Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal 2023 third quarter ended October 28, 2022; comparisons are with the quarter ended October 29, 2021. Fiscal 2023 is a 53-week year. Amounts are in U.S. dollars.
Business context and results
Dell designs, sells, and supports technology products and services. Its reportable segments are Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG). VMware was spun off in November 2021; prior-year income and segment comparisons exclude VMware’s results from continuing operations, while prior-year cash flows include VMware.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $24.7B (-6%) | $26.4B | $77.3B (+6%) | $73.2B |
| Gross margin | $5.7B; 23.1% | $5.5B; 20.9% | $16.9B; 21.9% | $16.3B; 22.2% |
| Operating income | $1.8B; 7.1% margin | $1.0B; 4.0% margin | $4.6B; 5.9% margin | $3.1B; 4.2% margin |
| Continuing-operations net income | $241M | $3.7B | $1.8B | $5.0B |
| Diluted EPS from continuing operations | $0.33 | $4.68 | $2.41 | $6.34 |
| Non-GAAP net income | $1.7B (+30%) | $1.3B | $4.4B (+25%) | $3.5B |
Quarterly GAAP earnings were affected by a $1.0B expense for the Class V litigation settlement. The prior-year comparison also included a $4.0B pre-tax gain from the Boomi sale. Management reported higher operating income mainly from ISG growth, lower amortization and lower prior-year transaction costs; non-GAAP results exclude specified items and are not GAAP measures.
Segments and material changes
- ISG: Q3 revenue rose 12% to $9.6B; servers and networking increased 14%, and storage increased 11%. Segment operating income rose 54% to $1.37B, with a 14.3% margin.
- CSG: Q3 revenue fell 17% to $13.8B, with commercial down 13% and consumer down 29%, primarily reflecting fewer units sold. Segment operating income declined 7% to $1.06B; margin increased to 7.7% as input costs eased.
- Services: Q3 revenue increased 6% to $5.8B; product revenue declined 10% to $18.9B. Nine-month revenue growth was driven chiefly by ISG.
- Q3 consolidated operating margin improved, supported by a richer mix toward ISG, lower input costs, and reduced operating expenses. Nine-month gross margin percentage declined amid higher input costs and foreign-exchange effects.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $851M, versus $7.2B a year earlier. Management attributed the decline mainly to working-capital pressures, including inventory and timing of vendor payments; prior-year cash flow included $3.2B from VMware.
- Nine-month investing cash outflow was $2.2B, principally capital expenditures. Financing cash outflow was $3.1B, including $2.7B of share repurchases and $728M of dividends. Cash and cash equivalents fell to $4.9B from $9.5B at fiscal year-end.
- At quarter-end, debt carrying value was $27.3B, including $10.1B of DFS debt; management-defined core debt was $16.2B. The filing reports $5.0B of available revolving credit and $9.9B of cash plus available borrowings. There were no quarter-end borrowings under the $5.0B commercial paper program.
- After quarter-end, Dell amended its revolving facility to transition from LIBOR to SOFR, extend maturity to November 2027, and increase commitments to $6.0B. Dell reported compliance with its interest-coverage covenant.
Outlook, risks, and unusual items
- Management expected weaker demand to affect the remainder of FY2023: CSG revenue was expected to decrease, and ISG growth was expected to be challenged, particularly in servers. No full-year revenue or earnings guidance is stated in the provided filing text.
- FY2023 capital expenditures were expected to total $3.1B–$3.3B, including about $1.1B for DFS operating-lease equipment and $0.3B for capitalized software development.
- Supply constraints were easing and expected to normalize through the rest of FY2023 and into FY2024. Logistics costs were expected to decline; component costs were expected to remain deflationary in the near term, while processor price increases were anticipated to affect costs beginning in FY2024.
- Dell accrued a $1.0B liability and expense for the Class V transaction litigation settlement. Payment and dismissal of claims are conditioned on final court approval; proceedings could continue if approval is not obtained. The settlement amount may be paid by Dell and/or insurers under indemnification obligations.
- Dell recorded $181M of costs for its Russia business exit during the first nine months. Management also cited macroeconomic and geopolitical uncertainty, foreign-exchange exposure, supply-chain risks, and potential tax effects from U.S. R&D cost capitalization. If not deferred or repealed, that tax provision could significantly increase FY2023 cash taxes.
- Management said current cash, future operating cash flow, and expected borrowing availability should cover material needs for at least the next 12 months. It noted near-term cash outflows related to the litigation settlement. The company continued dividends and repurchases while stating that deleveraging and maintaining investment-grade ratings remain priorities.
Key facts for investors to verify
- Final court approval, funding source, and ultimate cash impact of the $1.0B Class V settlement.
- Whether weaker PC and server demand persists, and whether ISG growth and margins can offset CSG declines.
- Operating cash flow and working-capital trends, especially inventory and vendor-payment timing.
- Cash-tax consequences of R&D capitalization and any legislative deferral or repeal.
- Debt maturities, DFS funding and credit performance, and the pace of buybacks and dividends relative to deleveraging.