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 endedJanuary 29, 2021 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 generally accepted accounting principles inthe United States of America ("GAAP"). Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period. 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 28, 2022 and our fiscal year endedJanuary 29, 2021 as "Fiscal 2022" and "Fiscal 2021," respectively. Fiscal 2022 and Fiscal 2021 include 52 weeks.
INTRODUCTION
Dell Technologies helps organizations and individuals build their digital future and transform how they work, live, and play. We provide customers with the industry's broadest and most innovative technology and services portfolio for the data era, spanning traditional infrastructure, emerging multi-cloud technologies, and essential technology needed in the "do anything from anywhere" economy. We continue to seamlessly deliver differentiated and holistic information technology ("IT") solutions to our customers, which has driven significant revenue growth and share gains.Dell Technologies' integrated solutions help customers modernize their IT infrastructure, manage and operate in a multi-cloud world, address workforce transformation, and provide critical solutions that keep people and organizations connected, which has proven even more important in this current time of disruption caused by the COVID-19 pandemic. We are helping customers accelerate their digital transformations to improve and strengthen business and workforce productivity. With our extensive portfolio and our commitment to innovation, we 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. As further evidence of our commitment to innovation, we are evolving and expanding our IT as-a-Service and cloud offerings through APEX, which will provide our customers with greater flexibility to scale IT to meet their evolving business needs and budgets.Dell Technologies' end-to-end portfolio is supported by a world-class organization with unmatched size and scale. We operate globally in 180 countries across key functional areas, including technology and product development, marketing, sales, financial services, and global services. Our go-to-market engine includes a 39,000-person sales force and a global network of over 200,000 channel partners.Dell Financial Services and its affiliates ("DFS") offer customer payment flexibility and enable synergies across the business. We employ 34,000 full-time service and support professionals and maintain more than 2,400 vendor-managed service centers. We manage a world-class supply chain that drives long-term growth and operating efficiencies, with approximately$70 billion in annual procurement expenditures and over 750 parts distribution centers. Together, these elements provide a critical foundation for our success, enabling us to offer unparalleled capability to our customers and making us the integrator of choice. Dell Technologies Vision and Innovation - Our vision is to be the essential technology company for the data era and a leader in end-user computing, software-defined data center solutions, data management, virtualization, edge computing, and cloud software. We believe that our results will benefit from an integrated go-to-market strategy, including enhanced coordination across all segments of our business, 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. 60
-------------------------------------------------------------------------------- Table of Contents We are seeing an accelerated rate of change in the IT industry. We seek to address our customers' evolving needs and their broader digital transformation objectives as they embrace the hybrid multi-cloud environment of today. For many customers, a top digital priority is to build stable and resilient remote operational capabilities. We are seeing demand for simpler, more agile IT across multiple clouds. The pandemic accelerated the introduction and adoption of new technologies to ensure productivity and collaboration from anywhere. In light of this rapid pace of innovation, 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 long-term sustainable growth.
Spin-off of
As described in Note 1 of the Notes to the Condensed Consolidated Financial Statements included in this report, onNovember 1, 2021 , subsequent to the close of the Company's third quarter of Fiscal 2022, the Company completed its previously announced spin-off ofVMware, Inc. by means of a special stock dividend (the "VMware Spin-off"). The VMware Spin-off was effectuated pursuant to a Separation and Distribution Agreement, dated as ofApril 14, 2021 (the "Separation and Distribution Agreement").Dell Technologies effectuated the VMware Spin-off by means of a special stock dividend of 30,678,605 shares of Class A common stock and 307,221,836 of Class B common stock ofVMware, Inc. toDell Technologies stockholders of record as of5:00 p.m. ,New York City time, onOctober 29, 2021 . Prior to receipt of theVMware, Inc. common stock by the Company's stockholders, each share ofVMware, Inc. Class B common stock automatically converted into one share ofVMware, Inc. Class A common stock. As a result of these transactions, each holder of record of shares ofDell Technologies common stock as of the distribution record date received approximately 0.440626 of a share ofVMware, Inc. Class A common stock for each outstanding share ofDell Technologies common stock owned by such holder as of such date.VMware, Inc. paid a special cash dividend, pro rata, to each holder ofVMware, Inc. common stock in an aggregate amount equal to$11.5 billion , of whichDell Technologies received$9.3 billion . Immediately followingVMware, Inc.'s payment of the special cash dividend, pursuant to the Separation and Distribution Agreement, the businesses ofVMware, Inc. were separated from the remaining businesses ofDell Technologies through a series of transactions that resulted in the pre-transaction stockholders ofDell Technologies owning shares in two separate public companies, consisting of (1)VMware, Inc. , which continues to own the businesses ofVMware, Inc. and its subsidiaries, and (2)Dell Technologies , which continues to ownDell Technologies' other businesses and subsidiaries. In connection with and upon completion of theVMware Spin-off, Dell Technologies andVMware, Inc. entered into a Commercial Framework Agreement (the "CFA"). The CFA provides a framework under whichDell Technologies andVMware, Inc. will continue their strategic commercial relationship after the transaction. The CFA has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and conditions.Dell Technologies andVMware, Inc. also entered into other agreements that will govern other aspects of their relationship, including, among others, a tax matters agreement and a transition services agreement.Dell Technologies used the net proceeds from its pro rata share of the special cash dividend received fromVMware, Inc. , as well as cash on hand, to repay a total of$9.4 billion principal amount of debt. For information about the debt repayments, see Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report. The Company will reportVMware results as discontinued operations beginning in the fourth quarter of Fiscal 2022. See Note 1 and Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information regarding the VMware Spin-off.
Products and Services
We design, develop, manufacture, market, sell, and support a wide range of
comprehensive and integrated solutions, products, and services. We are organized
into the following business units, which are our reportable segments:
•Infrastructure Solutions Group ("ISG") - ISG enables the digital transformation
of our customers through our trusted multi-cloud and big data solutions, which
are built upon a modern data center infrastructure. ISG works with customers in
the area of hybrid cloud deployment with the goal of simplifying, streamlining,
and automating cloud operations. ISG solutions are built for multi-cloud
environments and are optimized to run cloud native workloads in both public and
private clouds, as well as traditional on-premise workloads.
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Our comprehensive portfolio of advanced storage solutions includes traditional as well as next-generation storage solutions (such as all-flash arrays, scale-out file, object platforms, and software-defined solutions). We have simplified our storage portfolio to ensure that we deliver the technology needed for our customers' digital transformation. We continue to make enhancements to our portfolio of storage solutions and expect that these enhancements will drive long-term improvements in the business. InMay 2020 , we released our new PowerStore offering, a differentiated midrange storage solution that enables seamless updates using microservices and container-based software architecture. This offering allows us to compete more effectively within midrange storage and, as a result, we are seeing early signs of improving revenue velocity. Our server portfolio includes high-performance rack, blade, tower, and hyperscale servers, optimized for artificial intelligence and machine learning workloads. 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, allowing 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, and services, including support and deployment, configuration, and extended warranty services.
Approximately half of ISG revenue is generated by sales to customers in the
•Client Solutions Group ("CSG") - CSG includes branded hardware (such as
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 client offerings 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, our 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 DFS. 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
•VMware - TheVMware reportable segment ("VMware") reflects the operations ofVMware, Inc. (NYSE: VMW) withinDell Technologies .VMware works with customers in the areas of hybrid and multi-cloud, virtual cloud networking, digital workspaces, modern applications, and intrinsic security, 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, modernizing their applications, empowering digital workspaces, transforming networking, and embracing intrinsic security.VMware enables its customers to digitally transform their operations as they ready their applications, infrastructure, and employees for constantly evolving business needs.
Approximately half of
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Effective upon the completion of the VMware Spin-off in the fourth quarter of
Fiscal 2022, as described under "Spin-off of VMware, Inc. ," our Consolidated
Statements of Income will be recast to reflect VMware results as discontinued
operations and as such, VMware will no longer be identified as a reportable
segment. Pursuant to the CFA, Dell Technologies will continue to integrate
VMware, Inc.'s products and services with Dell Technologies' offerings and sell
them to end users. The results of those transactions will be reflected within
CSG and ISG, based on the nature of the underlying offering sold. Dell
Technologies will also continue to act as a distributor for VMware, Inc. ,
purchasing VMware, Inc.'s standalone products and services for resale to
end-user customers. The results of this business will be reflected in Other
businesses. The Company's prior period segment results will be recast to reflect
the change. See Note 1 and Note 18 of the Notes to the Condensed Consolidated
Financial Statements included in this report for more information regarding the
VMware Spin-off.
Our Other businesses, described below, consist of products and services
offerings of Secureworks and Virtustream, which are both majority-owned by Dell
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.
•Secureworks (NASDAQ: SCWX) is a leading global provider of 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.
•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.
On October 1, 2021 , we completed the sale of Boomi and certain related assets to
Francisco Partners and TPG Capital for a total cash consideration of
approximately $4.0 billion , resulting in a pre-tax gain on sale of $4.0 billion .
The Company ultimately recorded a $3.0 billion gain, net of $1.0 billion in tax
expense. The transaction was intended to support the Company's focus on fueling
growth initiatives through targeted investments to modernize Dell Technologies'
core infrastructure and by expanding in high-priority areas, including hybrid
and private cloud, edge, telecommunications solutions, and the Company's APEX
offerings.
On
Prior to the divestitures, the operating results of Boomi andRSA Security were included within Other businesses and did not qualify for presentation as a discontinued operation. See Note 1 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about these transactions. 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" and Note 16 of the Notes to the Condensed Consolidated Financial Statements included in this report.
