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 28, 2022 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. OnNovember 1, 2021 , the Company completed its spin-off ofVMware, Inc ("VMware"). In accordance with applicable accounting guidance, the results ofVMware , excluding Dell's resale ofVMware offerings, are presented as discontinued operations in the Condensed Consolidated Statements of Income and, as such, have been excluded from both continuing operations and segment results for prior periods presented. The Condensed Consolidated Statements of Cash Flows are presented on a consolidated basis for both continuing operations and discontinued operations.
Our fiscal year is the 52- or 53-week period ending on the Friday nearest
INTRODUCTION
Company Overview
Dell Technologies helps organizations build their digital futures and individuals transform how they work, live and play. We provide customers with one of the industry's broadest and most innovative solutions portfolio for the data era, including traditional infrastructure and extending to multi-cloud environments. We continue to seamlessly deliver differentiated and holistic IT solutions to our customers which has helped drive consistent revenue growth.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 through 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 including APEX-branded solutions which 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 that operates globally in approximately 180 countries across key functional areas, including technology and product development, marketing, sales, financial services, and services. Our go-to-market engine includes a 32,000-person sales force and a global network of over 200,000 channel partners.Dell Financial Services and its affiliates ("DFS") offer customers payment flexibility and enable synergies across the business. We employ approximately 35,000 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$75 billion in annual procurement expenditures and over 750 parts distribution centers. Together, these elements provide a critical foundation for our success. 54 -------------------------------------------------------------------------------- Table of Contents Our Vision and Strategy Our vision is to become the most essential technology company for the data era. We seek to address our customers' evolving needs and their broader digital transformation objectives as they embrace today's hybrid multi-cloud environment. We intend to execute on our vision by focusing on two overarching strategic priorities:
•Grow and modernize our core offerings in the markets in which we predominantly compete
•Pursue attractive new growth opportunities such as Edge, Telecom, data management, and as-a-Service consumption models
We believe that we are uniquely positioned in the data and multi-cloud era and that our results will benefit from our durable competitive advantages. We intend to continue to execute our business model to position our company for long-term success while balancing liquidity, profitability, and growth. We are seeing an accelerated rate of change in the IT industry and increased demand for simpler, more agile IT as companies leverage multiple clouds in their IT environments. COVID-19 has accelerated the introduction and adoption of new technologies to ensure productivity and collaboration from anywhere. To meet our customer needs, 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.
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 two business units, referred to as
•Infrastructure Solutions Group ("ISG") - ISG enables our customers' digital
transformation through our trusted multi-cloud and big data solutions, which are
built upon modern data center infrastructure. ISG helps 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.
Our comprehensive portfolio of advanced storage solutions includes traditional
storage solutions as well as next-generation storage solutions (such as
all-flash arrays, scale-out file, object platforms, and software-defined
solutions). Our PowerStore offering, a differentiated midrange storage solution
that enables seamless updates using microservices and container-based software
architecture, allows us to compete more effectively within midrange storage. We
continue to make enhancements to our storage solutions offerings and expect that
these offerings will drive long-term improvements in the business.
Our server portfolio includes high-performance rack, blade, tower, and
hyperscale servers, optimized to run high value workloads, including artificial
intelligence and machine learning. 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
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-------------------------------------------------------------------------------- Table of Contents optimize performance, reliability, manageability, design, and security. For our customers that are seeking to simplify client lifecycle management, Dell PC as a Service offering combines hardware, software, lifecycle services, and financing into one all-encompassing solution that provides predictable pricing per seat per month. 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
Our other businesses, described below, consists of our resale of standaloneVMware offerings, referred to as VMware Resale, as well as product and service offerings ofSecureWorks Corp. ("Secureworks") and Virtustream. These businesses are not classified as reportable segments, either individually or collectively. •VMware Resale consists of our sale of standaloneVMware offerings. Under the Commercial Framework Agreement entered into as part of our spin-off ofVMware ,Dell Technologies continues to act as a key channel partner in this relationship, resellingVMware offerings to our customers. This partnership is intended to facilitate mutually beneficial growth for both Dell andVMware .
•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. We believe the collaboration, innovation, and coordination of the operations and strategies across all segments of our business, as well as our differentiated go-to-market model, will continue to drive revenue synergies. Through our research and development activities, we are able to engineer leading innovative solutions that incorporate the distinct set of hardware, software, and services across all segments of our business. 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 17 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 globally. DFS originates, collects, and services
customer receivables primarily related to the purchase or use of our product,
software, and services solutions. We also arrange financing for some of our
customers in various countries where DFS does not currently operate as a captive
entity. DFS further strengthens our customer relationships through its flexible
consumption models which provide our customers with financial flexibility to
meet their changing technological requirements. Our flexible consumption models
enable us to offer our customers the option to pay over time and, in certain
cases, based on utilization. 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 5 of the Notes to the
Condensed Consolidated Financial Statements included in this report.
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Recent Transactions
Spin-Off of VMware, Inc. - On November 1, 2021 , we completed our spin-off of
VMware 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 of April 14, 2021 between Dell Technologies and VMware . As part of the
transaction, VMware paid a special cash dividend, pro rata, to each holder of
VMware common stock in an aggregate amount equal to $11.5 billion , of which Dell
Technologies received $9.3 billion .
In connection with and upon completion of the VMware Spin-off, we entered into a
Commercial Framework Agreement (the "CFA") with VMware , which provides the
framework under which we and VMware will continue our commercial relationship
after the transaction. Pursuant to the CFA, we continue to act as a distributor
of VMware's standalone products and services and purchase such products and
services for resale to customers. We also continue to integrate VMware's
products and services with Dell Technologies' offerings and sell them to
customers. The results of such operations are presented as continuing operations
within our Condensed Consolidated Statements of Income for all periods
presented.
The results of VMware , excluding Dell's resale of VMware offerings, are
presented as discontinued operations in the Condensed Consolidated Statements of
Income and, as such, have been excluded from both continuing operations and
segment results for the three months ended April 30, 2021 . The Condensed
Consolidated Statements of Cash Flows are presented on a consolidated basis for
both continuing operations and discontinued operations. See Note 2 of the Notes
to the Condensed Consolidated Financial Statements for additional information
about the VMware Spin-off.
