Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017, ended October 28, 2016. Amounts are in U.S. dollars; financial figures are in millions unless noted. Dell completed its EMC acquisition on September 7, 2016, so current-period results include EMC only from that date and are not directly comparable with prior periods.
Key financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $16,247 | $12,674 | $41,568 | $38,232 |
| Gross margin | $3,899; 24.0% | $2,132; 16.8% | $8,428; 20.3% | $6,133; 16.0% |
| Operating income (loss) | $(1,512) | $(78) | $(1,584) | $(488) |
| Continuing operations net income (loss) | $(1,637) | $(264) | $(2,323) | $(1,000) |
| Net income (loss) attributable to Dell Technologies | $(2,064) | $(180) | $(1,436) | $(949) |
- Revenue drivers: Q3 revenue rose 28% and nine-month revenue rose 9%, primarily because of EMC. Q3 included approximately $3.6 billion of EMC revenue and $0.6 billion of EMC net loss. Reported revenue also reflected purchase-accounting reductions of approximately $0.5 billion in each current-period comparison.
- Margins and adjusted results: Q3 non-GAAP operating income was $1,975, versus $607 a year earlier; nine-month non-GAAP operating income was $3,270, versus $1,570. Non-GAAP net income from continuing operations was $970 and $1,596, respectively, versus $294 and $671. These company-defined non-GAAP measures exclude significant items and are not GAAP substitutes.
- Cash flow: Nine-month operating cash flow was $1,546, compared with $1,191. Investing cash outflow was $38,059, including $37,614 net cash used for the EMC acquisition. Financing cash inflow was $38,810, largely reflecting merger-related borrowings and equity issuance.
- Balance sheet and liquidity: At October 28, cash and cash equivalents were $8,822, with $1,566 of available revolving-credit borrowings; total liquidity on that basis was $10,388. Debt principal was $56,787 (carrying value $55,672), versus $13,980 principal at January 29. Current assets were $36,407 and current liabilities $41,369. Management said cash, future operating cash flow, and expected facility availability should fund operations and obligations for at least 12 months.
Segments and material changes
- Client Solutions Group: Q3 revenue was $9,187, up 3%; operating income was $634, or 6.9% of segment revenue. Commercial revenue declined 1%, while consumer revenue increased 12%.
- Infrastructure Solutions Group: Q3 revenue was $5,989, up 61%, principally reflecting EMC storage; servers and networking revenue fell 8%. Operating income was $897, or 15.0% of segment revenue.
- VMware: Included only from the acquisition date; reported Q3 revenue was $1,289 and operating income was $548. Dell Technologies owned approximately 83.3% of VMware at quarter-end.
- Q3 operating expenses rose to $5,411 from $2,210. The company cited higher acquisition-related costs, purchase-accounting effects, acquired intangible amortization, and increased compensation and benefits. Q3 operating loss included $3.5 billion in aggregate purchase-accounting, amortization, transaction-related, and other corporate items.
- Total debt increased sharply to finance the EMC transaction, which involved approximately $45.9 billion of new debt. Interest and other expense was $794 in Q3, versus $203 a year earlier.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expects approximately $0.5 billion of fiscal 2017 capital expenditures and anticipates increased integration costs over the next 12 months. It described PC demand as uneven and cyclical, competition as intensifying, and traditional server and storage markets as pressured, while identifying cloud-native infrastructure as a growth opportunity.
- After quarter-end, Dell completed the Dell Software Group sale for approximately $2.4 billion and Dell Services sale for approximately $3.0 billion, expecting pre-tax gains of approximately $1.2 billion and $1.5 billion, respectively. The ECD sale for approximately $1.6 billion remained pending, subject to customary conditions.
- After quarter-end, the company used divestiture proceeds to repay $2.2 billion of the Asset Sale Bridge Facility and $2.1 billion of the Term Loan A-1 Facility; it also repaid approximately $1 billion of the revolving facility. These repayments occurred after the reported balance-sheet date.
- Q3 included $807 million of post-merger stock-compensation charges, approximately $309 million of acquisition-related costs, and an $80 million vendor-pricing settlement benefit to gross margin. Dell recorded a $489 million Q3 tax provision for the DSG discontinued operation, significantly affecting reported discontinued-operations results.
- The company reported $3.8 billion of unrecognized tax benefits and an IRS settlement after quarter-end requiring approximately $545 million payment; it expected to record an approximately $300 million tax benefit, subject to evaluation. Other risks include substantial debt and interest-rate exposure, merger integration and preliminary purchase accounting, legal and tax matters, foreign-exchange exposure, and risks tied to VMware performance. A 100-basis-point rate increase was estimated to add approximately $188 million in annual interest expense on specified variable-rate borrowings.
- Management stated disclosure controls were effective as of October 28, 2016. It continued to assess internal-control changes associated with EMC integration.
Important facts for investors to verify
- How EMC integration, purchase accounting, acquired-intangible amortization, and non-GAAP exclusions affect sustainable earnings and cash generation.
- Debt reduction after the reported period, remaining maturities and interest costs, covenant compliance, and the availability of liquidity.
- Final purchase-price allocation, including the acquired goodwill and intangible-asset values, which were preliminary and could change materially.
- Completion and actual proceeds or gains from the divestitures, and how proceeds are applied to debt.
- The performance and comparability of CSG, ISG, and VMware, particularly given the partial-period consolidation of acquired businesses and discontinued operations.