increasingly frustrated with management’s execution of the transition, and rather than try to solve the problem, it chose to give Mr. Dell the opportunity to purchase the Company from shareholders at an inadequate price. Mr. Dell would not be participating in the proposed go-private transaction if he did not believe in the Company’s future upside and his ability to execute the transformation of the business.

The Special Committee Has the Power to Act in the Best Interests of All Dell Shareholders

As we noted above, we believe the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake buyout. For shareholders trying to decide whether to support the transaction, the Company’s suspension of earnings guidance and extremely limited discussion of the Company’s future plans will make it difficult to make an informed choice. In the next draft of the proxy, the Special Committee should provide sufficient detail about Mr. Dell’s future plans so that public shareholders can properly evaluate their options.

The Special Committee has obtained two preliminary alternative proposals, both of which we view as superior to the Michael Dell / Silver Lake buyout. We view these proposals as superior primarily because each offers shareholders the opportunity to remain owners of Dell while also offering a higher cash price to owners who choose to exit their investment.

Southeastern urges the Special Committee to negotiate and evaluate these alternatives in good faith, and to recognize that offering shareholders a choice is a win / win outcome for all parties. We call upon the Special Committee to work hard to make this possibility a reality.

Sincerely,

O. Mason Hawkins G. Staley CatesChairman & CEO President & CIO

ABOUT SOUTHEASTERN ASSET MANAGEMENT

Southeastern Asset Management, Inc., headquartered in Memphis, Tenn., is an investment management firm with $34 billion in assets under management acting as investment advisor to institutional investors and the four Longleaf Partners Funds: Longleaf Partners Fund, Longleaf Partners Small-Cap Fund, Longleaf Partners Global Fund and Longleaf Partners International Fund, as well as two Irish domiciled UCITS Funds: Longleaf Partners Global UCITS Fund and Longleaf Partners US UCITS Fund. Southeastern was established in 1975, and the first of the Longleaf Partners Funds was launched in 1987.

As you might expect, there’s good news for any company in the business of building tablets and mobile phones, and lousy news for those building PCs. Worldwide sales of “devices,” a category that combines PCs, tablets, mobile phones and ultramobiles (tiny notebooks, presumably), will approach a combined three billion units by 2017, representing growth of 34 percent from 2012.

Growth will be led by tablets, which are expected to grow by 70 percent, to 467 million units. Phones will break the two-billion-unit mark in 2017, Gartner says. Traditional PCs, on the other hand, will decline by fewer than 300 million units by that year. Obviously, this is bad news for the PC players, including Hewlett-Packard and Dell, who are both struggling to get their PC divisions back on track, while at the same time trying to kick-start mobile device plays. (Click the chart below to make it bigger.)

Another nugget in the Gartner report: Google’s Android devices will dominate, accounting for nearly a billion and a half unit sales by 2017. Its nearest competition will be Microsoft’s Windows, and Apple’s combined portfolio of Mac and iOS devices, which will split about a billion devices between them.

Director Marc Andreessen got a 69.77 percent yes vote. John Hammergren had the smallest margin, receiving a vote of 53.91 percent in favor of his remaining on the board. Chairman Ray Lane got 58.88 percent of yes votes. G. Kennedy Thompson received a 55.15 percent vote in favor of his remaining on the board.

As proxy votes go this is about as close as you can come without actually removing a director. If nothing else, it’s hard for HP’s board not to have received the message loud and clear that shareholders were sending about the Autonomy deal and other difficulties the company has faced.

Here are some highlights from the day’s events.

1:59 pm: So it’s nearly 2 pm here in Mountain View, Calif., and we’re waiting for HP’s shareholder meeting to get under way.

Still waiting. The light FM jazz just stopped playing and now the audience is quiet. Aaaand just like that, onstage there’s Meg Whitman, Ray Lane, CFO Cathie Lesjak, chief legal counsel John Schultz and I think Rajiv Gupta from the board of directors.

Actually it’s not Rajiv Gupta, but a deputy general counsel whose name I don’t know.

John Schultz is speaking and is asking shareholders to observe meeting rules. He’s talking about the three shareholder proposals. Those who wish to speak in support or against the proposals can do so for only about five minutes.

More formalities to get the meeting going. A quorum is declared present. And the meeting can officially get started.

Now the slate of directors is up. All 11 directors are up for reelection to the board.

The second order of business is to re-appoint Ernst and Young as HP’s auditor. There are some proxy firms and other shareholder groups that are advising against that, in part because they blame Ernst and Young for failing to foresee some of the mess that was the Autonomy acquisition.

Other items of business is the say on pay proposal, a stock compensation plan and the formation of a human rights committee.

A shareholder is now speaking in favor of the human rights proposal. It deals with how HP does business in China and other countries with oppressive political regimes.