Boomi Divestiture - On October 1, 2021 , we completed the sale of Boomi, Inc.
("Boomi") and certain related assets 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. Prior to the divestiture, the operating results of Boomi were included
within other businesses and did not qualify for presentation as discontinued
operations. See Note 1 of the Notes to the Condensed Consolidated Financial
Statements included in this report for more information about this transaction.
Relationship with
Effective upon the completion of the VMware Spin-off,VMware is considered to be a related party of the Company. The related party relationship is as a result ofMichael Dell's ownership interest in bothDell Technologies andVMware andMr. Dell's continued service as Chairman and Chief Executive Officer ofDell Technologies and as Chairman of the Board ofVMware . Following the completion of the VMware Spin-off, the majority of transactions that occur betweenDell Technologies andVMware consist ofDell Technologies' purchase ofVMware products and services for resale, either on a standalone basis or as a part of integrated offerings. For more information regarding related party transactions withVMware , see Note 16 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Strategic Investments and Acquisitions
As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm,Dell Technologies Capital , with a focus on emerging technology areas that are relevant to 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. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in the companies. As ofApril 29, 2022 andJanuary 28, 2022 ,Dell Technologies held strategic investments in non-marketable securities 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.
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Business Trends and Challenges
Ukraine - We are monitoring and responding to effects of the ongoing military
conflict in Ukraine . As a result of the conflict, we are not selling, servicing
or supporting products in Russia , Belarus , and the Donetsk and Luhansk regions
of Ukraine . Operations in Russia and Ukraine accounted for less than 1% of net
revenue in Fiscal 2022 and assets attributable to Russian operations accounted
for less than 0.5% of total assets as of April 29, 2022 .
The conflict and the related economic sanctions are impacting markets worldwide.
Our business may be adversely affected by effects of the conflict, which could
include supply chain disruptions, product shipping delays, macroeconomic impacts
resulting from the exclusion of Russian financial institutions from the global
banking system, volatility in foreign exchange rates and interest rates,
inflationary pressures, and heightened cybersecurity and data theft threats. The
full impact of the conflict on our business operations and financial performance
remains uncertain and will depend on future developments. We will continue to
monitor the conflict and assess the related restrictions and other effects and
pursue prudent decisions for our team members, customers, and business.
COVID-19 Pandemic and Response - We continue to monitor the COVID-19 pandemic
and variants of the virus, as well as the impact the pandemic has on our
employees, customers, business partners, and communities. Our crisis management
team is actively engaged in evaluating changes in our environment and aligning
our response to recommendations of the World Health Organization and the U.S.
Centers for Disease Control and Prevention , and with governmental regulations.
We are deploying return-to-site processes based on our ongoing assessments of
local conditions. We continue to monitor regional conditions and utilize remote
work practices to ensure the health and safety of our employees, customers, and
business partners.
As discussed below, we continue to manage through the impacts of the COVID-19
pandemic on our supply chain. The full impact of the COVID-19 pandemic on our
business operations and financial performance remains uncertain and will depend
on future developments, including the severity, duration, and scope of the
pandemic across different geographies; the effectiveness of actions taken to
contain, mitigate or prevent the spread of variants of the virus; the further
development, availability, and acceptance of effective treatments or vaccines;
and governmental, business, and individuals' actions that have been and continue
to be taken in response to the pandemic. We will continue to actively monitor
global events and pursue prudent decisions to navigate in this uncertain and
ever-changing environment. For additional information about impacts of COVID-19
on our operations, see "Results of Operations-Consolidated Results" and
"-Business Unit Results."
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.
During the first quarter of Fiscal 2023, we continued to be impacted by
industry-wide constraints in the supply of limited-source components in certain
product offerings as a result of the global impacts of COVID-19. Demand for such
components continues to outpace supply, resulting in an increase in orders
pending fulfillment and extended lead times for our customers for certain
products, as well as an increase in logistics costs. Logistics costs remain
elevated as a result of both expedited shipments of components and overall rate
costs in the freight network as capacity remains constrained.
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.
Component costs were deflationary during the first quarter of Fiscal 2023.
We expect to continue to manage supply constraints and anticipate that the
overall cost environment will be inflationary for the remainder of Fiscal 2023.
In response to these pressures, we continue to take steps to actively address
our customers' demands while balancing profitability and growth.
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
quarter of Fiscal 2023, ISG net revenue benefited from continued demand for IT
infrastructure. While we expect ISG net revenue growth to continue throughout
the remainder of Fiscal 2023, we anticipate that the rate of growth will
moderate in the second half of the fiscal year. 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.
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Growth throughout 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 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.
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 quarter of Fiscal 2023, CSG net revenue growth continued at a
more moderate rate than in Fiscal 2022. We expect CSG net revenue growth to
continue to moderate throughout Fiscal 2023 as customers shift investment
towards IT infrastructure and industry-wide demand for consumer offerings
declines. Further, we expect that the CSG demand environment will continue to be
subject to seasonal trends.
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 we 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 designed to
match customers' consumption and financing preferences. 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 will
further strengthen our customer relationships and provide a foundation for
growth in recurring revenue.
These offerings typically result in multiyear agreements which generate
recurring revenue streams over the term of the arrangement. We define recurring
revenue as revenue recognized primarily related to hardware and software
maintenance as well as subscription, as-a-Service, and usage-based offerings,
and operating leases.
Macroeconomic Risks and Uncertainties - The impacts of trade protection
measures, including increases in tariffs and trade barriers, changes in
government policies and international trade arrangements, and geopolitical
issues 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 net revenue from sales to
customers outside of the United States during the first quarters of Fiscal 2023
and Fiscal 2022. As a result, our revenue can be impacted by fluctuations in
foreign currency exchange rates. We utilize a comprehensive hedging strategy
intended to mitigate the impact of foreign currency volatility over time, and we
adjust pricing when possible to further minimize foreign currency impacts.
Key Performance Metrics
Our key performance metrics include net revenue, operating income, and cash flows from operations, which are discussed elsewhere in this management's discussion and analysis.