DFS supports our businesses by offering and arranging various financing options and services for our customers primarily 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 3 of the Notes to the Condensed Consolidated Financial Statements included in this report. 63 -------------------------------------------------------------------------------- Table of Contents 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 all segments of our business 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, edge computing, and software development operations. As ofOctober 29, 2021 andJanuary 29, 2021 ,Dell Technologies held strategic investments of$1.5 billion and$1.4 billion , respectively.
In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives and accelerate our innovation agenda.
Business Trends and Challenges
COVID-19 Pandemic and Response - InMarch 2020 , theWorld Health Organization ("WHO") declared the outbreak of COVID-19 a pandemic. This declaration was followed by significant governmental measures implemented inthe United States and globally, including travel bans and restrictions, shelter-in-place orders, limitations and closures of non-essential businesses, and social distancing requirements in efforts to slow down and control the spread of the virus. The health of our employees, customers, business partners, and communities remains our primary focus. During Fiscal 2021, we took numerous actions in response to COVID-19, including a swift implementation of our business continuity plans. Our crisis management team remains actively engaged to respond to changes in our environment quickly and effectively, and to ensure that our ongoing response activities are aligned with recommendations of theWHO and theU.S. Centers for Disease Control and Prevention , and with governmental regulations. We are adjusting restrictions previously implemented as new information becomes available, governmental regulations are updated, and vaccines become more widely distributed. InSeptember 2021 , the President ofthe United States signed an executive order that requires employers withU.S. Government contracts to ensure that theirU.S. -based employees, contractors, and subcontractors that work on or in support of such contracts are fully vaccinated against COVID-19 (subject to medical and religious exemptions). We are a covered federal contractor due to a number of our agreements. We are taking steps to comply with the executive order for federal contractors. It is currently not possible to predict the impact the executive order may have on our workforce. Most of our employees were previously equipped with remote work capabilities over the past several years, which enabled us to quickly establish a work-from-home posture for the majority of our employees. Further, we implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with customers. We are deploying return-to-site processes based on ongoing assessments of local conditions by our management team, including a global policy requiring vaccination or a negative COVID-19 test for persons entering aDell site. We will continue to monitor conditions and utilize remote work practices to ensure the health and safety of our employees, customers, and business partners. We continue to work closely with our customers and business partners to support them as they expand their own remote work solutions and contingency plans and to help them access our products and services remotely. Our agility, our breadth, and our scale has and will continue to benefit us in serving our customers and business partners during this period of accelerated digital transformation, evolution of the "do anything from anywhere" economy, and uncertainty relating to the effects of COVID-19.
Notable actions include the following:
•Our global sales teams continue to successfully support our customers and partners remotely.
•We are helping to address our customers' cash flow requirements by expanding our as-a-service and financing offerings.
•Our close relationships and ability to connect directly with our customers
through our e-commerce business have enabled us to quickly meet the immediate
demands of the work- and learn-from-home environments as well as the long-term
demands of in-office, remote, and hybrid workforce environments.
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•The strength, scale, and resiliency of our global supply chain have afforded us
flexibility to manage through the significant disruption in the supply chain
environment. We continue to adapt in real time to events as they unfold by
applying predictive analytics to model a variety of outcomes to respond quickly
to the changing environment. We continue to optimize our global supply chain
footprint to maximize factory uptime, for both Dell Technologies and our
suppliers, by working through various local governmental regulations and
mandates and by establishing robust safety measures to protect the health and
safety of our essential team members.
•We continue to drive innovation and excellence in engineering with a largely
remote workforce. Engineers and product teams have delivered several critical
solutions, including cloud updates, key client product refreshes, PowerStore
midrange storage and software, and recently announced IT as-a-Service and cloud
offerings within the APEX portfolio.
During Fiscal 2021, we took precautionary measures to increase our cash position
and preserve financial flexibility. We also took a series of prudent steps to
manage expenses and preserve liquidity that included, among others, global
hiring limitations, a reduction in consulting, contractor and facilities-related
costs, global travel restrictions, and a temporary suspension of the Dell 401(k)
match program for U.S. employees. Effective January 1, 2021 , we resumed the Dell
401(k) match program, and in the fourth quarter of Fiscal 2021, we began to
reinstate selected employee-related compensation benefits. We will continue to
invest in long-term projects to support our growth and innovation initiatives,
while focusing on operating expense controls in certain areas of the business.
All of these actions are aligned with our strategy, which remains unchanged, of
focusing on gaining share, integrating and innovating across the Dell
Technologies portfolio, and strengthening our capital structure.
The impact of COVID-19 is accelerating digital transformation, and we continue
to see opportunities to create value and grow in response to resilient demand
for our IT solutions driven by a technology-enabled world. We will continue to
actively monitor global events and pursue prudent decisions to navigate in this
uncertain and ever-changing environment.
Supply Chain - Dell Technologies maintains limited-source supplier relationships
for certain components because the relationships are advantageous in the areas
of performance, quality, support, delivery, capacity, and price considerations.
We continue to be impacted by industry-wide constraints in the supply of limited-source components in certain product offerings as a result of the impacts of COVID-19. Further, global economic recovery has led to growth in demand that has outpaced supply, resulting in an increase in orders pending fulfillment and extended lead times for our customers for certain products.
These supply constraints coupled with increasing demand are leading to increases
in component costs, which, during the third quarter of Fiscal 2022, increased in
the aggregate. Component cost trends 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. For both ISG and CSG, we expect the overall component cost
environment to remain inflationary but begin to stabilize for the remainder of
Fiscal 2022. Further, we continue to experience increased freight costs for
expedited shipments of components and rate increases in the freight network as
capacity remains constrained. In response to these pressures, we continue to
assess and take proactive steps to address our customers' demands while
balancing both profitability and growth. We expect to continue navigating supply
chain dynamics in to Fiscal 2023.
ISG - We expect that ISG will continue to be impacted by the changing nature of
the IT infrastructure market and competitive environment. During the first nine
months of Fiscal 2022, ISG benefited from improvements in the macroeconomic
environment that we expect will continue through the remaining three months of
Fiscal 2022. With our scale and strong solutions portfolio, we believe we are
well-positioned to respond to ongoing competitive dynamics. Within servers and
networking, we will continue to be selective in determining whether to pursue
certain large hyperscale and other server transactions. We continue to focus on
customer base expansion and lifetime value of customer relationships.
The unprecedented data growth throughout all industries is generating continued
demand for our storage solutions and services. Cloud native applications are
expected to continue as a primary growth driver in the infrastructure market. We
believe the complementary cloud solutions across our business position us to
meet these demands for our customers. We benefit from offering solutions that
address 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. We continue to expand our offerings in external
storage arrays, which incorporate flexible, cloud-based functionality.
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Through our research and development efforts, we are developing new solutions in
this rapidly changing industry that we believe will enable us to continue to
provide superior solutions to our customers. Our customer base includes a
growing number of service providers, such as cloud service providers,
software-as-a-service companies, consumer webtech providers, and
telecommunications companies. These service providers turn to Dell Technologies
for our advanced solutions that enable efficient service delivery at cloud
scale. Through our collaborative, customer-focused approach to innovation, we
strive to deliver new and relevant solutions and software to the market quickly
and efficiently.
CSG - Our CSG offerings are an important element of our strategy, generating
strong cash flow and opportunities for cross-selling of complementary solutions.
During the first nine months of Fiscal 2022, CSG net revenue continued to be
strong across product offerings, driven primarily by the global economic
recovery coupled with customers seeking improved connectivity and productivity
in both personal and professional environments.
While we expect that the CSG demand environment will continue to be subject to
seasonal trends, we anticipate continued strong CSG demand through the remaining
three months of Fiscal 2022, in line with industry demand forecasts. Competitive
dynamics continue to be a factor in our CSG business and will impact pricing and
operating results. We remain committed to our long-term strategy for CSG and
will continue to make investments to innovate across the portfolio, while
benefiting from consolidation trends that are occurring in the markets in which
we compete.
Recurring Revenue and Consumption Models - Our customers are seeking new and
innovative models that address how they consume our solutions. We offer options
including as-a-service, utility, leases, and immediate pay models, all designed
to match customers' consumption and financing preferences. Our multiyear
agreements typically result in recurring revenue streams over the term of the
arrangement. We continue to evolve and build momentum across our family of
as-a-Service offerings as we pursue our strategy of modernizing our core
business solutions, with APEX at the forefront. We expect that our flexible
consumption models and as-a-service offerings through APEX will further
strengthen our customer relationships and provide a foundation for growth in
recurring revenue.
Macroeconomic Risks and Uncertainties - The impacts of trade protection
measures, including increases in tariffs and trade barriers, and changes in
government policies and international trade arrangements may affect our ability
to conduct business in some non-U.S. markets. We monitor and seek to mitigate
these risks with adjustments to our manufacturing, supply chain, and
distribution networks.
We manage our business on a U.S. dollar basis. However, we have a large global
presence, generating approximately half of our revenue by sales to customers
outside of the United States during both the third quarter and first nine months
of Fiscal 2022 and Fiscal 2021. As a result, our revenue can be, and in such
periods has been, 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.
Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted earnings
before interest and other, net, taxes, depreciation, and amortization ("adjusted
EBITDA"), and cash flows from operations, which are discussed elsewhere in this
management's discussion and analysis.
