Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended November 2, 2018; comparisons are with the quarter ended November 3, 2017. Year-to-date figures cover nine months. Amounts are in U.S. dollars.
Business context
Dell Technologies sells technology products and services through Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), VMware and other businesses. It also provides customer financing through Dell Financial Services (DFS). Management cited strong global demand and growth across all three reportable segments. Prior-period results were recast following adoption of the new revenue standard, so some product-versus-services classifications and reported figures differ from previously filed amounts.
Key financial results
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $22.5bn (+15%) | $19.6bn | $66.8bn (+17%) | $57.1bn |
| Gross margin | $5.9bn; 26.4% | $5.2bn; 26.7% | $17.9bn; 26.9% | $14.6bn; 25.7% |
| Operating loss | $(356)m | $(410)m | $(522)m | $(2.35)bn |
| Net loss | $(895)m | $(851)m | $(1.89)bn | $(2.79)bn |
| Net loss attributable to Dell Technologies Inc. | $(876)m | $(846)m | $(2.01)bn | $(2.75)bn |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $4.63bn | $3.74bn |
Reported Q3 revenue comprised $17.6bn of products (+17%) and $4.9bn of services (+9%). Nine-month revenue was $52.4bn from products (+20%) and $14.3bn from services (+8%). Segment revenue increased in Q3: ISG 19% to $8.9bn, CSG 11% to $10.9bn and VMware 15% to $2.2bn. CSG operating income fell 29% to $447m; ISG operating income rose 7% to $935m and VMware rose 21% to $768m.
Non-GAAP measures, which exclude specified items including purchase accounting, intangible amortization and transaction/corporate costs, showed Q3 operating income of $2.06bn (down 2%) and adjusted EBITDA of $2.43bn (down 1%). Nine-month non-GAAP operating income was $6.20bn (+15%) and adjusted EBITDA was $7.27bn (+13%). These company-defined measures are not substitutes for GAAP results.
Balance sheet, liquidity and debt
- At November 2, 2018, cash and cash equivalents were $15.15bn, investments $5.29bn, and total assets $121.24bn. Current assets were $42.96bn versus current liabilities of $47.58bn.
- Debt carrying value was $48.66bn ($49.36bn principal), including $8.15bn short-term and $40.51bn long-term debt. Core debt principal was $36.25bn. Total debt carrying value declined from $51.87bn at February 2, 2018.
- Cash, cash equivalents and available borrowings totaled $19.57bn; the main revolving facility had $3.3bn available. VMware and Pivotal facilities are for those subsidiaries’ purposes, not general Dell use.
- Nine-month cash from investing activities was $(221)m and financing activities $(2.84)bn. Capital expenditures were $861m. Management forecast FY2019 capital expenditures of $1.1bn–$1.3bn.
Material changes, outlook and risks
- Q3 gross margin percentage declined 30 basis points; management attributed pressure to CSG geographic mix and ISG’s higher server mix. CSG profitability was also affected by supply-chain dynamics, currency effects and higher compensation and commissions.
- A $190m goodwill impairment was recorded for Virtustream after lower forecasts tied to a streamlined business model. RSA Security’s goodwill fair value exceeded carrying value by 11%, and management said it would continue monitoring it.
- Management said supply-chain dynamics had increased inventory and could continue to pressure working capital. It expected slightly deflationary component costs in ISG and CSG for the rest of FY2019, and expected to continue investments in sales, R&D and business transformation.
- The proposed Class V transaction was amended after quarter-end on November 14, 2018: cash consideration increased to $120 per share, the aggregate cash cap to $14bn, and the exchange ratio to 1.5043–1.8130 Class C shares. It remained subject to stockholder approval and other conditions. VMware’s conditional $11bn special dividend was expected to fund most of Dell’s cash payment. Dell arranged up to $5bn of bridge financing and was evaluating permanent financing. Management expected liquidity to remain sufficient for at least 12 months, while noting cash would decline significantly if the transaction closed.
- Other exposures include tax audits and provisional U.S. tax-reform accounting, expiring tax holidays, foreign-exchange and variable-rate debt exposure, customer credit and working-capital risks, and litigation. A putative stockholder suit challenged the Class V transaction. Management stated it did not believe a material loss beyond accrued amounts was reasonably possible as of the reporting date, but outcomes remain uncertain.
Important facts for investors to verify
- Whether the amended Class V transaction received required approvals, closed on expected terms, and how cash elections and proration affected consideration and financing.
- Whether revenue growth converts to sustained operating profitability, particularly given CSG margin pressure and ISG server mix.
- Debt repayment progress, refinancing terms and interest costs, including the bridge financing and cash remaining after the proposed transaction.
- Inventory and working-capital trends, capital spending, and DFS receivable quality and funding needs.
- Final tax-reform estimates, tax-holiday renewals, and developments in material legal proceedings.