DELL TECHNOLOGIES INC. 
This management's discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company's annual report on Form 10-K for the fiscal year endedFebruary 1, 2019 and the unaudited Condensed Consolidated Financial Statements included in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and that are subject to numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied in any forward-looking statements.
Unless otherwise indicated, all results presented are prepared in a manner that
complies, in all material respects, with accounting principles generally
accepted in
Unless the context indicates otherwise, references in this report to "we," "us," "our," the "Company," and "Dell Technologies" meanDell Technologies Inc. and its consolidated subsidiaries, references to "Dell" meanDell Inc. andDell Inc.'s consolidated subsidiaries, and references to "EMC" meanEMC Corporation andEMC Corporation's consolidated subsidiaries. Our fiscal year is the 52- or 53-week period ending on the Friday nearestJanuary 31 . We refer to our fiscal year endingJanuary 31, 2020 and our fiscal year endedFebruary 1, 2019 as "Fiscal 2020" and "Fiscal 2019," respectively. Fiscal 2020 and Fiscal 2019 include 52 weeks.
INTRODUCTION
Dell Technologies is a leading global end-to-end technology provider, with a comprehensive portfolio of IT hardware, software, and service solutions spanning both traditional infrastructure and emerging multi-cloud technologies that enable our customers to build their digital future and transform how they work and live. We collaborate across key functional areas such as technology and product development and solutions, marketing, go-to-market and global services, and are supported byDell Financial Services . We believe this operational philosophy enables our platform to seamlessly deliver differentiated and holistic IT solutions to our customers, which has driven significant revenue growth and share gains.Dell Technologies operates with significant scale and a differentiated breadth of complementary offerings. Digital transformation has become essential to all businesses, and we have expanded our portfolio to include holistic solutions that enable our customers to drive their ongoing digital transformation initiatives.Dell Technologies' integrated solutions help customers modernize their IT infrastructure, address workforce transformation, and provide critical security solutions to protect against the ever increasing and evolving security threats. With our extensive portfolio and our commitment to innovation, we have the ability to offer secure, integrated solutions that extend from the edge to the core to the cloud, and we are at the forefront of the software-defined and cloud native infrastructure era. Our end-to-end portfolio is supported by a differentiated go-to-market engine, which includes a 40,000-person sales force, a global network of channel partners, and a world-class supply chain that together drive revenue growth and operating efficiencies. 68
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Products and Services
We design, develop, manufacture, market, sell, and support a wide range of products and services. We are organized into the following business units, which are our reportable segments:Infrastructure Solutions Group ;Client Solutions Group ; andVMware .
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transformation of our customers through our trusted multi-cloud and big
data solutions, which are built upon a modern data center infrastructure.
Our comprehensive portfolio of advanced storage solutions includes
traditional storage solutions as well as next-generation storage solutions
(such as all-flash arrays, scale-out file, object platforms, and
software-defined solutions), while our server portfolio includes
high-performance rack, blade, tower, and hyperscale servers. Our
networking portfolio helps our business customers transform and modernize
their infrastructure, mobilize and enrich end-user experiences, and
accelerate business applications and processes. Our strengths in server,
storage, and virtualization software solutions enable us to offer leading
converged and hyper-converged solutions, helping customers build modern
two-tier IT architecture for simplified management and operations. This
allows our customers to accelerate their IT transformation by acquiring
scalable integrated IT solutions instead of building and assembling their
own IT platforms. ISG also offers attached software, peripherals, andservices, including support and deployment, configuration, and extended
warranty services.
We are continuing our journey to simplify our storage portfolio, with the goal
of ensuring that we deliver the technology needed for our customers' digital
transformation. As our storage portfolio evolves, we will continue to support
our current portfolio of storage solutions.
Approximately half of ISG revenue is generated by sales to customers in the
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desktops, workstations, and notebooks) and branded peripherals (such as
displays and projectors), as well as third-party software and peripherals.
Our computing devices are designed with our commercial and consumer
customers' needs in mind, and we seek to optimize performance,
reliability, manageability, design, and security. In addition to our
traditional hardware business, we have a portfolio of thin clientofferings that we believe will allow us to benefit from the growth trends
in cloud computing. For our customers that are seeking to simplify client
lifecycle management, Dell PC as a Service offering combines hardware,
software, lifecycle services, and financing into one all-encompassing
solution that provides predictable pricing per seat per month through
Financial Services. CSG also offers attached software, peripherals, and
services, including support and deployment, configuration, and extended
warranty services.
Approximately half of CSG revenue is generated by sales to customers in the
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of
VMware works with customers in the areas of hybrid cloud, multi-cloud, modern applications, networking and security, and digital workspaces, helping customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments.VMware's portfolio supports and addresses the key IT priorities of customers: accelerating their cloud journey, empowering digital workspaces, and transforming networking and security.VMware solutions provide a flexible digital foundation to enable the digital transformation ofVMware's customers as they ready their applications, infrastructure, and devices for their future business needs. During the third quarter of Fiscal 2020,VMware, Inc. completed its acquisition ofCarbon Black, Inc. ("Carbon Black"), a developer of cloud-native endpoint protection, in a cash tender offer at a price of$26.00 per share. See Note 8 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information regarding the acquisition ofCarbon Black .
Approximately half of
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Our other businesses, described below, consist of product and service offerings of Pivotal, Secureworks,RSA Security , Virtustream, and Boomi, each of which is majority-owned byDell Technologies . These businesses are not classified as reportable segments, either individually or collectively, as the results of the businesses are not material to our overall results and the businesses do not meet the criteria for reportable segments. See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our other businesses.
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software development and IT operations a strategic advantage for
customers. Pivotal's cloud-native platform, Pivotal Cloud Foundry,
accelerates and streamlines software development by reducing the
complexity of building, deploying, and operating new cloud-native
applications and modernizing legacy applications. On April 24, 2018 ,Pivotal completed a registered underwritten initial public offering of its
Class A common stock.
On August 22, 2019 , Pivotal entered into a definitive merger agreement pursuant
to which it will be acquired by VMware, Inc. If the merger is completed, subject
to the terms of the merger agreement, holders of shares of the Pivotal Class A
common stock will receive $15 in cash per share and Dell Technologies will
receive 0.0550 of a share of VMware Class B common stock for each share of the
Pivotal Class B common owned by it. The outstanding shares of Pivotal Class B
common stock that are held by VMware, Inc. will be canceled as part of the
merger. Following completion of the merger, the shares of Pivotal Class A common
stock will cease to be listed on the New York Stock Exchange and registration of
the Pivotal Class A common stock under the Exchange Act will be terminated. The
merger is expected to be completed during the fourth quarter of Fiscal 2020.
The purchase of Pivotal will be accounted for as a transaction by entities under
common control. Assets and liabilities of Pivotal will remain at their
historical carrying amounts on the date of the transaction, with no new goodwill
being recognized. This transaction will require retrospective combination of the
VMware, Inc. and Pivotal entities for all periods presented, as if the
combination had been in effect since the inception of common control. Upon the
completion of the merger, the Company will report Pivotal results within the
VMware reportable segment, rather than in Other businesses. This change in the
segment reporting structure will be reflected as a recast of prior period
segment results.
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intelligence-driven information security solutions singularly focused on
protecting its clients from cyber attacks. The solutions offered by
Secureworks enable organizations of varying size and complexity to fortify
their cyber defenses to prevent security breaches, detect malicious
activity in near real time, prioritize and respond rapidly to security
incidents, and predict emerging threats.
• RSA Security provides essential cybersecurity solutions engineered to
enable organizations to detect, investigate, and respond to advanced
attacks, confirm and manage identities, and, ultimately, help reduce IP
theft, fraud, and cybercrime.
• Virtustream offers cloud software and infrastructure-as-a-service
solutions that enable customers to migrate, run, and manage
mission-critical applications in cloud-based IT environments.
• Boomi specializes in cloud-based integration, connecting information
between existing on-premise and cloud-based applications to ensure that
business processes are optimized, data is accurate and workflow is
reliable.
We recently unveiled the Dell Technologies Cloud, a new set of cloud
infrastructure solutions to make hybrid cloud environments simpler to deploy and
manage. The Dell Technologies Cloud portfolio consists of the new Dell
Technologies Cloud Platforms and the new Data Center-as-a-Service offering,
VMware Cloud on Dell EMC. These solutions enable a flexible range of IT and
management options with tight integration and a single vendor experience for
purchasing, deployment, services, and financing, giving customers more control
as the operational hub of their hybrid clouds.
We believe the increasing collaboration, innovation, and coordination of the
operations and strategies of our businesses, as well as our differentiated
go-to-market model, will continue to drive revenue synergies. Through our
coordinated research and development activities, we are able to jointly engineer
leading innovative solutions that incorporate the distinct set of hardware,
software, and services across our businesses.
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Our products and services offerings are continually evolving in response to industry dynamics. As a result, reclassifications of certain products and services solutions in major product categories may be required. For further discussion regarding our current reportable segments, see "Results of Operations - Business Unit Results."
Dell Financial Services Dell Financial Services and its affiliates ("DFS") support our businesses by offering and arranging various financing options and services for our customers inNorth America ,Europe ,Australia, and New Zealand . DFS originates, collects, and services customer receivables primarily related to the purchase or use of our product, software, and service solutions. We also arrange financing for some of our customers in various countries where DFS does not currently operate as a captive enterprise. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. The results of these operations are allocated to our segments based on the underlying product or service financed. For additional information about our financing arrangements, see Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Strategic Investments and Acquisitions
As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm,Dell Technologies Capital , with a focus on emerging technology areas that are relevant to theDell Technologies unique family of businesses and that will complement our existing portfolio of solutions. Our investment areas include storage, software-defined networking, management and orchestration, security, machine learning and artificial intelligence, Big Data and analytics, cloud, Internet of Things ("IoT"), and software development operations. In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives. As ofNovember 1, 2019 andFebruary 1, 2019 ,Dell Technologies held strategic investments of$0.8 billion and$1.0 billion , respectively.