Schultz is speaking, and says that the creation of another committee to oversee human rights issues isn’t in the business of shareholders.

Another human rights proposal is up, submitted by a set of religious groups. A reverence whose name I didn’t quite catch is now speaking about it. “We have noted HP’s policies to human rights and related to supply chain and equal opportunity.”

2:20 pm: I’m paraphrasing what he says: He’s speaking on behalf of a proposal that would require HP to report in more detail on supply chain issues, making sure that workers employed by suppliers are protected. HP reports on a lot of this stuff already, but he’s pushing for a lot more detail.

Often, he says, confidentiality rules prevent HP from disclosing exactly how it evaluates its human rights policies with suppliers.

Schultz is speaking again and says the company opposes the proposal.

Now another shareholder proposal, this one about retirement plans.

Schultz is speaking again, opposing the latest proposal. And getting the voting under way.

2:32 pm: Okay, CEO Meg Whitman is speaking. Her remarks are starting with a video.

Meg again: “Most of you know that I’ve been CEO for 18 months. I’ve come to love this company.”

“I’ve now met with 300 or 400 customers around the globe, and they tell me they want HP to win.”

“Some of our customers have operations in 150 or 160 countries, and they want a partner that can match them every step of the way.”

Now on to innovation. “Did you know that HP was the top of the list for patents obtained in 2012 in Silicon Valley, and No. 50 worldwide.”

“But we have to do more, better, faster.”

“Third, I’ve found that HP has tremendous foundational assets, and talented and committed employees. And lastly despite what you may have read, we’re on a solid financial footing.”

“The biggest thing I’ve learned in the last year, is that together we truly make it matter.”

“There is still room for improvement. Fiscal 2012 results were not where they needed to be.”

Whitman: Partners are crucial to our future and we need to embrace them like never before.

Whitman is now revisiting the plan she laid out at the analysts meeting last year.

Whitman: The good news is, we said what we said we would do in 2012. We took action, and took our medicine, and met our guidance.

2:40 pm: Whitman: We expect 2014 will be characterized by recovery and expansion.

2:41 pm: In 2015 we expect you’ll see a rapid acceleration of growth and innovation.

Whitman is now reiterating the financial results.

Whitman: Net debt position has improved to $4.7 billion. But we’re not done. We have a long way to go.

First is creating solid product roadmaps that change how IT is designed and built.

We are reigniting the powerhouse of HP, which is the channel.

Whitman: Why I’m so confident about our strategy: We are living in a period of enormous change. Big shifts in how technology is consumed, used and paid for.

Whitman: It feels like a bigger change than what I saw at eBay.

Whitman: We will succeed because only HP can provide the solutions for the new style of IT. We are the only company that can bring our customers devices, services, software all at once.

2:48 pm: Whitman is closing her remarks.

It has essentially been a repeat of the same speech she’s been giving since HP reported its most recent quarter.

Whitman is closing with some nice praise of HP employees, who “continue to innovate through thick and thin.” She’s now wrapped up.

Time for a Q and A with the shareholders. I see about seven people queuing up to the mics from where I’m sitting.

A question about the data center business. Now about 15 people lining up for questions.

The questioner opines: Over the last two or three years I’ve lost lost half the value of my HP shares.

Whitman: One of the question you’re asking is if you’re better off with a vertical stack versus a commitment to open standards. One of the strengths of this company is the hardware business and the commitment to open standards and open architecture.

Whitman: Now she’s talking about Moonshot, the tiny servers using Atom or ARM chips and which use less power, and take up a lot less space. It’s disruptive innovation, she says.

Whitman is now talking about the 3Par storage business, which tends to simplify enterprise storage.

Whitman: We are actually sold out of our mid-tier storage product. We haven’t been sold out of a product in quite a long time.

Whitman: We are also the leader in software defined networking.

Question: What is the board’s thinking with regard to nominating an independent chairman?

Whitman: I came to HP at a difficult time. My view about the board is that they are helping to turn HP around.

Whitman: This group is helping me lead the transition. Once you decide how you’re going to run your company, you have to get everyone marching in the same direction.

Another question: Change to Win is up. Bill Patterson is speaking. “A strong opposition vote will be delivered to several directors who were involved in overseeing the Autonomy acquisition. In the event that some directors don’t receive a majority vote, the board should comment on that and what it intends to do going forward.”

3:02 pm: Patterson is still speaking. These shareholder rights are of limited value that the company can demonstrate that it has active independent directors. Will the board comment in the event of a strong opposition vote?

Meg just called on director Ralph Whitworth, the activist investor, who owns a lot of shares. He says that he bought the shares and approached the company. He offered himself as a director and Meg and Chairman Ray Lane were up for it. “You can expect some evolution of the board in the coming weeks or months.”