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NON-GAAP FINANCIAL MEASURES
In this management's discussion and analysis, we use supplemental measures of
our performance which are derived from our consolidated financial information
but which are not presented in our consolidated financial statements prepared in
accordance with GAAP. These non-GAAP financial measures include non-GAAP product
net revenue; non-GAAP services net revenue; non-GAAP net revenue; non-GAAP
product gross margin; non-GAAP services gross margin; non-GAAP gross margin;
non-GAAP operating expenses; non-GAAP operating income; non-GAAP net income;
earnings before interest and other, net, taxes, depreciation, and amortization
("EBITDA"); and adjusted EBITDA. 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 from continuing operations prepared in accordance with GAAP, and
should be read only in conjunction with financial information presented on a
GAAP basis.
Effective in the first quarter of Fiscal 2023, non-GAAP product net revenue,
non-GAAP services net revenue, and non-GAAP net revenue no longer differ from
the most comparable GAAP financial measures. Such non-GAAP financial measures
are provided below for all periods presented as a result of purchase accounting
adjustments that impacted such financial measures in prior periods.
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,
stock-based compensation expense, other corporate expenses and, for non-GAAP net
income, fair value adjustments on equity adjustments and an aggregate adjustment
for income taxes. As the excluded items have a material impact on our financial
results, our management compensates for this limitation by relying primarily on
our GAAP results and using non-GAAP financial measures supplementally or for
projections when comparable GAAP financial measures are not available.
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 the "EMC 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, Inc. and its consolidated subsidiaries, respectively, were accounted for and recognized at fair value on the transaction dates. Accordingly, for the periods presented, amortization of intangible assets represents amortization associated with intangible assets recognized in connection with 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. 60 -------------------------------------------------------------------------------- Table of Contents •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. Accordingly, all of the assets and liabilities acquired in such transactions were accounted for and recognized at fair value as of the respective transaction dates, and the fair value adjustments are being amortized over the estimated useful lives in the periods following the transactions. The fair value adjustments primarily relate to property, plant, and equipment. 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 (income) expenses - Transaction-related expenses typically consist of acquisition, integration, and divestiture related costs, as well as the costs incurred in the VMware Spin-off, 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 income related to divestitures of businesses or asset sales. 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 of impairment charges, incentive charges related to equity investments, severance, facility action, payroll taxes associated with stock-based compensation, 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 strategic investments, which includes the recurring fair value adjustments of investments in publicly-traded companies, as well as those in privately-held companies, which are adjusted for observable price changes, and, to a lesser extent, any potential impairments. See Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on our strategic investment activity. 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 are determined based on the tax jurisdictions where the above items were incurred. See Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on our income taxes. 61 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for the periods indicated: Three Months Ended April 29, April 30, 2022 % Change 2021 (in
millions, except percentages)
Product net revenue$ 20,464 17 %$ 17,487
Non-GAAP adjustments:
Impact of purchase accounting - (1) Non-GAAP product net revenue$ 20,464 17 %$ 17,486 Services net revenue$ 5,652 11 %$ 5,103
Non-GAAP adjustments:
Impact of purchase accounting - 9 Non-GAAP services net revenue$ 5,652 11 %$ 5,112 Net revenue$ 26,116 16 %$ 22,590
Non-GAAP adjustments:
Impact of purchase accounting - 8 Non-GAAP net revenue$ 26,116 16 %$ 22,598 Product gross margin$ 3,455 13 %$ 3,053
Non-GAAP adjustments:
Amortization of intangibles 104 151 Impact of purchase accounting 2 - Stock-based compensation expense 13 9 Other corporate expenses 3 3 Non-GAAP product gross margin$ 3,577 11 %$ 3,216 Services gross margin$ 2,329 5 %$ 2,211 Non-GAAP adjustments: Amortization of intangibles - (1) Impact of purchase accounting - 9 Stock-based compensation expense 25 19 Other corporate expenses 10 10 Non-GAAP services gross margin$ 2,364 5 %$ 2,248 62
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Three Months Ended
April 29, April 30,
2022 % Change 2021
(in millions, except percentages)
Gross margin $ 5,784 10 % $ 5,264
Non-GAAP adjustments:
Amortization of intangibles 104 150
Impact of purchase accounting 2 9
Stock-based compensation expense 38 28
Other corporate expenses 13 13
Non-GAAP gross margin $ 5,941 9 % $ 5,464
Operating expenses $ 4,234 (1) % $ 4,277
Non-GAAP adjustments:
Amortization of intangibles (139) (295)
Impact of purchase accounting (7) (11)
Transaction-related expenses (5) (29)
Stock-based compensation expense (194) (144)
Other corporate expenses (83) (104)
Non-GAAP operating expenses $ 3,806 3 % $ 3,694
Operating income $ 1,550 57 % $ 987
Non-GAAP adjustments:
Amortization of intangibles 243 445
Impact of purchase accounting 9 20
Transaction-related expenses 5 29
Stock-based compensation expense 232 172
Other corporate expenses 96 117
Non-GAAP operating income $ 2,135 21 % $ 1,770
Net income from continuing operations $ 1,069 62 % $ 659
Non-GAAP adjustments:
Amortization of intangibles 243 445
Impact of purchase accounting 9 20
Transaction-related (income) expenses (2) 29
Stock-based compensation expense 232 172
Other corporate expenses 96 117
Fair value adjustments on equity investments (14) (194)
Aggregate adjustment for income taxes (199) (193)
Non-GAAP net income $ 1,434 36 % $ 1,055
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-------------------------------------------------------------------------------- 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 related to theEMC merger transaction and the going-private transaction, acquisition, integration, and divestiture related costs, impairment charges, and severance, facility action, and other costs, and stock-based compensation expense. We believe that, due to the non-operational nature of the purchase accounting entries, it is appropriate to exclude these adjustments. As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance. EBITDA and adjusted EBITDA do not purport to be alternatives to net income 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 following table presents a reconciliation of EBITDA and adjusted EBITDA to net income for the periods indicated:
Three Months Ended
April 29, April 30,
2022 % Change 2021
(in millions, except percentages)
Net income from continuing operations $ 1,069 62 % $ 659
Adjustments:
Interest and other, net (a) 337 288 Income tax expense (benefit) (b) 144 40 Depreciation and amortization 726 905 EBITDA $ 2,276 20 %$ 1,892 EBITDA $ 2,276 20 %$ 1,892 Adjustments: Stock-based compensation expense 232 172 Impact of purchase accounting (c) - 12 Transaction-related expenses (d) 5 29 Other corporate expenses (e) 96 117 Adjusted EBITDA $ 2,609 17 %$ 2,222 ____________________ (a)See "Results of Operations - Interest and Other, Net" for more information on the components of interest and other, net. (b)See Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on discrete tax items recorded during the first quarter of Fiscal 2023 and Fiscal 2022. (c)This amount includes the non-cash purchase accounting adjustments related to theEMC merger transaction and the going-private transaction. (d)Transaction-related expenses consist of acquisition, integration, and divestiture related costs, as well as the costs incurred in the VMware Spin-off. (e)Other corporate expenses includes impairment charges, incentive charges related to equity investments, severance, facility action, payroll taxes associated with stock-based compensation, and other costs. 64 --------------------------------------------------------------------------------
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RESULTS OF OPERATIONS
Consolidated Results
The following table summarizes our consolidated results for the periods
indicated. Unless otherwise indicated, all changes identified for the current
period results represent comparisons to results for the prior corresponding
fiscal period.
