Dell Technologies Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended May 4, 2018 (fiscal 2019 first quarter), compared with the three months ended May 5, 2017. Dell reports Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. Prior-period revenue and segment figures were recast for the company’s retrospective adoption of the new revenue standard.
Key financial metrics
| Metric | Q1 FY2019 | Prior comparable quarter |
|---|---|---|
| Revenue | $21.356 billion | $18.000 billion |
| Gross margin | $5.878 billion; 27.5% | $4.457 billion; 24.8% |
| Operating income (loss) | $(153) million | $(1.272) billion |
| Net income (loss) | $(538) million | $(1.203) billion |
| Net loss attributable to Dell Technologies Inc. | $(636) million | $(1.171) billion |
| Cash from operating activities | $1.159 billion | $285 million |
| Adjusted EBITDA (non-GAAP) | $2.383 billion | $1.795 billion |
Revenue increased 19% (17% on the company’s non-GAAP basis). Product revenue rose 22% to $16.671 billion; services revenue rose 7% to $4.685 billion. GAAP gross margin increased 32%; non-GAAP operating income rose 42% to $2.026 billion and non-GAAP net income rose 54% to $1.174 billion. These non-GAAP measures exclude substantial items, including acquired-intangible amortization, purchase-accounting effects, transaction costs, and other corporate expenses.
Segment revenue and operating income: ISG revenue was $8.667 billion (+25%) and operating income $939 million; CSG revenue was $10.271 billion (+14%) and operating income $533 million; VMware revenue was $2.028 billion (+12%) and operating income $613 million. VMware operating margin declined to 30.2% from 33.6%.
Cash, cash equivalents, and short-term investments totaled $17.726 billion at May 4; cash and cash equivalents alone were $15.324 billion. Current assets were $41.231 billion and current liabilities $44.114 billion. Total debt was $52.687 billion principal ($51.903 billion carrying value), including $39.797 billion of core debt. The company reported $4.909 billion of available borrowings across revolving facilities; $1.0 billion of VMware and $100 million of Pivotal facility capacity is restricted to those subsidiaries’ purposes. Operating, investing, and financing cash flows were $1.159 billion, $(149) million, and $543 million, respectively.
Material changes versus the prior comparable period
- Revenue growth spanned all three reportable segments. ISG server and networking revenue increased 41%, while storage revenue rose 10%; CSG commercial revenue grew 16% and consumer revenue 7%.
- GAAP operating loss narrowed by $1.119 billion, reflecting stronger ISG and CSG results and lower acquired-intangible amortization and purchase-accounting costs. GAAP net loss narrowed by $665 million.
- Operating cash flow increased $874 million, which management attributed to improved profitability and working-capital management, partly offset by annual incentive payouts.
- Fiscal 2019 first-quarter results included a $107 million net gain on investments. The company adopted accounting guidance that moved fair-value changes in certain equity investments into earnings; it recorded an approximately $100 million gain from this adoption-related accounting change.
- Pivotal completed its IPO on April 24. Dell’s ownership fell to approximately 65.1% from 77.1%, and proceeds from subsidiary share issuance contributed to financing cash flow.
Outlook, commentary, risks, and unusual items
- Management expects available cash, future operating cash flows, and expected revolver access to fund operations, capital spending, debt service, and other needs for at least the next 12 months. Fiscal 2019 capital expenditures were expected to be $1.1–$1.3 billion. No specific revenue or earnings forecast was provided.
- Management cited continuing demand for cloud, software-defined storage, hyper-converged infrastructure, and flexible consumption offerings. It expects server DRAM costs to remain a headwind for the rest of fiscal 2019; CSG costs were expected to be deflationary. Storage portfolio simplification is expected to take two to three years.
- Debt remains significant. The company repaid $500 million of unsecured notes and $68 million of term loans during the quarter. After quarter-end, it repaid $2.5 billion of EMC notes on June 1; it also drew $500 million under the China revolving facility on May 24. The company stated it complied with financial covenants at May 4.
- The provisional tax accounting for U.S. tax reform may be revised, potentially materially, by the end of fiscal 2019. A tax holiday benefiting income in Singapore, China, and Malaysia was due to expire at fiscal year-end 2019; renewal terms were uncertain. Unrecognized tax benefits were $3.2 billion.
- The company recorded a $108 million liability for Dell going-private appraisal proceedings at May 4. After quarter-end, it agreed to settle a portion for approximately $70 million, paid May 18. Management considered its reserve adequate; other legal matters were not considered reasonably likely to produce material losses beyond accrued amounts, though outcomes remain uncertain.
- Adoption of the new revenue standard affected timing and classification of revenue, deferred revenue, and contract costs. The company reported approximately $29 billion of remaining performance obligations and expected to recognize about 65% within 12 months; estimates can change.
Important facts for investors to verify
- Whether growth and operating improvements persist, particularly in ISG and CSG, and whether storage-market pressures and component costs affect future margins.
- How much of the improvement in reported earnings reflects underlying operations versus non-GAAP exclusions, purchase accounting, and the investment gain.
- Debt-service needs and refinancing capacity, including the effects of the $2.5 billion post-quarter repayment and continuing DFS financing growth.
- Final effects of U.S. tax-reform accounting, tax-audit outcomes, and expiration or renewal of tax holidays.
- Revenue-standard comparability: the prior-year figures were recast, and adoption changed revenue timing, product/services allocation, and deferred balances.