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-------------------------------------------------------------------------------- Table of Contents 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; EBITDA; and adjusted EBITDA. 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. We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. Management considers these non-GAAP measures in evaluating our operating trends and performance. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful and transparent 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 and gains, stock-based compensation expense, other corporate expenses and, for non-GAAP net income, fair value adjustments on equity investments 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. 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. 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 ofEMC onSeptember 7, 2016 , referred to as theEMC merger transaction, and the acquisition ofDell Inc. byDell Technologies Inc. onOctober 29, 2013 , referred to as the going-private transaction, all of the tangible and intangible assets and liabilities ofEMC andDell , respectively, were accounted for and recognized at fair value on the transaction dates. Accordingly, for the periods presented, amortization of intangible assets primarily represents amortization associated with intangible assets recognized in connection with theEMC merger transaction and the going-private transaction. 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 an enhanced understanding of our current operating performance and provide more meaningful period to period comparisons. •Impact of Purchase Accounting - The impact of purchase accounting includes purchase accounting adjustments related to theEMC merger transaction and, to 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 theEMC merger transaction and the going-private transaction were accounted for and recognized at fair value as of the respective 67
-------------------------------------------------------------------------------- Table of Contents 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 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 for purposes of calculating the non-GAAP financial measures presented below facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Transaction-related Expenses and Gains - Transaction-related expenses typically 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. From time to time, this category also may include transaction-related gains on divestitures of businesses or asset sales. During the third quarter of Fiscal 2022, we recognized a gain of$4.0 billion on the sale of Boomi, while during the third quarter of Fiscal 2021, we recognized a gain of$338 million on the sale ofRSA Security . We exclude these items for purposes of calculating the non-GAAP financial measures presented below to facilitate an enhanced understanding of our current operating performance and provide more meaningful period to period comparisons. •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. We estimate the fair value of service-based stock options using the Black-Scholes valuation model. To estimate the fair value of performance-based awards containing a market condition, we use theMonte Carlo valuation model. For all other share-based awards, the fair value is based on the closing price of the ClassC Common Stock as reported on the NYSE on the date of grant. Although stock-based compensation is an important aspect of the compensation of our employees and executives, the fair value of the stock-based awards may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. We believe that excluding stock-based compensation expense for purposes of calculating the non-GAAP financial measures presented below facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Other Corporate Expenses - Other corporate expenses consist primarily of impairment charges, incentive charges related to equity investments, severance, facilities action, and other costs. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives. We continue to optimize our facilities footprint 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 an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Fair Value Adjustments on Equity Investments - Fair value adjustments on equity investments primarily consist of the gain (loss) on our strategic investment portfolio, 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 an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •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 an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. The tax effects for the adjustments described above are determined based on the tax jurisdictions in which the items were incurred. See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our income taxes. 68 -------------------------------------------------------------------------------- Table of Contents 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 October 29, October 30, October 29, October 30, 2021 % Change 2020 2021 % Change 2020 (in millions, except percentages) Product net revenue$ 21,540 24 %$ 17,352 $ 58,968 18 %$ 50,127 Non-GAAP adjustments: Impact of purchase accounting - 2 - 8 Non-GAAP product net revenue$ 21,540 24 %$ 17,354 $ 58,968 18 %$ 50,135 Services net revenue$ 6,854 12 %$ 6,130 $ 20,035 11 %$ 17,985 Non-GAAP adjustments: Impact of purchase accounting 11 37 34 121 Non-GAAP services net revenue$ 6,865 11 %$ 6,167 $ 20,069 11 %$ 18,106 Net revenue$ 28,394 21 %$ 23,482 $ 79,003 16 %$ 68,112 Non-GAAP adjustments: Impact of purchase accounting 11 39 34 129 Non-GAAP net revenue$ 28,405 21 %$ 23,521 $ 79,037 16 %$ 68,241 Product gross margin$ 3,988 12 %$ 3,563 $ 11,831 16 %$ 10,204 Non-GAAP adjustments: Amortization of intangibles 277 376 828 1,122 Impact of purchase accounting 1 3 3 13 Stock-based compensation expense 14 7 35 17 Other corporate expenses 1 12 5 15 Non-GAAP product gross margin$ 4,281 8 %$ 3,961 $ 12,702 12 %$ 11,371 Services gross margin$ 4,071 10 %$ 3,698 $ 11,871 7 %$ 11,066 Non-GAAP adjustments: Amortization of intangibles (2) (1) (2) - Impact of purchase accounting 11 37 34 121 Stock-based compensation expense 48 44 148 124 Other corporate expenses 1 32 17 40 Non-GAAP services gross margin$ 4,129 8 %$ 3,810 $ 12,068 6 %$ 11,351 69
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Three Months Ended Nine Months Ended
October 29, October 30, October 29, October 30,
2021 % Change 2020 2021 % Change 2020
(in millions, except percentages)
Gross margin $ 8,059 11 % $ 7,261 $ 23,702 11 % $ 21,270
Non-GAAP adjustments:
Amortization of intangibles 275 375 826 1,122
Impact of purchase accounting 12 40 37 134
Stock-based compensation expense 62 51 183 141 Other corporate expenses 2 44 22 55 Non-GAAP gross margin$ 8,410 8 %$ 7,771 $ 24,770 9 %$ 22,722 Operating expenses$ 6,710 9 %$ 6,132 $ 19,606 7 %$ 18,303 Non-GAAP adjustments: Amortization of intangibles (419) (470) (1,288) (1,425) Impact of purchase accounting (5) (9) (25)
(31)
Transaction-related expenses (311) (52) (422)
(211)
Stock-based compensation expense (410) (385) (1,223) (1,078) Other corporate expenses (23) (170) (271) (340) Non-GAAP operating expenses$ 5,542 10 %$ 5,046 $ 16,377 8 %$ 15,218 Operating income$ 1,349 19 %$ 1,129 $ 4,096 38 %$ 2,967 Non-GAAP adjustments: Amortization of intangibles 694 845 2,114 2,547 Impact of purchase accounting 17 49 62 165 Transaction-related expenses 311 52 422 211 Stock-based compensation expense 472 436 1,406 1,219 Other corporate expenses 25 214 293 395 Non-GAAP operating income$ 2,868 5 %$ 2,725 $ 8,393 12 %$ 7,504 Net income$ 3,888 341 %$ 881 $ 5,706 164 %$ 2,162 Non-GAAP adjustments: Amortization of intangibles 694 845 2,114 2,547 Impact of purchase accounting 17 49 62
165
Transaction-related (income) and expenses (3,607) (286) (3,508)
(247)
Stock-based compensation expense 472 436 1,406 1,219 Other corporate expenses 25 106 293 287 Fair value adjustments on equity investments (27) (489) (352)
(591)
Aggregate adjustment for income taxes 553 169 24 (1,067) Non-GAAP net income$ 2,015 18 %$ 1,711 $ 5,745 28 %$ 4,475 70
-------------------------------------------------------------------------------- Table of Contents 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, stock-based compensation expense, transaction-related expenses, and other corporate expenses. Due to the nature of these transactions, we believe that it is appropriate to exclude these items. 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 for the periods indicated:
Three Months Ended Nine Months Ended
October 29, October 30, October 29, October 30,
2021 % Change 2020 2021 % Change 2020
(in millions, except percentages)
Net income $ 3,888 341 % $ 881 $ 5,706 164 % $ 2,162
Adjustments:
Interest and other, net (a) (3,436) (273) (2,689) 929
Income tax expense (benefit) (b) 897 521 1,079 (124)
Depreciation and amortization 1,242 1,361 3,721 4,017
EBITDA $ 2,591 4 % $ 2,490 $ 7,817 12 % $ 6,984
EBITDA $ 2,591 4 % $ 2,490 $ 7,817 12 % $ 6,984
Adjustments:
Stock-based compensation expense 472 436 1,406 1,219
Impact of purchase accounting (c) 11 39 38
129
Transaction-related expenses (d) 311 52 422
211
Other corporate expenses (e) 25 214 293 395 Adjusted EBITDA$ 3,410 6 %$ 3,231 $ 9,976 12 %$ 8,938 ____________________ (a)See "Results of Operations - Interest and Other, Net" for more information on the components of interest and other, net. (b)See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on discrete tax items recorded during the third quarter and first nine months of Fiscal 2022 and Fiscal 2021. (c)This amount includes the non-cash purchase accounting adjustments related to theEMC merger transaction and the going-private transaction, excluding depreciation. (d)Transaction-related expenses consist of acquisition, integration, and divestiture-related costs. (e)Other corporate expenses include impairment charges, incentive charges related to equity investments, severance, facilities action, and other costs. 71
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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
October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020
% of % % of % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Net revenue:
Products $ 21,540 75.9 % 24 % $ 17,352 73.9 % $ 58,968 74.6 % 18 % $ 50,127 73.6 %
Services 6,854 24.1 % 12 % 6,130 26.1 % 20,035 25.4 % 11 % 17,985 26.4 %
Total net revenue $ 28,394 100.0 % 21 % $ 23,482 100.0 % $ 79,003 100.0 % 16 % $ 68,112 100.0 %
Gross margin:
Products (a) $ 3,988 18.5 % 12 % $ 3,563 20.5 % $ 11,831 20.1 % 16 % $ 10,204 20.4 %
Services (b) 4,071 59.4 % 10 % 3,698 60.3 % 11,871 59.3 % 7 % 11,066 61.5 %
Total gross margin $ 8,059 28.4 % 11 % $ 7,261 30.9 % $ 23,702 30.0 % 11 % $ 21,270 31.2 %
Operating expenses $ 6,710 23.6 % 9 % $ 6,132 26.1 % $ 19,606 24.8 % 7 % $ 18,303 26.9 %
Operating income $ 1,349 4.8 % 19 % $ 1,129 4.8 % $ 4,096 5.2 % 38 % $ 2,967 4.4 %
Net income $ 3,888 13.7 % 341 % $ 881 3.8 % $ 5,706 7.2 % 164 % $ 2,162 3.2 %
Net income attributable to
Dell Technologies Inc. $ 3,843 13.5 % 362 % $ 832 3.5 % $ 5,561 7.0 % 175 % $ 2,023 3.0 %
Non-GAAP Financial Information
