Dell Technologies Inc. — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2022, the three months ended April 30, 2021; comparable period ended May 1, 2020. Amounts are in U.S. dollars. The filing is unaudited. Dell consolidates VMware and Secureworks.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $24.487B | $21.897B | +12% |
| Gross margin | $7.658B; 31.3% | $6.853B; 31.3% | +12%; margin flat |
| Operating income | $1.375B; 5.6% | $702M; 3.2% | +96% |
| Net income | $938M | $182M | +415% |
| Net income attributable to Dell | $887M | $143M | +520% |
| Diluted EPS | $1.13 | $0.19 | — |
| Operating cash flow | $2.238B | $(796)M | Improved $3.034B |
| Capital expenditures and capitalized software | $625M | $559M | — |
Products generated $18.034B of revenue (+12%); services generated $6.453B (+10%). GAAP product gross margin was 21.2% versus 20.2%; services gross margin was 59.5% versus 61.8%. Non-GAAP operating income was $2.714B (+26%), non-GAAP net income $1.819B (+59%), and adjusted EBITDA $3.235B (+24%). These are management-defined non-GAAP measures and are not substitutes for GAAP results.
Segments: Client Solutions Group (CSG) revenue was $13.305B (+20%) and operating income $1.090B (+84%); Infrastructure Solutions Group (ISG) revenue was $7.911B (+5%) and operating income $788M (+8%); VMware revenue was $2.991B (+9%) and operating income $841M (+9%).
Balance sheet, debt and liquidity
- At April 30, 2021, cash and cash equivalents were $14.244B; cash, cash equivalents and restricted cash totaled $15.260B.
- Total debt carrying value was $46.683B ($47.153B principal), down $1.301B carrying value from January 29, 2021. This includes $9.753B of DFS debt, most of which is non-recourse, and $4.750B of VMware notes, which are VMware obligations.
- Cash and cash equivalents plus available revolving borrowings totaled $19.711B. Dell reported $4.5B available under its revolving facility; a further $1.0B VMware facility is restricted to VMware purposes.
- Current liabilities were $54.856B and current assets $42.339B. Dell reported compliance with all financial covenants and said available liquidity should be sufficient for at least the next 12 months and the foreseeable future.
- Accounts receivable was $10.909B; inventory $3.828B; net financing receivables $10.241B. Deferred revenue was $31.376B, and remaining performance obligations were approximately $42B, with about 61% expected to be recognized in the next 12 months.
Material changes and management commentary
- Revenue growth was led by CSG, supported by demand for remote work and learning devices and gaming systems. VMware growth reflected subscriptions, SaaS and software maintenance. ISG server and networking revenue rose 9%, while storage revenue was flat.
- Operating cash flow swung to positive $2.238B from negative $796M, reflecting stronger profitability and more favorable working capital than in the pandemic-affected prior-year quarter.
- Interest and other expense, net, improved to $388M expense from $566M, primarily due to lower interest expense following debt repayments. The 5.0% effective tax rate included $103M of discrete stock-compensation tax benefits; the prior-year rate was negative 33.8% and included a $59M discrete benefit.
- Management expects component costs to become inflationary for the remainder of Fiscal 2022 and expects supply constraints and elevated freight costs to continue. It anticipates strong CSG demand, while warning that component costs, pricing and competition may affect margins. Operating expenses are expected to increase versus the comparable remainder of Fiscal 2021 as temporarily reduced pandemic-era expenses return.
- Fiscal 2022 capital expenditures are expected to total $2.7B–$2.9B, including approximately $800M for DFS operating-lease equipment and $300M for capitalized software development. The filing does not provide a clear numerical full-year revenue or earnings forecast.
Transactions, risks and contingencies
- Planned VMware separation: Announced April 14, 2021, with a target close in Q4 calendar 2021, subject to conditions including a favorable IRS private letter ruling. VMware was expected to pay a special dividend of $11.5B–$12.0B; Dell intended to use its share of proceeds to repay debt. The separation may be delayed or not completed, and could involve disruption, costs and customer deferrals. VMware results would be reported as discontinued operations after closing.
- Boomi sale: On May 1, 2021, Dell announced an agreement to sell Boomi and related assets for a stated transaction value of $4B, subject to adjustments and closing conditions; closing was expected by year-end 2021.
- Subsequent debt repayment: Dell repaid $1B of the Margin Loan Facility after quarter-end.
- Legal and tax matters: Dell said it did not believe a material loss exceeding accrued amounts was reasonably possible as of April 30, while noting that litigation outcomes are inherently uncertain. VMware patent litigation includes a prior $237M jury award that was set aside after the court ordered a new trial; VMware said it could not assess potential liability or damages. The IRS was examining fiscal years 2015–2019; unrecognized tax benefits were $1.4B.
- Operational risks: COVID-19 uncertainty, constrained component supply, inflationary input costs, freight expense, foreign-exchange exposure, competition and variable-rate debt could affect results. Management said market-risk exposure had not changed materially from its prior annual report. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether the VMware separation satisfies tax and other closing conditions, its timing, dividend amount and actual debt-repayment impact.
- Whether reported demand converts into shipments and revenue amid component shortages, and how rising component and freight costs affect product margins.
- Cash generation, working-capital trends and progress reducing core debt; distinguish corporate debt from DFS and VMware subsidiary debt.
- The persistence of reported earnings growth after considering the $103M tax benefit, investment gains and the difference between GAAP and management-defined non-GAAP measures.
- Closing conditions and final proceeds from the Boomi sale, and developments in the VMware patent case and tax examinations.