Dell Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 30, 2020; comparisons are with the quarter ended November 1, 2019. Nine-month comparisons cover the corresponding periods. Amounts are in U.S. dollars.
Business context and results
Dell is a global technology provider with three reportable segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. Its portfolio includes servers, storage, PCs, software, services, and customer financing.
| Metric | Q3 FY2021 | Change year over year | Nine months FY2021 | Change year over year |
|---|---|---|---|---|
| Revenue | $23.5 billion | +3% | $68.1 billion | Flat |
| Gross margin | $7.3 billion; 30.9% of revenue | +2%; down 0.3 percentage points | $21.3 billion; 31.2% | Flat |
| Operating income | $1.1 billion; 4.8% of revenue | +35% | $3.0 billion; 4.4% | +56% |
| Net income | $881 million | +60% | $2.2 billion | -58% |
| Net income attributable to Dell | $832 million; diluted EPS $1.08 | +67% | $2.0 billion; diluted EPS $2.64 | -52% |
| Operating cash flow | Not separately presented for the quarter | — | $5.5 billion | Compared with $5.8 billion |
Quarterly non-GAAP operating income was $2.7 billion (+12%), and non-GAAP net income was $1.7 billion (+18%). For nine months, they were $7.5 billion (+2%) and $4.5 billion (+2%), respectively. These company-defined measures exclude items including amortization, stock-based compensation, transaction costs, and other corporate expenses; they are not GAAP measures.
Segments and material changes
- ISG: Q3 revenue of $8.0 billion (-4%) and operating income of $882 million (-11%). Nine-month revenue was $23.8 billion (-6%). Softer infrastructure spending and higher server costs weighed on results.
- CSG: Q3 revenue of $12.3 billion (+8%) and operating income of $1.0 billion (+36%). Nine-month revenue was $34.6 billion (+2%). Remote-work and learning demand supported notebooks and consumer systems; commercial desktops were weaker.
- VMware: Q3 revenue of $2.9 billion (+8%) and operating income of $837 million (+18%). Nine-month revenue was $8.6 billion (+10%). Subscription, SaaS, and software-maintenance growth contributed.
- For the first nine months, services revenue rose 10% while product revenue declined 3%. The year-ago period included a $4.9 billion discrete tax benefit from intra-entity intellectual-property transfers, a major reason reported nine-month net income was much higher in FY2020.
Cash, debt, and liquidity
- At October 30, 2020, cash and cash equivalents were $11.3 billion; cash, cash equivalents, and restricted cash totaled $12.2 billion.
- Debt principal was $50.4 billion, down $2.3 billion from January 31, 2020; carrying value was $49.9 billion. Dell-defined core debt was $31.4 billion. DFS debt was $9.2 billion and primarily supported customer financing; most is non-recourse to Dell.
- Cash, cash equivalents, and available revolving borrowings totaled $16.8 billion, including $5.5 billion of available facilities. Of that availability, $1.0 billion belonged to VMware and is not available for Dell parent-company purposes.
- Nine-month cash from investing activities was $26 million, including proceeds from the RSA sale; financing activities used $3.5 billion. Capital expenditures and capitalized software costs were $1.6 billion. Management estimated FY2021 capital expenditures at approximately $1.9 billion.
- Management said available cash, future operating cash flow, and expected revolving-facility availability should cover operations, debt service, capital expenditures, repurchases, and other needs for at least 12 months. It intended to continue prioritizing core-debt paydown.
Outlook, risks, and unusual items
- Management expected Q4 FY2021 ISG demand to be slightly lower than the prior year’s sequential growth, citing continued data-center spending softness. It expected CSG demand to be slightly above normal seasonality.
- Dell was exploring alternatives for its VMware ownership, including a potential spin-off, but stated the process was exploratory and any spin-off would not occur before September 2021.
- COVID-19 drove uneven demand, cost-control measures, remote-work practices, and uncertainty in customer spending, supply availability, and credit-loss estimates. Component constraints affected shipment timing. Management noted some pandemic-related expense savings may fade over time.
- Dell offered up to $9 billion in customer financing support, including low- or zero-interest programs and payment deferrals; it did not expect the financial impact to DFS and its financing programs to be material.
- The RSA Security sale closed September 1, 2020 for approximately $2.082 billion in cash. It generated a $338 million pre-tax gain but a $21 million after-tax loss because of $359 million of tax expense. A strategic investment IPO generated a $465 million unrealized gain; both items affected reported results.
- A $237 million accrual remained for VMware’s patent dispute with Cirba after a jury verdict; post-trial motions were pending, and the final outcome could differ materially. The Class V transaction shareholder litigation had moved to discovery. Dell said it did not believe a material loss beyond recorded accruals was reasonably possible, while noting litigation outcomes are uncertain.
- FY2021 effective tax rates were affected by discrete items, including a $746 million audit-settlement benefit and the RSA-related tax expense. Dell paid $435 million to settle an IRS audit covering fiscal years 2010–2014; the IRS was examining fiscal years 2015–2019.
- The annual goodwill impairment review found each reporting unit’s fair value exceeded its carrying value. Dell reported compliance with financial debt covenants and effective disclosure controls as of October 30, 2020.
Most important facts for investors to verify
- Whether ISG demand, server and storage margins, and component availability improve or deteriorate relative to management’s Q4 expectations.
- Whether strong CSG and VMware demand persists, and how segment operating margins develop.
- Cash conversion and working-capital trends, including inventory, deferred revenue, and vendor-payment timing; confirm progress against the debt-paydown priority.
- The effect of CECL credit-loss assumptions and COVID-19 conditions on Dell’s trade and financing receivable allowances.
- Developments in the Cirba litigation, Class V shareholder case, IRS examination, and other tax matters.
- Any decision or updated timetable on VMware ownership alternatives, and the distinction between Dell’s liquidity and funds or facilities restricted to VMware.
- Reconcile reported results with non-GAAP results and assess the effect of the RSA disposal, investment valuation gain, discrete tax items, and severance costs.