Non-GAAP net revenue: Products$ 21,540 75.8 % 24 %$ 17,354 73.8 %$ 58,968 74.6 % 18 %$ 50,135 73.5 % Services 6,865 24.2 % 11 % 6,167 26.2 % 20,069 25.4 % 11 % 18,106 26.5 % Total non-GAAP net revenue$ 28,405 100.0 % 21 %$ 23,521 100.0 %$ 79,037 100.0 % 16 %$ 68,241 100.0 % Non-GAAP gross margin: Products (a)$ 4,281 19.9 % 8 %$ 3,961 22.8 %$ 12,702 21.5 % 12 %$ 11,371 22.7 % Services (b) 4,129 60.1 % 8 % 3,810 61.8 % 12,068 60.1 % 6 % 11,351 62.7 % Total non-GAAP gross margin$ 8,410 29.6 % 8 %$ 7,771 33.0 %$ 24,770 31.3 % 9 %$ 22,722 33.3 % Non-GAAP operating expenses$ 5,542 19.5 % 10 %$ 5,046 21.5 %$ 16,377 20.7 % 8 %$ 15,218 22.3 % Non-GAAP operating income$ 2,868 10.1 % 5 %$ 2,725 11.6 %$ 8,393 10.6 % 12 %$ 7,504 11.0 % Non-GAAP net income$ 2,015 7.1 % 18 %$ 1,711 7.3 %$ 5,745 7.3 % 28 %$ 4,475 6.6 % EBITDA$ 2,591 9.1 % 4 %$ 2,490 10.6 %$ 7,817 9.9 % 12 %$ 6,984 10.2 % Adjusted EBITDA$ 3,410 12.0 % 6 %$ 3,231 13.7 %$ 9,976 12.6 % 12 %$ 8,938 13.1 % ____________________ (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. 72
-------------------------------------------------------------------------------- Table of Contents 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 "Non-GAAP 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 the third quarter and first nine months of Fiscal 2022, both net revenue and non-GAAP net revenue increased 21% and 16%, respectively. These increases were due primarily to growth in net revenue for CSG and, to a lesser extent, increases in net revenue for ISG andVMware . CSG net revenue benefited primarily from increased sales of commercial and consumer offerings, driven by strong demand as a result of the global economic recovery coupled with customers seeking improved connectivity and productivity. ISG net revenue continued to benefit from overall improvements in the macroeconomic environment and a shift towards investment in IT infrastructure.VMware net revenue increased primarily due to continued growth in sales of subscriptions and software-as-a-service ("SaaS") offerings. During the third quarter and first nine months of Fiscal 2022, our operating income increased 19% and 38%, respectively, and our non-GAAP operating income increased 5% and 12%, respectively. The increases were primarily due to increases in operating income for CSG, driven primarily by our commercial offerings and, to a lesser extent, our consumer offerings. Operating income also benefited from decreases in amortization of intangible assets during both Fiscal 2022 periods presented. Our operating income as a percentage of net revenue remained flat at 4.8% and increased 80 basis points to 5.2% for the third quarter and first nine months of Fiscal 2022, respectively. The increase in our operating income as a percentage of net revenue for the first nine months of Fiscal 2022 was driven primarily by a decrease in amortization of intangible assets. Our non-GAAP operating income as a percentage of net revenue decreased 150 basis points to 10.1% and 40 basis points to 10.6% during the third quarter and first nine months of Fiscal 2022, respectively. The decreases in our non-GAAP operating income as a percentage of net revenue were driven primarily by declines in gross margin as a percentage of net revenue, principally due to supply chain challenges and the inflationary cost environment coupled with a shift in mix towards CSG offerings. Cash provided by operating activities was$7.2 billion and$5.5 billion for the first nine months of Fiscal 2022 and Fiscal 2021, respectively. The increase in operating cash flows during the first nine months of Fiscal 2022 was driven by strong growth coupled with favorable working capital dynamics, compared to unfavorable working capital impacts during the first nine months of Fiscal 2021. See "Market Conditions, Liquidity, and Capital Commitments" for further information on our cash flow metrics. We continue to see opportunities to create value and grow in response to resilient demand for our IT solutions driven by a technology-enabled world. We have demonstrated our ability to adjust as needed to changing market conditions with complementary solutions across all segments of our business, an agile workforce, and the strength of our global supply chain. As we continue to innovate and modernize our core offerings, we believe thatDell Technologies is well-positioned for long-term profitable growth. 73 -------------------------------------------------------------------------------- Table of Contents Net Revenue During the third quarter and first nine months of Fiscal 2022, both net revenue and non-GAAP net revenue increased 21% and 16%, respectively, driven primarily by increases in net revenue for CSG and, to a lesser extent, increases in net revenue for ISG andVMware . 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 and first nine months of Fiscal 2022, both product net revenue and non-GAAP product net revenue increased 24% and 18%, respectively, driven primarily by growth in CSG product net revenue and, to a lesser extent, ISG product net revenue. CSG product net revenue increased during the third quarter and first nine months of Fiscal 2022 primarily due to increases in units sold of both commercial and consumer product offerings as a result of continued strength in the demand environment and, to a lesser extent, an increase in average selling price of our commercial offerings. During the third quarter and first nine months of Fiscal 2022, ISG product net revenue increased due to increased sales volumes of our server offerings. Additionally, we experienced an increase in average selling price of our server offerings during the third quarter only. •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 and first nine months of Fiscal 2022, services net revenue increased 12% and 11%, respectively. Non-GAAP services net revenue increased 11% during both Fiscal 2022 periods presented. These increases were driven primarily by growth in CSG services net revenue and, to a lesser extent, growth in bothVMware and ISG services net revenue. CSG services net revenue increases were primarily attributable to growth within CSG hardware and software support and maintenance, while ISG services net revenue increased primarily as a result of growth within hardware support services.VMware services net revenue increases were primarily driven by growth withinVMware subscriptions and SaaS offerings. A substantial portion of services net revenue is derived from 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 all regions increased during the third quarter and first nine months of Fiscal 2022, driven by strong CSG performance.
Gross Margin
During the third quarter and first nine months of Fiscal 2022, our gross margin increased 11% to$8.1 billion and 11% to$23.7 billion , respectively. Our non-GAAP gross margin increased 8% to$8.4 billion and 9% to$24.8 billion during the third quarter and first nine months of Fiscal 2022, respectively. Both gross margin and non-GAAP gross margin benefited from an increase in gross margin for CSG and, to a lesser extent, increases for bothVMware and ISG. Gross margin and non-GAAP gross margin increases during the first nine months of Fiscal 2022 were partially offset by a decrease in gross margin for other businesses as a result of the impact of the divestiture ofRSA Security during the third quarter of Fiscal 2021. During the third quarter and first nine months of Fiscal 2022, our gross margin percentage decreased 250 basis points to 28.4% and 120 basis points to 30.0%, respectively. The decrease in gross margin percentage during the third quarter of Fiscal 2022 was primarily due to unfavorable impacts in gross margin percentage across CSG,VMware , and ISG, driven in part by supply chain challenges and the inflationary cost environment, coupled with a shift in mix towards CSG. These decreases were partially offset by a decrease in amortization of intangible assets. For the first nine months of Fiscal 2022, the decrease in gross margin percentage was driven by the same unfavorable impacts withinVMware and ISG as well as a shift in mix towards CSG, partially offset by an increase in gross margin percentage for CSG and a decrease in amortization of intangible assets. Non-GAAP gross margin percentage decreased 340 basis points to 29.6% and 200 basis points to 31.3% during the third quarter and first nine months of Fiscal 2022, respectively, driven by the same ISG, CSG, andVMware dynamics discussed above. •Products - During the third quarter and first nine months of Fiscal 2022, product gross margin increased 12% to$4.0 billion and 16% to$11.8 billion , respectively. The increases in product gross margin were primarily driven by growth in CSG product gross margin coupled with a decrease in amortization of intangible assets. During the same Fiscal 2022 periods, non-GAAP product gross margin increased 8% to$4.3 billion and 12% to$12.7 billion , respectively. The increases in non-GAAP product gross margin were primarily driven by an increase in CSG product gross margin. 74 -------------------------------------------------------------------------------- Table of Contents During the third quarter and first nine months of Fiscal 2022, product gross margin percentage decreased 200 basis points to 18.5% and 30 basis points to 20.1%, respectively. For the third quarter of Fiscal 2022, the decrease in product gross margin percentage was driven primarily by a decrease in CSG product gross margin percentage coupled with a shift in mix towards CSG, the effects of which were partially offset by a decrease in amortization of intangible assets. The decrease in product gross margin percentage during the first nine months of Fiscal 2022 was driven primarily by a shift in product mix towards CSG. During the same Fiscal 2022 periods, non-GAAP product gross margin percentage decreased 290 basis points to 19.9% and 120 basis points to 21.5%, respectively. The decreases in non-GAAP product gross margin percentage for the third quarter and first nine months of Fiscal 2022 were driven by the same CSG dynamics discussed above. •Services - During the third quarter and first nine months of Fiscal 2022, services gross margin increased 10% to$4.1 billion and 7% to$11.9 billion , respectively. The increases in services gross margin were primarily driven byVMware and CSG and, to a lesser extent, ISG.VMware services gross margin increased as a result of growth within subscription and SaaS offerings while CSG services gross margin increased due to growth in hardware support and maintenance. During the same Fiscal 2022 periods, non-GAAP services gross margin increased 8% to$4.1 billion and 6% to$12.1 billion , respectively. The changes were driven by the same dynamics discussed above. During the third quarter and first nine months of Fiscal 2022, services gross margin percentage decreased 90 basis points to 59.4% and 220 basis points to 59.3%, respectively. During the same Fiscal 2022 periods, non-GAAP services gross margin percentage decreased 170 basis points to 60.1% and 260 basis points to 60.1%, respectively. For the third quarter of Fiscal 2022, the decreases were as a result of declines in services gross margin percentage forVMware and ISG coupled with a shift in mix towards CSG, partially offset by an increase in services gross margin percentage for CSG. The declines for the first nine months of Fiscal 2022 were driven by a shift in mix towards CSG coupled with decreases in services gross margin percentage for CSG,VMware , 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 2022 and Fiscal 2021 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.
