Dell Technologies Inc. — Q2 Fiscal 2022 Form 10-Q
Reporting period: Quarter and six months ended July 30, 2021; comparisons are with the corresponding periods ended July 31, 2020. Amounts are in U.S. dollars.
Business context
Dell operates Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. Management cited demand for technology supporting remote, hybrid, and digital-transformation needs. The filing is unaudited and reports consolidated results including VMware, which Dell then majority-owned.
Key financial results
| Metric | Q2 FY2022 | Six months FY2022 | Comparable change |
|---|---|---|---|
| Revenue | $26.1 billion | $50.6 billion | Up 15% and 13% |
| Gross margin | $8.0 billion; 30.6% | $15.6 billion; 30.9% | Dollar margin up 12% in both periods; rate down 0.9 and 0.5 percentage points |
| Operating income | $1.4 billion; 5.3% margin | $2.7 billion; 5.4% margin | Up 21% and 49% |
| Net income | $880 million | $1.8 billion | Down 20% and up 42% |
| Net income attributable to Dell | $831 million | $1.7 billion | Down 21% and up 44% |
| Diluted EPS attributable to Dell | $1.05 | $2.18 | Compared with $1.37 and $1.56 |
| Operating cash flow | Not separately presented for quarter | $4.0 billion | Compared with $2.5 billion |
Q2 product revenue was $19.4 billion, up 16%; services revenue was $6.7 billion, up 12%. Six-month product and services revenue rose 14% and 11%, respectively. Six-month capital expenditures and capitalized software development costs were $1.3 billion.
Segments and period changes
- CSG: Q2 revenue grew 27% to $14.3 billion; operating income rose 39% to $995 million. Commercial revenue increased 32% and consumer revenue 17%. Six-month revenue grew 24%.
- ISG: Q2 revenue increased 3% to $8.4 billion; operating income was $970 million, essentially flat. Servers and networking grew 6%, while storage declined 1%.
- VMware: Q2 revenue increased 8% to $3.1 billion, while operating income declined 5% to $849 million. Subscription and SaaS growth supported revenue; transition to those offerings and higher expenses pressured margins.
- For the six months, operating cash flow improved amid higher profitability and more favorable working capital. Q2 net income nevertheless declined, primarily because of higher income tax expense; the prior-year comparison included a $746 million discrete tax benefit for the six-month period.
Debt, liquidity, and balance sheet
- At July 30, 2021, cash and cash equivalents were $11.7 billion; cash, cash equivalents, and restricted cash totaled $12.6 billion. Cash and cash equivalents had been $14.2 billion at January 29, 2021.
- Total debt carrying value was $43.6 billion, down from $48.0 billion; principal debt was $44.0 billion. Dell repaid $3.0 billion of its margin loan, plus notes totaling $1.475 billion during the six months. It repaid the remaining $1.0 billion margin loan after quarter-end.
- Management-defined core debt was $27.6 billion. DFS debt was $9.6 billion, mostly non-recourse; VMware notes were $4.75 billion and are obligations of VMware, not Dell.
- Available revolving borrowings totaled $5.5 billion, including $1.0 billion attributable to VMware. Dell stated that liquidity and expected cash flows would be sufficient for at least the next 12 months. Dell reported compliance with financial covenants.
- Current assets were $43.6 billion and current liabilities $55.5 billion. Deferred revenue totaled $31.8 billion; remaining performance obligations were approximately $46 billion, with about 61% expected to be recognized over the next 12 months.
Outlook, transactions, risks, and unusual items
- Management expected continued strong CSG demand through the rest of FY2022 and anticipated improving ISG demand. It did not provide specific revenue or earnings guidance in the supplied filing text.
- Management expected component costs to remain inflationary for the rest of FY2022, with constrained supply, longer customer lead times, and elevated freight costs; it expected supply-chain challenges to continue into FY2023. These factors could affect pricing, margins, and fulfillment.
- FY2022 capital expenditures were expected to total $2.7–$2.9 billion, including approximately $0.9 billion for equipment under operating leases and $0.3 billion for capitalized software development.
- The planned VMware spin-off was expected in calendar Q4 2021, subject to conditions including a favorable IRS ruling. VMware was to pay a $11.5–$12.0 billion special dividend; Dell intended to use its share of proceeds to repay debt. Completion, timing, tax treatment, separation costs, and business disruption were identified risks. VMware results were expected to be presented as discontinued operations after closing.
- The proposed Boomi sale was valued at $4 billion, subject to closing adjustments, and was expected to close in FY2022 Q3. Boomi assets and liabilities were classified as held for sale at quarter-end.
- Q2 gains on investments were $168 million, versus $8 million a year earlier, contributing to the improvement in interest and other, net. Lower interest expense also helped. GAAP Q2 net income was affected by higher taxes; six-month effective tax rates were 9.1% in FY2022 versus negative 101.4% in FY2021, chiefly reflecting different discrete tax items.
- Notable contingencies include the Class V transaction shareholder litigation and VMware patent litigation involving Cirba. Dell said it did not believe a material loss exceeding amounts accrued was reasonably possible, while noting litigation outcomes remain uncertain. Tax audits and $1.4 billion of unrecognized tax benefits are also disclosed.
Investor verification priorities
- Track supply availability, component and freight inflation, pricing actions, and the resulting effect on gross margins and order fulfillment.
- Verify the VMware spin-off’s closing conditions, tax ruling, final dividend, debt repayment, and post-separation commercial arrangements.
- Reconcile reported cash and liquidity with amounts held at VMware and the availability of revolving facilities to Dell itself.
- Assess debt reduction and refinancing needs alongside the substantial scheduled maturities disclosed in the debt table.
- Review segment profitability, especially VMware margin pressure and whether strong CSG demand and pricing remain sustainable.
- Monitor litigation and tax-audit developments, as well as the closing and proceeds of the Boomi divestiture.