Three Months Ended
April 29, 2022 April 30, 2021
% of % % of
Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Net revenue:
Products $ 20,464 78.4 % 17 % $ 17,487 77.4 %
Services 5,652 21.6 % 11 % 5,103 22.6 %
Total net revenue $ 26,116 100.0 % 16 % $ 22,590 100.0 %
Gross margin:
Products (a) $ 3,455 16.9 % 13 % $ 3,053 17.5 %
Services (b) 2,329 41.2 % 5 % 2,211 43.3 %
Total gross margin $ 5,784 22.1 % 10 % $ 5,264 23.3 %
Operating expenses $ 4,234 16.2 % (1) % $ 4,277 18.9 %
Operating income $ 1,550 5.9 % 57 % $ 987 4.4 %
Net income from continuing
operations $ 1,069 4.1 % 62 % $ 659 2.9 %
Non-GAAP Financial Information
Three Months Ended
April 29, 2022 April 30, 2021
% of % of
Non-GAAP % Non-GAAP
Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Non-GAAP net revenue:
Products $ 20,464 78.4 % 17 % $ 17,486 77.4 %
Services 5,652 21.6 % 11 % 5,112 22.6 %
Total non-GAAP net revenue $ 26,116 100.0 % 16 % $ 22,598 100.0 %
Non-GAAP gross margin:
Products (a) $ 3,577 17.5 % 11 % $ 3,216 18.4 %
Services (b) 2,364 41.8 % 5 % 2,248 44.0 %
Total non-GAAP gross margin $ 5,941 22.7 % 9 % $ 5,464 24.2 %
Non-GAAP operating expenses $ 3,806 14.5 % 3 % $ 3,694 16.4 %
Non-GAAP operating income $ 2,135 8.2 % 21 % $ 1,770 7.8 %
Non-GAAP net income $ 1,434 5.5 % 36 % $ 1,055 4.7 %
EBITDA $ 2,276 8.7 % 20 % $ 1,892 8.4 %
Adjusted EBITDA $ 2,609 10.0 % 17 % $ 2,222 9.8 %
____________________
(a) Product gross margin percentages represent product gross margin as a
percentage of product net revenue, and non-GAAP product gross margin percentages
represent non-GAAP product gross margin as a percentage of non-GAAP product net
revenue.
(b) Services gross margin percentages represent services gross margin as a
percentage of services net revenue, and non-GAAP services gross margin
percentages represent non-GAAP services gross margin as a percentage of non-GAAP
services net revenue.
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-------------------------------------------------------------------------------- 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 revenue are calculated based on non-GAAP net revenue. See "NonGAAP Financial Measures" for additional information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Overview
During the first quarter of Fiscal 2023, our net revenue increased 16% due to growth in net revenue for both CSG and ISG. CSG net revenue benefited primarily from strength in our commercial offerings. ISG net revenue growth resulted from demand for overall investment in IT infrastructure as customers continue to invest in digital transformation. During the first quarter of Fiscal 2023, our operating income increased 57% to$1.6 billion and our non-GAAP operating income increased 21% to$2.1 billion . These increases were primarily due to growth in operating income for ISG, driven principally by our storage offerings. Operating income also benefited from the favorable impact of a decrease in amortization of intangible assets. Operating income and non-GAAP operating income as a percentage of net revenue increased 150 basis points to 5.9% and 40 basis points to 8.2%, respectively, primarily driven by ISG. ISG operating income as a percentage of net revenue increased as a result of a decrease in operating expenses as a percentage of net revenue due to strong revenue growth coupled with disciplined cost management. These factors were partially offset by declines in gross margin as a percentage of net revenue for both CSG and ISG which declined in part as a result of increased cost of net revenue that was not entirely offset by pricing adjustments. Operating income as a percentage of net revenue also increased as a result of the favorable impact of a decrease in amortization of intangible assets. Cash used by operating activities was$0.3 billion during the first quarter of Fiscal 2023. Operating cash flows during the first quarter of the fiscal year are typically lower due to seasonal revenue trends as well as the timing of annual personnel-related payments. Operating cash flows were also impacted by higher than normal inventory balances as we continue to proactively manage supply chain challenges. During the first quarter of Fiscal 2022, cash provided by operating activities was$2.2 billion . See "Market Conditions, Liquidity, Capital Commitments, and Contractual Cash Obligations" 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 to changing market conditions with complementary solutions across both 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.
Net Revenue
During the first quarter of Fiscal 2023, our net revenue increased 16% primarily due to an increase in net revenue for both CSG and ISG. 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 first quarter of Fiscal
2023, our product net revenue increased 17% driven by growth within both CSG and
ISG. CSG product net revenue increased principally due to an increase in average
selling price for our commercial offerings. ISG product net revenue growth was
primarily attributable to growth in net revenue for servers and networking,
driven by an increase in average selling price, and, to a lesser extent, an
increase in net revenue for storage.