Business Trends and Challenges
We are seeing an accelerated rate of change in the IT industry. Organizations are embracing digital technology to achieve their business objectives. Our vision is to be an essential infrastructure company and leader in end-user computing, data center infrastructure solutions, data management, virtualization, IoT, and cloud software that our customers continue to trust and rely on for their IT solutions and their broader business transformation objectives as they embrace the hybrid multi-cloud environment of today. We continue to invest in research and development, sales, and other key areas of our business to deliver superior products and solutions capabilities and to drive execution of long-term sustainable growth. We believe that our results will benefit from an integrated go-to-market strategy, including enhanced coordination among the family ofDell Technologies companies, and from our differentiated products and solutions capabilities. We intend to continue to execute on our business model and seek to balance liquidity, profitability, and growth to position our company for long-term success. We expect that ISG will continue to be impacted by the changing nature of the IT infrastructure market and competitive environment. The overall server demand environment remains varied among international regions with areas of softness inChina andWestern Europe . We will continue to be selective in determining whether to pursue certain large server transactions as we drive for balanced growth and profitability. With our scale and strong product portfolio, we believe we are well positioned to respond to ongoing competitive dynamics. Cloud-native applications are expected to continue as a primary growth driver in the infrastructure market as IT organizations increasingly become multi-cloud environments. We believe the complementary cloud solutions across our business strongly position us to meet these demands for our customers, who are increasingly looking to leverage different forms of cloud-based computing. We also continue to be impacted by the emerging trends of enterprises deploying software-defined storage, hyper-converged infrastructure, and modular solutions based on server-centric architectures. These trends are changing the way customers are consuming our traditional storage offerings, and we are focused on enabling new capabilities in our storage portfolio. Offsetting such trends, however, is the unprecedented data growth throughout all industries, which is generating continued demand for our storage products and services. We have leading solutions through our ISG andVMware data center offerings. In addition, through our research and development efforts, we expect to develop new solutions in this rapidly changing industry that we believe will enable us to continue to provide superior solutions to our customers. 71
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In ISG, we are also seeing continued interest in flexible consumption models by our customers as they seek to build greater flexibility into their cost structures. These solutions are generally multi-year contracts that typically result in recognition of revenue over the term of the arrangement. We expect these flexible consumption models will further strengthen our customer relationships and will provide more predictable revenue streams over time. We are able to leverage our traditional strength in the PC market to offer solutions and services that provide higher-value, recurring revenue streams. Given current market trends, we expect that the demand environment will continue to be cyclical. For instance, CSG demand was robust in the first nine months of Fiscal 2020 as we realized benefits from the Microsoft Windows 10 operating system refresh cycle. Although we expect continued strong demand into early next year, we expect overall CSG demand will soften in Fiscal 2021 as the Windows 10 refresh cycle winds down. Competitive dynamics will continue to be a factor in our CSG business as we seek to balance profitability and growth. We are committed to a long-term growth strategy that we believe will benefit from the consolidation trends that are occurring in the markets in which we compete. Our CSG offerings are an important element of our strategy, generating strong cash flow and opportunities for cross-selling of complementary solutions. During the third quarter and first nine months of Fiscal 2020, we recognized benefits to our operating results from significant component cost declines. We expect component costs to remain deflationary in the aggregate through early next fiscal year, but to a lesser degree relative to the previous three quarters. We are now beginning to see cost inflation across certain components and we expect the overall environment to be inflationary, which may result in Fiscal 2021 operating results more consistent with historical levels. The component cost trends and forecasts are dependent on the strength or weakness of actual end user demand and supply dynamics, which will continue to evolve and ultimately impact the translation of the cost environment to pricing and operating results.Dell Technologies maintains limited-source supplier relationships for processors, because the relationships are advantageous in the areas of performance, quality, support, delivery, capacity, and price considerations. We are seeing the impact of processor supply constraints on our CSG product offerings. Delays in the supply of this limited-source component could affect the timing of shipments of certain CSG products in desired quantities or configurations in the fourth quarter and into Fiscal 2021. The impacts of trade protection measures, including increases in tariffs and trade barriers due to the current geopolitical climate and changes and instability in government policies and international trade arrangements, will continue to affect our ability to conduct business in non-U.S. markets. Among such impacts, we expect slower demand inChina to continue to affect our results into Fiscal 2021. We continue to mitigate these risks with adjustments to our manufacturing, supply chain and distribution networks. We manage our business on aU.S. dollar basis. However, we have a large global presence, generating approximately half of our revenue by sales to customers outside ofthe United States during both the first nine months of Fiscal 2020 and Fiscal 2019. As a result, our revenue can be impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts. During the past twelve months, there has been a sustained weakening of foreign currencies relative to theU.S. dollar, and we will continue to respond to foreign currency fluctuations with appropriate strategies through the end of Fiscal 2020. Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted EBITDA, and cash flows from operations, which are discussed elsewhere in this report.
Class
OnDecember 28, 2018 , we completed a transaction ("Class V transaction") in which we paid$14.0 billion in cash and issued 149,387,617 shares of our ClassC Common Stock to holders of our Class V Common Stock in exchange for all outstanding shares of Class V Common Stock. The non-cash consideration portion of the Class V transaction totaled$6.9 billion . As a result of the Class V transaction, the tracking stock feature ofDell Technologies' capital structure was terminated. The ClassC Common Stock is traded on theNew York Stock Exchange . 72
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The aggregate cash consideration and the fees and expenses incurred in connection with the Class V transaction were funded with proceeds of$3.67 billion from new term loans under our senior secured credit facilities, proceeds of a margin loan financing in an aggregate principal amount of$1.35 billion , proceeds ofDell Technologies' pro-rata portion, in the amount of$8.87 billion , of a special$11 billion cash dividend paid byVMware, Inc. in connection with the Class V transaction, and cash on hand atDell Technologies and its subsidiaries. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for information about the debt incurred by us to finance the Class V transaction. 73
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NON-GAAP FINANCIAL MEASURES
In this management's discussion and analysis, we use supplemental measures of
our performance which are derived from our consolidated financial information
but which are not presented in our consolidated financial statements prepared in
accordance with GAAP. These non-GAAP financial measures include non-GAAP product
net revenue; non-GAAP services net revenue; non-GAAP net revenue; non-GAAP
product gross margin; non-GAAP services gross margin; non-GAAP gross margin;
non-GAAP operating expenses; non-GAAP operating income; non-GAAP net income;
earnings before interest and other, net, taxes, depreciation, and amortization
("EBITDA"); and adjusted EBITDA.
We use non-GAAP financial measures to supplement financial information presented
on a GAAP basis. We believe that excluding certain items from our GAAP results
allows management to better understand our consolidated financial performance
from period to period and better project our future consolidated financial
performance as forecasts are developed at a level of detail different from that
used to prepare GAAP-based financial measures. Moreover, we believe these
non-GAAP financial measures provide our stakeholders with useful information to
help them evaluate our operating results by facilitating an enhanced
understanding of our operating performance and enabling them to make more
meaningful period to period comparisons. There are limitations to the use of the
non-GAAP financial measures presented in this report. Our non-GAAP financial
measures may not be comparable to similarly titled measures of other companies.
Other companies, including companies in our industry, may calculate non-GAAP
financial measures differently than we do, limiting the usefulness of those
measures for comparative purposes.
Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net
revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP
gross margin, non-GAAP operating expenses, non-GAAP operating income, and
non-GAAP net income, as defined by us, exclude amortization of intangible
assets, the impact of purchase accounting, transaction-related expenses,
stock-based compensation expense, other corporate expenses and, for non-GAAP net
income, fair value adjustments on equity adjustments and an aggregate adjustment
for income taxes. As the excluded items have a material impact on our financial
results, our management compensates for this limitation by relying primarily on
our GAAP results and using non-GAAP financial measures supplementally or for
projections when comparable GAAP financial measures are not available. The
non-GAAP financial measures are not meant to be considered as indicators of
performance in isolation from or as a substitute for net revenue, gross margin,
operating expenses, operating income, or net income prepared in accordance with
GAAP, and should be read only in conjunction with financial information
presented on a GAAP basis.
Reconciliations of each non-GAAP financial measure to its most directly
comparable GAAP financial measure are presented below. We encourage you to
review the reconciliations in conjunction with the presentation of the non-GAAP
financial measures for each of the periods presented. The discussion below
includes information on each of the excluded items as well as our reasons for
excluding them from our non-GAAP results. In future fiscal periods, we may
exclude such items and may incur income and expenses similar to these excluded
items. Accordingly, the exclusion of these items and other similar items in our
non-GAAP presentation should not be interpreted as implying that these items are
non-recurring, infrequent, or unusual.
Dell Technologies' non-GAAP net income now excludes, among other items, fair
value adjustments on equity investments as well as discrete tax items. These
items were not excluded in the prior presentation of our non-GAAP net income for
the three and nine months ended November 2, 2018 . Upon our return to the public
markets in December 2018 as a result of the Class V transaction, we reevaluated
the presentation of non-GAAP net income and made these changes to facilitate the
evaluation of our current operating performance and the comparability of our
current operating performance to our past operating performance. Non-GAAP net
income for the three and nine months ended November 2, 2018 has been recast to
reflect the current presentation.
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The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:
• Amortization of Intangible Assets - Amortization of intangible assets
primarily consists of amortization of customer relationships, developed
technology, and trade names. In connection with our acquisition by merger of
acquisition of Dell Inc. by Dell Technologies Inc. on October 29, 2013 ,
referred to as the going-private transaction, all of the tangible and
intangible assets and liabilities of EMC and Dell , respectively, were
accounted for and recognized at fair value on the transaction dates.Accordingly, for the periods presented, amortization of intangible assets
represents amortization associated with intangible assets recognized in
connection with the
Amortization charges for purchased intangible assets are significantly
impacted by the timing and magnitude of our acquisitions, and these charges
may vary in amount from period to period. We exclude these charges for
purposes of calculating the non-GAAP financial measures presented below to
facilitate a more meaningful evaluation of our current operating performance
and comparisons to our past operating performance.
• Impact of Purchase Accounting - The impact of purchase accounting includes
purchase accounting adjustments related to the
a lesser extent, the going-private transaction, recorded under the
acquisition method of accounting in accordance with the accounting guidance
for business combinations. This guidance prescribes that the purchase price
be allocated to assets acquired and liabilities assumed based on the
estimated fair value of such assets and liabilities on the date of the
transaction. Accordingly, all of the assets and liabilities acquired in the
and recognized at fair value as of the respective transaction dates, and the
fair value adjustments are being amortized over the estimated useful lives in
the periods following the transactions. The fair value adjustments primarily
relate to deferred revenue, inventory, and property, plant, and equipment.