3:06 pm: Whitworth: I hope you will respect the results today and work with us to make this company stronger and more valuable.

More questions. SEIU union trust, a pension fund. Can you confirm that Whitworth has been appointed to a special committee to investigate the Autonomy acquisition. There’s a concern that directors who were involved with that deal not be on that committee.

John Schultz confirms a special committee has been formed. Whitworth, Gary Reiner and G. Kennedy Thompson are on it.

Schultz: The independence of this committee is passed on by a court of law. We believe the committee has the right scope of charter, and the members are the right ones in place consistent with the law.

The questioner is expressing “grave concern” that Thompson should not be on the committee.

A former HP employee, one who dates back to what he calls “the good old days,” would like HP to celebrate its 75 anniversary. Lots of applause.

Whitman: We have an employee committee on that.

Another question. Seven more people in the line. Latest questioner asking about human rights, surveillance in less developed countries. “Never ever admit that David Packard is most admired for cutting 10 percent off expenses, and cutting his own compensation.”

The questioner is suggesting the elimination of health insurance brokers somewhere in the employee benefit process.

Now 10 more people waiting in line to ask questions.

The “question” is more or less turning into a political diatribe about health care policy. Whitman is cutting her off and asking her to get to the point.

3:15 pm: She’s basically trying to get Whitman to support a single payer health insurance scheme.

Another question from a Presbyterian Minister. Something about never voting against the State of Israel. However, he says, HP is selling its products in a way that support the “occupation” of Palestine. He’s asking for transparency, which he says is lacking in the Proxy statement on how products are being used.

Whitman is pointing out an HP exec who is responsible for responses to questions like this, to address his concerns.

Another question from a shareholder and retiree. “My portfolio has taken a dramatic fall. Regardless of this, I marked a ballot to support everything the board recommends.” He’d now like to read something published in 1976.

He’s asking Whitman to stand up for the old HP Way. “It turns out its really hard to kill founder DNA. … We are at our core an engineering company.”

Question from a representative for the AFL-CIO fund. Can you address how the board expects the biggest vote against an S&P auditor in a long time? It’s a question about the proposal to dump Ernst and Young as an auditor.

Whitman: When we do an outside enterprise deal, we have to have someone certify the financials. To have someone other than our auditor do it, it’s not a good use of your money. It would be duplicative to have someone else do it.

Question: What other boards does Whitman serve on? How do you justify the time spent on other boards.

Whitman: After I lost the governor’s race [in California] I was asked to go on a lot of boards and I did. I have been reducing my committments to other boards. She used to be on the board of ZipCar and is now off that as the company has been sold. The remaining corporate board I sit on is Proctor and Gamble and that is good for HP. It’s good to see another big company struggling.

The same questioner is a fan of his HP 20S calculator. “It’s an example of the HP Way. I’d like to see that return.”

Whitman: I came to set this company up for the next 75 years. This company is an icon of American business. We are important around the globe.

One last question and then it’s time to announce the results of the vote.

Last question is from a guy who lived across the street from David Packard. Apparently,he’d like to sell a company to HP. Whitman is laughing.

Whitman is referring him to CFO Cathie Lesjak.

Proxy vote time.

This is the moment of truth. A few stragglers are still voting.

3:29 pm: Polls are closed.

Chairman Ray Lane is announcing the results based on the preliminary tally. Directors first. All have received at least 50 percent. All 11 directors have survived.

3:31 pm: And Ernst and Young has been renominated as HP’s auditor.

The directors and Ernst and Young were the two big items. We don’t yet know what the percentages were on the various directors who had been targeted by ISS, Glass Lewis, Calpers and others.

What’s left is the proposals on human rights committees. Less than 4 percent voted in favor.

It’s pretty much going as the company recommended. Patterson from Change to Win is asking for the percentages on the director votes.

Lane is declaring the business of the meeting concluded. That ends the meeting.

And we’re done!

Preorders will ship the week of May 13, and the device will arrive in U.S. Best Buy stores beginning May 19. It will cost $80.

The tiny, three-inch Leap sensor is meant to be placed in front of computer keyboards and, using hyper-precise motion sensor technology, tracks finger gestures and reflects the movements on screen. It currently works with Windows 7 and 8, and Mac OS X 10.7 and 10.8, on desktops and laptops. (For a visual of how it works, check out the video embedded here.)

Last month, the company raised $30 million in funding from existing and new investors, and also announced a partnership with Asus to distribute the Leap with select Asus notebooks and PCs.

Leap Motion today also divulged a series of app titles in development that will work with the sensor, including Cut the Rope, Wreck-It Ralph and Painter Freestyle Beta. The company’s app store has been named “Airspace.”

