Dell Technologies Inc. — Q2 FY2023 Form 10-Q
Reporting period: Fiscal second quarter ended July 29, 2022; comparisons are with the quarter ended July 30, 2021. Six-month figures cover the first half of each fiscal year. FY2023 has 53 weeks. The VMware spin-off, completed November 1, 2021, makes prior-period comparisons less directly comparable: VMware’s former operations are discontinued operations in prior-period income statements, while cash-flow comparisons still include VMware in the prior-year period.
Financial results and key metrics
| Metric | Q2 FY2023 | Six months FY2023 |
|---|---|---|
| Revenue | $26.425 billion, up 9% | $52.541 billion, up 12% |
| Gross margin | $5.439 billion; 20.6% of revenue, down from 22.6% | $11.223 billion; 21.4%, down from 23.0% |
| Operating income | $1.270 billion, up 25%; 4.8% margin | $2.820 billion, up 41%; 5.4% margin |
| Continuing-operations net income | $506 million, down from $629 million | $1.575 billion, up from $1.288 billion |
| Diluted EPS, continuing operations | $0.68, versus $0.80 | $2.06, versus $1.65 |
| Cash from operating activities | $455 million for the first six months, versus $3.963 billion in the prior-year period |
Revenue growth was led by Infrastructure Solutions Group (ISG), up 12% in the quarter, and Client Solutions Group (CSG), up 9%. ISG servers and networking rose 16% and storage rose 6%. CSG commercial revenue rose 15%, while consumer revenue fell 9%. Management attributed margin pressure primarily to higher costs and foreign-exchange movements, not fully offset by pricing. Lower operating expenses and reduced intangible amortization supported operating income.
Liquidity and debt: Cash and cash equivalents were $5.507 billion at July 29, down from $9.477 billion at January 28. Cash plus available revolving borrowings was $10.506 billion, including approximately $5.0 billion available under the revolving credit facility. Debt carrying value was $26.934 billion, including $16.120 billion of core debt; core debt was essentially unchanged from fiscal year-end. Total stockholders’ equity remained negative at $2.755 billion. The company reported compliance with its revolving-facility interest-coverage covenant.
Operating cash flow fell sharply year over year, reflecting working-capital movements and the absence of VMware’s contribution, which accounted for $2.1 billion of prior-year first-half operating cash flow. Investing activities used $1.498 billion, mainly for capital expenditures; financing activities used $2.752 billion. First-half capital expenditures and capitalized software costs were $1.497 billion. The company repurchased approximately $2.1 billion of shares and paid $490 million in dividends.
Material changes and unusual items
- Interest and other, net was an expense of $635 million for the quarter, versus $292 million a year earlier. A $255 million quarterly net investment loss, primarily from strategic-investment valuation declines, was a major factor; lower interest expense partly offset it.
- The company recognized $189 million of costs related to exiting Russia, primarily asset impairments and other exit costs. It also reported $310 million of strategic-investment impairments during the first half.
- Q2 GAAP gross margin declined 1% despite revenue growth. GAAP operating income rose partly because amortization of acquired intangible assets was lower; non-GAAP operating income rose 4% for the quarter.
- Deferred revenue was $28.025 billion. Remaining performance obligations were approximately $41 billion, with about 61% expected to be recognized over the next twelve months.
Outlook, management commentary, and risks
- Management expected ISG revenue growth to continue through the remainder of FY2023, but at a moderating rate. It expected CSG demand and revenue to decline over the remainder of the fiscal year. No numerical full-year revenue or earnings guidance is provided in the filing text.
- FY2023 capital expenditures were expected to total $3.1–$3.3 billion, including approximately $1.1 billion for DFS operating-lease equipment and $0.4 billion for capitalized software development.
- Management said supply constraints, especially for certain ISG components, were extending lead times and increasing pending orders. Logistics costs were expected to remain elevated for the rest of the fiscal year, though management anticipated they would begin declining in Q3; component costs were expected to remain moderately deflationary into Q3.
- Other risks include macroeconomic uncertainty, weaker PC demand, inflation and input costs, foreign-exchange and interest-rate volatility, geopolitical and supply-chain disruption, and cybersecurity threats. The company said it believed available cash, future operating cash flow, and borrowing capacity would meet material cash needs for at least the next twelve months.
- The VMware spin-off’s tax-free treatment depends on tax requirements being satisfied; failure could result in significant liabilities. The company also faces ongoing tax examinations and audits. A Delaware class action related to the 2018 Class V transaction was in discovery, with trial scheduled for December 5, 2022; a separate Pivotal-related case had a proposed settlement awaiting court approval. Management did not believe a material loss above amounts accrued was reasonably possible as of quarter-end, while noting litigation outcomes remain uncertain.
- After quarter-end, the Inflation Reduction Act was enacted. Dell was assessing its potential effects, including a 15% corporate alternative minimum tax effective for the fiscal year ending February 2, 2024, and a 1% excise tax on share repurchases after December 31, 2022.
Important facts for investors to verify
- Whether the anticipated ISG growth moderation and CSG decline materialized, and how demand shifts affected revenue and margins.
- Whether operating cash flow and working capital improved, given the substantial year-over-year cash-flow decline and the prior-year VMware comparison.
- Progress on debt reduction, liquidity, and capital returns, including remaining authorization under the $5 billion repurchase program and the effect of the new share-repurchase excise tax.
- Actual capital spending versus the $3.1–$3.3 billion FY2023 expectation, and changes in supply constraints, logistics costs, and component pricing.
- Developments in strategic-investment valuations and impairments, Russia exit costs, tax audits and spin-off tax treatment, and material litigation.
- How reported GAAP results compare with non-GAAP measures, which exclude items including amortization, stock compensation, investment valuation changes, and certain corporate and transaction costs.