Although the purchase accounting adjustments and related amortization of
those adjustments are reflected in our GAAP results, we evaluate the
operating results of the underlying businesses on a non-GAAP basis, after
removing such adjustments. We believe that excluding the impact of purchase
accounting provides results that are useful in understanding our current
operating performance and provides more meaningful comparisons to our past
operating performance.
• Transaction-related Expenses - Transaction-related expenses consist of
acquisition, integration, and divestiture related costs, and are expensed as
incurred. These expenses primarily represent costs for legal, banking,
consulting, and advisory services, as well as certain compensatory retention
awards directly related to the
months of Fiscal 2019, this category also included
related to integration of our inventory policies and management process,
including customer evaluation units and manufacturing and engineering
inventory.
• Stock-based Compensation Expense - Stock-based compensation expense consists
of equity awards granted based on the estimated fair value of those awards at
grant date. For service-based stock options, we typically estimate the fair
value using the Black-Scholes valuation model and for performance-based
awards containing a market condition, we estimate the fair value using the
compensation expense was previously included within the non-GAAP adjustment
for other corporate expenses. Due to the growth in our stock-based
compensation expense, we have revised our presentation to present stock-based
compensation expense separately in our reconciliations presented below.
Stock-based compensation expense varies from period to period and is
significantly impacted by our share price and the various assumptions used
for valuation purposes. Therefore, although we will incur this type of
expense in the future, we believe that eliminating these charges for purposes
of calculating the non-GAAP financial measures presented below facilitates a
more meaningful evaluation of our current operating performance and
comparisons to our past operating performance. See Note 16 of the Notes to
the Condensed Consolidated Financial Statements for additional information on
equity award issuances.
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• Other Corporate Expenses - Other corporate expenses consists primarily of
impairment charges and severance, facility action, and other costs.
Virtustream gross impairment charges of
incurred during the first nine months of Fiscal 2020 and Fiscal 2019,
respectively. See Note 8 of the Notes to the Condensed Consolidated Financial
Statements for additional information on Virtustream impairment charges.
Severance costs are primarily related to severance and benefits for employees
terminated pursuant to cost savings initiatives. We continue to integrate
owned and leased facilities and may incur additional costs as we seek
opportunities for operational efficiencies. Other corporate expenses vary
from period to period and are significantly impacted by the timing and nature
of these events. Therefore, although we may incur these types of expenses in
the future, we believe that eliminating these charges for purposes of
calculating the non-GAAP financial measures presented below facilitates a
more meaningful evaluation of our current operating performance and
comparisons to our past operating performance.
• Fair Value Adjustments on Equity Investments - Fair value adjustments on
equity investments primarily consists of the gain (loss) on strategic
investments, which includes the recurring fair value adjustments of
investments in publicly-traded companies, as well as those in privately-held
companies, which are adjusted for observable price changes and, to a lesser
extent, any potential impairments. Given the volatility in the ongoing
adjustments to the valuation of these strategic investments, we believe that
excluding these gains and losses for purposes of calculating non-GAAP net
income presented below facilitates a more meaningful evaluation of our
current operating performance and comparisons to our past operating
performance.
• Aggregate Adjustment for Income Taxes - The aggregate adjustment for income
taxes is the estimated combined income tax effect for the adjustments
described above, as well as an adjustment for discrete tax items. Due to the
variability in recognition of discrete tax items from period to period, we
believe that excluding these benefits or charges for purposes of calculating
non-GAAP net income facilitates a more meaningful evaluation of our current
operating performance and comparisons to our past operating performance. The
tax effects are determined based on the tax jurisdictions where the above
items were incurred. This category includes discrete tax benefits of
billion recorded in the first nine months of Fiscal 2020 for intra-entity
asset transfers, and
2020 related to an audit settlement. See Note 11 of the Notes to the
Condensed Consolidated Financial Statements for additional information on our
income taxes.
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The table below presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for the periods indicated:
Three Months Ended Nine Months Ended
November 1, 2019 % Change November 2, 2018 November 1, 2019 % Change November 2, 2018
(in millions, except percentages)
Product net revenue $ 17,485 (1 )% $ 17,625 $ 52,349 - % $ 52,445
Non-GAAP adjustments:
Impact of purchase
accounting 5 15 15 50
Non-GAAP product net
revenue $ 17,490 (1 )% $ 17,640 $ 52,364 - % $ 52,495
Services net revenue $ 5,359 10 % $ 4,857 $ 15,773 10 % $ 14,335
Non-GAAP adjustments:
Impact of purchase
accounting 79 154 235 486
Non-GAAP services net
revenue $ 5,438 9 % $ 5,011 $ 16,008 8 % $ 14,821
Net revenue $ 22,844 2 % $ 22,482 $ 68,122 2 % $ 66,780
Non-GAAP adjustments:
Impact of purchase
accounting 84 169 250 536
Non-GAAP net revenue $ 22,928 1 % $ 22,651 $ 68,372 2 % $ 67,316
Product gross margin $ 3,927 28 % $ 3,060 $ 11,823 27 % $ 9,331
Non-GAAP adjustments:
Amortization of
intangibles 517 726 1,555 2,154
Impact of purchase
accounting 7 17 20 63
Transaction-related
expenses - 99 (5 ) 236
Stock-based compensation
expense 3 2 9 5
Other corporate expenses 2 - 11 3
Non-GAAP product gross
margin $ 4,456 14 % $ 3,904 $ 13,413 14 % $ 11,792
Services gross margin $ 3,199 11 % $ 2,883 $ 9,426 9 % $ 8,613
Non-GAAP adjustments:
Impact of purchase
accounting 79 154 235 486
Transaction-related
expenses - 3 - 3
Stock-based compensation
expense 30 18 82 49
Other corporate expenses 4 38 32 42
Non-GAAP services gross
margin $ 3,312 7 % $ 3,096 $ 9,775 6 % $ 9,193
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Three Months Ended Nine Months Ended
November 1, 2019 % Change November 2, 2018 November 1, 2019 % Change November 2, 2018
(in millions, except percentages)
Gross margin $ 7,126 20 % $ 5,943 $ 21,249 18 % $ 17,944
Non-GAAP adjustments:
Amortization of
intangibles 517 726 1,555 2,154
Impact of purchase
accounting 86 171 255 549
Transaction-related
expenses - 102 (5 ) 239 Stock-based compensation expense 33 20 91 54 Other corporate expenses 6 38 43 45
Non-GAAP gross margin $ 7,768 11 % $ 7,000
Operating expenses $ 6,290 - % $ 6,299
5 % $ 18,466
Non-GAAP adjustments:
Amortization of
intangibles (540 ) (820 ) (1,779 ) (2,440 )
Impact of purchase
accounting (10 ) (22 ) (44 ) (81 )
Transaction-related
expenses (76 ) (65 ) (170 ) (198 ) Stock-based compensation expense (289 ) (236 ) (795 ) (617 ) Other corporate expenses (49 ) (220 ) (749 ) (343 ) Non-GAAP operating expenses $ 5,326 8 % $ 4,936$ 15,807 7 %$ 14,787 Operating income (loss) $ 836 335 % $ (356 ) $ 1,905 465 % $ (522 ) Non-GAAP adjustments: Amortization of intangibles 1,057 1,546 3,334 4,594 Impact of purchase accounting 96 193 299 630
Transaction-related
expenses 76 167 165 437 Stock-based compensation expense 322 256 886 671 Other corporate expenses 55 258 792 388
Non-GAAP operating income $ 2,442 18 % $ 2,064 $ 7,381 19 % $ 6,198
Net income (loss) $ 552 162 % $ (895 ) $ 5,113 370 %$ (1,894 ) Non-GAAP adjustments: Amortization of intangibles 1,057 1,546 3,334 4,594 Impact of purchase accounting 96 193 299 630
Transaction-related
expenses 76 167 165 437 Stock-based compensation expense 322 256 886 671 Other corporate expenses 55 258 792 388 Fair value adjustments on equity investments (18 ) 17 (160 ) (229 ) Aggregate adjustment for income taxes (695 ) (345 ) (6,024 ) (962 )
Non-GAAP net income (a) $ 1,445 21 % $ 1,197 $ 4,405 21 % $ 3,635
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(a) Non-GAAP net income has been recast to exclude fair value adjustments on
equity investments, the corresponding tax effects of those adjustments, and
discrete tax items.
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In addition to the above measures, we also use EBITDA and adjusted EBITDA to provide additional information for evaluation of our operating performance. Adjusted EBITDA excludes purchase accounting adjustments related to theEMC merger transaction and the going-private transaction, acquisition, integration, and divestiture related costs, impairment charges, severance, facility action, and other costs, and stock-based compensation expense. We believe that, due to the non-operational nature of the purchase accounting entries, it is appropriate to exclude these adjustments. As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance. EBITDA and adjusted EBITDA do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. In particular, EBITDA and adjusted EBITDA are not intended to be a measure of free cash flow available for management's discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.
The table below presents a reconciliation of EBITDA and adjusted EBITDA to net income (loss) for the periods indicated:
Three Months Ended Nine Months Ended
November 1, 2019 % Change November 2, 2018 November 1, 2019 % Change November 2, 2018
(in millions, except percentages)
Net income (loss) $ 552 162 % $ (895 ) $ 5,113 370 % $ (1,894 )
Adjustments:
Interest and other, net
(a) 677 639 2,000 1,564
Income tax benefit (b) (393 ) (100 ) (5,208 ) (192 )
Depreciation and
amortization 1,494 1,961 4,608 5,806
EBITDA $ 2,330 45 % $ 1,605 $ 6,513 23 % $ 5,284
EBITDA $ 2,330 45 % $ 1,605 $ 6,513 23 % $ 5,284
Adjustments:
Stock-based compensation
expense 322 256 886 671
Impact of purchase
accounting (c) 84 169 251 536
Transaction-related
expenses (d) 76 158 165 409
Other corporate expenses
(e) 45 238 771 368
Adjusted EBITDA $ 2,857 18 % $ 2,426 $ 8,586 18 % $ 7,268
____________________
(a) See "Results of Operations - Interest and Other, Net" for more information on
the components of interest and other, net.
