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 the three and six months endedJuly 30, 2021 . 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 nearestJanuary 31 . We refer to our fiscal year endingFebruary 3, 2023 as "Fiscal 2023" and our fiscal year endedJanuary 28, 2022 as "Fiscal 2022." Fiscal 2023 will include 53 weeks and Fiscal 2022 included 52 weeks.
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 durable competitive advantages provide a critical foundation for our success. 58
-------------------------------------------------------------------------------- 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, machine learning, artificial
intelligence, and data analytics 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
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•Client Solutions Group ("CSG") - CSG includes branded hardware (such as
desktops, workstations, and notebooks) and branded peripherals (such as
displays, docking stations, and other electronics), as well as third-party
software and peripherals. CSG also includes services offerings, including
support and deployment, configuration, and extended warranty services. Our
computing devices are designed with our commercial and consumer customers' needs
in mind, and we seek to optimize performance, reliability, manageability,
design, and security. 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.
Approximately half of CSG revenue is generated by sales to customers in the
Our other businesses, described below, consist 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 discussed below 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 the 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 and may be
impacted by, among other items, changes in the interest rate environment and the
translation of those changes in to pricing. 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 and six months ended July 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 included in this report 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
The Company is considered to be a related party ofVMware 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, Inc. 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 have commercial value, which could result in a loss of a substantial part of our initial investment in the companies. During the second quarter of Fiscal 2023, we recognized a net loss of$255 million on our strategic investments generally in line with overall public equity market declines. As ofJuly 29, 2022 andJanuary 28, 2022 , we held strategic investments in non-marketable securities of$1.3 billion and$1.4 billion , respectively. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information.
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
Macroeconomic conditions continue to evolve globally and, during the second
quarter of Fiscal 2023, while net revenue grew, we experienced a notable change
in the demand for both our ISG and CSG offerings. Demand for our CSG offerings
decreased in line with industry-wide declines while demand for our ISG offerings
moderated as a result of customer uncertainty in response to the macroeconomic
environment. Although we expect ISG net revenue growth to continue through the
remainder of Fiscal 2023, we anticipate that the rate of growth will moderate.
Within CSG, we expect that demand for our offerings will continue to decline,
which we anticipate will result in a decrease in CSG net revenue through the
remainder of Fiscal 2023. We will continue to actively monitor global events and
make prudent decisions to navigate this environment. We believe our durable
competitive advantages continue to position us for long-term success.
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 second quarter and first six months of Fiscal 2023, we continued to
be impacted by industry-wide constraints in the supply of limited-source
components in certain product offerings, principally within ISG, as a result of
the global impacts of COVID-19. Demand for certain product components within ISG
continues to outpace supply, resulting in an increase in orders pending
fulfillment and extended lead times for our customers. While we expect to
continue to manage these supply constraints for the remainder of Fiscal 2023, we
anticipate that they may moderate dependent on the overall demand environment.
Supply chain dynamics also continue to impact logistics and component costs,
which we refer to as input costs. Logistics costs remained elevated for the
second quarter and first six months of Fiscal 2023 as a result of both expedited
shipments of components and overall rate costs in the freight network, as
capacity remains constrained. While we expect overall logistics costs to remain
elevated for the remainder of Fiscal 2023, we anticipate these costs will begin
to decline in the third quarter of Fiscal 2023. Component costs were
deflationary during the second quarter and first six months of Fiscal 2023, and
we expect such costs will remain moderately deflationary into the third quarter
of Fiscal 2023. 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.
In response to these pressures, we continue to take steps to actively address our customers' demands while balancing profitability and growth.
