Dell Technologies Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020 (52 weeks). The filing was signed March 27, 2020. The request’s “2019 Q4” label does not match the filing’s reporting period; the filing also reports fiscal fourth-quarter results for the three months ended January 31, 2020.
Business context and reporting period
Dell Technologies is a global technology provider spanning hardware, software, services and financing. Its reportable segments are Infrastructure Solutions Group (ISG), Client Solutions Group (CSG) and VMware. Fiscal 2020 growth came from CSG and VMware, partly offset by weaker ISG servers and networking.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $92.2 billion | $90.6 billion |
| Gross margin | $28.9 billion; 31.4% | $25.1 billion; 27.6% |
| Operating income (loss) | $2.6 billion | ($191) million |
| Net income (loss) | $5.5 billion | ($2.2) billion |
| Net income (loss) attributable to Dell Technologies Inc. | $4.6 billion | ($2.3) billion |
| Cash from operating activities | $9.3 billion | $7.0 billion |
| Adjusted EBITDA (non-GAAP) | $11.8 billion | $10.3 billion |
- Revenue rose 2%; product revenue declined 1% while services revenue increased 12%. Gross margin expanded 380 basis points, reflecting lower component costs, a larger VMware contribution and lower amortization and purchase-accounting charges.
- Non-GAAP operating income rose 15% to $10.1 billion; non-GAAP net income rose 16% to $6.1 billion. These measures exclude significant costs and adjustments and are not substitutes for GAAP results.
- FY2020 GAAP net income included a $5.5 billion income tax benefit, including $4.9 billion of deferred tax benefits from transfers of intellectual property to Irish subsidiaries. Pretax results were approximately breakeven, so reported net income and EPS were materially affected by discrete tax items.
- Fiscal Q4 revenue was $24.0 billion, gross margin $7.7 billion, and net income attributable to Dell Technologies Inc. $408 million; diluted EPS was $0.54. FY2019 quarterly EPS used separate Class V and DHI Group reporting, limiting direct comparison.
- Cash and cash equivalents were $9.3 billion at year-end; remaining available borrowings under revolving facilities were approximately $6.0 billion. Total debt principal was $52.7 billion, down $1.6 billion year over year; core debt declined $5.5 billion to $33.8 billion. Stockholders’ equity was $3.2 billion, including a Dell Technologies Inc. stockholders’ deficit of $1.6 billion.
- Interest and other, net expense increased to $2.6 billion from $2.2 billion, principally due to higher interest expense. A 100-basis-point increase in rates was estimated to add about $160 million to annual interest expense on variable-rate debt.
- Deferred revenue increased to $27.8 billion from $24.0 billion. Remaining performance obligations were approximately $36 billion, with about 61% expected to be recognized within 12 months.
Material changes versus the prior comparable period
- CSG revenue increased 6% to $45.8 billion and operating income rose 60% to $3.1 billion, supported by commercial PC demand, the Windows 10 refresh cycle and lower component costs. Consumer revenue fell 6%.
- ISG revenue decreased 7% to $34.0 billion, including a 14% decline in servers and networking; storage revenue was approximately flat. ISG operating income declined 4% to $4.0 billion.
- VMware revenue increased 12% to $10.9 billion, driven by subscriptions, SaaS and maintenance renewals. Operating income increased 5% to $3.1 billion, while its operating margin declined to 28.3% from 30.0% as sales and R&D expenses increased.
- Operating cash flow improved by $2.3 billion, attributed to stronger profitability and working-capital discipline, including lower inventory.
- Debt principal fell despite additional DFS borrowings to fund growth in customer financing. The balance sheet also reflects adoption of the lease standard, which added $1.6 billion of operating lease liabilities at adoption.
Outlook, risks and unusual items
- Management expected CSG demand to remain strong early in FY2021 but decelerate as the Windows 10 refresh cycle wound down. It anticipated an inflationary component-cost environment that could pressure ISG and CSG margins and said consolidated operating results might trend more toward FY2019 levels.
- Management expected weaker demand in China to affect FY2021 results. COVID-19 effects were uncertain; the company cited heightened interest in work-from-home solutions while warning of potential supply-chain, demand, productivity and capital-market disruption. In March 2020 it drew $3.0 billion on its revolving facility as a precaution to preserve financial flexibility.
- FY2021 capital expenditures were forecast at $2.4–$2.6 billion, including $1.0–$1.1 billion for DFS operating-lease equipment. Management stated that cash, future operating cash flow and expected facility borrowings should cover at least the next 12 months of operations and obligations.
- Virtustream incurred a $619 million gross impairment charge ($524 million net of tax) in FY2020. VMware accrued $237 million following a patent-infringement jury verdict; VMware intended to challenge the verdict, and final resolution could differ materially from the accrual.
- In February 2020, Dell agreed to sell RSA Security for approximately $2.075 billion, subject to adjustments and closing conditions. The company also authorized up to $1.0 billion of Class C share repurchases over 24 months. Dell said it did not presently intend to pay cash dividends.
- Key risks include substantial indebtedness and refinancing needs, variable interest rates, intense competition, dependence on limited-source suppliers and contract manufacturers, cybersecurity and privacy incidents, goodwill and intangible-asset impairment, tax uncertainty, and COVID-19-related disruption. Goodwill and intangible assets totaled $59.8 billion, about half of total assets.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective. The auditor identified critical audit matters involving revenue performance obligations, goodwill and trade-name impairment assessments, and the IP transfers’ tax valuation.
Investor verification priorities
- Separate recurring operating performance from the $5.5 billion tax benefit, especially the $4.9 billion deferred benefit tied to Irish IP transfers and the assumptions supporting realization.
- Track core-debt reduction, debt maturities, covenant compliance and the cash available to Dell itself; VMware subsidiary borrowing proceeds are generally restricted to VMware purposes.
- Assess whether CSG can sustain growth after the Windows 10 refresh and absorb component-cost inflation, and whether ISG server demand and China exposure recover.
- Monitor COVID-19 effects on orders, supply chains, customer payments and financing access, including the subsequent $3.0 billion revolver draw.
- Follow the Cirba patent case, RSA sale completion and proceeds, Virtustream’s impairment history, and the valuation headroom in goodwill and intangible assets.