(b) See Note 11 of the Notes to the Condensed Consolidated Financial Statements
for additional information on discrete tax items recorded during the first
nine months of Fiscal 2020.
(c) This amount includes the non-cash purchase accounting adjustments related to
the
(d) Transaction-related expenses includes acquisition, integration, and
divestiture related costs.
(e) Other corporate expenses includes impairment charges and severance, facility
action, and other costs. See Note 8 of the Notes to the Condensed
Consolidated Financial Statements for additional information on Virtustream
impairment charges.
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Table of Contents RESULTS OF OPERATIONS Consolidated Results
The following table summarizes our consolidated results for each of the periods presented. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
% of % % of % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Net revenue:
Product $ 17,485 76.5 % (1 )% $ 17,625 78.4 % $ 52,349 76.8 % - % $ 52,445 78.5 %
Services 5,359 23.5 % 10 % 4,857 21.6 % 15,773 23.2 % 10 % 14,335 21.5 %
Total net revenue $ 22,844 100.0 % 2 % $ 22,482 100.0 % $ 68,122 100.0 % 2 % $ 66,780 100.0 %
Gross margin:
Product (a) $ 3,927 22.5 % 28 % $ 3,060 17.4 % $ 11,823 22.6 % 27 % $ 9,331 17.8 %
Services (b) 3,199 59.7 % 11 % 2,883 59.4 % 9,426 59.8 % 9 % 8,613 60.1 %
Total gross margin $ 7,126 31.2 % 20 % $ 5,943 26.4 % $ 21,249 31.2 % 18 % $ 17,944 26.9 %
Operating expenses $ 6,290 27.5 % - % $ 6,299 28.0 % $ 19,344 28.4 % 5 % $ 18,466 27.7 %
Operating income
(loss) $ 836 3.7 % 335 % $ (356 ) (1.6 )% $ 1,905 2.8 % 465 % $ (522 ) (0.8 )%
Net income (loss) $ 552 2.4 % 162 % $ (895 ) (4.0 )% $ 5,113 7.5 % 370 % $ (1,894 ) (2.8 )%
Net income (loss)
attributable to
Dell Technologies
Inc. $ 499 2.2 % 157 % $ (876 ) (3.9 )% $ 4,208 6.2 % 309 % $ (2,011 ) (3.0 )%
Non-GAAP Financial Information
Non-GAAP net
revenue:
Product $ 17,490 76.3 % (1 )% $ 17,640 77.9 % $ 52,364 76.6 % - % $ 52,495 78.0 %
Services 5,438 23.7 % 9 % 5,011 22.1 % 16,008 23.4 % 8 % 14,821 22.0 %
Total non-GAAP net
revenue $ 22,928 100.0 % 1 % $ 22,651 100.0 % $ 68,372 100.0 % 2 % $ 67,316 100.0 %
Non-GAAP gross
margin:
Product (a) $ 4,456 25.5 % 14 % $ 3,904 22.1 % $ 13,413 25.6 % 14 % $ 11,792 22.5 %
Services (b) 3,312 60.9 % 7 % 3,096 61.8 % 9,775 61.1 % 6 % 9,193 62.0 %
Total non-GAAP
gross margin $ 7,768 33.9 % 11 % $ 7,000 30.9 % $ 23,188 33.9 % 10 % $ 20,985 31.2 %
Non-GAAP operating
expenses $ 5,326 23.2 % 8 % $ 4,936 21.8 % $ 15,807 23.1 % 7 % $ 14,787 22.0 %
Non-GAAP operating
income $ 2,442 10.7 % 18 % $ 2,064 9.1 % $ 7,381 10.8 % 19 % $ 6,198 9.2 %
Non-GAAP net income
(c) $ 1,445 6.3 % 21 % $ 1,197 5.3 % $ 4,405 6.4 % 21 % $ 3,635 5.4 %
EBITDA $ 2,330 10.2 % 45 % $ 1,605 7.1 % $ 6,513 9.5 % 23 % $ 5,284 7.8 %
Adjusted EBITDA $ 2,857 12.5 % 18 % $ 2,426 10.7 % $ 8,586 12.6 % 18 % $ 7,268 10.8 %
____________________
(a) Product gross margin percentages represent product gross margin as a
percentage of product net revenue, and non-GAAP product gross margin
percentages represent non-GAAP product gross margin as a percentage of
non-GAAP product net revenue.
(b) Services gross margin percentages represent services gross margin as a
percentage of services net revenue, and non-GAAP services gross margin
percentages represent non-GAAP services gross margin as a percentage of
non-GAAP services net revenue.
(c) Non-GAAP net income has been recast to exclude fair value adjustments on
equity investments, the corresponding tax effects of those adjustments, and
discrete tax items.
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Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, EBITDA, and adjusted EBITDA are not measurements of financial performance prepared in accordance with GAAP. Non-GAAP financial measures as a percentage of net revenue are calculated based on non-GAAP net revenue. See "NonGAAP Financial Measures" for additional information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Overview
During both the third quarter and first nine months of Fiscal 2020, our net revenue increased 2%. During the third quarter and first nine months of Fiscal 2020, our non-GAAP net revenue increased 1% and 2%, respectively. The increases in net revenue and non-GAAP net revenue were attributable to increases in net revenue in CSG andVMware , which were partially offset by declines in ISG net revenue. The increase in CSG revenue primarily resulted from the Microsoft Windows 10 operating system refresh cycle combined with strong execution by the business.VMware net revenue increased due to growth in software license revenue and strong renewals ofVMware enterprise agreements, maintenance contracts sold in previous periods, and additional maintenance contracts sold in conjunction with new software license sales. ISG net revenue decreased primarily because of weakness in servers and networking. During the first nine months of Fiscal 2020, we benefited from the strength of our broad IT solutions portfolio, which helped us navigate market volatility and competitive pressures. We believe we are well-positioned for long-term profitable growth while also maintaining the ability to adjust as needed to changing market conditions with complementary solutions across our businesses. During the third quarter of Fiscal 2020, our operating income was$836 million compared to an operating loss of$356 million during the third quarter of Fiscal 2019. During the first nine months of Fiscal 2020, our operating income was$1.9 billion compared to an operating loss of$522 million during the first nine months of Fiscal 2019. The increases in our operating income for the third quarter and first nine months of Fiscal 2020 were primarily attributable to an increase in operating income for CSG due to lower component costs and a decrease in amortization of intangible assets. During the first nine months, these benefits were partially offset by an increase in other corporate expenses, which primarily included Virtustream impairment charges. Amortization of intangible assets and other corporate expenses that impacted our operating income totaled$1.1 billion and$1.8 billion for the third quarter of Fiscal 2020 and Fiscal 2019, respectively, and$4.1 billion and 5.0 billion for the first nine months of Fiscal 2020 and Fiscal 2019, respectively. Excluding these costs, the impact of purchase accounting, stock-based compensation expense, and transaction-related expenses, our non-GAAP operating income was$2.4 billion and$2.1 billion during the third quarter of Fiscal 2020 and Fiscal 2019, respectively. During the first nine months of Fiscal 2020 and Fiscal 2019, our non-GAAP operating income was$7.4 billion and$6.2 billion , respectively. The increases in our non-GAAP operating income for the third quarter and first nine months of Fiscal 2020 were primarily due to an increase in operating income for CSG. Cash provided by operating activities was$5.8 billion and$4.6 billion during the first nine months of Fiscal 2020 and Fiscal 2019, respectively. The increase in operating cash flows during the first nine months of Fiscal 2020 was primarily driven by improved profitability and continued working capital discipline. See "Market Conditions, Liquidity, and Capital Commitments" for further information on our cash flow metrics.
Net Revenue
During both the third quarter and first nine months of Fiscal 2020, our net revenue increased 2%. During the third quarter and first nine months of Fiscal 2020, our non-GAAP net revenue increased 1% and 2%, respectively. The increases in net revenue and non-GAAP net revenue were primarily attributable to increases in net revenue in CSG andVMware , which were partially offset by declines in ISG net revenue. See "Business Unit Results" for further information.
• Product Net Revenue - Product net revenue includes revenue from the sale of
hardware products and software licenses. During the third quarter of Fiscal
2020, product net revenue and non-GAAP product net revenue decreased 1%.
During the first nine months of Fiscal 2020, product net revenue and non-GAAP
product net revenue were unchanged. For the periods presented, these changes
were driven by decreases in product net revenue for ISG servers and
networking, which were offset by increases in product net revenue for CSG and
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• Services Net Revenue - Services net revenue includes revenue from our
services offerings and support services related to hardware products and
software licenses. During the third quarter of Fiscal 2020, services net
revenue and non-GAAP services net revenue increased 10% and 9%, respectively.
During the first nine months of Fiscal 2020, services net revenue and
non-GAAP services net revenue increased 10% and 8%, respectively. These
increases were primarily due to an increase in services revenue for hardware
support and deployment and software maintenance due to growth in CSG and
offerings that have been deferred over a period of time, and, as a result,
reported services net revenue growth rates will be different than reported
product net revenue growth rates.
From a geographical perspective, net revenue generated by sales to customers in theAmericas increased during the third quarter of Fiscal 2020 due to strong performance in CSG andVMware . Net revenue from sales to customers in APJ decreased slightly during the third quarter of Fiscal 2020, primarily as the result of a weaker demand environment for ISG servers and networking, particularly inChina . In EMEA, net revenue from sales to customers remained flat during the third quarter of Fiscal 2020. Net revenue generated by sales to customers in theAmericas and EMEA increased during the first nine months of Fiscal 2020 due to strong performance in CSG andVMware . Net revenue from sales to customers in APJ remained flat during the first nine months of Fiscal 2020.
Gross Margin
During the third quarter and first nine months of Fiscal 2020, our gross margin increased 20% to$7.1 billion and 18% to$21.2 billion , respectively. During the third quarter and first nine months of Fiscal 2020, our gross margin percentage increased 480 basis points to 31.2% and 430 basis points to 31.2%, respectively. The increases in our gross margin percentage during the third quarter and first nine months of Fiscal 2020 were primarily attributable to a deflationary component cost environment and a decrease in amortization of intangibles and purchase accounting adjustments. Our gross margin for the third quarter and first nine months of Fiscal 2020 included the impact of amortization of intangibles and purchase accounting adjustments of$0.6 billion and$1.8 billion , respectively. Excluding these costs, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP gross margin for the third quarter and first nine months of Fiscal 2020 increased 11% to$7.8 billion and 10% to$23.2 billion , respectively, and non-GAAP gross margin percentage increased 300 basis points to 33.9% and 270 basis points to 33.9%, respectively. The increases in our non-GAAP gross margin were attributable to increases in gross margin across all three business units. The increases in our non-GAAP gross margin percentage were primarily due to higher gross margin percentages for both ISG and CSG which benefited from the deflationary component cost environment.
