Dell Technologies : Q1, FY’21 EARNINGS CALL

Dell Technologies Q1, FY'21 EARNINGS CALL

Thursday, May 28, 2020

Robert Williams

• Thanks Erica and thanks everyone for joining us. With me today are ourvice-chairman and Chief Operating Officer, Jeff Clarke, our CFO, Tom Sweet and our Treasurer, Tyler Johnson.
• In addition to our press release, financial tables and webdeck, beginning with Q1, edited prepared remarks and additional materials are now available before the call on our IR website. The guidance section will be covered on today's call.
• During this call, unless we indicate otherwise, all references to financial measures refer tonon-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, EBITDA, adjusted EBITDA and adjusted free cash flow.
• A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release.
• Please also note that all growth percentages refer toyear-over-year change unless otherwise specified and that VMware historical segment results have been recast to include Pivotal results.
• Finally, I'd like to remind you that all statements made during this call that relate to future results and events areforward-looking statements, based on current expectations.
• Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our webdeck and SEC reports. We assume no obligation to update ourforward-looking statements.
• Now, I'll turn it over to Jeff.

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Jeff Clarke - Business

• Thanks Rob.

COVID-19 Response

• We are all living and working in extraordinary times. Let me upfront, on behalf of the Dell Technologies team, send our thoughts and best wishes to the global community. Though we are starting to see positive signs around the globe with regards to the pandemic, we understand the unimaginable scope and scale of what it is - at its core - a humanitarian crisis. We know that little in our world is untouched.
• On a personal level, what keeps me going is staying connected.COVID-19 has challenged every convention of our lives. I am finishing up day 78 working from home and settling into a new normal.
• • I'm remote, yet more connected than ever, with a deeper sense of unity;
  • I'm not traveling, but I'm visiting with more customers, partners, suppliers and team members;
  • And I'm busier than ever, yet I have more time for my family than I have had in years.
• As I reflect on the past quarter, several truths have been reinforced through the pandemic…

1. Technology has never been more important. It plays a key role in fighting the virus on the front lines, it is essential in the development of vaccines, and will be a catalyst in the recovery.
2. As a result, Digital Transformation will accelerate us into the 4th industrial revolution.
3. Dell Technologies' broad portfolio of businesses and capabilities enabled us to work through the crisis and deliver differentiated results - for our customers and our company.

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• Over Q1, through today and into the future, our focus has been and will be on our 1) people, 2) our customers and 3) our business.

1. The safety and health of ourteam members, their families and the communities where we live and work is job one.
2. • We restricted global travel and moved tovirtual-only events.
   • 90 percent of our 165,000 team members worldwide moved towork-from-home over one weekend, and they're successfully supporting our customers and partners remotely.
   • And we are protecting our essential employees whose jobs require them to be onsite or with customers with newpandemic-specific protocols.
3. Next,our customers- consumer to small businesses to multi-national corporations - were forced to implement work-from-home and learn-from-home strategies and re-establish business continuity literally overnight.
4. • We saw a 'flight to quality' where customers leaned on technology partners who had the flexibility and agility to provide solutions at scale, across all of their IT needs, and deliver services quickly and globally.
   • ConsiderNew York City, as an example. Our team helped their Department of Information Technology and Telecommunicationssupport the city's health care professionals and first responders. Securing critical technology ranging from PCs to servers, storage and VMware - all in a centralized manner, with swift implementation.
   • As governments issued theirshelter-in-place orders, no one was at receiving docks to get needed technology. So, we shipped notebooks, monitors and accessories directly to people's homes. Or we set up "drive throughs" - with proper social distancing and PPE in place - to get people the equipment they needed to be productive and connected.

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1. • We rolled out our Payment Flexibility Program, so customers can access the technology they need now, scale the usage of IT and preserve cash. This program includes zero percent interest rates and up to a180-day payment deferral. And we are also making $9 Billion in financing available this year.
   • Plus, we added aone-year term to our Dell Technologies on Demandofferings, which can be used with the Dell Technologies Cloud Platform to rapidly consume hybrid cloud infrastructure.
2. Third,the business.We saw unprecedented demand dynamics over the course of the quarter. And though we face an uncertain environment as we look ahead and made a series of prudent in-quarter decisions to manage costs and liquidity, we did so with the intent to accelerate through and beyond this crisis. All actions were in line with our strategy, which remains unchanged: we are focused on gaining share, integrating and innovating across our portfolio, and creating long-term value for all stakeholders. Despite uncertainty, we are in a position of strength, and have a unique opportunity to perform differentially, no matter the environment.

