Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended August 4, 2017. Amounts are in U.S. dollars; financial statement amounts are generally in millions. Results are not directly comparable with 2016 because EMC was acquired on September 7, 2016, while Dell Services, Dell Software Group, and Enterprise Content Division were divested and reported as discontinued operations.
Financial performance
| Metric | Q2 FY2018 | Six months FY2018 |
|---|---|---|
| Net revenue | $19.299 billion; up 48% | $37.115 billion; up 47% |
| Gross margin | $4.809 billion; 24.9% of revenue | $9.111 billion; 24.5% of revenue |
| Operating income (loss) | $(979) million | $(2.479) billion |
| Net loss from continuing operations | $(978) million | $(2.361) billion |
| Net income (loss) attributable to Dell Technologies | $(946) million | $(2.280) billion |
| Cash provided by operating activities | Not stated separately | $2.056 billion |
GAAP operating results included substantial acquisition-related purchase accounting and intangible amortization. Management reported non-GAAP operating income of $1.552 billion for Q2 and $2.749 billion for the six months, and non-GAAP net income from continuing operations of $873 million and $1.454 billion, respectively. These are non-GAAP measures and exclude significant costs; the filing cautions they are not substitutes for GAAP results.
- Products generated $14.355 billion of Q2 revenue, up 31%; services generated $4.944 billion, up 133%. Much of the increase reflected EMC consolidation.
- Segment revenue and operating income for Q2: Client Solutions Group (CSG) $9.851 billion and $566 million; Infrastructure Solutions Group (ISG) $7.406 billion and $430 million; VMware $1.907 billion and $561 million. VMware was not included in the prior-year comparison.
- Interest and other expense, net, was $545 million in Q2 and $1.118 billion for the six months, primarily reflecting higher debt-related interest expense.
Balance sheet, debt and liquidity
- At August 4, 2017, cash and cash equivalents were $9.213 billion; current assets were $32.205 billion and current liabilities $42.126 billion.
- Total debt was $49.946 billion principal amount, or $49.060 billion carrying value, versus $50.356 billion principal amount at February 3, 2017. Cash plus available revolving borrowings totaled $12.317 billion, including $3.104 billion of available revolver capacity.
- Management stated that cash, expected operating cash flow, and available revolver borrowings should be sufficient for at least the next 12 months. The company was in compliance with its financial covenants at quarter-end.
- Cash declined $261 million during the six months. Investing activities used $1.290 billion and financing activities used $1.075 billion. Capital expenditures were $561 million; management expected approximately $1.3 billion for FY2018.
- Financing receivables, net, were $6.672 billion, with an allowance of $135 million. Total deferred revenue was $19.6 billion, most of which was expected to be recognized over the next two years.
Changes, outlook and notable items
- Reported revenue and gross margin expanded with EMC consolidation, but GAAP operating loss widened due principally to acquisition-related amortization, purchase accounting, higher operating expenses and increased interest costs. Prior-year earnings also included income from discontinued operations.
- Management cited higher component costs affecting CSG and ISG and expected pressure to continue in the near term. CSG margin also faced cost pressure that pricing did not fully offset; its Q2 operating margin benefited from a $68 million vendor settlement. ISG cited traditional storage demand weakness, product-mix pressure and increased investment spending.
- Management described ongoing integration of EMC, investment in research and development and sales capabilities, and a strategy focused on client devices, infrastructure, virtualization and cloud solutions. No specific consolidated revenue or earnings guidance was provided in the filing text.
- Cash conversion cycle was negative 46 days, compared with negative 67 days a year earlier; the 21-day deterioration was attributed to EMC-related collection, inventory and supplier-payment patterns.
- Subsequent to quarter-end, VMware issued $4.0 billion of debt and Dell repaid its $1.5 billion VMware Note Bridge Facility using part of the proceeds and other cash. VMware’s debt is not an obligation of Dell Technologies or its other subsidiaries.
- All 15 EMC merger-related lawsuits were resolved. The appraisal proceeding related to Dell’s 2013 going-private transaction remained on appeal; the recorded liability was approximately $129 million. The company reported $3.2 billion of net unrecognized tax benefits and ongoing tax audits; unfavorable outcomes could affect results, cash flows or financial position.
Important facts for investors to verify
- How much of the reported growth and segment profitability reflects EMC consolidation versus underlying organic performance, given the limited comparability with 2016.
- Whether GAAP losses, acquisition-related amortization and purchase accounting charges decline as integration progresses, and how non-GAAP exclusions reconcile to recurring costs.
- Debt maturities, interest expense, refinancing capacity and the availability of cash held outside the United States; assess liquidity alongside the company’s substantial debt burden.
- Whether component-cost inflation, ISG storage trends and the deterioration in the cash conversion cycle persist, and whether the $68 million vendor settlement recurs.
- Developments in the appraisal appeal, tax audits and other contingencies, including any change in reserves or potential exposure.