Dell Technologies Inc. — Q1 Fiscal 2025 Form 10-Q
Reporting period: Three months ended May 3, 2024; comparisons are with the three months ended May 5, 2023 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Dell sells technology products and services through its Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and other businesses. Consolidated revenue increased 6%, led by AI-optimized server demand. Management said demand improved as the macroeconomic environment stabilized, but competition intensified and pressured pricing and margins.
| Metric | Q1 FY2025 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $22.244 billion | $20.922 billion | +6% |
| Gross margin | $4.806 billion; 21.6% of revenue | $5.018 billion; 24.0% | -4%; margin down 240 bps |
| Operating income | $920 million; 4.1% of revenue | $1.069 billion; 5.1% | -14%; margin down 100 bps |
| Net income | $955 million | $578 million | +65% |
| Diluted EPS | $1.32 | $0.79 | +67% |
| Operating cash flow | $1.043 billion | $1.777 billion | -41% |
| Free cash flow (non-GAAP) | $457 million | $1.079 billion | -58% |
| Adjusted free cash flow (non-GAAP) | $623 million | $687 million | -9% |
Reported net income benefited substantially from a $408 million income tax benefit, including discrete benefits of approximately $400 million tied to expirations of statutes of limitations and $200 million related to stock-based compensation. Non-GAAP net income was $923 million, down 4%, and non-GAAP diluted EPS was $1.27, down 3%. Non-GAAP measures are company-defined and exclude specified items.
Segments and material changes
| Business | Revenue | Year-over-year change | Operating income / margin |
|---|---|---|---|
| ISG | $9.227 billion | +22%; servers and networking +42%, storage flat | $736 million; 8.0% margin, versus 9.7% |
| CSG | $11.967 billion | Flat; commercial +3%, consumer -15% | $732 million; 6.1% margin, versus 7.4% |
| Other businesses | $1.049 billion | Down from $1.343 billion | $6 million, versus a $36 million loss |
- AI-optimized server demand drove ISG growth, but GPU supply lagged demand and left elevated backlog at quarter-end.
- CSG revenue was held flat as higher unit sales were offset by lower average selling prices; competitive pricing contributed to lower segment profitability.
- On March 25, 2024, Dell terminated its VMware Commercial Framework Agreement and stopped distributing VMware standalone products. Dell will continue supporting prior resale customers and integrating selected VMware offerings. Management expects VMware-related resale revenue to continue declining.
- Gross margin pressure reflected competitive pricing and a revenue mix shift toward AI-optimized servers. Services gross margin increased 4%, while product gross margin declined 11%.
Cash, debt and liquidity
- Cash and cash equivalents were $5.830 billion at May 3, 2024, down from $7.366 billion at February 2, 2024. Cash, cash equivalents and restricted cash totaled $5.962 billion.
- Debt carrying value was $25.480 billion ($25.705 billion principal), compared with $25.994 billion carrying value at fiscal year-end. Management-defined core debt was $14.462 billion. Most DFS debt is asset-backed and non-recourse to Dell, subject to the stated program structures.
- Current assets were $34.627 billion and current liabilities were $47.734 billion. Dell reported approximately $5.999 billion of available revolving credit capacity and no outstanding revolver or commercial-paper borrowings.
- Management said cash, expected operating cash flows and available borrowing sources should be sufficient for material cash needs over the next 12 months and foreseeable future. The company was in compliance with its revolving-credit interest coverage covenant.
- Operating cash flow was lower year over year, reflecting prior-year working-capital benefits from reductions in inventory and receivables, alongside current-period incentive payments and other working-capital movements. Inventory increased to $4.782 billion from $3.622 billion at fiscal year-end.
- Dell repurchased approximately 6.7 million shares for $700 million and paid dividends at $0.445 per share, up from $0.37. The board had approved a 20% quarterly dividend increase; about $3.684 billion remained under the repurchase authorization at May 3.
- Remaining performance obligations were approximately $39 billion; Dell expected to recognize about 59% as revenue in the next 12 months. These estimates may change.
Outlook, risks and unusual items
- Outlook: Management expects full-year FY2025 revenue growth, led primarily by ISG and to a lesser extent CSG. It anticipates growth in AI-optimized and traditional servers and storage, and expects a PC refresh cycle to support CSG later in the year. The filing provides no numerical full-year revenue or earnings guidance.
- Management expects competitive pricing to persist and input costs, particularly components, to rise in the second half of FY2025. It also noted the potential for demand, supply and cost trends to fluctuate.
- On March 18, 2024, Dell issued $1.0 billion of 5.40% senior notes due 2034 and used the proceeds to prepay part of its 6.02% notes due 2026.
- R2 Semiconductor patent litigation in Germany resulted in an injunction decision affecting certain products; Dell appealed. R2 also filed actions in France and Italy. Dell said it could not reasonably estimate potential losses; Intel agreed to defend and indemnify Dell against certain losses.
- The IRS proposed adjustments relating mainly to fiscal 2018–2019 transactions. Dell disputes the proposals and expects the appeals process to extend beyond the next 12 months. Unfavorable tax audit outcomes could affect results, financial position or cash flows.
- Management reported effective disclosure controls. Dell implemented a new ERP system during the quarter and expects further finance-system migrations; related control processes are being adapted.
Key facts for investors to verify
- Whether AI-server demand, GPU availability and elevated backlog translate into revenue growth without further gross-margin deterioration.
- Whether competitive pricing, CSG performance and expected component-cost increases affect full-year profitability.
- How much of the reported earnings increase reflects discrete tax benefits; compare GAAP results with non-GAAP net income and EPS.
- Whether operating cash flow and free cash flow recover, considering inventory levels, working capital, dividends and repurchases.
- Developments in the R2 litigation and IRS examinations, including potential financial exposure and the scope of Intel’s indemnification.