Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of Fiscal 2022, ended October 29, 2021; compared with the periods ended October 30, 2020. Amounts are in U.S. dollars. This is a pre-spin-off reporting period and includes VMware.
Business context and major events
Dell sells infrastructure and client-computing products and services, and provided VMware’s results as a reportable segment during the period. On November 1, 2021, Dell completed the VMware spin-off. VMware paid a special cash dividend of $11.5 billion, of which Dell received approximately $9.3 billion, and Dell distributed its VMware shares to Dell stockholders. Dell will report VMware as discontinued operations beginning in the fourth quarter of Fiscal 2022; prior-period results will be recast.
Dell completed the sale of Boomi on October 1, 2021 for approximately $4.0 billion in cash. It recorded a $4.0 billion pre-tax gain and a $3.0 billion gain after $1.0 billion of related tax expense.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $28.4 billion, up 21% | $79.0 billion, up 16% |
| Gross margin | $8.1 billion; 28.4% of revenue, down 250 basis points | $23.7 billion; 30.0% of revenue, down 120 basis points |
| Operating income | $1.35 billion, up 19%; 4.8% margin, flat | $4.10 billion, up 38%; 5.2% margin, up 80 basis points |
| Net income attributable to Dell | $3.84 billion, versus $0.83 billion | $5.56 billion, versus $2.02 billion |
| Non-GAAP operating income | $2.87 billion, up 5%; 10.1% margin, down 150 basis points | $8.39 billion, up 12%; 10.6% margin, down 40 basis points |
| Non-GAAP net income | $2.02 billion, up 18% | $5.75 billion, up 28% |
Revenue growth was led by Client Solutions Group (CSG): quarterly revenue rose 35% to $16.5 billion; Infrastructure Solutions Group (ISG) rose 5% to $8.4 billion; VMware rose 10% to $3.2 billion. For the nine months, CSG revenue increased 28%, ISG 4%, and VMware 9%. The large increase in GAAP net income was principally driven by the Boomi sale gain, rather than operating growth alone.
For the nine months, cash from operations was $7.2 billion, versus $5.5 billion. Investing activities provided $2.1 billion, primarily reflecting Boomi sale proceeds, while financing activities used $1.0 billion. Capital expenditures and capitalized software costs were $2.1 billion. Cash, cash equivalents, and restricted cash totaled $23.4 billion at quarter-end; balance-sheet cash and cash equivalents were $22.4 billion.
Debt and liquidity
At October 29, total debt was $48.5 billion principal amount ($48.0 billion carrying value), including $10.0 billion of Dell Financial Services debt and $10.8 billion of VMware notes. Dell reported $27.0 billion of core debt. Approximately $9.4 billion of principal was classified as short-term in anticipation of repayment following the spin-off. Quarter-end cash and borrowing availability totaled $28.4 billion, but included $12.5 billion of cash held by VMware and $1.5 billion of VMware revolving capacity.
After quarter-end, Dell used the $9.3 billion dividend proceeds and cash on hand to repay $9.4 billion of core debt. It also established a new $5.0 billion revolving credit facility maturing in 2026. Dell incurred $181 million of debt breakage fees and recognized $110 million of unamortized debt discounts in connection with debt extinguishments. Management said available cash, future operating cash flow, and borrowing capacity should cover needs for at least the next 12 months.
Outlook, risks, and unusual items
- Outlook: Fiscal 2022 capital expenditures were expected to total $2.9 billion. Management anticipated strong CSG demand through the remaining quarter of Fiscal 2022 and expected supply-chain dynamics to continue into Fiscal 2023.
- Costs and supply: Component shortages, higher component and freight costs, and extended customer lead times pressured margins. Dell expected the inflationary component-cost environment to remain but begin stabilizing in the rest of Fiscal 2022.
- Spin-off: Dell and VMware entered into a commercial framework agreement with an initial five-year term, plus annual renewals, as well as tax and transition-services agreements. Dell cautioned that the spin-off may not deliver intended benefits and could cause customer delays, disruption, or separation costs.
- Other risks: The filing identifies foreign-exchange, interest-rate, trade-policy, COVID-19, and supply-chain risks. Dell reported ongoing tax audits, including an IRS examination of Fiscal 2015–2019, and $1.5 billion of unrecognized tax benefits. It stated that it did not believe a material loss exceeding recorded accruals was reasonably possible as of quarter-end, while noting litigation outcomes remain inherently unpredictable.
- Legal matters: Disclosed cases include the Class V transaction litigation and VMware-related litigation involving Cirba and the Pivotal acquisition. The Cirba patent case had a prior $237 million jury award set aside; Dell/VMware said it could not assess the potential liability or damages.
- Controls: Management concluded disclosure controls were effective as of October 29, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Post-spin-off Dell cash, debt, liquidity, and interest expense, separating Dell’s resources from VMware’s pre-spin balances and debt.
- Underlying earnings and margins excluding the Boomi gain and other non-GAAP adjustments; note that non-GAAP measures exclude items including stock compensation and transaction costs.
- Whether supply constraints, component inflation, and freight costs stabilize as management expected, and how these affect margins and order fulfillment.
- Post-spin-off revenue, customer relationships, and costs under the VMware commercial and transition agreements.
- Developments in the disclosed litigation and tax audits, including any changes to loss assessments or reserves.