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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
October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020
% 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 $ 5,293 18.6 % 11 % $ 4,772 20.3 % $ 15,398 19.5 % 7 % $ 14,419 21.1 %
Research and development 1,417 5.0 % 4 % 1,360 5.8 % 4,208 5.3 % 8 % 3,884 5.7 %
Total operating expenses $ 6,710 23.6 % 9 % $ 6,132 26.1 % $ 19,606 24.8 % 7 % $ 18,303 26.8 %
Three Months Ended Nine Months Ended
October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020
% of Non-GAAP % % of Non-GAAP % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars
Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Non-GAAP operating
expenses $ 5,542 19.5 %
10 % $ 5,046 21.4 % $ 16,377 20.7 % 8 % $ 15,218 22.3 %
During the third quarter and first nine months of Fiscal 2022, operating
expenses increased 9% and 7%, respectively. Non-GAAP operating expenses
increased 10% and 8% for the third quarter and first nine months of Fiscal 2022,
respectively. These increases were primarily driven by employee-related expenses
as a result of performance-based compensation associated with strong operating
results, coupled with the reintroduction of expenses that were temporarily
reduced during Fiscal 2021 in response to the COVID-19 pandemic.
•Selling, General, and Administrative - Selling, general, and administrative
("SG&A") expenses increased 11% and 7%, respectively, during the third quarter
and first nine months of Fiscal 2022. The increases were primarily due to an
increase in employee-related compensation and benefits expense as well as an
increase in outside services expense incurred in connection with our
transformational initiatives, primarily the VMware Spin-off.
•Research and Development - Research and development ("R&D") expenses are
primarily composed of personnel-related expenses incurred to develop the
software that powers our solutions. R&D expenses grew 4% and 8% during the third
quarter and first nine months of Fiscal 2022, respectively. As a percentage of
net revenue, R&D expenses were approximately 5.0% and 5.8% for the third quarter
of Fiscal 2022 and Fiscal 2021, respectively, and 5.3% and 5.7% for the first
nine months of Fiscal 2022 and Fiscal 2021, respectively. The decreases in R&D
expenses as a percentage of net revenue were attributable to revenue growth that
outpaced the scale of R&D investments. We intend to continue to support R&D
initiatives to innovate and introduce new and enhanced solutions into the
market.
We continue to make targeted investments designed to enable growth, marketing,
and R&D, while balancing these investments with 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.
76
-------------------------------------------------------------------------------- Table of Contents Operating Income During the third quarter and first nine months of Fiscal 2022, our operating income increased 19% and 38% to$1.3 billion and$4.1 billion , respectively, and our non-GAAP operating income increased 5% and 12% to$2.9 billion and$8.4 billion , respectively. The increases were primarily due to growth in operating income for CSG, driven primarily by our commercial offerings and, to a lesser extent, our consumer offerings. Operating income during the third quarter and first nine months of Fiscal 2022 also benefited from a decrease in amortization of intangible assets. Our operating income as a percentage of net revenue remained flat at 4.8% and increased 80 basis points to 5.2% for the third quarter and first nine months of Fiscal 2022. The increase in our operating income as a percentage of net revenue for the first nine months of Fiscal 2022 was driven primarily by a decrease in amortization of intangible assets. Our non-GAAP operating income as a percentage of net revenue decreased 150 basis points to 10.1% and 40 basis points to 10.6% during the third quarter and first nine months of Fiscal 2022, respectively. The decreases in our non-GAAP operating income as a percentage of net revenue were driven primarily by declines in gross margin as a percentage of net revenue, principally due to supply chain challenges and the inflationary cost environment coupled with a shift in mix towards CSG offerings.
Interest and Other, Net
The following table presents information regarding interest and other, net for
the periods indicated:
Three Months Ended Nine Months Ended
October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020
(in millions)
Interest and other, net:
Investment income, primarily interest $ 11 $ 11 $ 32 $ 47
Gain on investments, net 27 489 352 591
Interest expense (482) (566) (1,475) (1,855)
Foreign exchange (33) (31) (146) (130)
Gain on disposition of businesses and
assets 3,968 338 3,968 458
Other (55) 32 (42) (40)
Total interest and other, net $ 3,436 $ 273 $ 2,689 $ (929)
During the third quarter and first nine months of Fiscal 2022, the change in
interest and other, net was favorable by $3.2 billion and $3.6 billion ,
respectively. The favorability in both periods was primarily driven by the
pre-tax gain of $4.0 billion on the sale of Boomi and, to a lesser extent, a
decrease in interest expense due to debt paydowns. The favorability was
partially offset by a decrease in net gains on our strategic investments
portfolio. For further details on the Boomi divestiture, see Note 1 of the Notes
to the Condensed Consolidated Financial Statements included in this report.
77
-------------------------------------------------------------------------------- Table of Contents Income and Other Taxes
The following table presents information regarding our income and other taxes for the periods indicated:
Three Months Ended Nine Months Ended
October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020
(in millions, except percentages) (in millions, except percentages)Income before income taxes $ 4,785$ 1,402 $ 6,785$ 2,038 Income tax expense (benefit) $ 897 $ 521 $ 1,079 $ (124) Effective income tax rate 18.7 % 37.2 % 15.9 % -6.1 % For the third quarter of Fiscal 2022 and Fiscal 2021, our effective income tax rate was 18.7% and 37.2%, respectively. For the first nine months of Fiscal 2022 and Fiscal 2021, our effective income tax rate was 15.9% and -6.1%, respectively. For the third quarter and first nine months of Fiscal 2022, our effective income tax rate includes tax expense of$1.0 billion related to the divestiture of Boomi during the third quarter of Fiscal 2022. In comparison, for the first nine months of Fiscal 2021, our effective income tax rate included discrete tax benefits of$746 million related to an audit settlement that was recorded in the second quarter of Fiscal 2021 and tax expense of$359 million related to the divestiture ofRSA Security during the third quarter of Fiscal 2021. Our effective income tax rates are also impacted by a change in our jurisdictional mix of income and lower overall taxes on foreign operations. 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, differences between the book and tax treatment of certain items, and the discrete tax items discussed above. 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 andChina . 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 ofOctober 29, 2021 , 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 10 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income
During the third quarter and first nine months of Fiscal 2022, net income increased 341% to$3.9 billion and 164% to$5.7 billion , respectively. The increases for the third quarter and first nine months of Fiscal 2022 were primarily attributable to a favorable change in interest and other, net, as result of the gain on sale of Boomi and, to a lesser extent, an increase in operating income. Non-GAAP net income increased 18% to$2.0 billion and 28% to$5.7 billion during the third quarter and first nine months of Fiscal 2022, respectively. The increases in non-GAAP net income during both the third quarter and first nine months of Fiscal 2022 were primarily attributable to an increase in non-GAAP operating income and a reduction in interest expense during the first nine months of Fiscal 2022, partially offset by an increase in tax expense. 78
-------------------------------------------------------------------------------- Table of Contents Non-controlling Interests Net income attributable to non-controlling interests consists of net income or loss attributable to our non-controlling interests inVMware, Inc. and Secureworks. During the third quarter of Fiscal 2022 and Fiscal 2021, net income attributable to non-controlling interests was$45 million and$49 million , respectively. The decrease in net income attributable to non-controlling interests during the third quarter of Fiscal 2022 was primarily due to a decrease in net income attributable to our non-controlling interest inVMware, Inc. During the first nine months of Fiscal 2022 and Fiscal 2021, net income attributable to non-controlling interests was$145 million and$139 million , respectively. The increase in net income attributable to non-controlling interests during the first nine months of Fiscal 2022 was primarily due to an increase in net income attributable to our non-controlling interest inVMware, Inc. For more information about our non-controlling interests, see Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income Attributable to
Net income attributable toDell Technologies Inc. represents net income and an adjustment for non-controlling interests. During the third quarter of Fiscal 2022 and Fiscal 2021, net income attributable toDell Technologies Inc. was$3.8 billion and$0.8 billion , respectively. During the first nine months of Fiscal 2022 and Fiscal 2021, net income attributable toDell Technologies Inc. was$5.6 billion and$2.0 billion , respectively. The increase in net income attributable toDell Technologies Inc. during the third quarter and first nine months of Fiscal 2022 was primarily attributable to increases in net income for both periods. 79
-------------------------------------------------------------------------------- Table of Contents 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 16 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, 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
October 29, 2021 % Change October 30, 2020 October 29, 2021 % Change October 30, 2020
(in millions, except percentages)Net revenue: Servers and networking $ 4,533 9 % $ 4,164 $ 13,104 8 % $ 12,118 Storage 3,895 1 % 3,860 11,667 - % 11,682 Total ISG net revenue $ 8,428 5 % $ 8,024 $ 24,771 4 % $ 23,800 Operating income: ISG operating income $ 892 1 % $ 882 $ 2,650 2 % $ 2,587 % of segment net revenue 10.6 % 11.0 % 10.7 % 10.9 % Net Revenue - During the third quarter and first nine months of Fiscal 2022, ISG net revenue increased 5% and 4%, respectively. These increases were primarily driven by sales of servers and networking attributable to improvements in the macroeconomic environment and a shift towards investment in IT infrastructure. In comparison, net revenue during the third quarter and first nine months of Fiscal 2021 was affected by a weaker demand environment as a result of COVID-19, when customers shifted their investments toward remote work and business continuity solutions. Net revenue from sales of servers and networking increased 9% and 8% during the third quarter and first nine months of Fiscal 2022, respectively, as a result of an increase in units sold due to continued demand for our PowerEdge servers. During the third quarter of Fiscal 2022, the increase in net revenue was further driven by an increase in average selling price for our PowerEdge servers as we managed pricing in response to the cost environment. Storage revenue increased 1% and remained flat during the third quarter and first nine months of Fiscal 2022, respectively. We benefited from growth within hyper-converged infrastructure which was offset by a decline in other storage offerings. To a lesser extent, during the third quarter of Fiscal 2022, we also benefited from growth within our data protection offerings. Overall, we have experienced growth in demand for the majority of our storage offerings, most notably within midrange storage, that we expect will benefit net revenue in future periods. ISG customers are seeking new and innovative models that address how they consume our solutions. We offer options including as-a-service, utility, leases, and immediate pay models, all designed to match customers' consumption and financing preferences. Our multiyear agreements typically result in recurring revenue streams over the term of the arrangement. We expect that our flexible consumption models and as-a-service offerings through APEX will further strengthen our customer relationships and provide a foundation for growth in recurring revenue.