That in turn triggered speculation that HP might be planning something special. Persistent rumors that HP is reconsidering the breakup option refuse to die, fanned in no small part by a sketchier-than-an-art-class report from Quartz. Word that Faber was on the scene as the earnings report crossed the wires led some traders to wonder if a breakup announcement was imminent.

Nothing could be further from the truth. The interview with Whitman happened early this morning, and she batted those rumors away once again: “I am convinced that we should not break up this company.” In the end, though, it’s going to come down to the turnaround strategy in place and the financial results that it yields. If it doesn’t work out, then naturally all options are on the table.

It’s also worth noting that HP shares are up by more than 15 percent today, and rose above the $19 mark for the first time since August. If nothing else, yesterday’s results have given shareholders hope that there is a light, however faint, far, far at the end of HP’s tunnel.

Anyway, it’s worth watching the interview, which lasts about 11 minutes:

Deutsche Bank analyst Chris Whitmore, in a note to clients this morning, gave credit where it was due, but maintained his “sell” rating on HP shares. For all the sunshine visible in HP’s results, the fundamentals remain weak. Better operating margins in printing, and a slower-than-expected bleed-off in services contracts helped. And the $2.6 billion in operating cash flow that was so helpful in paying down net debt? Half a billion of it came from a one-time tax benefit and lower bonus payments to employees in 2012, Whitmore writes. “Unfortunately, none of these items appear sustainable and underlying weakness persists across all HP’s major businesses,” he wrote.

While he raised his price target on HP shares to $12 from $10, Whitmore says there’s still no fundamental change in HP’s business to make him consider upgrading his rating: “We remain concerned about ongoing weak printer unit shipments and the structural decline of this market, ongoing deterioration across the PC industry on both a unit and pricing basis, poor bookings performance and future contract losses in Services, the ongoing rapid decline of high margin Enterprise products and the associated future high-margin Tech Services revenue run-off.”

HP shares are rising after hours on word that the company rather handily beat its own expectations and those of the Street. The consensus view called for it to report 71 cents a share in per-share earnings. HP came in at 82 cents. Sales were also ahead of the consensus, despite the fact that revenue fell in nearly every significant business segment.

Still, don’t harsh HP’s buzz with too many details. There’s more to crow about: Net debt of the operating company came down by $1 billion to $4.7 billion, and it’s looking like HP will be close to zero debt for the operating company this year.

The results if nothing else buy Meg Whitman and her team some time to quiet the critics who say HP should be split into two or more companies in order to unlock value. That buzz was prominent late in the trading session as rumors flew that a breakup announcement might accompany earnings. As careful AllThingsD readers might have already guessed, a breakup isn’t in the cards, at least not for the time being.

The conference call with analysts is about to get under way momentarily and I’m listening in. Expect lots of questions about the balance sheet, and probably more chatter about the breakup idea.

One bit of housekeeping: Since I’m in New York, the time stamps are set to Eastern Standard Time.

Earlier:
5:05 pm: Joining the call in progress. CEO Meg Whitman is speaking. She says the restructuring program put in place last year is having the desired effect.

Whitman: We improved operating company net debt position for the fourth consecutive quarter.

Whitman: Revenue from converged storage products was up 18 percent.

Whitman: In servers, business stabilized. We expect to grow market share by 1 percentage point this year.

Whitman: Networking showed continued growth, up 6 percent. I was also pleased with performance improvements in printing. New business models and new printers helped boost operating margins.

One thing that changed in developing markets is that the price of hardware has increased while the price of ink has dropped. That’s the Ink Advantage program she’s talking about.

Whitman: PCs gained 1.4 percentage points of share world wide, and 4 points in the U.S.

Whitman: Total enterprise services exceeded expectations. There is still a long way to go, but I believe that ES (the former EDS) will deliver on the recovery plan put in place last year.

Whitman: We are making significant investments to improve our channel partner programs.

Whitman: If we can mobilize HPs 300,000+ employees there is nothing we can’t do.

Whitman: Turnarounds happen when old and new customers believe. In HP’s case customers are really starting to believe. We saw a number of big wins including one with the U.S. Department of Veterans Affairs. Another is eyewear company Luxottica (sorry if I misspelled that), which hired HP to run its data centers.

Whitman: We clearly still face a long road ahead. I don’t like that we saw revenue declines in all our business lines. Restoring growth is a priority and we’re on it.

Whitman: It will be toward the end of the year before the recovery plan starts showing up on the top line.

5:14 pm: Whitman: There are a lot of reasons we are in the PC market. She’s addressing again why there won’t be a spinoff of the PC business.

Whitman: Pricing continues to be very competitive.

In Enterprise Group, we are seeing a tepid market in Europe for servers.