•Services Net Revenue - Services net revenue includes revenue from our services
offerings and support services related to hardware products and software
licenses. During the first quarter of Fiscal 2023, services net revenue
increased 11%, driven primarily by growth in CSG services net revenue and, to a
lesser extent, growth in ISG services net revenue. Growth in CSG services net
revenue was primarily due to increases in services net revenue attributable to
both hardware support and maintenance and third-party software support and
maintenance. ISG services net revenue increased primarily as a result of growth
within hardware support services. A substantial portion of services net revenue
is derived from
66
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Table of Contents 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 first quarter of Fiscal 2023, driven by both CSG and ISG. Gross Margin During the first quarter of Fiscal 2023, our gross margin increased 10% to$5.8 billion and our non-GAAP gross margin increased 9% to$5.9 billion . These increases were driven primarily by growth in ISG gross margin and, to a lesser extent, growth within CSG gross margin as we benefited from continued strength across both businesses. During the first quarter of Fiscal 2023, our gross margin percentage decreased 120 basis points to 22.1% due to a decline in gross margin percentage for both CSG and ISG, the effect of which was partially offset by the favorable impact of a decrease in amortization of intangible assets. Both CSG and ISG gross margin percentage declined in part as a result of increased cost of net revenue that was not entirely offset by pricing adjustments. Increased cost of net revenue was principally driven by the cumulative effect of cost inflation that occurred throughout Fiscal 2022, which broadly impacted our product offerings. ISG gross margin percentage also declined as a result of a shift in revenue mix towards servers and networking. Non-GAAP gross margin percentage decreased 150 basis points to 22.7% due to the same CSG and ISG dynamics discussed above. •Products Gross Margin - During the first quarter of Fiscal 2023, product gross margin increased 13% to$3.5 billion and non-GAAP product gross margin increased 11% to$3.6 billion primarily driven by growth within ISG. ISG product gross margin increased principally due to revenue growth in our storage offerings coupled with an increase in the average selling price of our server offerings. During the first quarter of Fiscal 2023, product gross margin percentage decreased 60 basis points to 16.9%, primarily due to a decline in product gross margin percentage for CSG. The decline in CSG product gross margin percentage was partially offset by growth in product gross margin percentage for ISG coupled with the favorable impact of a decrease in amortization of intangible assets. Non-GAAP product gross margin percentage decreased 90 basis points to 17.5% and was driven by the same CSG and ISG impacts discussed above. •Services Gross Margin - During the first quarter of Fiscal 2023, services gross margin and non-GAAP services gross margin both increased 5% to$2.3 billion and$2.4 billion , respectively. The increases were driven primarily by increased CSG services gross margin as a result of growth within hardware support and maintenance associated with products sold in prior periods.
Services gross margin percentage decreased 210 basis points to 41.2% and non-GAAP services gross margin percentage decreased 220 basis points to 41.8%. The decreases were primarily driven by declines in services gross margin percentage across CSG and ISG, to a lesser extent, a shift in mix towards CSG.
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 first
quarter of Fiscal 2023 and the first quarter of Fiscal 2022 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
April 29, 2022 April 30, 2021
%
Dollars % of Net Revenue Change Dollars % of Net Revenue
(in millions, except percentages)
Operating expenses:
Selling, general, and
administrative $ 3,553 13.6 % (3) % $ 3,658 16.2 %
Research and development 681 2.6 % 10 % 619 2.7 %
Total operating expenses $ 4,234 16.2 % (1) % $ 4,277 18.9 %
Three Months Ended
April 29, 2022 April 30, 2021
% of Non-GAAP Net % % of Non-GAAP Net
Dollars Revenue Change Dollars Revenue
(in millions, except percentages)
Non-GAAP operating expenses $ 3,806 14.5 % 3 % $ 3,694 16.4 %
During the first quarter of Fiscal 2023, total operating expenses remained
essentially flat as a decrease in selling, general, and administrative expenses
was mostly offset by an increase in research and development expenses. Non-GAAP
operating expenses increased 3% primarily as a result of increased employee
compensation and benefits driven by growth in employee headcount.
•Selling, General, and Administrative - Selling, general, and administrative
("SG&A") expenses decreased 3% during the first quarter of Fiscal 2023. The
decrease was primarily attributable to a decrease in amortization of intangible
assets, partially offset by an increase in employee compensation and benefits
principally due to growth in employee headcount.
•Research and Development - Research and development ("R&D") expenses are
primarily composed of personnel-related expenses related to product development.
During the first quarter of Fiscal 2023, R&D expenses grew 10% as a result of an
increase in employee compensation and benefits primarily due to growth in
employee headcount. As a percentage of net revenue, R&D expenses for the first
three months of Fiscal 2023 and Fiscal 2022 were essentially flat at
approximately 2.6% and 2.7%, respectively. We intend to continue supporting R&D
initiatives to innovate and introduce new and enhanced solutions into the
market.
We continue to make selective investments designed to enable growth, marketing,
and R&D, while balancing our efforts to drive cost efficiencies in the business.
We also expect to continue making investments in support of our own digital
transformation to modernize our IT operations.
Operating Income
During the first quarter of Fiscal 2023, our operating income increased 57% to$1.6 billion and our non-GAAP operating income increased 21% to$2.1 billion . These increases were principally attributable to growth in operating income for ISG, driven primarily by our storage offerings. Operating income also benefited from the favorable impact of a decrease in amortization of intangible assets. 68
-------------------------------------------------------------------------------- Table of Contents Operating income and non-GAAP operating income as a percentage of net revenue increased 150 basis points to 5.9% and 40 basis points to 8.2%, respectively, primarily driven by ISG. ISG operating income as a percentage of net revenue increased as a result of a decrease in operating expenses as a percentage of net revenue due to strong revenue growth coupled with disciplined cost management. These factors were partially offset by a decline in gross margin as a percentage of net revenue for both CSG and ISG which declined in part as a result of increased cost of net revenue that was not entirely offset by pricing adjustments. Operating income as a percentage of net revenue further benefited from the favorable impact of the decrease in amortization of intangible assets.
Interest and Other, Net
The following table presents information regarding interest and other, net for
the periods indicated:
Three Months Ended
April 29, 2022 April 30, 2021
(in millions)
Interest and other, net:
Investment income, primarily interest $ 15 $ 10
Gain on investments, net 14 193
Interest expense (265) (433)
Foreign exchange (89) (52)
Other (12) (6)
Total interest and other, net $ (337) $ (288)
During the first quarter of Fiscal 2023, the change in interest and other, net
was unfavorable by $49 million primarily due to a decrease in gain on
investments, net, partially offset by a decrease in interest expense resulting
from debt repayments.
