Dell Technologies Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended May 1, 2020, compared with the three months ended May 3, 2019. Fiscal 2021 is a 52-week year ending January 29, 2021. Unaudited results include VMware and Secureworks. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $21.897 billion | $21.908 billion | Flat |
| Gross margin | $6.853 billion; 31.3% | $6.797 billion; 31.0% | Up 1%; margin +30 bps |
| Operating income | $702 million; 3.2% | $550 million; 2.5% | Up 28% |
| Net income | $182 million | $329 million | Down 45% |
| Net income attributable to Dell Technologies Inc. | $143 million; diluted EPS $0.19 | $293 million; diluted EPS $0.38 | Down 51% |
| Non-GAAP net income | $1.143 billion | $1.209 billion | Down 5% |
| Operating cash flow | $(796) million | $682 million | Declined $1.478 billion |
| Capital expenditures and capitalized software costs | $559 million | $716 million | Down |
Product revenue fell 3% to $16.038 billion; services revenue rose 10% to $5.859 billion. Product gross margin was $3.234 billion (20.2% of product revenue), while services gross margin was $3.619 billion (61.8%). Management reported non-GAAP operating income of $2.161 billion, down 2%, and adjusted EBITDA of $2.607 billion, up 1%. These are non-GAAP measures and exclude specified costs; they should not be treated as substitutes for GAAP results.
Segments and material changes
- Infrastructure Solutions Group (ISG): Revenue decreased 8% to $7.569 billion; operating income fell 13% to $732 million. Server and networking revenue declined 10%, and storage declined 5%, amid weaker demand, competitive pricing, and COVID-19 disruption.
- Client Solutions Group (CSG): Revenue increased 2% to $11.104 billion. Commercial revenue rose 4%, led by commercial notebooks and work-from-home demand; consumer revenue fell 5%. Operating income declined 25% to $592 million as margin pressure and expedited supply-chain costs weighed on results.
- VMware: Revenue rose 12% to $2.755 billion; operating income increased 30% to $773 million. Growth reflected subscriptions and SaaS, software maintenance, and enterprise agreement renewals. Pivotal results are included in VMware, with prior-period segment results recast.
- Consolidated revenue was nearly unchanged as CSG and VMware growth offset ISG weakness. Services growth was supported by hardware support, deployment, and software maintenance.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $12.229 billion at May 1, up from $9.302 billion at January 31; cash, cash equivalents, and restricted cash totaled $12.998 billion. The quarter’s increase reflected financing proceeds despite negative operating and investing cash flows.
- Total debt carrying value was $56.728 billion ($57.347 billion principal), up from $52.056 billion carrying value at January 31. Current debt was $8.375 billion and long-term debt $48.353 billion. First-quarter issuance included $2.25 billion of Dell First Lien Notes and $2.0 billion of VMware Notes; DFS debt also increased.
- Management reported $17.701 billion of cash, cash equivalents, and available borrowings, including $5.472 billion of available facilities. Some VMware cash and borrowing capacity is for VMware’s own purposes and is not available to fund Dell Technologies generally.
- Current assets were $40.931 billion versus current liabilities of $50.011 billion. Total liabilities were $116.555 billion. Dell reported a stockholders’ deficit of $1.614 billion, offset by non-controlling interests to produce total stockholders’ equity of $3.240 billion.
- Operating cash flow was affected by collection timing and higher inventory maintained for supply continuity. Management expected most of these working-capital impacts to normalize by fiscal year-end. Financing cash flow was positive $4.264 billion, principally from debt issuance; investing cash flow was negative $485 million.
Outlook, risks, and unusual items
- COVID-19: Management described demand and the economic environment as uncertain and said the full effects on results, liquidity, and cash flows could not be predicted. The company shifted most employees to remote work, maintained operations through supply-chain measures, and supported customer financing. It tightened spending, including hiring limits and lower consulting, contractor, and travel costs, and later temporarily suspended the U.S. 401(k) match.
- Demand and costs: Management expected CSG demand to decelerate during FY2021 in the macroeconomic environment, despite first-quarter demand for remote-work products. It expected component costs to become inflationary in Q2 and the second half of FY2021, potentially pressuring ISG and CSG operating results. Processor and other component supply constraints, including COVID-related delays, could affect shipments.
- Capital spending: FY2021 capital expenditures were expected to total $2.3–$2.5 billion, including approximately $1.0 billion for DFS operating-lease equipment. No consolidated revenue or earnings guidance was provided in the supplied filing text.
- Liquidity actions: Dell drew $3.0 billion on its revolving facility in March as a precaution and repaid it during the quarter; it also issued debt to preserve financial flexibility. Management believed cash, future operating cash flows, and available borrowing capacity would fund operations and obligations for at least the next 12 months. Dell’s stock repurchase program was suspended during the quarter after approximately $240 million of repurchases; about $760 million remained authorized.
- RSA divestiture: Dell agreed to sell RSA Security for approximately $2.075 billion, subject to closing adjustments and customary conditions, with closing expected in Q3 FY2021. RSA assets of about $2.1 billion and liabilities of $365 million were classified as held for sale; the business was not presented as discontinued operations.
- Tax and other items: The quarter included a $59 million discrete tax benefit from an intra-entity intellectual-property transfer; the prior-year quarter included a $405 million similar benefit. A $120 million gain on sale of intellectual property improved interest and other, net. CECL adoption reduced opening equity by $110 million and increased credit-loss allowances. Management cited COVID-19 uncertainty in estimating future credit losses.
- Contingencies: VMware had a $237 million accrual for a Cirba patent-infringement jury verdict; post-trial motions remained under consideration, and the final outcome could differ materially from the accrued amount. Dell also disclosed ongoing tax audits, including IRS examinations; resolution of certain tax matters could reduce unrecognized tax benefits by an estimated $550–$850 million and materially affect the effective tax rate.
- Other noted risks include competition, currency movements, supplier concentration, debt service and refinancing needs, and potential impairment judgments. Dell said it was in compliance with financial covenants at May 1, 2020.
Most important facts for investors to verify
- Whether negative operating cash flow and working-capital pressures normalized as management expected, and how COVID-19 affected collections, inventory, and credit-loss allowances.
- Whether the anticipated inflationary component-cost environment and weaker demand affected ISG and CSG margins and FY2021 results.
- Debt maturities, refinancing needs, access to liquidity, and the distinction between Dell and VMware cash and borrowing resources.
- Progress and final proceeds from the RSA sale, and any changes in the Cirba litigation exposure or tax-audit outcomes.
- How much reported profitability depends on non-GAAP exclusions, discrete tax benefits, and the intellectual-property sale gain; compare those measures with GAAP results.