Whitman: We will now be breaking out converged storage from traditional storage to better show the growth there.

5:17 pm: Now Whitman is talking about the hiring of Larry Stack to reignite sales in the Enterprise Services group. (Wonder where you read about that first? You got it: AllThingsD.)

Whitman: Now talking about HP Labs under its new head Martin Fink.

Whitman: Talking about Project Moonshot. We expect this to truly revolutionize the economics of the data center.

Whitman: If just 10 large web services switched to Moonshot servers, they could save $120 million a year, and 100 million (?) metric tons of CO2 released into the atmosphere, because it consumes so much less power than prior models.

Whitman: I’m pleased about Q1 and feel good about the rest of the year.

Now CFO Cathie Lesjak is speaking.

Lesjak: At the highest level, I would characterize this quarter as one more data point in our consistent, but not linear, recovery plan.

Lesjak: Now she’s talking about some new reporting information disclosures.

Lesjak: (Going through the numbers again.) From a global economic perspective, we are still seeing headwinds, but some healthier pockets.

5:23 pm: R&D spending declined, though it was because of some tax credits and some contract accelerations in Q4.

Lesjak: Europe was a challenge, but we continue to see good signs in Asia-Pacific and Japan.

Lesjak: Decline in printer revenue is partially due to a shift toward higher-end printers and away from lower-priced ones.

Lesjak: Again, solid growth in server sales in Asia, especially in China.

Lesjak: Talking more about the storage business. Q1 was the fourth consecutive quarter where margins expanded. Now Business Critical Servers. Phase two of the trial with Oracle is expected in Q2, which will address Oracle’s breach of contract and damages.

(Though Oracle lost the first phase of the trial, it has promised to appeal the decision.)

Lesjak: In services, we have moved away from unprofitable contracts.

Lesjak: We saw strong growth in security and big data software offerings.

Now talking about cash and capital allocation. $253 million went back to shareholders through share repurchases, and $258 million via the dividend. Net debt is now $4.7 billion at the operating company level.

Lesjak: As we’ve said, 2013 is a fix-and-rebuild year. There are market and macro pressure and some of the ES changes are being delayed.

And now we’re heading into Q&A.

Question from Bill Shope of Goldman Sachs; he’s asking about the breakup idea.

Whitman: We have no plans to break up the company. (Heard that??) HP is better and stronger together.

Whitman: We have a terrific set of assets. When you think about our brand, our scale, our distribution, and importantly the customers want this company to be together. We feel strongly it’s better together.

Katy Huberty of Morgan Stanley: Earnings on the back half of the year look like they may come down. What else makes you cautious about the back half of the year?

Lesjak: It’s really about Enterprise Services not having the runoff in Q1 that we expected.

There’s also some challenges about the timing of signings.

Lesjak: There’s some cautious optimism there.

5:44 pm: Toni Sacconaghi of Bernstein: Where are you in your cost savings?

Lesjak: The non-labor savings are coming in later this year.

Question from Ben Reitzes of Barclays: I understand why you want to keep guidance in place, but why not raise the free cash flow target above $5 billion?

Lesjak: Glad you pointed out the operating cash flow. We’re happy with it, up 115 percent. We’ve really gotten a lot of discipline. We don’t typically update our cash flow mid year. Best way to think about it is that it was a very big deposit on the year.

Question from Shannon Cross: How will you judge the success of the OfficeJet ProX printer platform? How do you think about this versus your laser platform?

Whitman: This is an exciting opportunity because it prints at the speed and quality of a laster. We’re going to drive it as hard as we can. We’re going to measure the units installed. With regard to laser we have a great laser lineup, but if there is cannibalization; that’s the way business goes. If there’s going to be cannibalization, better we do it to ourselves than someone do it to us.

Missed a question there. Sorry about that.

5:53 pm: Question about Enterprise systems sales.

Whitman reminds us that BCS sales got whacked again. But there’s a good product lineup coming. Waiting for another mention of Moonshot.

Whitman: We have to make the right investments because it’s a big piece of HP’s profitability. (Lesjak just mentioned in the answer to the previous question that PSG accounts for only 10 percent of HP’s operating profitability.)

Another question, this one from Mark Moskowitz of J.P. Morgan. Clearly your net debt position is improving nicely. How are you thinking about investment internally from R&D and acquisitions?

Whitman: For 2013, we’re still focused on rebuilding the balance sheet and offsetting dilution. We’re going to stay focused on fixing what we have. You never say never, maybe there’s a tuck-in acquisition we have to have, but there’s nothing in the plan. Also, one thing we have to stop doing at HP is increase R&D and then pulling it back, and then repeating that. We’re going to stay on the plan that we have.