From a geographical perspective, net revenue attributable to ISG increased in all regions during the third quarter and first nine months of Fiscal 2022.
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Operating Income - During the third quarter and first nine months of Fiscal
2022, ISG operating income as a percentage of net revenue decreased 40 basis
points to 10.6% and 20 basis points to 10.7%, respectively. The declines in
operating income as a percentage of net revenue during both Fiscal 2022 periods
were driven by declines in ISG gross margin percentage. ISG gross margin
percentage decreased as a result of a shift in mix within ISG towards servers
and networking coupled with a decline in gross margin percentage for storage, in
part due to a shift in mix of storage offerings sold. The decrease in gross
margin percentage was partially offset by a decrease in operating expense as a
percentage of net revenue.
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The following table presents net revenue and operating income attributable to CSG for the periods indicated:
Three Months Ended Nine Months Ended
October 29, October 29, October 30,
2021 % Change October 30, 2020 2021 % Change 2020
(in millions, except percentages)
Net revenue:
Commercial $ 12,292 40 % $ 8,783 $ 32,668 28 % $ 25,456
Consumer 4,254 21 % 3,503 11,446 25 % 9,137
Total CSG net revenue $ 16,546 35 % $ 12,286 $ 44,114 28 % $ 34,593
Operating income:
CSG operating income $ 1,147 14 % $ 1,002 $ 3,232 40 % $ 2,309
% of segment net revenue 6.9 % 8.2 % 7.3 % 6.7 %
Net Revenue - During the third quarter and first nine months of Fiscal 2022, CSG
net revenue increased 35% and 28%, respectively, driven primarily by increases
in units sold across the majority of product offerings as a result of continued
strong demand. Increases in average selling price, principally within our
commercial offerings, also contributed to revenue growth.
Commercial revenue increased 40% and 28% during the third quarter and first nine
months of Fiscal 2022, respectively, primarily due to an increase in sales of
commercial desktops and notebooks driven by continued strong demand as customers
invest in in-office, remote, and hybrid workforce environments. Increases in
average selling price also contributed to revenue growth, most notably in the
third quarter of Fiscal 2022, as we continue to navigate through supply chain
shortages and managed pricing in response to the current inflationary cost
environment.
Consumer revenue increased 21% and 25% during the third quarter and first nine
months of Fiscal 2022, respectively, primarily due to an increase in units sold
as a result of strong demand across the majority of consumer product offerings.
From a geographical perspective, net revenue attributable to CSG increased across all regions during the third quarter and first nine months of Fiscal 2022.
Operating Income - During the third quarter of Fiscal 2022, CSG operating income
as a percentage of net revenue decreased 130 basis points to 6.9%. The decrease
was primarily attributable to declines in both commercial and consumer gross
margin percentages which were impacted by heightened supply chain challenges,
logistics costs, and the inflationary component cost environment. The gross
margin percentage decreases were partially offset by a shift in mix towards
commercial product offerings and a decrease in operating expenses as a
percentage of net revenue.
During the first nine months of Fiscal 2022, CSG operating income as a
percentage of net revenue increased 60 basis points to 7.3%. The increase was
primarily driven by an increase in gross margin percentage, principally within
our consumer offerings, coupled with a decrease in operating expenses as a
percentage of net revenue. The increase in gross margin percentage was primarily
driven by disciplined pricing as we managed through both cost and supply chain
challenges discussed above. These challenges were more unfavorable to the third
quarter of Fiscal 2022 as compared to the first half of Fiscal 2022.
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VMware The following table presents net revenue and operating income attributable to
Three Months Ended Nine Months Ended
October 29,
2021 % Change October 30, 2020 October 29, 2021 % Change October 30, 2020
(in millions, except percentages)Net revenue: VMware net revenue $ 3,178 10 % $ 2,893$ 9,317 9 %$ 8,556 Operating income: VMware operating income $ 837 - % $ 837$ 2,527 1 %$ 2,504 % of segment net revenue 26.3 % 28.9 % 27.1 % 29.3 % Net Revenue -VMware net revenue primarily consists of revenue from the sale of software licenses under perpetual licenses and subscription and SaaS offerings, as well as related software maintenance services, support, training, consulting services, and hosted services.VMware net revenue for the third quarter and first nine months of Fiscal 2022 increased 10% and 9%, respectively, primarily due to growth in sales of subscription and SaaS offerings, driven by increased demand for cloud offerings. Both license revenue and software maintenance revenue also increased to a lesser extent, with the latter continuing to benefit from maintenance contracts sold in previous periods.
Operating Income - During the third quarter and first nine months of Fiscal 2022,VMware operating income as a percentage of net revenue decreased 260 basis points to 26.3% and 220 basis points to 27.1%, respectively. These decreases were due to a decline inVMware gross margin percentage and an increase in operating expense as a percentage of net revenue.VMware gross margin percentage declined in part due to a transition towards subscription and SaaS offerings. Operating expenses increased as a result of higher employee compensation expense primarily attributable to investments in key R&D initiatives, coupled with the reintroduction of expenses that were temporarily reduced in Fiscal 2021. 83 --------------------------------------------------------------------------------
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$14.2 billion and$12.8 billion as ofOctober 29, 2021 andJanuary 29, 2021 , respectively. We maintain an allowance for expected credit losses to cover receivables that may be deemed uncollectible. The allowance for expected credit losses is an estimate based on an analysis of historical loss experience, current receivables aging, management's assessment of current conditions and reasonable and supportable expectation of future conditions, and specific identifiable customer accounts that are deemed at risk. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. As ofOctober 29, 2021 andJanuary 29, 2021 , the allowance for expected credit losses was$100 million and$104 million , respectively. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We will continue to monitor the aging of our accounts receivable and take actions, where necessary, to reduce our exposure to credit losses.
DFS supportsDell 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, provided through APEX, 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$2.1 billion for the third quarter of Fiscal 2022 and Fiscal 2021, respectively, and$5.8 billion and$6.5 billion for the first nine months of Fiscal 2022 and Fiscal 2021, respectively. We experienced a decline in new financing originations during Fiscal 2022 as more customers leveraged financing during Fiscal 2021 in the early stages of the COVID-19 pandemic. DFS leases are classified as sales-type leases, direct financing leases, or operating leases. 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 are immaterial. Leases that commenced prior to the effective date of the current lease accounting standard continue to be accounted for under previous lease accounting guidance. As ofOctober 29, 2021 andJanuary 29, 2021 , our financing receivables, net were$10.2 billion and$10.5 billion , respectively. We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. Our allowance for expected credit losses in future periods may vary from our current estimates. For the third quarter of Fiscal 2022 and Fiscal 2021, the principal charge-off rate for our financing receivables portfolio was 1.1% and 0.7%, respectively. For the first nine months of Fiscal 2022 and Fiscal 2021, the principal charge-off rate for our total portfolio was 0.7% and 0.9%, 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. 84 -------------------------------------------------------------------------------- Table of Contents We retain a residual interest in equipment leased under our fixed-term lease programs. As ofOctober 29, 2021 andJanuary 29, 2021 , the residual interest recorded as part of financing receivables was$265 million and$424 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. We assess the carrying amount of our recorded residual values for expected losses. Generally, expected losses as a result of residual value risk on equipment under lease are not considered to be significant primarily 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. To mitigate our exposure, we work closely with customers and dealers to manage the sale of returned assets. No material expected losses were recorded related to residual assets during the third quarter and first nine months of Fiscal 2022 and Fiscal 2021. As ofOctober 29, 2021 andJanuary 29, 2021 , equipment under operating leases, net was$1.6 billion and$1.3 billion , respectively. Based on triggering events, we assess the carrying amount of the equipment under operating leases recorded for impairment. No material impairment losses were recorded related to such equipment during the third quarter and first nine months of Fiscal 2022 and Fiscal 2021. DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing. For DFS operating leases, which have increased under the current lease standard, the initial funding is classified as a capital expenditure and reflected as an impact to cash flows used in investing activities.
See Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our financing receivables and the associated allowances, and the equipment under operating leases.
Off-Balance Sheet Arrangements
As of
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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 6 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 business and 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. 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.
The following table presents our cash and cash equivalents as well as our available borrowings as of the dates indicated:
October 29 ,
2021
(in millions) Cash and cash equivalents, and available borrowings: Cash and cash equivalents (a)
$ 22,406 $ 14,201
Remaining available borrowings under revolving credit 5,969 5,467
facilities (b) Total cash, cash equivalents, and available borrowings $ 28,375 $ 19,668
____________________
(a) Of the$22.4 billion of cash and cash equivalents as ofOctober 29, 2021 ,$12.5 billion was held byVMware, Inc. (b) Of the$6.0 billion of remaining available borrowings under revolving credit facilities,$1.5 billion was attributable to the VMware Revolving Credit Facility. Our revolving credit facilities as ofOctober 29, 2021 consist of the Revolving Credit Facility and the VMware Revolving Credit Facility. The Revolving Credit Facility has a maximum aggregate borrowing capacity of$4.5 billion , and available borrowings under this facility are reduced by draws on the facility and outstanding letters of credit. As ofOctober 29, 2021 , there were no borrowings outstanding under the facility. Borrowings under the Revolving Credit Facility are used for general corporate purposes on a short-term basis. 86 -------------------------------------------------------------------------------- Table of Contents OnNovember 1, 2021 , we entered into a new senior secured Revolving Credit Facility (the "2021 Revolving Credit Facility") to replace the old senior secured Revolving Credit Facility under the Existing Credit Agreement. The 2021 Revolving Credit Facility, which matures onNovember 1, 2026 , provides us with revolving commitments in an aggregate principal amount of$5.0 billion for general corporate purposes and includes a letter of credit sub-facility of up to$500 million and a swing-line loan sub-facility of up to$500 million . See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information. The VMware Revolving Credit Facility has a maximum capacity of$1.5 billion . As ofOctober 29, 2021 , there were no outstanding borrowings under the facility. None of the net proceeds of borrowings under the VMware Revolving Credit 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. andVMware, Inc.'s subsidiaries.
See Note 5 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 borrowings expected to be available under our revolving credit facilities, will be sufficient over at least the next twelve months and for the foreseeable future thereafter to fund our operations, debt service requirements and maturities, capital expenditures, share repurchases, dividend payments, and other corporate needs.
Debt
The following table summarizes our outstanding debt as of the dates indicated:
Increase
October 29, 2021 (decrease) January 29, 2021
(in millions)
Core debt
Senior Secured Credit Facilities and First $ 24,754 $ (23) $ 24,777
Lien Notes
Unsecured Notes and Debentures 952 (400) 1,352
Senior Notes 1,625 (1,075) 2,700
EMC Notes - (1,000) 1,000
DFS allocated debt (366) 300 (666)
Total core debt 26,965 (2,198) 29,163
DFS related debt
DFS debt 9,977 311 9,666
DFS allocated debt 366 (300) 666
Total DFS related debt 10,343 11 10,332
Margin Loan Facility and other 400 (3,835) 4,235
Debt of public subsidiary
VMware Notes 10,750 6,000 4,750
Total public subsidiary debt 10,750 6,000 4,750
Total debt, principal amount 48,458 (22) 48,480
Carrying value adjustments (479) 17 (496)
Total debt, carrying value $ 47,979 $ (5) $ 47,984
During the first nine months of Fiscal 2022, the outstanding principal amount of
our debt remained relatively flat, primarily as a result of principal repayments
of $6.5 billion offset by the issuance of $6.0 billion of VMware Notes and
$0.4 billion of net DFS debt activity.
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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. Our
core debt was $27.0 billion as of October 29, 2021 . During the first nine months
of Fiscal 2022, the decrease in our core debt was driven by principal
repayments, including $1.1 billion principal amount of our 5.875% Senior Notes
due June 2021 , $1.0 billion principal amount of our 3.375% EMC Notes due June
2023 , and $0.4 billion principal amount of our 4.625% Unsecured Notes due April
2021 .
In connection with the VMware Spin-off executed on November 1, 2021 , VMware,
Inc. paid a cash dividend, pro rata, to each of the holders of VMware, Inc.
common stock in an aggregate amount equal to $11.5 billion , of which Dell
Technologies received $9.3 billion . Subsequent to October 29, 2021 and the
completion of the transaction, the Company utilized the net proceeds from its
pro rata share, as well as cash on hand, to repay $9.4 billion in outstanding
principal amount of core debt. Further, in connection with the termination of
the Existing Credit Agreement, which governed the Senior Secured Credit
Facilities, the tangible and intangible assets that secured the First Lien Notes
were released as collateral and, as such, our remaining core debt became
unsecured. Additionally, on November 19, 2021 , the Company issued a partial
redemption notice of $1.25 billion principal amount of the 5.45% First Lien
Notes due June 2023 with the repayment expected to occur on December 6, 2021 .
See Note 18 of the Notes to the Condensed Consolidated Financial Statements
included in this report for more information about VMware Spin-off and
debt-related activity subsequent to
As ofOctober 29, 2021 , our Margin Loan Facility and other debt was$0.4 billion and consisted only of other debt. During the first nine months of Fiscal 2022, we fully repaid the Margin Loan Facility in the principal amount of$4.0 billion . DFS related debt primarily represents debt from our securitization and structured financing programs. The majority of DFS debt is non-recourse toDell Technologies and represents borrowings under securitization programs and structured financing programs, for which our risk of loss is limited to transferred lease and loan payments and associated equipment, and under which the credit holders 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 3 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our DFS debt. Public subsidiary debt representsVMware, Inc. indebtedness.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. None of the net proceeds of the VMware Notes 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.
See Note 5 of the Notes to the Condensed Consolidated Financial Statements
included in this report for more information about our debt and
We have made steady progress in paying down debt and we will continue to include deleveraging as an important component of our overall strategy. We have achieved an investment grade corporate family rating from three major credit rating agencies, with the final upgrade occurring subsequent toOctober 29, 2021 . 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. Under our variable-rate debt, we could experience variations in our future interest expense from potential fluctuations in applicable reference rates, 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 and without public announcement, 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. 88
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The following table presents a summary of our Condensed Consolidated Statements of Cash Flows for the periods indicated:
Nine Months Ended
October 29, 2021 October 30, 2020
(in millions)
Net change in cash from:
Operating activities $ 7,214 $ 5,530
Investing activities 2,053 26
Financing activities (1,028) (3,483)
Effect of exchange rate changes on cash, cash equivalents, and (54) (67)
restricted cash
Change in cash, cash equivalents, and restricted cash $ 8,185 $ 2,006
Operating Activities - Cash provided by operating activities was $7.2 billion
for the first nine months of Fiscal 2022 compared to cash provided by operating
activities of $5.5 billion for the first nine months of Fiscal 2021. The
increase in operating cash flows during the first nine months of Fiscal 2022 was
primarily driven by strong growth. Additionally, working capital dynamics were
favorable for the period primarily due to timing of purchases and payments to
vendors, partially offset by higher end of quarter shipments and increased
inventory as we continue to navigate the current supply chain environment. In
comparison, during the first nine months of Fiscal 2021 we experienced
unfavorable working capital impacts.
DFS offerings are initially funded through cash on hand at the time of
origination, most of which is subsequently replaced with third-party financing.
For DFS offerings which qualify as sales-type leases, the initial funding of
financing receivables is reflected as an impact to cash flows from operations,
and is largely subsequently offset by cash proceeds from financing activities.
For DFS operating leases, which have increased under the current leasing
standard, the initial funding is classified as a capital expenditure and
reflected as cash flows used in investing activities. DFS new financing
originations were $5.8 billion and $6.5 billion during the first nine months of
Fiscal 2022 and Fiscal 2021, respectively. As of October 29, 2021 , DFS had $10.2
billion of financing receivables, net and $1.6 billion of equipment under
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 operating leases, as well as capitalized software development
costs, acquisitions and divestitures, strategic investments, and the maturities,
sales, and purchases of investments. During the first nine months of Fiscal
2022, cash provided by investing activities was $2.1 billion and was primarily
driven by net cash proceeds related to the divestiture of Boomi, partially
offset by capital expenditures and capitalized software development costs. In
comparison, cash provided by investing activities was $26 million during the
first nine months of Fiscal 2021, which was primarily attributable to net cash
proceeds from the divestiture of RSA Security during the the third quarter of
Fiscal 2021, largely offset by capital expenditures and acquisitions of
businesses.
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. Cash used in financing activities was $1.0 billion
during the first nine months of Fiscal 2022 and primarily consisted of debt
repayments and repurchases of common stock by our public subsidiaries, partially
offset by net cash proceeds from the issuance of VMware Notes and DFS debt. In
comparison, cash used in financing activities of $3.5 billion during the first
nine months of Fiscal 2021 primarily consisted of debt repayments and
repurchases of common stock by our public subsidiaries, partially offset by cash
proceeds from the issuances of multiple series of First Lien Notes and VMware
Notes.