Income and Other Taxes
The following table presents information regarding our income and other taxes
for the periods indicated:
Three Months Ended
April 29, 2022 April 30, 2021
(in millions, except percentages)
Income before income taxes $ 1,213 $ 699
Income tax expense $ 144 $ 40
Effective income tax rate 11.9 % 5.7 %
For the first quarter of Fiscal 2023 and the first quarter of Fiscal 2022, our
effective income tax rates were 11.9% on pre-tax income of $1.2 billion , and
5.7% on pre-tax income of $0.7 billion , respectively. The change in our
effective income tax rate was primarily driven by the impact of discrete tax
benefits related to stock-based compensation, a change in our jurisdictional mix
of income, and higher U.S. tax on foreign operations, the effects of which were
partially offset by higher benefits from foreign tax credits.
Higher U.S. tax on foreign operations was due to the capitalization of research
and development costs. Under the Tax Cuts and Jobs Act, which was enacted on
December 22, 2017 , research and development expenses incurred for tax years
beginning after December 31, 2021 must be capitalized and amortized ratably over
five or 15 years for tax purposes, depending on where the research activities
were conducted. Our effective income tax rate for future quarters of Fiscal 2023
may be impacted by actions taken by the U.S. government to defer or repeal this
provision, as well as by the actual mix of jurisdictions in which income is
generated and the impact of any discrete tax items. In addition, if the
provision is not deferred or repealed, we expect it will result in a significant
increase in our cash tax liabilities for Fiscal 2023, as well as significantly
reduce our deferred tax liabilities.
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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 in the United States . The differences between our
effective income tax rate and the U.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 discrete tax items. In certain
jurisdictions, our tax rate is significantly less than the applicable statutory
rate as a result of tax holidays. The majority of our foreign income that is
subject to these tax holidays is attributable to Singapore and China . A
significant portion of these income tax benefits relates to a tax holiday that
will be effective until January 31, 2029 . Our other tax holidays will expire in
whole or in part during Fiscal 2030 through Fiscal 2031. 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 of April 29,
2022 , we were not aware of any matters of noncompliance related to these tax
holidays.
For further discussion regarding tax matters, including the status of income tax audits, see Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income from Continuing Operations
Net income from continuing operations was$1.1 billion in the first quarter of Fiscal 2023, compared to$0.7 billion in the first quarter of Fiscal 2022 while non-GAAP net income was$1.4 billion in the first quarter of Fiscal 2023, compared to$1.1 billion in the first quarter of Fiscal 2022. The increases were primarily attributable to an increase in operating income, partially offset by an increase in tax expense during the period. Non-GAAP net income further benefited from a favorable change in interest and other, net. 70 -------------------------------------------------------------------------------- Table of Contents Business Unit Results Our reportable segments are based on the ISG and CSG business units. A description of our business units is provided under "Introduction." See Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income (loss), respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
Three Months Ended
April 29, 2022 % Change April 30, 2021
(in millions, except percentages)
Net revenue:
Servers and networking $ 5,048 22 % $ 4,140
Storage 4,237 9 % 3,893
Total ISG net revenue $ 9,285 16 % $ 8,033
Operating income:
ISG operating income $ 1,082 39 % $ 778
% of segment net revenue 11.7 % 9.7 %
Net Revenue - During the first quarter of Fiscal 2023, ISG net revenue increased
16% due to growth in net revenue for both servers and networking and storage as
a result of demand for IT infrastructure as customers continue to invest in
digital transformation.
Revenue from the sales of servers and networking increased 22% during the first quarter of Fiscal 2023. The increased revenue was primarily driven by an increase in average selling price of our server offerings as we continue to manage pricing in response to supply chain challenges including component availability and increased logistics costs.
During the first quarter of Fiscal 2023, storage revenue increased 9% due to strength across the majority of our storage offerings.
ISG customers are interested in new and innovative models that address how they consume our solutions. We offer options that include as-a-Service, utility, leases, and immediate pay models which are 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 first quarter of Fiscal 2023.
Operating Income - During the first quarter of Fiscal 2023, ISG operating income
as a percentage of net revenue increased 200 basis points to 11.7% primarily due
to a decrease in operating expenses as a percentage of revenue that resulted
from strong revenue growth coupled with disciplined cost management. The
favorable impact of the decrease in operating expenses as a percentage of
revenue was partially offset by the impact of a shift in revenue mix towards
servers and networking.
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-------------------------------------------------------------------------------- Table of ContentsClient Solutions Group
The following table presents net revenue and operating income attributable to CSG for the periods indicated:
Three Months Ended
April 29, 2022 % Change April 30, 2021
(in millions, except percentages)
Net revenue:
Commercial $ 11,971 22 % $ 9,808
Consumer 3,616 3 % 3,503
Total CSG net revenue $ 15,587 17 % $ 13,311
Operating income:
CSG operating income $ 1,115 3 % $ 1,080
% of segment net revenue 7.2 % 8.1 %
Net Revenue - During the first quarter of Fiscal 2023, CSG net revenue increased
17% primarily driven by an increase in revenue attributable to our commercial
offerings.
Commercial and consumer net revenue increased 22% and 3%, respectively,
primarily due to an increase in average selling price across our product
offerings. To a lesser extent, an increase in units sold of commercial offerings
also contributed to net revenue growth. Within consumer, the effect of increased
average selling price was partially offset by a decrease in units sold. We
increased average selling prices for both our commercial and consumer offerings
as we continued to manage pricing in response to supply chain challenges
including component availability and increased logistic costs.
From a geographical perspective, net revenue attributable to CSG increased across all regions during the first quarter of Fiscal 2023.
Operating Income - During the first quarter of Fiscal 2023, CSG operating income
as a percentage of net revenue decreased 90 basis points to 7.2% primarily as a
result of increased cost of net revenue that was not entirely offset by pricing
adjustments. Increased cost of net revenue was principally driven by the
cumulative effect of cost inflation that occurred throughout Fiscal 2022, which
broadly impacted our product offerings. These factors were partially offset by a
decrease in operating expenses as a percentage of revenue.
