Dell Technologies Inc. — Fiscal 2024 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended November 3, 2023; comparisons are to the corresponding periods ended October 28, 2022 unless noted. Balance-sheet comparisons are to February 3, 2023. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $22.3 billion, down 10% | $66.1 billion, down 14% |
| Gross margin | $5.1 billion; 23.1% of revenue, flat | $15.6 billion; 23.5%, up 160 basis points |
| Operating income | $1.5 billion, down 16%; 6.7% margin | $3.7 billion, down 19%; 5.6% margin |
| Net income | $1.0 billion, versus $241 million | $2.0 billion, up 12% |
| Diluted earnings per share | $1.36, versus $0.33 | $2.78, versus $2.41 |
| Operating cash flow | Not provided for the quarter in the supplied filing text | $7.1 billion, versus $851 million |
Product revenue was $16.2 billion in the quarter, down 14%; services revenue was $6.0 billion, up 4%. Quarterly product gross margin rate fell 100 basis points to 16.6%, while services gross margin rate was 40.9%, down 10 basis points. Management attributed the overall gross-margin resilience to lower input costs and pricing discipline, partly offset by product mix.
Segments: ISG revenue was $8.5 billion, down 12%, and operating income was $1.1 billion, down 22% (12.6% segment margin). CSG revenue was $12.3 billion, down 11%, and operating income was $925 million, down 13% (7.5% margin). Commercial and consumer revenue fell 8% and 19%, respectively; servers and networking and storage revenue fell 10% and 13%.
Cash, debt, and liquidity
- Cash and cash equivalents were $8.3 billion at November 3, versus $8.6 billion at February 3. Cash, cash equivalents, and restricted cash totaled $8.4 billion.
- For the first nine months, operating cash flow was $7.1 billion, investing cash outflow $2.1 billion, and financing cash outflow $5.3 billion. Operating cash flow benefited from inventory reduction, strong collections, and timing of vendor purchases and payments; it also included the effects of the Class V settlement payment and receivables sale.
- Debt carrying value was $26.6 billion (principal $26.9 billion), down from $29.6 billion carrying value at February 3. Core debt was $15.8 billion. Debt reduction mainly reflected repayment of $2.0 billion of senior notes and lower DFS debt.
- Available liquidity comprised $8.3 billion of cash and approximately $6.0 billion available under the revolving credit facility. No borrowings were outstanding under that facility or the commercial paper program. Management said available cash, expected operating cash flow, and borrowing capacity should meet requirements for at least the next 12 months.
- Current assets were $37.0 billion and current liabilities $48.9 billion. Dell reported a $1.2 billion quarterly dividend and $1.3 billion of share repurchases during the nine months; it authorized an additional $5 billion repurchase capacity.
Material changes and unusual items
- Revenue declines reflected weaker PC demand and cautious enterprise IT spending. Nine-month CSG revenue fell 17% and ISG revenue fell 14%.
- The quarter’s net-income comparison benefited from the prior-year $1.0 billion Class V litigation settlement expense. Dell paid the settlement in May 2023 and said it expects no further expense related to it. Thus, reported net-income growth does not reflect improved operating income, which declined.
- Nine-month severance expense was $434 million, compared with $160 million in the prior-year period.
- Dell sold its U.S. consumer revolving receivables portfolio for approximately $390 million cash, derecognizing $380 million of receivables; the gain was immaterial.
- Broadcom completed its acquisition of VMware on November 22, after quarter-end. Dell said the transaction ended its related-party relationship with VMware. Dell’s VMware resale activity and related commercial arrangements remain relevant to future results.
Outlook, risks, and contingencies
- Management expects revenue declines in both CSG and ISG for the remainder of Fiscal 2024 compared with the fourth quarter of Fiscal 2023, and expects Broadcom’s VMware acquisition to reduce “other businesses” revenue beginning in Fiscal 2024’s fourth quarter. Management cited early signs of macroeconomic stabilization and expects revenue growth in Fiscal 2025; these statements are forward-looking, not a detailed earnings forecast.
- AI-optimized server demand exceeded available GPU supply, increasing backlog for those products. Dell expects component-cost deflation to moderate in the rest of Fiscal 2024 and turn inflationary in Fiscal 2025. Fiscal 2024 capital expenditures were expected to total $2.8–$3.0 billion.
- Risks highlighted include persistent macroeconomic weakness, competitive pricing pressure, single- or limited-source suppliers, foreign-exchange movements, interest-rate exposure, trade restrictions, geopolitical volatility, and potential changes in customer IT spending. Management also cautioned that working-capital timing contributed to operating cash flow.
- Dell is contesting IRS proposed adjustments for fiscal 2018–2019 and is undergoing an IRS examination for fiscal 2020–2022. Unrecognized tax benefits were $1.2 billion; resolution of certain matters could reduce them by up to $0.4 billion and materially affect the effective tax rate.
- Dell reported no material goodwill or indefinite-lived intangible impairment in its annual review. It said it did not believe a material loss exceeding amounts accrued was reasonably possible for its disclosed legal matters, while noting that outcomes remain uncertain.
Important facts for investors to verify
- Whether PC and enterprise infrastructure demand stabilizes as management anticipates, and whether AI-server GPU supply converts backlog into revenue.
- How much of the $7.1 billion nine-month operating cash flow reflects sustainable earnings and collections versus inventory and payment timing.
- Segment revenue, operating margins, and competitive pricing trends, particularly in ISG servers and CSG PCs.
- The effect of Broadcom’s VMware ownership on Dell resale revenue, product availability, and commercial arrangements.
- Debt maturities, variable-rate financing costs, and the company’s ability to balance dividends and buybacks with debt reduction and investment needs.
- Developments in the IRS disputes and tax examinations, including any effect on reserves, cash payments, or the effective tax rate.