Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended November 3, 2017. Amounts are in U.S. dollars; financial statements are unaudited. Fiscal 2018 has 52 weeks, versus 53 weeks in fiscal 2017.
Business context and comparability
Dell Technologies combines Client Solutions Group (CSG), Infrastructure Solutions Group (ISG), VMware, and other businesses. The EMC merger closed September 7, 2016, so current-period results include EMC for the full periods while prior-year comparisons include it only from the merger date. Dell Services, Dell Software Group, and Enterprise Content Division were divested in fiscal 2017 and are reported as discontinued operations. As a result, year-over-year comparisons are not fully like-for-like.
Financial results
| Metric | Three months ended Nov. 3, 2017 | Nine months ended Nov. 3, 2017 | Prior comparable period |
|---|---|---|---|
| Revenue | $19.61 billion, up 21% | $56.73 billion, up 36% | $16.25 billion and $41.57 billion |
| Gross margin | $5.16 billion; 26.3% of revenue | $14.27 billion; 25.2% | $3.90 billion; 24.0% and $8.43 billion; 20.3% |
| Operating loss | $533 million | $3.01 billion | $1.51 billion and $1.58 billion loss |
| Net loss from continuing operations | $941 million | $3.30 billion | $1.64 billion and $2.32 billion loss |
| Net loss attributable to Dell Technologies Inc. | $937 million | $3.22 billion | $2.06 billion and $1.44 billion loss |
| Operating cash flow | Not presented separately for the quarter | $3.68 billion | $1.57 billion for nine months |
- Quarterly product revenue was $14.68 billion, up 19%; services revenue was $4.93 billion, up 27%. Nine-month product and services revenue rose 25% and 83%, respectively; the services increase largely reflects EMC consolidation.
- For the quarter, CSG revenue was $9.96 billion, ISG $7.52 billion, and VMware $1.95 billion. Their year-over-year reported revenue growth was 8%, 26%, and 52%, respectively. Nine-month growth comparisons are particularly affected by the timing of the EMC merger.
- Quarterly GAAP gross margin improved, but the company still reported an operating and net loss. Nine-month operating loss widened, primarily reflecting higher acquired-intangible amortization and purchase-accounting charges.
- Management-reported non-GAAP operating income was $1.99 billion for the quarter and $4.74 billion for nine months; non-GAAP net income from continuing operations was $1.11 billion and $2.56 billion. These measures exclude significant items, including purchase accounting and intangible amortization; they are not GAAP results.
Balance sheet, debt, and liquidity
- At November 3, 2017, cash and cash equivalents were $11.71 billion; short- and long-term investments totaled $6.28 billion. Cash was up from $9.47 billion at February 3, 2017, and the filing says most cash was held outside the United States.
- Total debt had a $52.52 billion principal amount and $51.65 billion carrying value, compared with $50.36 billion and $49.39 billion, respectively, at fiscal year-end. Total liabilities were $102.81 billion. Debt includes $30.89 billion of senior secured facilities and first-lien notes, plus $4.35 billion of structured financing debt.
- Current assets were $34.53 billion versus current liabilities of $40.74 billion. Management reported $4.90 billion of available borrowings and $16.60 billion of cash, cash equivalents, and available borrowings combined. Some borrowing capacity and $6.0 billion of cash belonged to VMware or Pivotal and were restricted to those businesses’ purposes.
- Nine-month operating cash flow was $3.68 billion; investing activities used $1.99 billion and financing activities provided $496 million. Capital expenditures were $902 million. Management attributed higher operating cash flow to improved profitability and working-capital initiatives, partly offset by growth in financing receivables and interest and tax payments.
- The company refinanced credit facilities, reducing interest-rate margins, and repaid bridge debt. VMware issued $4.0 billion of notes; VMware’s debt proceeds are not generally available for Dell Technologies’ corporate purposes. Dell reported compliance with financial covenants at quarter-end.
Changes, outlook, and risks
- Growth reflects the expanded post-EMC business, not solely organic performance. Management said quarterly non-GAAP operating income was relatively flat year over year, while nine-month non-GAAP operating income increased 45%.
- Component-cost inflation pressured CSG and ISG margins. Management expected the trend to moderate but continue into fiscal 2019. CSG demand was relatively flat in the quarter; ISG faced weaker demand for certain high-end and traditional midrange storage products, changing product mix, and investment-related costs.
- Management emphasized integration progress, product and R&D investment, and customer-focused growth; it did not provide specific consolidated revenue or earnings guidance in the supplied filing text. Fiscal 2018 capital expenditures were expected to be approximately $1.2 billion. Management said available cash, future operating cash flow, and expected borrowing capacity should fund needs for at least the next 12 months, and anticipated building cash ahead of fiscal 2019 maturities.
- Risks include substantial debt service and upcoming maturities, foreign-exchange and interest-rate exposure, component costs, competition and storage-market shifts, and tax uncertainty. The company had $3.2 billion of net unrecognized tax benefits and was contesting IRS and other tax matters; unfavorable outcomes could materially affect results.
- No goodwill impairment was identified in the annual test, but the Core Storage, Servers and Networking reporting unit’s fair value exceeded carrying value by 18%, lower than the cushion for other reporting units. Management said it would continue monitoring it.
- Legal matters include a pending appeal in the Dell going-private appraisal proceedings; the recorded liability was approximately $129 million. Management believed reserves were adequate and did not believe a material loss beyond accrued amounts was reasonably possible, while noting outcomes remain uncertain.
- Subsequent to quarter-end, VMware agreed to acquire VeloCloud for an estimated approximately $470 million in cash, subject to closing conditions. DFS also entered into a $200 million credit agreement.
Investor verification priorities
- Separate organic growth from EMC-related consolidation effects, especially in ISG and VMware, and assess whether reported growth translates into durable cash generation.
- Review GAAP losses against non-GAAP results and the size and persistence of excluded acquisition, amortization, purchase-accounting, and integration costs.
- Assess debt maturities, interest expense, covenant headroom, and which cash and credit resources are actually available to the parent company.
- Track component-cost effects and storage demand, particularly ISG operating margins and the monitored goodwill reporting unit.
- Check developments in tax disputes, appraisal litigation, and the VeloCloud acquisition, including final purchase price and integration costs.