Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Three months ended May 5, 2017 (first quarter of Fiscal 2018). Amounts are in U.S. dollars. The comparison is with the three months ended April 29, 2016. Results are not directly comparable: Dell acquired EMC in September 2016, so the current quarter includes EMC while the prior quarter does not; Dell Services, Dell Software Group, and Enterprise Content Division are presented as discontinued operations.
Financial performance and liquidity
| Metric | Current quarter | Prior comparable quarter |
|---|---|---|
| Net revenue | $17.816 billion | $12.241 billion |
| Gross margin | $4.302 billion; 24.1% of revenue | $2.193 billion; 17.9% |
| Operating income (loss) | $(1.500) billion | $(139) million |
| Net income (loss) from continuing operations | $(1.383) billion | $(424) million |
| Net income (loss) attributable to Dell Technologies Inc. | $(1.334) billion | $55 million |
| Cash from operating activities | $240 million | Cash used: $63 million |
| Cash and cash equivalents at period end | $9.554 billion | — |
| Total debt, principal amount | $50.728 billion | $50.356 billion at February 3, 2017 |
- Revenue rose 46%, chiefly reflecting the EMC businesses; company-defined non-GAAP revenue rose 48% to $18.171 billion.
- GAAP gross margin increased 96%, but included substantial acquisition-related purchase accounting and intangible amortization. Company-defined non-GAAP operating income was $1.197 billion, non-GAAP continuing-operations net income was $581 million, and adjusted EBITDA was $1.567 billion. These non-GAAP measures exclude significant costs and are not GAAP results.
- Product gross margin was 11.6%, down from 13.6%; services gross margin was 57.6%, up from 39.3%. The consolidated gross-margin improvement principally reflected acquired businesses with higher margins.
- Interest and other, net was expense of $573 million, versus $219 million, mainly due to higher debt and interest expense following the EMC transaction. Depreciation and amortization was $2.212 billion, including $1.776 billion of intangible amortization.
- Cash from investing activities was $51 million and cash used in financing activities was $205 million. Capital expenditures were $245 million. Cash and cash equivalents plus remaining revolving-credit availability totaled $12.232 billion; $3.9 billion of cash was held by VMware.
- Current assets were $30.384 billion and current liabilities $36.636 billion. Debt carrying value was $49.790 billion. The company reported compliance with its financial covenants and $2.678 billion of available revolving borrowings.
Material changes and business mix
- Client Solutions Group revenue increased 6% to $9.056 billion; operating income declined 3% to $374 million, and operating margin fell to 4.1% from 4.5%. Management cited higher component costs and pricing pressure.
- Infrastructure Solutions Group revenue increased 91% to $6.916 billion, primarily from acquired storage operations; operating income rose 68% to $323 million, while margin declined to 4.7% from 5.3%.
- VMware contributed $1.736 billion of revenue and $486 million of operating income, a 28.0% segment margin. The prior-year comparison did not include VMware as a Dell Technologies reportable segment.
- Operating expenses rose 149% to $5.802 billion, reflecting acquired businesses, increased headcount, purchase accounting, amortization, and integration costs. Management reported $2.7 billion of combined purchase accounting, intangible amortization, transaction-related, and other corporate expenses affecting operating results.
- Cash conversion cycle was negative 42 days versus negative 57 days. Management attributed the 15-day deterioration to the acquired EMC businesses, including higher days sales outstanding and inventory and lower days payable outstanding.
Outlook, risks, and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected Fiscal 2018 capital expenditures of approximately $1.3 billion and said cash, future operating cash flows, and available revolving credit should fund operations, capital expenditures, repurchases, and debt service for at least the next 12 months.
- Management described demand as uneven and cyclical, anticipated intensified competition in PCs, and expected traditional server and storage markets to remain pressured. It also cited component-cost inflation, particularly for CSG and ISG, and ongoing EMC integration as challenges. Strategic priorities include investing in R&D, sales, and next-generation infrastructure and cloud solutions.
- Debt principal increased modestly from February 3, 2017. During the quarter, Dell refinanced and increased its Term Loan B, issued a $2.0 billion margin loan secured by VMware shares, and used financing proceeds to retire the Margin Bridge Facility. The debt burden and related interest requirements remain material.
- Goodwill was $38.930 billion and intangible assets $33.283 billion. Management reported no indication of goodwill impairment at May 5, 2017; impairment estimates depend on forecasts and other significant assumptions.
- The company reported $3.1 billion of net unrecognized tax benefits and ongoing tax disputes and examinations. The IRS began an audit of fiscal years 2010–2014 in May 2017. Tax outcomes could materially affect results, financial position, or cash flows.
- The appraisal proceeding relating to Dell’s 2013 going-private transaction remained under appeal; the recorded liability was approximately $129 million. The company said it believed its reserve was adequate. It also described copyright-levy and other litigation exposures, while stating it did not believe a material loss exceeding accrued amounts was reasonably possible.
- Other notable items: Dell repurchased $359 million of its Class V shares during the quarter; the extended repurchase program was completed after quarter-end. The company adopted certain accounting standards, including early adoption of guidance for intra-entity asset transfers, which increased retained earnings by approximately $84 million.
Most important facts for investors to verify
- How much of reported growth and segment performance reflects EMC consolidation rather than comparable underlying growth; the periods are not directly comparable.
- The sustainability of operating cash generation and non-GAAP profitability after integration, purchase accounting, amortization, and other excluded expenses.
- Debt-service capacity, refinancing needs, covenant headroom, and the effect of interest rates on a highly leveraged balance sheet.
- Whether component-cost inflation, storage and server market trends, and the weaker cash conversion cycle improve or worsen.
- Potential effects of tax audits, the appraisal appeal, and other legal matters, as well as assumptions supporting goodwill and intangible-asset carrying values.