Q1 Operational Comments

• Let me move to a few operational comments for the first quarter.
• To get more specific on demand, we sawhigh-single digit orders growth for commercial client and double-digit orders growth for notebooks. For example, orders growth for our Latitude notebook family grew 37 percent year-over-year and 45 percent sequentially.
  This growth came primarily from large commercial and government customers, which did put some pressure on profitability.
• We were the only vendor in the top five to have positiveyear-over-year PC unit growth for calendar Q1, according to IDC. We hit our highest share position to-date for worldwide PCs at 19.4 percent. In commercial PCs, Dell moved to #2 worldwide with 26.2 percent unit share.

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• As customers shifted spend to remote work solutions and BCRP, they did so at the expense of infrastructure spending-- resulting in lower ISG demand. But there were some highlights.
• • While down, we saw improved server performance, and expect to gain unit and revenue share for Mainstream servers when IDC x86 server results come out next month.
  • And though we expect our external storage share to be roughly flat in calendar Q1, we expect share growth inhigh-end,purpose-builtback-up appliances and unstructured arrays.
• From a customer standpoint, we saw orders strength in banking and financial services, government and healthcare & life sciences-- each up 15 to 20 percent in Q1. We also saw very strong double-digit demand in consumer direct and solid high-single-digit demand in small business. For small and medium business, however, demand did soften as the quarter progressed given the shelter-in-place orders of various governments. We saw demand drop over the quarter in the most impacted sectors, including retail, manufacturing, energy and transportation.
• Throughout this time, we have been advantaged by our agility, our breadth and our scale. We can pivot quickly and lean into the opportunities that exist with unmatched capabilities, including…
• Our direct global sales force, flexible consumption models and online leadership. These are truly differentiators for us.
• • Our teams had to be nimble and quickly embrace a new sales motion. We successfully pivoted toall-virtual engagements, with hundreds of thousands of virtual customer interactions in the quarter.
  • And oure-commerce business set us apart. In April, site visits to DellTechnologies.com were up 77 percent. Driven largely by interest in remote work offerings and learning - ranging from PC solutions and services, quickstart

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bundles for VDI, and SD-WAN for home access to take stress off corporate networks.

• Another strength is our global supply chain, its scale and resiliency, which enabled the needed flexibility to manage through many different challenges over the past years. We used our global footprint and partnerships to fulfill orders as quickly as possible, exploring all sourcing, production and logistics strategies to meet our customers' needs.
• We continue to drive innovation and excellence in engineering with a largely remote workforce. Our engineers and product teams delivered several critical solutions in the past couple of months-- all from home.
• • PowerStore is now shipping and is astep-level improvement in the market. It's up to seven times faster and three times more responsive than our previous midrange arrays. The feedback from customers has been fantastic, and we are seeing unprecedented interest -- the pipeline is building. This is a game changer for us in midrange storage.
  • Last week, we launched several Dell Technologies Cloud advancements, including the Dell Technologies Cloud OneFS for Google Cloud. This combines the scalability and performance of Isilon with Google Cloud's analytics and compute services to help customers simplify management of private and public cloud storage.
• And in March, VMware introduced new software solutions that place us squarely at the center of our customers'multi-cloud world.
• • The releases featured VMware Tanzu, a portfolio of products and services that transform the way enterprises build, run, and manage application software.
  • Also included were major updates to the core portfolio across VMware Cloud Foundation, including the largest evolution of vSphere in a decade,NSX-T, vSAN and vRealize Operations Cloud, which continue to bring innovation to our leading

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infrastructure stack that powers on-premise environments and public clouds across the world.

• These are just a few examples of how we're delivering on our customer needs and executing our strategy.

Moving from Response to Recovery

• As the world starts to pivot from response to recovery, I see it in three phases.

Phase 1) The Rapid response- this phase is largely behind us. Organizations have moved to work from home; kids are learning at home and we are seeing hopeful signs, including possible vaccines.