Question from Brian Marshall at ISI about the software business, where he’s seeing some deceleration of growth.

Whitman: The bright spots in software are Vertica and security. Apps and ops are not where we want them to be. We need to make some changes that will kick in by 2014. We have some basic blocking and tackling there.

Steve Milunovich asking about PC supplies and inventory.

Lesjak: Channel inventory on PCs, overall it’s good. On the consumer side, despite the fact we gained share in consumer we ended a bit higher than we would like. The real star is the channel inventory in printing. We have been dogged by ink supplies inventory being too high for several quarters. Now its down 27 percent since the peak. We’ve had dollar declines over the last six quarters.

Whitman: One of the things we’ve asked the business groups to do is limit discounting to get products out the door. It’s healthier for us and better for the channel. It also allows us to differentiate our ink and toner product and get away from the commoditization we were expecting about 18 months ago.

Final question from Credit Suisse: About free cash flow. Given the improvement, it looks like you will pay down most of your debt. If you are generating $6 billion to $7 billion in free cash flow each year, how dedicated are you to increasing dividends and buybacks?

Lesjak: At the end of the year we’ll be thinking about how we allocate capital around the time of the next analyst meeting. We are committed to returning cash to shareholders. Our view around dividends is that over the long term, our payout ratio should improve as well. We are aligned and working with the board to determine the mix.

6:05 pm: Closing remarks from Whitman: The turnaround is on track and we did better than we expected we would. We have to deliver and continue to execute as an organization.

And we’re done. See you next quarter!

Today’s earnings report, which is expected after the markets close for trading in New York, will be the first since the end of HP’s worst year ever. The list of its woes is well known. There was the Autonomy acquisition, which contributed more than $5 billion of an $8.8 billion write-down that shocked shareholders. That write-down came on top of another write-down, this one worth about $8 billion, on the 2008 acquisition of the IT services firm EDS. During 2012, HP’s shares traded at levels not seen since 2002, going back to the days immediately following its mammoth acquisition of Compaq Computer.

That acquisition made HP the world’s biggest vendor of personal computers, a market that is now in decline, but which affords HP a certain amount of scale that helps it in other businesses. Combined, PCs and printers, another declining market, amount to about half of HP’s revenue, and more often than not get most of the attention from shareholders. And for that reason it’s not exactly difficult to find Wall Street analysts who have rated HP shares with a “sell” or equivalent. Though likely untrue, persistent rumors that say a breakup or sale of a significant business unit is coming continue to goad HP shares higher. “Talking to investors, the biggest story on HP these days isn’t about its business fundamentals but whether the company will split itself in two or more pieces,” analyst Shaw Wu of Sterne-Agee wrote in a research note today.

The consensus of analysts polled by Thomson Reuters calls for HP to report a per-share profit of 71 cents on sales of $27.8 billion. The bar, however, is relatively low: A year ago, HP reported per-share earnings of 92 cents.

CEO Meg Whitman has made a persistent case that, despite all its recent troubles — and calling them “troubles” feels like describing World War I as a case of bad vibes — HP will not only be saved, but will remain whole. She has also characterized 2013 as the year during which the arduous work of repairing and rebuilding will begin in earnest.

Whitman has been hinting publicly that signs of the turnaround are coming, though they’re not yet visible. The narrative at HP lags reality, she said at The Wall Street Journal’s CIO Network conference last month.

For the moment, Whitman seems to have earned the trust of HP shareholders impatient for more positive results. She has been on the job 17 months, and on her watch, HP shares are down about 25 percent, while the S&P 500 has risen by 32 percent. By that benchmark, Whitman compares favorably with former CEO Carly Fiorina, who, at the 17-month mark, presided over a 46 percent drop in HP shares, while the S&P 500 was down only 6 percent. But at the same point in the Mark Hurd era, HP shares were up by 66 percent, well ahead of the S&P 500, which was up only 11 percent. (Whitman’s immediate predecessor, Léo Apotheker, never made it to 17 months.)

If that’s true, then there’s a good reason to expect that the turnaround she anticipates will be visible first in HP’s enterprise-facing businesses. In this, HP has a new weapon upon which rests a great deal of hope. It’s called Project Moonshot. Announced late in 2011, it is a fundamental rethinking of a server.

I saw an example of one during a meeting last month with Dave Donatelli, HP’s executive vice president and head of its enterprise business, during a recent visit to the company’s headquarters in Palo Alto, Calif.

It’s about the size of a trade-paperback book — and not a very thick one, either — yet it’s a full-blown server. It comes in flavors running Intel’s low-power Atom chip, but also ARM-based chips, and can be outfitted with many of them. For storage, it can be configured with a conventional spinning hard drive, or a flash-memory-based solid-state drive. It can also be tricked out with a lot of system memory, and with a graphical processor unit (GPU) like those from Nvidia, which are increasingly being used to give computers some extra oomph on certain kinds of computing jobs.