• Products - During the third quarter of Fiscal 2020, product gross margin
increased 28% to
510 basis points to 22.5%. During the third quarter of Fiscal 2020, non-GAAP
product gross margin increased 14% to
gross margin percentage increased 340 basis points to 25.5%. The increases in
product gross margin and non-GAAP product gross margin were driven by
primarily by the strength in sales of CSG commercial products and
software licenses and the deflationary component cost environment for ISG and
CSG. Product gross margin also benefited from a decrease in amortization of
intangibles and transaction-related costs. Product gross margin percentage
and non-GAAP product gross margin percentage increased primarily due to the
higher product gross margin percentages for both ISG and CSG, which benefited
from the deflationary component cost environment.
During the first nine months of Fiscal 2020, product gross margin increased 27% to$11.8 billion , and product gross margin percentage increased 480 basis points to 22.6%. During the first nine months of Fiscal 2020, non-GAAP product gross margin increased 14% to$13.4 billion , and non-GAAP product gross margin percentage increased 310 basis points to 25.6%. The increases in product gross margin and non-GAAP product gross margin were driven primarily by increases in product revenue due to strength in sales of CSG commercial products andVMware software licenses and the deflationary component cost environment for ISG and CSG. Product gross margin also benefited from a decrease in amortization of intangibles and transaction-related costs. Product gross margin percentage and non-GAAP product gross margin percentage increased primarily as a result of higher product gross margin percentages for both ISG and CSG, which benefited from the deflationary component cost environment. 82
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• Services - During the third quarter of Fiscal 2020, services gross margin
increased 11% to
30 basis points to 59.7%. Services gross margin increased due to growth in
decrease in purchase accounting adjustments, which totaled
respectively. Excluding these adjustments, transaction-related expenses,
stock-based compensation expense, and other corporate expenses, non-GAAP
services gross margin increased 7% to
gross margin percentage decreased 90 basis points to 60.9%. The decrease in
services gross margin percentage was primarily attributable to a change in
mix of software and hardware maintenance for CSG and ISG, although the
deflation in the third quarter of Fiscal 2020 was at a lower rate than during
the first six months of Fiscal 2020 .
During the first nine months of Fiscal 2020, services gross margin increased 9% to$9.4 billion , and services gross margin percentage decreased 30 basis points to 59.8%. Services gross margin increased due to growth in services gross margin inVMware software maintenance. The decrease in services gross margin percentage was attributable to lower CSG services gross margin. Services gross margin benefited from a decrease in purchase accounting adjustments, which totaled$0.2 billion and$0.5 billion during the first nine months of Fiscal 2020 and Fiscal 2019, respectively. Excluding these adjustments, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP services gross margin increased 6% to$9.8 billion , and non-GAAP services gross margin percentage decreased 90 basis points to 61.1%. The decrease in services gross margin percentage was primarily attributable to a change in mix of software and hardware maintenance for CSG and ISG.
Vendor Programs and Settlements
Our gross margin is affected by our ability to achieve competitive pricing with our vendors and contract manufacturers, including through our negotiation of a variety of vendor rebate programs to achieve lower net costs for the various components we include in our products. Under these programs, vendors provide us with rebates or other discounts from the list prices for the components, which are generally elements of their pricing strategy. We account for vendor rebates and other discounts as a reduction in cost of net revenue. We manage our costs on a total net cost basis, which includes supplier list prices reduced by vendor rebates and other discounts. The terms and conditions of our vendor rebate programs are largely based on product volumes and are generally negotiated either at the beginning of the annual or quarterly period, depending on the program. The timing and amount of vendor rebates and other discounts we receive under the programs may vary from period to period, reflecting changes in the competitive environment. We monitor our component costs and seek to address the effects of any changes to terms that might arise under our vendor rebate programs. Our gross margins for the third quarter and first nine months of Fiscal 2020 and Fiscal 2019 were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost. We are not aware of any significant changes to vendor pricing or rebate programs that may impact our results in the near term.
In addition, we have pursued legal action against certain vendors and are currently involved in negotiations with other vendors regarding their past pricing practices. We have negotiated settlements with some of these vendors and may have additional settlements in future periods. These settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment.
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Operating Expenses
The following table presents information regarding our operating expenses for the periods indicated:
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
% of % % of % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Operating
expenses:
Selling,
general, and
administrative $ 5,028 22.0 % (3 )% $ 5,159 22.9 % $ 15,677 23.0 % 4 % $ 15,064 22.6 %
Research and
development 1,262 5.5 % 11 % 1,140 5.1 % 3,667 5.4 % 8 % 3,402 5.1 %
Total operating
expenses $ 6,290 27.5 % - % $ 6,299 28.0 % $ 19,344 28.4 % 5 % $ 18,466 27.7 %
Other Financial Information
Non-GAAP
operating
expenses $ 5,326 23.2 % 8 % $ 4,936 21.8 % $ 15,807 23.1 % 7 % $ 14,787 22.0 %
During the third quarter and first nine months of Fiscal 2020, total operating
expenses remained flat and increased 5%, respectively. During the third quarter
of Fiscal 2020, operating expenses remained flat primarily due to offsetting
impacts of an increase in selling, general, and administrative expenses, and a
decrease in amortization of intangibles. During the first nine months of Fiscal
2020, operating expenses increased primarily due to an increase in selling,
general, and administrative expenses, partially offset by a decrease in
amortization of intangibles.
Our operating expenses include the impact of purchase accounting, amortization
of intangible assets, transaction-related expenses, stock-based compensation
expense, and other corporate expenses. In aggregate, these items totaled $1.0
billion and $1.4 billion for the third quarter of Fiscal 2020 and Fiscal 2019,
respectively, and $3.5 billion and $3.7 billion for the first nine months of
Fiscal 2020 and Fiscal 2019, respectively. Excluding these costs, total non-GAAP
operating expenses increased 8% and 7% for the third quarter and first nine
months of Fiscal 2020, respectively.
• Selling, General, and Administrative - Selling, general, and administrative
("SG&A") expenses decreased 3% during the third quarter of Fiscal 2020 due to
a decrease in amortization of intangibles, partially offset by an increase in
SG&A expenses that was driven by investments in our go-to-market
capabilities, including sales headcount, and higher performance-based
compensation and commission costs. During the first nine months of Fiscal
2020, SG&A expenses increased 4% due to increased compensation-related
expenses associated with revenue growth and sales headcount, as well as
Virtustream impairment charges. These increases were partially offset by a
decrease in amortization of intangibles.
• Research and Development - Research and development ("R&D") expenses are
primarily composed of personnel-related expenses related to product
development. R&D expenses as a percentage of net revenue were approximately
5.5% and 5.1% for the third quarter of Fiscal 2020 and Fiscal 2019,
respectively, and 5.4% and 5.1% for the first nine months of Fiscal 2020 and
Fiscal 2019, respectively. As our industry continues to change and as the
needs of our customers evolve, we intend to support R&D initiatives to
innovate and introduce new and enhanced solutions into the market.
We continue to make investments designed to enable growth, particularly in our
sales force, marketing, and R&D, while balancing our efforts to drive cost
efficiencies in the business. We also expect to continue to make investments in
support of our own digital transformation to modernize and streamline our IT
operations.
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Operating Income/Loss
During the third quarter of Fiscal 2020, our operating income was$836 million compared to an operating loss of$356 million during the third quarter of Fiscal 2019. During the first nine months of Fiscal 2020, our operating income was$1.9 billion compared to an operating loss of$522 million during the first nine months of Fiscal 2019. The operating income we recognized for the third quarter and first nine months of Fiscal 2020 was primarily attributable to an increase in operating income for CSG and a decrease in amortization of intangible assets. During the first nine months of Fiscal 2020, these benefits were partially offset by an increase in other corporate expenses, which primarily include Virtustream impairment charges. Amortization of intangible assets and other corporate expenses that impacted our operating income totaled$1.1 billion and$1.8 billion for the third quarter of Fiscal 2020 and Fiscal 2019, respectively, and$4.1 billion and$5.0 billion for the first nine months of Fiscal 2020 and Fiscal 2019, respectively. Excluding these costs, the impact of purchase accounting, stock-based compensation expense, and transaction-related expenses, our non-GAAP operating income was$2.4 billion and$2.1 billion during the third quarter of Fiscal 2020 and Fiscal 2019, respectively. During the first nine months of Fiscal 2020 and Fiscal 2019, our non-GAAP operating income was$7.4 billion and$6.2 billion , respectively. The increases in our non-GAAP operating income for the third quarter and first nine months of Fiscal 2020 were primarily due to an increase in operating income for CSG. Interest and Other, Net The following table provides information regarding interest and other, net for the periods indicated: Three Months Ended Nine Months EndedNovember 1, 2019 November 2, 2018
(in millions)
Interest and other, net: Investment income, primarily interest $ 41 $ 84 $ 127 $ 247 Gain (loss) on investments, net 18 (17 ) 160 229 Interest expense (654 ) (612 ) (2,045 ) (1,830 ) Foreign exchange (43 ) (63 ) (123 ) (174 ) Other (39 ) (31 ) (119 ) (36 )
Total interest and other, net $ (677 ) $ (639 ) $
(2,000 )
During the third quarter and first nine months of Fiscal 2020, the change in interest and other, net was unfavorable by$38 million and$436 million , respectively, primarily due to higher interest expense and a decrease in net gain on investments. To fund a portion of the cash consideration paid in the Class V transaction, we incurred additional debt and liquidated a significant amount of our investments. As a result, we expect higher interest expense and lower investment income to continue in Fiscal 2020. See Note 3 and Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for further information regarding our investments and debt, respectively.