Capital Commitments
Capital Expenditures - During the first nine months of Fiscal 2022 and Fiscal
2021, we spent $2.1 billion and $1.6 billion , respectively, on property, plant,
and equipment and capitalized software development costs. Product demand,
product mix, and the use of contract manufacturers, as well as ongoing
investments in operating and IT infrastructure and software development,
influence the level and prioritization of our capital expenditures. Aggregate
capital expenditures for Fiscal 2022 are currently expected to total
$2.9 billion , of which approximately $1.0 billion is expected to be expended for
equipment under operating leases and approximately $0.3 billion for capitalized
software development costs.
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-------------------------------------------------------------------------------- Table of Contents Repurchases of Common Stock -Effective as ofSeptember 23, 2021 , our board of directors approved a stock repurchase program (the "2021 Stock Repurchase Program") under which we are authorized to use assets to repurchase up to$5 billion of shares of our ClassC Common Stock with no established expiration date. As ofOctober 29, 2021 , the cumulative authorized amount remaining for stock repurchases was$5 billion . Subsequent to the third quarter of Fiscal 2022 throughNovember 30, 2021 , we repurchased approximately 3.1 million shares for approximately$173 million . 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. As ofOctober 29, 2021 , purchase obligations were$5.2 billion ,$0.7 billion , and$0.8 billion for the remaining three months of Fiscal 2022, and for Fiscal 2023 and Fiscal 2024 and thereafter, respectively. 90 -------------------------------------------------------------------------------- Table of Contents Summarized Guarantor Financial Information As discussed in Note 5 of the Notes to the Condensed Consolidated Financial Statements included in this report,Dell International L.L.C. andEMC Corporation (the "Issuers"), both of which are wholly-owned subsidiaries ofDell Technologies , completed private offerings of multiple series of senior secured notes issued onJune 1, 2016 ,March 20, 2019 , andApril 9, 2020 (collectively, the "First Lien Notes"). OnMay 17, 2021 , the Issuers launched an exchange offer of the outstanding First Lien Notes for registered senior secured notes with substantially similar terms (the "Exchange Notes"). InJune 2021 , the Issuers completed the exchange offer and issued an aggregate of$18.4 billion principal amount of Exchange Notes in exchange for the same principal amount of First Lien Notes. As ofOctober 29, 2021 , the aggregate principal amount of unregistered First Lien Notes remaining outstanding following the settlement of the exchange offer was approximately$0.1 billion . Guarantees - The Exchange Notes are guaranteed on a joint and several unsecured basis byDell Technologies and on a joint and several secured basis byDenali Intermediate, Inc. ("Denali Intermediate"),Dell and each of Denali Intermediate's wholly-owned domestic subsidiaries that guarantees the Issuers' Senior Credit Facility obligations (collectively, the "Guarantors"). Not all of Denali Intermediate's subsidiaries guarantee the Exchange Notes, including none of Denali Intermediate's non-wholly-owned subsidiaries, foreign subsidiaries, receivables subsidiaries and subsidiaries designated as unrestricted subsidiaries under the Senior Credit Facility (such non-guarantor subsidiaries, collectively, the "Non-Guarantor Subsidiaries").SecureWorks Corp. ,Virtustream, Inc. ,VMware, Inc. ,EMC Equity Assets LLC andVMW Holdco L.L.C. (collectively, the "Unrestricted Subsidiaries") have been designated as unrestricted subsidiaries under the Senior Credit Facility and therefore do not guarantee the Exchange Notes or the Senior Credit Facility obligations. See Exhibit 22.1 filed with this report for a list of subsidiary guarantors and issuers of guaranteed securities. The guarantees are full and unconditional, subject to certain customary release provisions. The indentures that govern the Exchange Notes provide that guarantees by subsidiaries of Denali Intermediate may be released in the event, among other things, (1) such Guarantor is sold or sells all of its assets in compliance with the applicable provisions of the indentures; (2) such Guarantor is released from its guaranty under the Senior Credit Facility, including the declaration of such subsidiary as "unrestricted" under the Senior Credit Facility; (3) the merger, amalgamation or consolidation, or liquidation, of such Guarantor; or (4) the achievement of investment grade ratings with respect to the Issuers and the Exchange Notes. In addition, all Guarantors will be released from their guarantees if the requirements for legal defeasance or covenant defeasance or to discharge the indentures have been satisfied. Basis of Preparation of the Summarized Financial Information - The tables below are summarized financial information provided in conformity with Rule 13-01 of theSEC's Regulation S-X. The summarized financial information of the Issuers and Guarantors (collectively, the "Obligor Group ") is presented on a combined basis, excluding intercompany balances and transactions between entities in theObligor Group . To the extent material, theObligor Group's amounts due from, amounts due to and transactions with Non-Guarantor Subsidiaries have been presented separately.The Obligor Group's investment balances in Non-Guarantor Subsidiaries have been excluded.
The following table presents summarized results of operations information for
the
Nine Months Ended
October 29, 2021
(in millions)
Net revenue (a) $ 18,608
Gross margin (b) $ 6,492
Operating loss (c) $ (687)
Interest and other, net 2,936
Income before income taxes $ 2,249
Net income attributable to Obligor Group $ 1,801
____________________
(a) Includes net revenue from services provided and product sales to Non-Guarantor Subsidiaries of$2,069 million and$122 million , respectively. (b) Includes cost of net revenue from resale of solutions purchased from Non-Guarantor Subsidiaries of$1,837 million . (c) Includes operating expenses from shared services provided by Non-Guarantor Subsidiaries of$59 million . 91
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The following table presents summarized balance sheet information for the
October 29, 2021 January 29, 2021 (a)
(in millions)
ASSETS
Current assets $ 16,429 $ 12,160
Short-term intercompany loan receivables 2,379 -
Total current assets 18,808 12,160
Goodwill and intangible assets 15,592
16,229
Other non-current assets 6,910
6,185
Long-term intercompany loan receivables 2,236 4,714
Total assets $ 43,546 $ 39,288
LIABILITIES
Current liabilities $ 26,552 $ 15,761
Intercompany payables 5,574 5,527
Total current liabilities 32,126 21,288
Long-term debt 17,749 27,951
Other non-current liabilities 9,248 7,549
Total liabilities $ 59,123 $ 56,788
____________________
(a) During the three months ended
Summarized Affiliate Financial Information
The equity interests of various affiliates withinDell Technologies' consolidated group have been pledged as collateral for the Exchange Notes.Dell Technologies is therefore subject to Rule 13-02 of theSEC's Regulation S-X, which requires that summarized financial information for the affiliates whose securities are pledged as collateral (collectively, the "Affiliate Group ") be provided on a combined basis to the extent such information is material and materially different than the corresponding amounts presented in the Consolidated Financial Statements ofDell Technologies . The summarized financial information for theAffiliate Group would produce results materially consistent with information presented inDell Technologies' Consolidated Financial Statements and we have therefore not included such information in this report. In particular, the assets, liabilities, and results of operations of theAffiliate Group are not materially different than the corresponding amounts presented in the Consolidated Financial Statements ofDell Technologies , except with respect to the redeemable shares as ofJanuary 29, 2021 . The redeemable shares balance was$472 million as reflected on the Condensed Consolidated Statements of Financial Position included in this report, as compared to no redeemable shares reflected on theAffiliate Group balance sheet as of the respective dates.
Collateral Arrangement - The collateral ("Collateral") securing the Exchange Notes generally consists of the following, whether now owned or hereafter acquired:
•100% of the equity interests of the Issuers,Dell and each Material Subsidiary (as defined in the applicable indenture) that is a wholly-owned subsidiary of the Issuers and the Guarantors (which pledge, in the case of capital stock of any Foreign Subsidiary or FSHCO (each as defined in the applicable indenture), is limited to 65% of the voting capital stock and 100% of the non-voting capital stock of such Foreign Subsidiary or FSHCO); and •substantially all tangible and intangible personal property and material fee-owned real property of the Issuers and Guarantors (other thanDell Technologies ) including but not limited to, accounts receivable, inventory, equipment, general intangibles (including contract rights), investment property, intellectual property, real property, intercompany notes, instruments, chattel paper and documents, letter of credit rights, commercial tort claims, and proceeds of the foregoing.
See Exhibit 22.1 filed with this report for a list of each affiliate of
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Delivery of the Collateral securing the Exchange Notes would be required in certain customary events of default, including failure to make required payments, failure to comply with covenants, and the occurrence of certain events of bankruptcy and insolvency.
The Collateral may be released in certain circumstances, including, (1) to enable the sale, transfer or other disposition of such property or assets, (2) upon the release of the guarantee of a Guarantor, (3) upon such property or asset becoming an "excluded asset" as defined in the indentures governing the Exchange Notes, (4) upon the achievement of investment grade ratings with respect to the Issuers and the Exchange Notes, and (5) to the extent the liens on the Collateral securing the Senior Credit Facility obligations are released (other than in connection with the payment in full of the Senior Credit Facility). The Collateral does not include, and will not include, among other things, (1) a pledge of the assets or equity interests of certain subsidiaries, including the Unrestricted Subsidiaries and their respective subsidiaries, (2) any fee-owned real property with a book value of less than$150 million , (3) any commercial tort claims or letter of credit rights with an individual value of less than$50 million , (4) any "principal property" as defined in the indentures governing the Unsecured Notes and Debentures ofDell and the EMC Notes, and capital stock of any subsidiary holding "principal property" as defined in the indenture governing the Unsecured Notes and Debentures ofDell , or (5) certain excluded assets. 93
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