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--------------------------------------------------------------------------------Table of Contents OTHER BALANCE SHEET ITEMS Accounts Receivable We sell products and services directly to customers and through a variety of sales channels, including retail distribution. Our accounts receivable, net, was$11.8 billion and$12.9 billion as ofApril 29, 2022 andJanuary 28, 2022 , respectively. We maintain an allowance for expected credit losses to cover receivables that may be deemed uncollectible. As ofApril 29, 2022 andJanuary 28, 2022 , the allowance for expected credit losses was$72 million and$90 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.
The Company offers or arranges various financing options and services for our customers globally, including through captive financing operations. DFS originates, collects, and services customer receivables primarily related to the purchase of our product, software, and service solutions. The Company further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. New financing originations were$2.1 billion and$1.9 billion for the first quarter of Fiscal 2023 and Fiscal 2022, respectively. The Company's leases are generally classified as sales-type 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. As ofApril 29, 2022 andJanuary 28, 2022 , our financing receivables, net were$10.2 billion and$10.6 billion , respectively. We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. For both the first quarter of Fiscal 2023 and Fiscal 2022, the principal charge-off rate for our financing receivables portfolio was 0.5%. The credit quality of our financing receivables has improved in recent years 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 credit 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. We retain a residual interest in equipment leased under our lease programs. As ofApril 29, 2022 andJanuary 28, 2022 , the residual interest recorded as part of financing receivables was$176 million and$217 million , respectively. The decline in residual interest was principally attributable to a corresponding increase in originations of operating leases. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, we assess the carrying amount of our recorded residual values for impairment. Generally, 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. Further, the lease agreement clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. No expected losses were recorded related to residual assets during the first quarter of Fiscal 2023 and Fiscal 2022. As ofApril 29, 2022 andJanuary 28, 2022 , equipment under operating leases, net was$1.9 billion and$1.7 billion , respectively. We assess the carrying amount of the equipment under operating leases for impairment whenever events or circumstances may indicate that an impairment has occurred. No material impairment losses were recorded related to such equipment during the first quarter of Fiscal 2023 and Fiscal 2022. DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with asset-backed 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. 73
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See Note 5 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 equipment under operating leases.
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LIQUIDITY, CAPITAL COMMITMENTS, AND MARKET CONDITIONS
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. 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 facility, will be sufficient over at least the next twelve months and for the foreseeable future thereafter meet our material cash requirements, including funding of our operations, debt-related payments, capital expenditures, and other corporate needs. As part of our overall capital allocation strategy, we intend to drive growth while maintaining our investment grade rating and focusing on returning capital to our stockholders through both share repurchase programs and dividend payments.
The following table presents our cash and cash equivalents as well as our available borrowings as of the dates indicated:
April 29, 2022
(in millions) Cash and cash equivalents, and available borrowings: Cash and cash equivalents
$ 6,654 $ 9,477 Remaining available borrowings under revolving credit facilities
4,969 4,969
Total cash, cash equivalents, and available borrowings
$ 14,446
During the first quarter of Fiscal 2023, cash and cash equivalents decreased by$2.8 billion , primarily driven by return of approximately$1.75 billion of capital to stockholders through both share repurchases and our first quarterly dividend payment. Our revolving credit facilities as ofApril 29, 2022 consist of the 2021 Revolving Credit Facility, which has a maximum capacity of$5.0 billion . Available borrowings under this facility are reduced by draws on the facility and outstanding letters of credit. As ofApril 29, 2022 , there were no borrowings outstanding under the facility and remaining available borrowings totaled approximately$5.0 billion . We may regularly use our available borrowings from the 2021 Revolving Credit Facility on a short-term basis for general corporate purposes. See Note 7 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about the 2021 Revolving Credit Facility. 75
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Debt
The following table presents our outstanding debt as of the dates indicated:
April 29, 2022 Change January 28, 2022
(in millions)
Core debt
Senior Notes $ 16,300 $ - $ 16,300
Legacy Notes and Debentures 952 - 952
DFS allocated debt (728) 405 (1,133)
Total core debt 16,524 405 16,119
DFS related debt
DFS debt 9,825 179 9,646
DFS allocated debt 728 (405) 1,133
Total DFS related debt 10,553 (226) 10,779
Other 320 (17) 337
Total debt, principal amount 27,397 162 27,235
Carrying value adjustments (275) 6 (281)
Total debt, carrying value $ 27,122 $ 168 $ 26,954
During the first quarter of Fiscal 2023, the outstanding principal amount of our
debt increased by $0.2 billion to $27.4 billion as of April 29, 2022 , primarily
driven by net DFS debt activity.
We define core debt as the total principal amount of our debt, less DFS related
debt and other debt. Our core debt was $16.5 billion and $16.1 billion as of
April 29, 2022 and January 28, 2022 , respectively. See Note 7 of the Notes to
the Condensed Consolidated Financial Statements included in this report for more
information about our debt.
DFS related debt primarily represents debt from our securitization and
structured financing programs. Our risk of loss under these programs is limited
to transferred lease and loan payments and associated equipment, as the credit
holders have no recourse to Dell 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 is based
on the underlying credit quality of the assets. See Note 5 of the Notes to the
Condensed Consolidated Financial Statements included in this report for more
information about our DFS debt.
We have made steady progress in paying down debt and we will continue to pursue
deleveraging as an important component of our overall strategy. As a result of
our debt reduction and liability management strategy, we achieved an investment
grade corporate family rating from three major credit rating agencies during
Fiscal 2022.
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 include short-term borrowings under our
revolving credit facility. 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. There are no
scheduled maturities related to our outstanding core debt during Fiscal 2023.
However, at our sole discretion, we 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.
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Cash Flows
The following table presents a summary of our Condensed Consolidated Statements of Cash Flows for the periods indicated:
Three Months Ended
April
29, 2022
(in millions)
Net change in cash from:
Operating activities $ (269) $ 2,238
Investing activities (720) (519)
Financing activities (1,706) (1,638)Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(111) (5)
Change in cash, cash equivalents, and restricted cash $ (2,806) $ 76
Cash flows for the three months ended April 30, 2021 are inclusive of cash flows
attributable to VMware . Effective November 1, 2021 , as a result of the VMware
Spin-off, cash flows ceased to include VMware . See "Introduction" and Note 1 and
Note 2 of the Notes to the Condensed Consolidated Financial Statements included
in this report for additional information regarding the VMware Spin-off.