Income and Other Taxes
For the third quarter of Fiscal 2020, our effective income tax rate benefit was 247.2% on pre-tax income of$159 million . For the third quarter of Fiscal 2019, our effective income tax rate was 10.1% on pre-tax losses of$1.0 billion . For the first nine months of Fiscal 2020 and Fiscal 2019, our effective income tax rates were 5482.1% and 9.2%, respectively, on pre-tax losses of$95 million and$2.1 billion , respectively. The changes in our effective tax rates were primarily driven by discrete tax items and a change in our jurisdictional mix of income. 85
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Our effective tax rate for the first nine months of Fiscal 2020 also includes$4.9 billion of discrete tax benefits related to intra-entity asset transfers,$273 million of discrete tax expense related to certain foreign tax credits associated withU.S. Tax Reform discussed below and$95 million of discrete tax benefits relating to Virtustream impairment charges discussed in Note 8 of the Notes to the Condensed Consolidated Financial Statements included in this report. In the first nine months of Fiscal 2020, we completed two intra-entity asset transfers of certain of our intellectual property to Irish subsidiaries, resulting in discrete tax benefits of$4.9 billion . The tax benefit for each intra-entity asset transfer was recorded as a deferred tax asset in the period of transaction and represents the book and tax basis difference on the transferred assets measured based on the applicable Irish statutory tax rate. The tax deductions for amortization of the assets will be recognized in the future and any amortization not deducted for tax purposes will be carried forward indefinitely underIrish Tax laws. We expect to be able to realize the deferred tax assets resulting from these intra-entity asset transfers. For the third quarter and first nine months of Fiscal 2020, our effective tax rate includes$305 million of discrete tax benefits related to an audit settlement. For the first nine months of Fiscal 2019, our effective tax rate includes$154 million of discrete tax benefits resulting from the impact of our adoption of the new revenue recognition standard in the first quarter of Fiscal 2019. The Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform") was signed into law onDecember 22, 2017 . Among other things,U.S. Tax Reform lowers theU.S. corporate income tax rate to 21% from 35%, establishes a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries, requires a minimum tax on certain future earnings generated by foreign subsidiaries while providing for future tax-free repatriation of earnings through a 100% dividends-received deduction, and places limitations on the deductibility of net interest expense. InDecember 2019 , theU.S. Department of the Treasury released final and newly proposed regulations related to foreign tax credits and the base erosion anti-abuse tax. We are currently evaluating the impact of these regulations and will recognize any resulting adjustments as necessary. We anticipate that theU.S. Department of the Treasury and the Internal Revenue Service will continue to issue regulatory guidance clarifying certain provisions ofU.S. Tax Reform. When additional guidance is issued, we will recognize the related tax impact in the fiscal quarter of such issuance. Our effective income tax rate can fluctuate depending on the geographic distribution of our worldwide earnings, as our foreign earnings are generally taxed at lower rates than inthe United States . The differences between our effective income tax rate and theU.S. federal statutory rate of 21% principally result from the geographical distribution of income and differences between the book and tax treatment of certain items. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and lower tax rates is attributable toSingapore ,China , andMalaysia . A significant portion of these income tax benefits relates to a tax holiday that will be effective untilJanuary 31, 2029 . Our other tax holidays will expire in whole or in part during Fiscal 2022 through Fiscal 2030. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. As ofNovember 1, 2019 , we were not aware of any matters of non-compliance related to these tax holidays.
For further discussion regarding tax matters, including the status of income tax audits, see Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income/Loss
During the third quarter and first nine months of Fiscal 2020, net income was$0.6 billion and$5.1 billion , respectively, compared to net loss of$0.9 billion and$1.9 billion during the third quarter and first nine months of Fiscal 2019, respectively. The net income we recognized during the third quarter of Fiscal 2020 was primarily attributable to an increase in operating income. The net income we recognized during the first nine months of Fiscal 2020 was primarily attributable to an increase in tax benefit and, to a lesser extent, an increase in operating income, which was partially offset by an increase in interest and other, net expense. Net income for the third quarter and first nine months of Fiscal 2020 and Fiscal 2019 included amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, other corporate expenses, fair value adjustments on equity investments, and discrete tax items. Excluding these costs and the related tax impacts, non-GAAP net income was$1.4 billion and$4.4 billion during the third quarter and first nine months of Fiscal 2020, respectively, and was$1.2 billion and$3.6 billion during the third quarter and first nine months of Fiscal 2019, respectively. The increase in non-GAAP net income during the third quarter and first nine months of Fiscal 2020 was primarily attributable to an increase in operating income, which was partially offset by an increase in interest and other, net expense. 86
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Non-controlling Interests
Net income or loss attributable to non-controlling interests consisted of net income or loss attributable to our non-controlling interests inVMware, Inc. , Pivotal, and Secureworks. During the third quarter and first nine months of Fiscal 2020, net income attributable to non-controlling interests was$53 million and$905 million , respectively. During the third quarter and first nine months of Fiscal 2019, net income or loss attributable to non-controlling interests was$19 million net loss and$117 million net income, respectively. The increase in net income attributable to non-controlling interests during the third quarter and first nine months of Fiscal 2020 was attributable to an increase in net income attributable to our non-controlling interest inVMware, Inc. For more information about our non-controlling interests, see Note 13 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income (Loss) Attributable to
Net income (loss) attributable toDell Technologies Inc. represents net income or loss and an adjustment for non-controlling interests. During the third quarter and first nine months of Fiscal 2020, net income attributable toDell Technologies Inc. was$0.5 billion and$4.2 billion , respectively. During the third quarter and first nine months of Fiscal 2019, net loss attributable toDell Technologies Inc. was$0.9 billion and$2.0 billion , respectively. The net income attributable toDell Technologies Inc. we recognized during the third quarter and first nine months of Fiscal 2020 was primarily attributable to an increase in net income for the periods. 87
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Business Unit Results
Our reportable segments are based on the following business units: ISG, CSG, andVMware . A description of our three business units is provided under "Introduction." See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income (loss), respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
Three Months Ended Nine Months Ended
November 1, 2019 % Change November 2, 2018 November 1, 2019 % Change November 2, 2018
(in millions, except percentages)
Net revenue:
Servers and
networking $ 4,241 (16)% $ 5,054 $ 12,858 (13)% $ 14,700
Storage 4,149 7% 3,883 12,355 2% 12,131
Total ISG net
revenue $ 8,390 (6)% $ 8,937 $ 25,213 (6)% $ 26,831
Operating
income:
ISG operating
income $ 996 7% $ 935 $ 2,889 -% $ 2,886
% of segment net
revenue 11.9 % 10.5 % 11.5 % 10.8 %
Net Revenue - During both the third quarter and first nine months of Fiscal
2020, ISG net revenue decreased 6%, primarily due to a decrease in sales of
servers and networking. Revenue from the sales of servers and networking
decreased 16% and 13% during the third quarter and first nine months of Fiscal
2020, respectively, primarily driven by a decline in units sold of our PowerEdge
servers due to a weaker demand environment. Certain competitive dynamics also
contributed to lower server sales volumes, as we focused on profitability over
net revenue growth. During the third quarter of Fiscal 2020, further
contributing to the decrease in ISG net revenue, average selling prices for
servers decreased primarily due to competitive pressures in certain geographies.
During the first nine months of Fiscal 2020, the impact of the lower volume of
PowerEdge sales was partially mitigated by an increase in average selling prices
from the sale of servers with more robust compute capacity and higher memory and
storage content, which was driven by customer demand for servers that enable big
data analytics. Storage revenue increased 7% and 2% during the third quarter and
first nine months of Fiscal 2020, respectively. We experienced relatively stable
demand in storage. We continue to make go-to-market investments and enhancements
to our storage solutions offerings and expect that these investments will drive
long-term improvements in the business.
Component costs were deflationary in the aggregate for ISG during the first nine
months of Fiscal 2020, and we continue to monitor our pricing in response to the
changing cost environment. We expect the aggregate ISG component cost
environment to continue to be deflationary through early next fiscal year, but
to a lesser degree relative to the previous three quarters. For Fiscal 2021, we
expect an inflationary component cost environment, which may put pressure on ISG
operating results, particularly in servers and networking.
In ISG, we continue to see interest in flexible consumption models by our
customers as they seek to build greater flexibility into their cost structures.
We generally provide these solutions under multi-year contracts that typically
result in recognition of revenue over the term of the arrangement. We expect
these flexible consumption models will further strengthen our customer
relationships and will build more predictable revenue streams over time.
From a geographical perspective, net revenue attributable to ISG decreased in
the Americas , EMEA, and APJ during the third quarter of Fiscal 2020. Net revenue
attributable to ISG increased in EMEA, and decreased in the Americas and APJ
during the first nine months of Fiscal 2020. The decreases in ISG revenue in APJ
were more significant than changes in net revenue in the other regions, and were
driven by a weaker demand environment, particularly in China , which we expect to
continue into Fiscal 2021.
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Operating Income - During the third quarter and first nine months of Fiscal 2020, ISG operating income as a percentage of net revenue increased 140 basis points to 11.9% and 70 basis points to 11.5%, respectively, due to an increase in ISG gross margin percentage resulting from the deflationary cost environment discussed above. The increase in ISG operating margins were offset by an increase in ISG operating expenses as a percentage of ISG net revenue. ISG operating expenses increased due to investments we made in our go-to-market capabilities to ensure the optimal coverage model to serve the needs of our customers.
Client Solutions Group
The following table presents net revenue and operating income attributable to CSG for the periods indicated:
Three Months Ended Nine Months Ended
November 1, 2019 % Change November 2, 2018 November 1, 2019 % Change November 2, 2018
(in millions, except percentages)
Net revenue:
Commercial $ 8,330 9% $ 7,613 $ 25,714 11% $ 23,085
Consumer 3,080 (6)% 3,292 8,354 (9)% 9,219
Total CSG net
revenue $ 11,410 5% $ 10,905 $ 34,068 5% $ 32,304
Operating
income:
CSG operating
income $ 739 65% $ 447 $ 2,514 79% $ 1,405
% of segment net
revenue 6.5 % 4.1 % 7.4 % 4.3 %
Net Revenue - During both the third quarter and first nine months of Fiscal
2020, CSG net revenue increased 5% primarily driven by the Microsoft Windows 10
operating system refresh cycle, combined with strong execution by the business.