Phase 2) The new normal- As a society, we're realizing that work isn't a destination, rather it's something many of us can do from anywhere, anytime. We are solving customer issues remotely with great success, and customer conversations have changed from "what do we do now" to "how do we plan for the future?"

Phase 3) And then into the third phase - new opportunities.High-volumes of virtual, online business. An accelerated digital existence - making an automated, intelligent and secure supply chain paramount to business continuity. Artificial Intelligence and Machine Learning play a big role to glean meaningful business insights from the vast amounts of data this digital existence will create.

• Dell Technologies is uniquely positioned to win in this evolving backdrop, and our Q1 performance again highlights our differentiation and resiliency.

Summary

• So to summarize:
• • Our breadth of solutions, our scale and our strength have never been more important-- with customers increasingly turning to us as a deep and trusted partner when they need help most.

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• Thanks to our customers and the incredible efforts of our team, we've been able to execute on our strategy and emerge from this in an even stronger competitive position.
• This pandemic has changed everything with unprecedented speed and scope - billions of people's lives upended in a matter of weeks. But there is also tremendous innovation and collaboration, heroism and humanity.
• There is a lot to be hopeful for and a there's a lot of opportunity ahead.
• Now, I'll turn it over to Tom for a deeper look at the financials.

Tom Sweet - Financial Results and Liquidity

• Thanks, Jeff.

Navigating Current Environment

• The global effects ofCOVID-19 created a challenging environment to navigate, but I am proud of our team members and partners around the globe. They continued to support our customers and many front-line organizations battling this pandemic -- while also managing their own personal needs and responsibilities.
• Demand was strong for work- andlearn-from-home solutions and business continuity solutions, especially during the first two months of the quarter.
• Revenue for the first quarter was $21.9 billion, which was flatyear-over-year. FX movement, particularly in the Euro zone, Brazil and China, created a headwind this quarter, impacting growth by approximately 170 basis points.
• Gross margin was down 1 percent to $7.3 billion or 33.4 percent of revenue. Overall, gross margin was lower due to the strong CSG performance along with the mix shift to large commercial and government customers that Jeff mentioned.
• Given the environment, we proactively took cost actions during the quarter to protect and position the company. These measures included a global hiring freeze, reduction in

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consulting and contractor costs, global travel restrictions and most recently, the decision to suspend our 401K match. The majority of our costs are variable, allowing us to quickly adjust. Our rapid cost actions helped drive operating expenses down 1 percent year- over-year and down 8 percent sequentially to $5.2 billion. We continue to evaluate the business, and are prepared to take additional actions, as necessary.

• Operating income was down 2 percent to $2.2 billion, or 9.8 percent of revenue.
• Profitability was slightly lower as we managed through multiple impacts in the quarter. Supplychain-related costs for certain components, and expedite costs for moving products in this environment were higher in the quarter. We were also impacted by mix dynamics related to strong demand for WFH, a higher mix of large commercial and government transactions, and the impacts from a strong dollar even as we adjusted pricing.
• Profitability was also impacted by the application of the new Current Expected Credit Loss or CECL accounting standard, as we recorded increased receivable reserves of approximately $100 million.
• Our consolidated net income was $1.1 billion, down 5 percent; and EPS was $1.34, down 8 percent.
• Adjusted EBITDA was $2.6 billion, or 11.9 percent of revenue, and $11.8 billion for the trailing twelve months.

Business Unit Results

• Shifting to our business unit results, Client Solutions Group delivered revenue of $11.1 billion, up 2 percent. Commercial revenue was $8.6 billion, up 4 percent, includingdouble-digit orders growth in commercial notebooks and mobile workstations. Consumer revenue was $2.5 billion, down 5 percent, as we shifted supply to direct from retail. Our consumer direct orders were up nearly 40 percent, while consumer retail orders were down 37 percent.

