Dell Technologies Inc. — FY2018 Form 10-K
Business context and period. This annual report covers the fiscal year ended February 2, 2018 (Fiscal 2018, 52 weeks). Dell Technologies sells PCs and related services, enterprise servers, storage and networking, and VMware software. Comparisons with Fiscal 2017 are affected by the EMC merger: EMC results were consolidated only from September 7, 2016, and Fiscal 2017 included 53 weeks. The figures below are consolidated unless noted.
Financial performance
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Revenue | $78.66 billion | $61.64 billion |
| Gross profit / margin | $20.05 billion / 25.5% | $12.96 billion / 21.0% |
| Operating loss / margin | $(3.33) billion / (4.2)% | $(3.25) billion / (5.3)% |
| Continuing-operations net loss | $(3.86) billion | $(3.74) billion |
| Operating cash flow | $6.81 billion | $2.31 billion |
| Cash and cash equivalents at year-end | $13.94 billion | $9.47 billion |
| Total debt, principal amount | $52.69 billion | $50.36 billion |
- Revenue rose 28%, primarily from including a full year of EMC-acquired businesses; product revenue increased 21% and services revenue 54%. Services rose to 25.2% of revenue from 21.0%.
- GAAP gross margin increased 450 basis points. Operating loss remained substantial as operating expenses grew 44%, including acquisition-related amortization and integration costs.
- Management’s non-GAAP operating income was $6.86 billion, up 34%, and adjusted EBITDA was $8.22 billion, up 38%. These are non-GAAP measures; exclusions include purchase accounting, intangible amortization, transaction costs and other corporate expenses.
- Fiscal 2018 interest and other expense was $2.36 billion, including $2.41 billion of interest expense. Capital expenditures were $1.21 billion; operating cash flow less capital expenditures was approximately $5.60 billion.
- At year-end, current assets were $38.96 billion versus current liabilities of $45.89 billion. Cash plus reported available borrowings was $18.82 billion; availability includes facilities restricted to VMware and Pivotal and is not all available to the parent.
Segments and fourth quarter
- Client Solutions Group (CSG) revenue was $39.46 billion, up 7%; operating income was $2.19 billion, or 5.6% of segment revenue. Premium notebooks and workstations and pricing actions supported results.
- Infrastructure Solutions Group (ISG) revenue was $30.65 billion, up 41%, largely reflecting acquired storage operations. Operating income declined 9% to $2.18 billion, and segment margin fell to 7.1% from 11.0% amid investment, product-mix pressure and component inflation.
- VMware revenue was $7.93 billion and operating income $2.52 billion; results include a full fiscal year, compared with only the post-merger period in Fiscal 2017.
- Fiscal fourth-quarter revenue was $21.94 billion and gross profit $5.78 billion. Dell Technologies reported a $511 million net loss attributable to the company for the quarter; the filing’s quarterly table shows $223 million of continuing-operations income attributable to Class V and a $288 million loss attributable to the DHI Group.
Liquidity, debt and capital
- Debt carrying value was $51.87 billion, including $7.87 billion short-term and $44.00 billion long-term; principal due in Fiscal 2019 was $7.89 billion. Cash was $13.94 billion, including $6.0 billion held by VMware.
- Management stated that cash, future operating cash flow and expected borrowing availability should fund operations, capital expenditures and debt service for at least the next 12 months. The company was in compliance with financial covenants at year-end.
- Debt refinancing reduced margins on certain term loans during the year. Variable-rate borrowings expose the company to higher interest costs; the filing estimates a 100-basis-point rate increase would add about $140 million in annual interest expense on specified variable-rate debt.
- Fiscal 2019 capital expenditures were expected to be $1.1–$1.3 billion. No cash dividend was declared, and the company said it did not currently intend to pay one in the foreseeable future.
Outlook, risks and unusual items
- Management emphasized integration of EMC, cross-selling, cost efficiencies and continued investment in sales, marketing and research and development. It expects component-cost increases affecting CSG and ISG to moderate in Fiscal 2019; no specific consolidated revenue or earnings guidance is provided in the filing.
- Key operating risks include intense hardware and software competition, changing PC demand, traditional storage weakness and cloud competition, component-cost inflation, reliance on limited-source suppliers and contract manufacturers, and execution risks in integration and transformation.
- Fiscal 2018 included $10.2 billion of purchase-accounting impacts, acquired-intangible amortization, transaction-related expenses and other corporate expenses affecting operating loss. Acquired-intangible amortization alone was $7.0 billion.
- The Tax Cuts and Jobs Act produced a provisional $0.3 billion tax benefit, reflecting a $1.3 billion deferred-tax remeasurement benefit offset by $1.0 billion of transition-tax expense. The estimate could be revised in Fiscal 2019. The company also disclosed $3.2 billion of unrecognized tax benefits and ongoing tax audits.
- Legal matters include ongoing appraisal proceedings related to Dell’s 2013 going-private transaction and other claims. Management reported that it did not believe a material loss exceeding amounts accrued was reasonably possible, while noting litigation outcomes remain uncertain.
- The Class V stock is a tracking stock, not an interest in a separate legal entity; it was intended to track approximately 61% of Dell Technologies’ economic interest in VMware. Dell Technologies’ controlling stockholders hold substantial voting power, and the company relies on controlled-company exemptions from certain NYSE governance requirements.
- PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting. A subsequent event was the March 2018 filing of Pivotal’s IPO registration statement; the company also completed the sale of Mozy for approximately $146 million.
Important facts for investors to verify
- How much of the reported revenue and cash-flow growth reflects acquired EMC operations versus organic growth, and how comparable segment trends are after accounting for the merger and Fiscal 2017’s extra week.
- Whether non-GAAP profitability translates into sustainable GAAP earnings after acquired-intangible amortization, purchase accounting, integration costs and interest expense.
- Debt maturity and refinancing plans, covenant headroom, the availability of cash held in subsidiaries, and sensitivity to interest-rate increases.
- Whether ISG margins recover as component costs moderate and storage offerings adapt to cloud, software-defined and hyper-converged competition.
- The final accounting impact of U.S. tax reform, future tax-holiday terms, and outcomes of significant tax audits and appraisal proceedings.
- The implications of the tracking-stock structure, concentrated voting control, governance exemptions and potential conflicts between the DHI Group and Class V holders.