Although we expect continued strong CSG demand into early Fiscal 2021, we expect
overall CSG demand will decelerate in Fiscal 2021 as the Windows 10 refresh
cycle winds down.
During the third quarter and first nine months of Fiscal 2020, commercial
revenue increased 9% and 11%, respectively, due to continued strong demand for
our commercial products across all product categories, driven by the Microsoft
Windows 10 operating system refresh cycle. Consumer revenue decreased 6% and 9%
during the third quarter and first nine months of Fiscal 2020, respectively, due
to lower demand as we continue to focus on commercial and higher-end consumer
products. During the first nine months of Fiscal 2020, the decline in consumer
demand was partially offset by an increase in average selling prices for our
higher-priced consumer notebooks.
The aggregate CSG component cost environment was deflationary in the third quarter and first nine months of Fiscal 2020, and we expect deflationary conditions to continue through the end of Fiscal 2020, but to a lesser degree relative to the previous three quarters. For Fiscal 2021, we expect an inflationary component cost environment, which will put pressure on CSG operating results.
From a geographical perspective, net revenue attributable to CSG increased in theAmericas , EMEA, and APJ during the third quarter and first nine months of Fiscal 2020. Operating Income - During the third quarter and first nine months of Fiscal 2020, CSG operating income as a percentage of net revenue increased 240 basis points to 6.5% and 310 basis points to 7.4%, respectively. The increases were primarily due to lower component costs that positively impacted CSG gross margin and a shift in product mix to higher-margin product offerings. 89
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The following table presents net revenue and operating income attributable to
Three Months Ended Nine Months Ended
November 1, 2019 % Change November 2, 2018 November 1, 2019 % Change November 2, 2018
(in millions, except percentages)
Net revenue:
VMware net
revenue $ 2,483 11% $ 2,229 $ 7,231 12% $ 6,451
Operating
income:
VMware operating
income $ 717 (7)% $ 768 $ 2,093 (1)% $ 2,117
% of segment net
revenue 28.9 % 34.5 % 28.9 % 32.8 %
Net Revenue - VMware net revenue primarily consists of revenue from the sale of
software licenses under perpetual licenses, related software maintenance and
support, training, consulting services, and hosted services. VMware net revenue
for the third quarter and first nine months of Fiscal 2020 increased 11% and
12%, respectively, primarily due to growth in software license revenue and sales
of software maintenance services. Software license revenue reflected broad-based
growth across the product portfolio. Software maintenance revenue benefited from
strong renewals of VMware enterprise agreements, revenue recognized from
maintenance contracts sold in prior periods, and additional maintenance
contracts sold in conjunction with new software license sales.
From a geographical perspective, approximately half of VMware net revenue during
the third quarter and first nine months of Fiscal 2020 was generated by sales to
customers in the United States . VMware net revenue for the third quarter and
first nine months of Fiscal 2020 was positively affected by growth across U.S.
and international markets.
Operating Income - During the third quarter and first nine months of Fiscal
2020, VMware operating income as a percentage of net revenue decreased 560 basis
points to 28.9% and 390 basis points to 28.9%, respectively. The decrease was
driven by an increase in operating expenses as a percentage of net revenue as
the result of an increase in compensation-related expense associated with sales
and sales support, primarily due to increased headcount, as well as to an
increase in R&D expenses.
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Table of Contents OTHER BALANCE SHEET ITEMS Accounts Receivable We sell products and services directly to customers and through a variety of sales channels, including retail distribution. Our accounts receivable, net, was$11.4 billion and$12.4 billion as ofNovember 1, 2019 andFebruary 1, 2019 , respectively. We maintain an allowance for doubtful accounts to cover receivables that may be deemed uncollectible. The allowance for losses is based on a provision for accounts that are collectively evaluated based on historical bad debt experience as well as specific identifiable customer accounts that are deemed at risk. As ofNovember 1, 2019 andFebruary 1, 2019 , the allowance for doubtful accounts was$98 million and$85 million , respectively. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We monitor the aging of our accounts receivable and continue to take actions to reduce our exposure to credit losses.
Dell Financial Services and its affiliates ("DFS") supportDell Technologies by offering and arranging various financing options and services for our customers globally, including through captive financing operations inNorth America ,Europe ,Australia, and New Zealand . DFS originates, collects, and services customer receivables primarily related to the purchase of our product, software, and service solutions. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. New financing originations were$2.0 billion and$1.6 billion for the third quarter of Fiscal 2020 and Fiscal 2019, respectively, and$5.7 billion and$5.2 billion for the first nine months of Fiscal 2020 and Fiscal 2019, respectively. As ofFebruary 2, 2019 , we adopted the new lease standard discussed in Note 1 and Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this report. The adoption of the new lease standard did not result in a change to leases that commenced prior to adoption. For new leases that commenced subsequent to the adoption of the new lease standard, DFS accounts for the leases as sales-type leases, direct financing leases, or operating leases depending on lease classification guidance. Amounts due from lessees under sales-type leases or direct financing leases are recorded as part of financing receivables, with interest income recognized over the contract term. On commencement of sales-type leases, we typically qualify for up-front revenue recognition. On originations of operating leases, we record equipment under operating leases, classified as property, plant, and equipment, and recognize rental revenue and depreciation expense, classified as cost of net revenue, over the contract term. Direct financing leases under the new lease standard are immaterial. As ofNovember 1, 2019 andFebruary 1, 2019 , our financing receivables, net were$9.1 billion and$8.6 billion , respectively. We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. For the third quarter of Fiscal 2020 and Fiscal 2019, the principal charge-off rate for our total portfolio was 0.9% and 1.0%, respectively. For the first nine months of Fiscal 2020 and Fiscal 2019, the principal charge-off rate for our total portfolio was 1.0% and 1.2%, respectively. The credit quality of our financing receivables has improved in recent years due to an overall improvement in the credit environment and as the mix of high-quality commercial accounts in our portfolio has continued to increase. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables without recourse to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved. 91
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We retain a residual interest in equipment leased under our lease programs. As ofNovember 1, 2019 andFebruary 1, 2019 , the residual interest recorded as part of financing receivables was$611 million and$674 million , respectively. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, we assess the carrying amount of our recorded residual values for impairment. Generally, residual value risk on equipment under lease is not considered to be significant, because of the existence of a secondary market with respect to the equipment. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. Our remarketing sales staff works closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure. No impairment losses were recorded related to residual assets during the third quarter and first nine months of Fiscal 2020. As ofNovember 1, 2019 , equipment under operating leases, net was$626 million and was immaterial as ofFebruary 1, 2019 . The increase in equipment under operating leases, net is due to our adoption of the new lease standard and the elimination of the third-party residual value guarantee insurance in the lease classification test for sales-type leases. Based on triggering events, we assess the carrying amount of the equipment under operating leases recorded for impairment. No impairment losses were recorded related to such equipment during the third quarter and first nine months of Fiscal 2020. DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. As a result, while the initial funding of financing receivables is reflected as an impact to cash flows from operations and investing, this funding is largely subsequently offset by cash flows from financing. Additionally, as a result of our adoption of the new leasing standard on lessor accounting, the increase to future originations of operating leases results in a shift from financing receivables to capital expenditures, which benefits our cash flows provided by operating activities by the increase in capital expenditures being reported as cash flows used in investing activities. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our financing receivables and the equipment under operating leases. Off-Balance Sheet Arrangements As ofNovember 1, 2019 , we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations. 92
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MARKET CONDITIONS, LIQUIDITY, AND CAPITAL COMMITMENTS
Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties. We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized credit rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments. We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than theU.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See Note 7 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our use of derivative instruments. We are exposed to interest rate risk related to our variable-rate debt portfolio. In the normal course of business, we follow established policies and procedures to manage this risk, including monitoring of our asset and liability mix. As a result, we do not anticipate any material losses from interest rate risk. The impact of any credit adjustments related to our use of counterparties on our Condensed Consolidated Financial Statements included in this report has been immaterial.
Liquidity and Capital Resources
To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our strategic initiatives. In addition to internally generated cash, we have access to other capital sources to finance our strategic initiatives and fund growth in our financing operations. As ofNovember 1, 2019 , we had$8.6 billion of total cash and cash equivalents. Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost-effective manner. A significant portion of our income is earned in non-U.S. jurisdictions. Prior to the enactment ofU.S. Tax Reform as discussed above in "Results of Operations - Income and Other Taxes," earnings available to be repatriated tothe United States would be subject toU.S. federal income tax, less applicable foreign tax credits.U.S. Tax Reform fundamentally changes theU.S. approach to taxation of foreign earnings to a modified territorial tax system, which generally allows companies to make distributions of non-U.S. earnings tothe United States without incurring additionalU.S. federal tax. However, local andU.S. state taxes may still apply. We have provided for future tax liabilities on income earned in non-U.S. jurisdictions, except for foreign earnings that are considered indefinitely reinvested outside ofthe United States . During the fourth quarter of Fiscal 2019, as discussed above in "Introduction - ClassV Transaction ," we completed a transaction in which all issued and outstanding shares of our Class V Common Stock were exchanged for cash or shares of ClassC Common Stock at the stockholder's election. We paid a total of$14 billion of cash to holders of Class V Common Stock. To fund a majority of the cash payment to stockholders,VMware, Inc. declared a conditional$11 billion one-time special cash dividend (the "Special Dividend"), which was paid pro-rata toVMware, Inc. stockholders as of the dividend record date ofDecember 27, 2018 and in connection with the completion of the Class V transaction. Our cash, cash equivalents, and investments declined significantly, commensurate with the cash required to fund this transaction. 93
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VMware, Inc. has advised us that, following its payment of the Special Dividend,VMware, Inc. will remain committed to a balanced capital allocation policy through investment in its product and solutions offerings, acquisitions, and returning capital to its stockholders through share repurchases. As ofNovember 1, 2019 ,$1.1 billion remained available for share repurchases. During the first nine months of Fiscal 2020,VMware, Inc. repurchased 7.3 million shares of its Class A common stock in the open market for approximately$1.3 billion . During the first nine months of Fiscal 2019,VMware, Inc. did not repurchase any shares of its Class A common stock. We funded a majority of the cash consideration paid in the Class V transaction from the$8.87 billion of the proceeds of the Special Dividend. The remaining amount of the cash consideration was primarily funded with$3.67 billion of proceeds from new senior secured term loans under our senior secured credit facilities and proceeds of a margin loan financing in an aggregate principal amount of$1.35 billion . See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for information about the debt we incurred to finance the Class V transaction.