The case Donatelli makes is simple, and can’t help but resonate with customers, especially with those building large data centers: When compared to a mainstream HP server currently on the market, one built using the Moonshot approach consumes 89 percent less power, and requires 94 percent less physical space. “We imagine a world where you can fit thousands of these servers in a single rack,” he says. “It really is a fundamental revolution in how servers work.” And no one, Donatelli says — not Dell, not IBM, not Oracle — makes anything quite like it. And it will begin shipping soon.

Moonshot will be an important piece of HP’s strategy, especially as many big companies seek to build massive data centers running hundreds of thousands of servers at once. Large companies increasingly want to get the same economies of scale that smaller ones get by farming out their IT infrastructure to cloud companies like Amazon Web Services and Rackspace, but they don’t always want to let go of their IT infrastructure entirely. And then there are the cloud service providers themselves. “Many of the large cloud providers run 250,000 or maybe even a half a million servers. Within three to five years we’ll be talking many times that amount,” Donatelli says. “Those data centers will get very expensive, and they won’t be very environmentally friendly.”

And there are other important pieces on HP’s chessboard. HP’s cloud services business — which will presumably be a big consumer of Moonshot hardware, Donatelli says — is already a multibillion-dollar business. And its 3Par enterprise storage business — a company HP acquired in 2010 after a bitter bidding war with Dell — reported record sales in its most recent quarter. Then there’s enterprise networking, a business built primarily out of 3Com, a company HP acquired in 2009. Only Cisco Systems is bigger in that business, Donatelli says, and, yes, it’s a lot bigger, comprising about two-thirds of the addressable market, leaving HP and everyone else to fight over the remaining third. But that’s a fight that HP is winning, beating out, in the reckoning of research firm IDC, players like Alcatel-Lucent, Juniper and Huawei.

And what of Business Critical Servers, the unique HP business built on Intel’s exotic Itanium chip? Long a source of beefy profits derived from services supporting Itanium’s finicky customers, HP’s BCS business suffered from an injection of doubt about its future, whipped up in no small part by Oracle, which insisted that HP intended to kill the platform. Oracle said it would stop making software that supported it. That prompted a lawsuit from HP, which argued that Oracle had agreed to continue supporting Itanium, and was bound by that agreement. HP won, but it hasn’t helped HP sell more Itanium servers. That’s because, Donatelli says, Unix-based servers are fundamentally a business in decline. “That marketplace is in secular decline,” he says. “Although you and I will be here five years from now, and will still be talking about it, it is a shrinking market. We will drive as much revenue as we can from it and, over time, it will disappear.”

HP recently updated its line of Itanium servers with a machine that’s three times faster than its predecessor. But there’s also a solid business capturing recovering Unix customers and helping them move to more mainstream platforms running Linux and traditional Intel chips. HP does offer a “mission critical” server that contains a mainstream Intel Xeon processor. Expect more like that.

And what of those declining service revenues related to BCS? The good news is that they will decline slowly. Itanium customers aren’t exactly known for moving fast or swapping out their machines that often. The better news is that HP’s 3Par storage line carries with it an interesting service profile that’s kind of similar to what has been the norm with Itanium. “There is a backfill coming to replace what is being lost,” Donatelli says.

And while he couldn’t get specific — HP will be more specific when it reports its results later today — Donatelli said 2013 looks like it may be an important transitional year for HP customers, and thus for HP itself. “We see more and more customers starting to rethink how they run their operations, and how they can change them significantly,” he said. “We think that’s a big opportunity. The enterprise doesn’t move like a light switch. It moves gradually. But when it starts to move, it really moves.”

Lenovo said Wednesday that Mr. Yang would be an “observer” of the company’s board, but wouldn’t have any voting rights or exercise any other rights of a director. His primary role will be to attend board meetings and provide his views, the company said.

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Basically it shows that every line of business at Dell continues to be in decline — except one, and that’s the combined server and networking businesses.

Here’s the slide, and it may constitute something of a last look at the state of Dell before it completes its leveraged buyout.

As you can see, servers and networking grew 18 percent, versus everything else, which declined year over year. Separate them out and server revenue grew 5 percent, while networking grew 42 percent. While the growth seems healthy, it’s not enough to offset everything else. Servers and networking combined amounted to less than 19 percent of sales. Dell’s business shrank in the remaining 81 percent.

It’s hard to make shareholders happy when the trend lines look like that. So now you see, in one place, why Dell is going private.