Operating Activities - Cash used by operating activities of $0.3 billion during
the first quarter of Fiscal 2023 primarily reflected lower seasonal sales trends
affecting parts of our business as well as the timing of annual
personnel-related payments. Operating cash flows were also impacted by higher
than normal inventory balances as we continue to proactively manage supply chain
challenges. During the first quarter of Fiscal 2022, cash provided by operating
activities was $2.2 billion , of which $1.3 billion related to VMware , and was
driven by both working capital management and profitability.
Investing Activities - Investing activities primarily consist of cash used to
fund capital expenditures for property, plant, and equipment, which includes
equipment under DFS operating leases. Additional activities include capitalized
software development costs, strategic investments, and the maturities, sales,
and purchases of investments. During the first quarter of Fiscal 2023 and Fiscal
2022, cash used in investing activities was $0.7 billion and $0.5 billion ,
respectively, and was primarily used by capital expenditures.
Financing Activities - Financing activities primarily consist of the proceeds
and repayments of debt and cash used to repurchase common stock. Cash used in
financing activities was $1.7 billion during the first quarter of Fiscal 2023
and primarily consisted of repurchases of common stock, including shares
repurchased to settle employee tax withholding on stock-based compensation, and
the payment of our first quarterly dividend. Cash used in financing activities
of $1.6 billion during the first quarter of Fiscal 2022 primarily consisted of
debt repayments and repurchases of common stock by our public subsidiaries.
DFS Cash Flow Impacts - DFS offerings are initially funded through cash on hand
at the time of origination, most of which is subsequently replaced with
asset-backed financing. For DFS offerings that 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 accounting standard, the initial funding is classified as a capital
expenditure and reflected as cash flows used in investing activities. DFS new
financing originations were $2.1 billion and $1.9 billion during the first
quarter of Fiscal 2023 and Fiscal 2022, respectively. As of April 29, 2022 , DFS
had $10.2 billion of total net financing receivables and $1.9 billion of
equipment under DFS operating leases, net.
Capital Commitments
Capital Expenditures - We spent$0.7 billion during the first quarter of Fiscal 2023 and Fiscal 2022 on property, plant, and equipment and capitalized software development costs, of which the funding of equipment under DFS operating leases totaled$0.2 billion for both periods. Product demand, product mix, the use of contract manufacturers, and ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2023 are currently expected to total between$2.9 billion and$3.1 billion , of which approximately$0.9 billion of expenditures are expected to be applied to equipment under DFS operating leases and approximately$0.3 billion to capitalized software development costs. 77
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Repurchases of Common Stock - Effective as ofSeptember 23, 2021 , our board of directors approved a stock repurchase program with no established expiration date under which we are authorized to repurchase up to$5 billion of shares of our ClassC Common Stock. During the first quarter of Fiscal 2023, we repurchased approximately 29 million shares of ClassC Common Stock for a total purchase price of approximately$1.5 billion . These amounts exclude shares repurchased to settle employee tax withholding related to the vesting of stock awards. Dividend Payments - OnFebruary 24, 2022 , the Company announced that its Board of Directors has adopted a dividend policy under which the Company intends to pay quarterly cash dividends on its common stock at an initial rate of$0.33 per share per fiscal quarter. During the three months endedApril 29, 2022 , the Company paid an initial quarterly dividend under the new policy in the amount of$248 million to the holders of record of all of the issued and outstanding shares of common stock as of the close of business onApril 20, 2022 . 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. Purchase orders are not included in purchase obligations, as they typically represent our authorization to purchase rather than binding purchase obligations. As ofApril 29, 2022 , such purchase obligations were$3.1 billion ,$0.4 billion , and$0.8 billion for the remaining nine months of Fiscal 2023, Fiscal 2024, and Fiscal 2025 and thereafter, respectively.
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 8 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. 78
-------------------------------------------------------------------------------- Table of Contents Summarized Guarantor Financial Information As discussed in Note 7 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 (the "Senior Notes"). InJune 2021 , the Issuers completed an exchange offer and issued$18.4 billion aggregate principal amount of registered senior notes under the Securities Act of 1933 in exchange for the same principal amount and substantially identical terms of the Senior Notes. The aggregate principal amount of unregistered Senior Notes remaining outstanding following the settlement of the exchange offer was approximately$0.1 billion . During Fiscal 2022, the tangible and intangible assets of the Issuers and guarantors that secured obligations under the Senior Notes were released as collateral. As a result, the Senior Notes became fully unsecured. In addition, all guarantees of the Senior Notes by subsidiaries ofDell Inc. were released.
Guarantees - The Senior Notes are guaranteed on a joint and several unsecured
basis by
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 .The Obligor Group's amounts due from, amounts due to, and transactions withNon-Obligor Subsidiaries andVMware, Inc. and its consolidated subsidiaries (the "Related Party ") have been presented separately.The Obligor Group's investment balances in Non-Obligor Subsidiaries have been excluded.
The following table presents summarized results of operations information for
the
Three Months Ended
April 29, 2022
(in millions)
Net revenue (a) $ 2,504
Gross margin (b) 1,115
Operating income 275
Interest and other, net (c) (544)
Loss before income taxes (269)
Net loss attributable to Obligor Group $ (171)
____________________
(a) Includes net revenue from services provided and product sales to Non-Obligor Subsidiaries of$277 million and$35 million , respectively. (b) Includes cost of net revenue from resale of solutions purchased from Non-Obligor Subsidiaries and theRelated Party of$251 million and$171 million , respectively. Includes costs of net revenue from shared services provided by Non-Obligor Subsidiaries of$184 million . (c) Includes interest expense on inter-company loan payables of$302 million . 79
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The following table presents summarized balance sheet information for the
April 29, 2022 January 28, 2022
(in millions)
ASSETS
Current assets $ 3,038 $ 3,106
Intercompany receivables 623 988
Due from related party, net 65 59
Total current assets 3,726 4,153
Due from related party, net 713 710
Goodwill and intangible assets 15,259 15,399
Other non-current assets 2,857 2,810
Total assets $ 22,555 $ 23,072
LIABILITIES
Current liabilities $ 4,616 $ 4,625
Due to related party 81 192
Total current liabilities 4,697 4,817
Long-term debt 17,006 17,001
Intercompany loan payables 37,476 37,509
Other non-current liabilities 3,515 3,473
Total liabilities $ 62,694 $ 62,800
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