Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter ended November 1, 2019; comparisons are with the quarter ended November 2, 2018. Nine-month results cover the same respective year-to-date periods. Amounts are in U.S. dollars.
Business context
Dell reports three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. Results consolidate majority-owned businesses. The quarter’s growth came from CSG and VMware, partly offset by weaker ISG server and networking sales.
Financial performance
| Metric | Third quarter | Nine months |
|---|---|---|
| Revenue | $22.844 billion, up 2% year over year | $68.122 billion, up 2% |
| Product / services revenue | $17.485 billion, down 1%; $5.359 billion, up 10% | $52.349 billion, essentially flat; $15.773 billion, up 10% |
| Gross margin | $7.126 billion; 31.2% of revenue, versus 26.4% | $21.249 billion; 31.2%, versus 26.9% |
| Operating income (loss) | $836 million, versus a $356 million loss | $1.905 billion, versus a $522 million loss |
| Net income (loss) | $552 million, versus an $895 million loss | $5.113 billion, versus a $1.894 billion loss |
| Net income (loss) attributable to Dell Technologies Inc. | $499 million, versus an $876 million loss | $4.208 billion, versus a $2.011 billion loss |
| Cash from operating activities | Not reported as a quarterly figure in the provided filing text | $5.783 billion, versus $4.625 billion |
Gross margin improvement reflected lower component costs and lower intangible amortization and purchase-accounting charges. Management said operating cash flow benefited from improved profitability and working-capital discipline. Non-GAAP operating income was $2.442 billion for the quarter and $7.381 billion for the nine months; adjusted EBITDA was $2.857 billion and $8.586 billion, respectively. These are company-defined non-GAAP measures and exclude specified costs.
Segments and material changes
- ISG: Revenue was $8.390 billion, down 6% in the quarter. Servers and networking fell 16%, while storage rose 7%. Operating income was $996 million, up 7%.
- CSG: Revenue was $11.410 billion, up 5%; commercial revenue rose 9%, while consumer revenue fell 6%. Operating income increased 65% to $739 million, benefiting from lower component costs and higher-margin mix.
- VMware: Revenue was $2.483 billion, up 11%, supported by software licenses and maintenance. Operating income declined 7% to $717 million as sales-related compensation and R&D costs increased.
- For the nine months, ISG revenue declined 6% to $25.213 billion; CSG increased 5% to $34.068 billion; VMware increased 12% to $7.231 billion.
Cash, debt, and liquidity
- Cash and cash equivalents were $8.555 billion at November 1, 2019, down from $9.676 billion at February 1, 2019. Cash, cash equivalents, and restricted cash totaled $9.341 billion.
- Debt principal was $53.026 billion; carrying value was $52.391 billion, including $7.664 billion current and $44.727 billion long-term debt. Core debt was $35.872 billion, down $3.435 billion from fiscal year-end.
- Available borrowings under revolving facilities were $7.386 billion; cash plus available borrowings totaled $15.941 billion. Dell said existing cash, operating cash flow, and expected facility borrowings should fund needs for at least the next 12 months. VMware facility proceeds are restricted to VMware and its subsidiaries.
- Operating cash flow was $5.783 billion; investing cash outflow was $3.982 billion, including $1.612 billion of capital expenditures and $2.429 billion for acquisitions; financing cash outflow was $2.600 billion.
- Fiscal 2020 capital expenditures were expected to total $2.2 billion–$2.4 billion, including about $1.0 billion for equipment recognized under the new lease standard.
Outlook, risks, and unusual items
- No specific consolidated revenue or earnings guidance is provided in the filing text. Management expected CSG demand to remain strong into early Fiscal 2021, then soften as the Windows 10 refresh cycle winds down.
- Component costs were deflationary during the reported periods. Management expected deflation to ease by early the next fiscal year and an overall inflationary environment in Fiscal 2021, potentially pressuring ISG and CSG results.
- Management cited weaker server demand in China and Western Europe, trade and tariff uncertainty, and processor supply constraints that could affect CSG shipments in the fourth quarter and into Fiscal 2021. It also described competitive pressure in servers and networking.
- The nine-month net income includes a $4.9 billion discrete tax benefit from transferring intellectual property to Irish subsidiaries. The quarter included a $305 million discrete tax benefit from an audit settlement; Dell paid $438 million to settle an IRS audit during the quarter. These items substantially distort reported effective tax rates and net income.
- A $619 million gross impairment charge related to Virtustream was recorded in the first quarter; the filing reports no remaining Virtustream goodwill, intangible assets, or property, plant, and equipment at November 1. RSA Security goodwill fair value exceeded carrying value by 13%, which management said it would continue to monitor.
- VMware completed its acquisition of Carbon Black for a preliminary purchase price of $2.0 billion, net of cash acquired. Pivotal agreed to be acquired by VMware, with completion expected in the fourth quarter of Fiscal 2020.
- Class V transaction-related stockholder litigation remained pending. Dell reported an immaterial proposed settlement in a separate securities class action, subject to final court approval. Dell said it did not believe a material loss exceeding accrued amounts was reasonably possible, while noting litigation outcomes are inherently unpredictable.
- The company adopted the new lease standard in Fiscal 2020, recognizing $1.6 billion of operating lease liabilities and related right-of-use assets at adoption. Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was reported.
Most important facts for investors to verify
- How much of the $5.113 billion nine-month net income reflects sustainable operations versus the $4.9 billion tax benefit and other discrete tax items.
- Whether CSG growth and margin gains can persist as the Windows refresh cycle fades and component costs turn inflationary.
- Whether ISG server and networking demand stabilizes, particularly in China, and whether supply constraints affect CSG shipments.
- Debt repayment progress, upcoming maturities, interest expense, and liquidity available to Dell itself versus restricted VMware and DFS financing sources.
- Integration and expected returns from Carbon Black, the planned Pivotal merger, and the implications of the Virtustream impairment and RSA Security valuation headroom.
- Updates on tax audits and legal proceedings, including the Class V litigation and final approval of the securities settlement.