Dell reported earnings of 40 cents per share on sales of $14.3 billion, better than the consensus view of 39 cents a share on sales of $14.12 billion. Dell shares rose by 4 cents, or about 0.3 percent, to $13.85 after hours as the news crossed the wires.

Dell, you’ll remember, is still in the process of trying to transform itself from the PC-heavy company you remember from the funny TV ads into a more enterprise-focused company emphasizing servers, software and services. The main trouble Dell has had is that it hasn’t been able to make the enterprise-focused business grow fast enough — at least not yet — to offset the dwindling sales of the PC segment.

Since that hasn’t worked out so well yet, Dell has decided to pursue a leveraged buyout and go private. Expect a lot of questions from analysts about that, and precious few answers from Dell

I’ll have a little more in a few minutes after I’ve taken a closer look at the press release, but for now here it is:

ROUND ROCK, Texas–(BUSINESS WIRE)–
Dell announced fiscal 2013 fourth quarter and full-year results today, with revenue of $14.3 billion for the quarter and $56.9 billion for the year. Revenue from enterprise solutions and services grew 6 percent in the quarter to $5.2 billion and was $19.4 billion, or 34 percent of Dell revenue for the fiscal year, a 4 percent gain over fiscal year 2012.
“We continued to execute our long-term strategy in Q4, and realized a 6 percent increase in our enterprise solutions and services business,” said Brian Gladden, Dell CFO. “We also continued to generate strong cash flow from operations of $1.4 billion in the quarter. Our strong balance sheet and cash position enabled the company to invest almost $5 billion in new capabilities and intellectual property this fiscal year, including great assets like Quest, SonicWall, Wyse and AppAssure.”
Results
Revenue in the quarter was $14.3 billion, an 11 percent decrease from the previous year, and a 4 percent increase sequentially. Revenue for the 2013 fiscal year was $56.9 billion, an 8 percent decrease. Dell’s fiscal year 2012 had an extra week, which was incorporated into the company’s Q4 results.
GAAP operating income for the quarter was $698 million, or 4.9 percent of revenue. Non-GAAP operating income was $954 million, or 6.7 percent of revenue. Gross margins for the quarter benefitted by approximately $250 million, primarily resulting from vendor settlements. For the fiscal year, GAAP operating income was $3 billion and non-GAAP operating income was $4 billion.
GAAP earnings per share in the quarter was 30 cents, down 30 percent from the previous year; non-GAAP EPS was 40 cents, down 22 percent. For the fiscal year, GAAP EPS was $1.35, down 28 percent year over year and non-GAAP EPS was $1.72, down 19 percent.
Cash flow from operations in the quarter was $1.4 billion, and Dell ended Q4 with $15.3 billion in cash and investments. Full-year cash flow from operations was $3.3 billion.

Products and Solutions:
Dell server revenue increased 5 percent driven by strong growth in the company’s hyper-scale data center solutions business and migration to the company’s 12th-generation servers. The 12G-server line now represents almost 80 percent of Dell PowerEdge server revenue at average selling prices and margins that are a premium over previous-generation servers.
Dell networking continued to deliver strong growth, with a 42 percent revenue increase, including more than 100 percent growth in the company’s Force10 business.
Dell Quest software delivered revenue over the company’s stated target of $180-$200 million for the quarter. The company’s security software business also grew sequentially.
Dell desktop and mobility business revenue declined 20 percent and was up 3 percent sequentially.
Business Units and Regions:
Large Enterprise had revenue of $4.7 billion in the quarter, a 7 percent decrease. Operating income for the quarter was $393 million, a 16 percent decrease. Server and networking revenue increased 25 percent and ES&S business grew 10 percent. Revenue for the full year was $17.8 billion, down 5 percent from the previous year.
Public revenue was $3.5 billion, a 9 percent decrease. Operating income for the quarter was $236 million, a 25 percent decrease. Servers and networking revenue grew 11 percent. Revenue for the full year was $14.8 billion, down 8 percent from the previous year.
Small and Medium Business revenue was $3.4 billion, a 5 percent decrease. Operating income for the quarter was $385 million, a 4 percent decrease. SMB enterprise solutions and services sales increased 9 percent for the quarter, driven by servers and networking growth of 13 percent and services revenue growth of 17 percent. Revenue for the full year was $13.4 billion, down 1 percent from the previous year.
Consumer revenue was $2.8 billion, a 24 percent decline for the quarter. Operating income was $8 million, an 87 percent decrease. Revenue for the full year was $10.9 billion, down 20 percent from the previous year.
EMEA revenue decreased 14 percent in the quarter, Americas was down 10 percent, and Asia-Pacific and Japan declined 9 percent.
Company Outlook:
Given the company’s announcement Feb. 5 of a definitive merger agreement to take Dell private, the company is not providing an outlook for its fiscal 2014 or Q1.