Foreign Currency Exposure - We manage our business on aU.S. dollar basis. However, we have a large global presence, generating approximately half of our net revenue from sales to customers outside ofthe United States during the second quarter and first six months of Fiscal 2023 and Fiscal 2022. As a result, our operating results can be, and particularly in recent periods have been, impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts. Ukraine War - We are monitoring and responding to effects of the ongoing war inUkraine . WhenRussia invadedUkraine , we made the decision to not sell, service, or support products inRussia ,Belarus , and restricted regions ofUkraine . Operations inRussia andUkraine accounted for less than 1% of net revenue in Fiscal 2022. During the second quarter of Fiscal 2023, we recognized$189 million in costs associated with exiting our business inRussia , primarily related to asset impairments and other exit related costs. We have resumed product sales to non-sanctioned areas inUkraine . We are focused on providing products and support to Ukrainian customers, as they rebuild infrastructure and restore businesses and the financial sector. The war and the related economic sanctions are impacting markets worldwide. Our business may be adversely affected by potential effects, including 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 war on our business operations and financial performance will depend on future developments. We will continue to monitor and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business. 62
-------------------------------------------------------------------------------- Table of Contents COVID-19 Pandemic and Response - We continue to monitor the COVID-19 pandemic and variants of the coronavirus, as well as the impact the pandemic has on our employees, customers, business partners, and communities. As discussed above, we continue to manage through the impacts of the COVID-19 pandemic on our supply chain. The ongoing impact of the COVID-19 pandemic on our business operations and financial performance remains uncertain and will depend on future developments. 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." Inflation Reduction Act - Subsequent to the close of the second quarter of Fiscal 2023, the Inflation Reduction Act of 2022 was enacted into law. The statute includes a 15% corporate alternative minimum tax on adjusted financial statement income which is effective for the fiscal year endedFebruary 2, 2024 . The new law also imposes a 1% excise tax on share repurchases, effective for repurchases made afterDecember 31, 2022 . We are currently assessing the potential impact of this law. Other 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. ISG - We expect that ISG will continue to be impacted by the changing nature of the IT infrastructure market and competitive environment. 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. 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 toDell 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. Competitive dynamics continue to be a factor in our CSG business and impact pricing and operating results. We remain committed to our long-term strategy for CSG and will continue to make investments to innovate across the portfolio while benefiting from consolidation trends that are occurring in the markets in which we compete. We expect that the CSG demand environment will continue to be subject to seasonal trends. 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, loans, and immediate pay models designed to match customers' consumption and financing preferences. We believe these options are particularly beneficial during times of economic uncertainty as they provide our customers with financial flexibility to further enable them to procure our solutions. 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. 63
-------------------------------------------------------------------------------- Table of Contents 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 to show 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. 65 -------------------------------------------------------------------------------- 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 that are still amortizing 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. During the second quarter of Fiscal 2023, we recognized$189 million in costs associated with exiting our business inRussia , primarily related to asset impairments and other exit related 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 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. 