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• The strong demand for remote work and learning solutions drove the strong commercial client and notebook performance. The team did a nice job working through supply chain impacts. We saw extended lead times, particularly for mobile solutions, but these are now trending back to more normal levels.
• CSG Operating Income was $592 million or 5.3 percent of revenue. CSG profitability was impacted by a higher mix of large commercial and government customers and less deflationary component costs compared to a year ago.
• ISG revenue was $7.6 billion, down 8 percent. Storage revenue was $3.8 billion, down 5 percent. We sawdouble-digit demand growth in VxRail and in our high-end PowerMax solution and solid demand in unstructured storage, offset by softness in other areas of core storage.
• Servers and networking revenue was $3.8 billion, down 10 percent. However, we did see improved orders results for mainstream servers and expect to gain share in this category.
• ISG operating income was $732 million or 9.7% of revenue, which was down 60 basis points. The first quarter is typically our lightest quarter for ISG, particularly storage, as it historically builds throughout the year.
• Our VMware business unit had a strong quarter, delivering revenue of $2.8 billion, up 12 percent and operating income of $773 million, or 28.1 percent of revenue.
• • Based on VMware'sstand-alone results, Subscription and as a Service revenue grew 39 percent, with the strongest revenue performance from EUC, Carbon Black, and VeloCloud offerings, as well as VMware Cloud on AWS, which had a triple-digit revenue growth rate.
  • Both NSX and vSAN product bookings grew over 20 percent.

Capital Structure and Balance Sheet

• Turning to our balance sheet and capital structure, we ended the quarter with $13.2 billion of cash and investments. This includes the cash from the $2.25 billion of notes issued by

Dell Technologies and $2.0 billion issued by VMware in the first quarter. As announced,

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the primary use of proceeds from these offerings is the repayment of debt. Earlier this month, VMW paid down $1.25 billion of the Note due in August 2020, and at the Dell Tech level we expect to use the $2.25 billion in proceeds to pay down debt in the coming months.

• Our total debt balance ended the quarter at $57.3 billion, and core debt ended the quarter at $36.6 billion.
• Core debt excludes $9.1 billion ofDFS-related debt -- the majority of which is non- recourse to the company and is backed by high-quality receivables. We are focused on ensuring DFS is properly capitalized to support our customers as evidenced by the $1.1B asset backed fixed-term securitization we did in the quarter.
• We are effectively managing working capital in this challenging environment. We had a use of cash flow from operations of approximately $800 million, impacted by our normal annual bonus payout, P&L seasonality and approximately $900 million of COVID impact to working capital, principally related to timing of accounts receivable collections and higher inventory, which we expect to normalize in the coming quarters.
• Adjusted free cash flow in Q1 was negative $1.2 billion, coming off of a very strong fourth quarter. Our first quarter tends to be our weakest in regards to cash generation given normal seasonality impacts. On a trailing twelve month basis, adjusted free cash flow was $7.6 billion.
• We have suspended the share repurchase program announced on the Q4 call. In the first quarter, we did repurchase approximately 6 million shares for approximately $240 million.
• Our liquidity position is strong with excess cash on the balance sheet and $5.5 billion of undrawn revolver capacity, after repaying a partial draw in Q1. We are comfortable with our capital structure, including our ability to support DFS growth.
• We have worked to smooth out our debt maturity towers, with only $600 million due this June, plus approximately $200 million of debt amortization for the year.

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We are a Different Company Now

• As I reflect on current results and future opportunities, I am reminded that we are a different company than we were just three years ago and most certainly different than we were in any of the prior economic slowdowns.
• Today we have assembled a broad set of capabilities that are differentiated within the industry and drive an attractive financial model.
• We have broad diversification across our portfolio of software and service solutions;hybrid-cloud technologies and traditional infrastructure -- all of which are multi-billion- dollar businesses. And, similarly we have broad diversification across our customer base, which allows us a view to customer behavior and demand trends given our direct model.
• We have a software and security business that's more than $15 billion, with strongas-a- service and recurring revenue characteristics. This creates a stable revenue base, particularly during volatile times.
• Our total deferred revenue is $27.6 billion, up 14 percentyear-over-year. Our recurring revenue, which includes deferred revenue amortization, utility and as-a-Service models, is now approximately $6 billion a quarter, up 16 percent year-over-year.
• We are focused on our commitment to maximizelong-term value creation for all aligned shareholders -- by growing faster than competitors, growing EPS faster than revenue and generating strong cash flow over time.

Closing Thoughts

• So to close, these are unprecedented times, but Dell Technologies is well positioned. We are moving forward… winning the consolidation, integrating and innovating across Dell Technologies to create the future of technology infrastructure, and creatinglong-term value for all stakeholders.

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• This is our strategy and focus. And in a world that is increasingly looking for resiliency, reliability and innovation… we are uniquely positioned to emerge from this time as the essential technology company for the data era.

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