The following table summarizes our cash and cash equivalents as well as our available borrowings as of the dates indicated:
November 1, 2019
(in millions)
Cash and cash equivalents, and available borrowings: Cash and cash equivalents (a)
$ 8,555 $ 9,676
Remaining available borrowings under revolving credit facilities
7,386 5,586
Total cash, cash equivalents, and available
borrowings $ 15,941 $ 15,262
____________________
(a) Of the
billion was held by
Our revolving credit facilities include the Revolving Credit Facility and the China Revolving Credit Facility, which we renewed during the first quarter of Fiscal 2020. The Revolving Credit Facility and the China Revolving Credit Facility have maximum aggregate borrowings of$4.5 billion and$0.5 billion , respectively. Available borrowings under these facilities are reduced by draws on the facility and, under the Revolving Credit Facility, outstanding letters of credit. As ofNovember 1, 2019 , there were no borrowings outstanding under the facilities and remaining available borrowings totaled approximately$5.0 billion . We may regularly use our available borrowings from both our Revolving Credit Facility and our China Revolving Credit Facility on a short-term basis for general corporate purposes. The VMware Revolving Credit Facility has maximum aggregate borrowings of$1.0 billion . As ofNovember 1, 2019 ,$1.0 billion was available under theVMware Revolving Credit Facility. The VMware Term Loan Facility has a borrowing capacity of up to$2.0 billion .VMware, Inc. may borrow against the VMware Term Loan Facility two times up to its borrowing capacity of$2.0 billion untilFebruary 7, 2020 . As ofNovember 1, 2019 , the outstanding balance was$600 million , and$1.4 billion remained available to be drawn down for future borrowing purposes. None of the net proceeds of such borrowings will be made available to support the operations or satisfy any corporate purposes ofDell Technologies , other than the operations and corporate purposes ofVMware, Inc. andVMware, Inc.'s subsidiaries.
The Pivotal Revolving Credit Facility had maximum aggregate borrowings of
See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about each of the foregoing revolving credit facilities.
We believe that our current cash and cash equivalents, together with cash that
will be provided by future operations and expected borrowings under our
revolving credit facilities, will be sufficient over at least the next twelve
months to fund our operations, debt service requirements and maturities, capital
expenditures, share repurchases, and other corporate needs.
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Debt
The following table summarizes our outstanding debt as of the dates indicated:
November 1, 2019 Increase (decrease) February 1, 2019
(in millions)
Core debt
Senior Secured Credit Facilities and
First Lien Notes $ 29,722 $ (2,998 ) $ 32,720
Unsecured Notes and Debentures 1,352 (600 ) 1,952
Senior Notes 2,700 (550 ) 3,250
EMC Notes 3,000 - 3,000
DFS allocated debt (902 ) 713 (1,615 )
Total core debt 35,872 (3,435 ) 39,307
DFS related debt
DFS debt 7,568 1,639 5,929
DFS allocated debt 902 (713 ) 1,615
Total DFS related debt 8,470 926 7,544
Margin Loan Facility and other 4,024 636 3,388
Public subsidiary debt
VMware Notes 4,000 - 4,000
VMware Term Loan Facility 600 600 -
Other 60 60 -
Total public subsidiary debt 4,660 660 4,000
Total debt, principal amount 53,026 (1,213 ) 54,239
Carrying value adjustments (635 ) 83 (718 )
Total debt, carrying value $ 52,391 $
(1,130 )
During the first nine months of Fiscal 2020, the outstanding principal amount of
our debt decreased by
During the first nine months of Fiscal 2020, core debt decreased by$3.4 billion to$35.9 billion as ofNovember 1, 2019 . We define core debt as the total principal amount of our debt, less DFS related debt, our Margin Loan Facility and other debt, and public subsidiary debt. The decrease in core debt was primarily due to our deleveraging efforts. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our debt. During the first nine months of Fiscal 2020, we issued an additional$1.6 billion , net, in DFS debt to support the expansion of its financing receivables portfolio. DFS related debt primarily represents debt from our securitization and structured financing programs. For DFS debt under securitization programs, our risk of loss is limited to transferred lease and loan payments and associated equipment, and the credit holders under these programs have no recourse toDell Technologies . To fund expansion of the DFS business, we balance the use of the securitization and structured financing programs with other sources of liquidity. We approximate the amount of our debt used to fund the DFS business by applying a 7:1 debt to equity ratio to the sum of our financing receivables balance and equipment under our DFS operating leases, net. The debt to equity ratio used is based on the underlying credit quality of the assets. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our DFS debt. As ofNovember 1, 2019 , margin loan and other debt primarily consisted of the$4.0 billion Margin Loan Facility. We amended the Margin Loan Facility during the first quarter of Fiscal 2020, and increased the principal amount by$650 million to$4.0 billion . Public subsidiary debt representsVMware, Inc. indebtedness. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information aboutVMware, Inc. debt. 95
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VMware, Inc. and its respective subsidiaries are unrestricted subsidiaries for purposes of the core debt ofDell Technologies . NeitherDell Technologies nor any of its subsidiaries, other thanVMware, Inc. , is obligated to make payment on the VMware Notes or the VMware Term Loan Facility. None of the net proceeds of the VMware Notes or the VMware Term Loan Facility will be made available to support the operations or satisfy any corporate purposes ofDell Technologies , other than the operations and corporate purposes ofVMware, Inc. and its subsidiaries. Our requirements for cash to pay principal and interest on our core debt increased significantly due to the borrowings we incurred to finance theEMC merger transaction and, to a lesser extent, the Class V transaction. We have made good progress in paying down core debt since theEMC merger transaction. We believe we will continue to be able to make our debt principal and interest payments, including the short-term maturities, from existing and expected sources of cash, primarily from operating cash flows. Cash used for debt principal and interest payments may also include short-term borrowings under our revolving credit facilities. We will continue to focus on paying down core debt. Under our variable-rate debt, we could have variations in our future interest expense from potential fluctuations in LIBOR, or from possible fluctuations in the level of DFS debt required to meet future demand for customer financing. We or our affiliates or their related persons, at our or their sole discretion, may purchase, redeem, prepay, refinance, or otherwise retire any amount of our outstanding indebtedness under the terms of such indebtedness at any time and from time to time, in open market or negotiated transactions with the holders of such indebtedness or otherwise, as appropriate market conditions exist.
Cash Flows
The following table contains a summary of our Condensed Consolidated Statements of Cash Flows for the periods indicated:
Nine Months Ended
November 1, 2019 November 2, 2018
(in millions)
Net change in cash from:
Operating activities $ 5,783 $ 4,625
Investing activities (3,982 ) (221 )
Financing activities (2,600 ) (2,844 )
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash (100 ) (262 )
Change in cash, cash equivalents, and restricted
cash $ (899 ) $ 1,298
Operating Activities - Cash provided by operating activities was $5.8 billion
for the first nine months of Fiscal 2020 compared to $4.6 billion for the first
nine months of Fiscal 2019. The increase in operating cash flows during the
first nine months of Fiscal 2020 was attributable to improved profitability and
continued working capital discipline. Cash provided by operating activities
includes a $0.4 billion payment for a tax settlement during the third quarter of
Fiscal 2020.
DFS offerings are initially funded through cash on hand at the time of
origination, most of which is subsequently replaced with third-party financing.
As a result, while the initial funding of financing receivables is reflected as
an impact to cash flows from operations and investing, this funding impact is
largely subsequently offset by cash flows from financing. Additionally, as a
result of our adoption of the new leasing standard on lessor accounting in the
first quarter of Fiscal 2020, the increase to future originations of operating
leases results in a shift from financing receivables to capital expenditures,
which benefits our cash flows provided by operating activities by the increase
in capital expenditures being reported as cash flows used in investing
activities. DFS new financing originations were $5.7 billion and $5.2 billion
during the first nine months of Fiscal 2020 and Fiscal 2019, respectively. As of
November 1, 2019 , DFS had $9.1 billion of total net financing receivables and
$0.6 billion of equipment under DFS operating leases, net.
Investing Activities - Investing activities primarily consist of cash used to
fund capital expenditures for property, plant, and equipment, which includes
equipment under DFS operating leases, capitalized software development costs,
strategic investments, and the maturities, sales, and purchases of investments.
During the first nine months of Fiscal 2020, cash used in investing activities
was $4.0 billion and was primarily driven by capital expenditures and
acquisition of businesses, which were partially offset by net cash proceeds from
the net sales of investments. In comparison, cash used by investing activities
was $0.2 billion during the first nine months of Fiscal 2019 and was primarily
driven by capital expenditures and acquisition of businesses, partially offset
by net sales of investments.
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Financing Activities - Financing activities primarily consist of the proceeds and repayments of debt, cash used to repurchase common stock, and proceeds from the issuance of common stock of subsidiaries. Cash used in financing activities of$2.6 billion during the first nine months of Fiscal 2020 primarily consisted of repayments of debt and repurchases of common stock by our public subsidiaries. In comparison, cash used by financing activities of$2.8 billion during the first nine months of Fiscal 2019 was primarily driven by repayments of debt, including anEMC senior note issued in the principal amount of$2.5 billion we repaid during the second quarter of Fiscal 2019 and the Term Loan A-3 Facility in the amount of$1.2 billion we repaid during the third quarter of Fiscal 2019. Capital Commitments Capital Expenditures - During the first nine months of Fiscal 2020, we spent$1.6 billion on property, plant, and equipment, which included gross equipment under DFS operating leases of$0.7 billion . During the first nine months of Fiscal 2019, we spent$0.9 billion on property, plant, and equipment. These expenditures were incurred in connection with our global expansion efforts and infrastructure investments made to support future growth, and, in Fiscal 2020, the funding of equipment under DFS operating leases. Product demand, product mix, and the use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2020, which will involve infrastructure investments, strategic initiatives, and funding our DFS leasing operations, are currently expected to total between$2.2 billion and$2.4 billion , of which approximately$1.0 billion relates to the property, plant, and equipment to be recognized under the new lease accounting standard. Purchase Obligations - Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be canceled without penalty. We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for our production. 97
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