66 -------------------------------------------------------------------------------- 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 Six Months Ended July 29, July 30, July 29, July 30, 2022 % Change 2021 2022 % Change 2021 (in millions, except percentages) Product net revenue$ 20,810 10 %$ 18,895 $ 41,274 13 %$ 36,382 Non-GAAP adjustments: Impact of purchase accounting - 1 - - Non-GAAP product net revenue$ 20,810 10 %$ 18,896 $ 41,274 13 %$ 36,382 Services net revenue$ 5,615 6 %$ 5,296 $ 11,267 8 %$ 10,399 Non-GAAP adjustments: Impact of purchase accounting - 7 - 16 Non-GAAP services net revenue$ 5,615 6 %$ 5,303 $ 11,267 8 %$ 10,415 Net revenue$ 26,425 9 %$ 24,191 $ 52,541 12 %$ 46,781 Non-GAAP adjustments: Impact of purchase accounting - 8 - 16 Non-GAAP net revenue$ 26,425 9 %$ 24,199 $ 52,541 12 %$ 46,797 Product gross margin$ 3,139 (2) %$ 3,203 $ 6,594 5 %$ 6,256 Non-GAAP adjustments: Amortization of intangibles 105 149 209 300 Impact of purchase accounting - 2 2 2 Stock-based compensation expense 13 11 26 20 Other corporate expenses 13 1 16 4 Non-GAAP product gross margin$ 3,270 (3) %$ 3,366 $ 6,847 4 %$ 6,582 Services gross margin$ 2,300 1 %$ 2,272 $ 4,629 3 %$ 4,483 Non-GAAP adjustments: Amortization of intangibles - 1 - - Impact of purchase accounting - 7 - 16 Stock-based compensation expense 24 21 49 40 Other corporate expenses 56 6 66 16 Non-GAAP services gross margin$ 2,380 3 %$ 2,307 $ 4,744 4 %$ 4,555 67
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Three Months Ended Six Months Ended
July 29, July 30, July 29, July 30,
2022 % Change 2021 2022 % Change 2021
(in millions, except percentages)
Gross margin $ 5,439 (1) % $ 5,475 $ 11,223 5 % $ 10,739
Non-GAAP adjustments:
Amortization of intangibles 105 150 209 300
Impact of purchase accounting - 9 2 18
Stock-based compensation expense 37 32 75 60
Other corporate expenses 69 7 82 20
Non-GAAP gross margin $ 5,650 - % $ 5,673 $ 11,591 4 % $ 11,137
Operating expenses $ 4,169 (6) % $ 4,458 $ 8,403 (4) % $ 8,735
Non-GAAP adjustments:
Amortization of intangibles (139) (292) (278) (587)
Impact of purchase accounting (3) (6) (10)
(17)
Transaction-related expenses (3) (37) (8)
(66)
Stock-based compensation expense (199) (174) (393) (318) Other corporate expenses (127) (144) (210) (248) Non-GAAP operating expenses$ 3,698 (3) %$ 3,805 $ 7,504 - %$ 7,499 Operating income$ 1,270 25 %$ 1,017 $ 2,820 41 %$ 2,004 Non-GAAP adjustments: Amortization of intangibles 244 442 487 887 Impact of purchase accounting 3 15 12 35 Transaction-related expenses 3 37 8 66 Stock-based compensation expense 236 206 468 378 Other corporate expenses 196 151 292 268 Non-GAAP operating income$ 1,952 4 %$ 1,868 $ 4,087 12 %$ 3,638 Net income from continuing operations$ 506 (20) %$ 629 $ 1,575 22 %$ 1,288 Non-GAAP adjustments: Amortization of intangibles 244 442 487 887 Impact of purchase accounting 3 15 12 35 Transaction-related (income) expenses (4) 25 (6) 54 Stock-based compensation expense 236 206 468 378 Other corporate expenses 212 151 308 268 Fair value adjustments on equity investments 255 (168) 241
(362)
Aggregate adjustment for income taxes (186) (134) (385) (327) Non-GAAP net income$ 1,266 9 %$ 1,166 $ 2,700 22 %$ 2,221 68
-------------------------------------------------------------------------------- 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 Six Months Ended
July 29, July 30, July 29, July 30,
2022 % Change 2021 2022 % Change 2021
(in millions, except percentages)
Net income from continuing operations $ 506 (20) % $ 629 $ 1,575 22 % $ 1,288
Adjustments:
Interest and other, net (a) 635 292 972 580
Income tax expense (benefit) 129 96 273 136
Depreciation and amortization 744 904 1,470 1,809
EBITDA $ 2,014 5 % $ 1,921 $ 4,290 13 % $ 3,813
EBITDA $ 2,014 5 % $ 1,921 $ 4,290 13 % $ 3,813
Adjustments:
Stock-based compensation expense 236 206 468 378
Impact of purchase accounting (b) - 8 -
20
Transaction-related expenses (c) 3 37 8
66
Other corporate expenses (d) 196 151 292 268 Adjusted EBITDA$ 2,449 5 %$ 2,323 $ 5,058 11 %$ 4,545 ____________________ (a)See "Results of Operations - Interest and Other, Net" for more information on the components of interest and other, net. (b)This amount includes the non-cash purchase accounting adjustments related to theEMC merger transaction and the going-private transaction. (c)Transaction-related expenses consist of acquisition, integration, and divestiture related costs, as well as the costs incurred in the VMware Spin-off. (d)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. During the second quarter and first six months of Fiscal 2023, other corporate expenses includes$189 million of costs incurred in connection with exiting our business inRussia . 69 --------------------------------------------------------------------------------
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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 Six Months Ended
July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021
% of % % of % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Net revenue:
Products $ 20,810 78.8 % 10 % $ 18,895 78.1 % $ 41,274 78.6 % 13 % $ 36,382 77.8 %
Services 5,615 21.2 % 6 % 5,296 21.9 % 11,267 21.4 % 8 % 10,399 22.2 %
Total net revenue $ 26,425 100.0 % 9 % $ 24,191 100.0 % $ 52,541 100.0 % 12 % $ 46,781 100.0 %
Gross margin:
Products (a) $ 3,139 15.1 % (2) % $ 3,203 17.0 % $ 6,594 16.0 % 5 % $ 6,256 17.2 %
Services (b) 2,300 41.0 % 1 % 2,272 42.9 % 4,629 41.1 % 3 % 4,483 43.1 %
Total gross margin $ 5,439 20.6 % (1) % $ 5,475 22.6 % $ 11,223 21.4 % 5 % $ 10,739 23.0 %
Operating expenses $ 4,169 15.8 % (6) % $ 4,458 18.4 % $ 8,403 16.0 % (4) % $ 8,735 18.7 %
Operating income $ 1,270 4.8 % 25 % $ 1,017 4.2 % $ 2,820 5.4 % 41 % $ 2,004 4.3 %
Net income from continuing
operations $ 506 1.9 % (20) % $ 629 2.6 % $ 1,575 3.0 % 22 % $ 1,288 2.8 %
Non-GAAP Financial Information
Three Months Ended Six Months Ended
July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021
% of Non-GAAP % % of Non-GAAP % of Non-GAAP % % of Non-GAAP
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Non-GAAP net revenue:
Products $ 20,810 78.8 % 10 % $ 18,896 78.1 % $ 41,274 78.6 % 13 % $ 36,382 77.7 %
Services 5,615 21.2 % 6 % 5,303 21.9 % 11,267 21.4 % 8 % 10,415 22.3 %
Total non-GAAP net revenue $ 26,425 100.0 % 9 % $ 24,199 100.0 % $ 52,541 100.0 % 12 % $ 46,797 100.0 %
Non-GAAP gross margin:
Products (a) $ 3,270 15.7 % (3) % $ 3,366 17.8 % $ 6,847 16.6 % 4 % $ 6,582 18.1 %
Services (b) 2,380 42.4 % 3 % 2,307 43.5 % 4,744 42.1 % 4 % 4,555 43.7 %
Total non-GAAP gross
margin $ 5,650 21.4 % - % $ 5,673 23.4 % $ 11,591 22.1 % 4 % $ 11,137 23.8 %
Non-GAAP operating
expenses $ 3,698 14.0 % (3) % $ 3,805 15.7 % $ 7,504 14.3 % - % $ 7,499 16.0 %
Non-GAAP operating income $ 1,952 7.4 % 4 % $ 1,868 7.7 % $ 4,087 7.8 % 12 % $ 3,638 7.8 %
Non-GAAP net income $ 1,266 4.8 % 9 % $ 1,166 4.8 % $ 2,700 5.1 % 22 % $ 2,221 4.7 %
EBITDA $ 2,014 7.6 % 5 % $ 1,921 7.9 % $ 4,290 8.2 % 13 % $ 3,813 8.1 %
Adjusted EBITDA $ 2,449 9.3 % 5 % $ 2,323 9.6 % $ 5,058 9.6 % 11 % $ 4,545 9.7 %
____________________
(a) Product gross margin and non-GAAP product gross margin percentages are
calculated as a percentage of product net revenue and non-GAAP product net
revenue, respectively.
(b) Services gross margin and non-GAAP services gross margin percentages are
calculated as a percentage of services net revenue and non-GAAP services net
revenue, respectively.
70
-------------------------------------------------------------------------------- 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 second quarter and first six months of Fiscal 2023, our net revenue increased 9% and 12%, respectively, due to growth in net revenue for both CSG and ISG. CSG net revenue benefited from growth in net revenue attributable to our commercial offerings. ISG net revenue growth continued throughout the second quarter and first six months of Fiscal 2023 driven by strength in our offerings across both servers and networking and storage. During the second quarter and first six months of Fiscal 2023, our operating income increased 25% to$1.3 billion and 41% to$2.8 billion , respectively. These increases were primarily due to the favorable impact of a decrease in amortization of intangible assets and growth in operating income for ISG. Growth in ISG operating income for the second quarter of Fiscal 2023 was driven by our server and networking and storage offerings while, for the first six months of Fiscal 2023, ISG operating income growth was primarily due to strength in our storage offerings. During the second quarter and first six months of Fiscal 2023 our non-GAAP operating income increased 4% to$2.0 billion and increased 12% to$4.1 billion driven by the same ISG dynamics discussed above. Operating income as a percentage of net revenue increased 60 basis points to 4.8% and 110 basis points to 5.4% during the second quarter and first six months of Fiscal 2023, respectively. These increases were primarily driven by a decrease in operating expenses as a percentage of net revenue due to continued disciplined cost management and by the favorable impact of a decrease in amortization of intangible assets. The effect of these factors was partially offset by declines in gross margin as a percentage of net revenue primarily due to the impacts of an overall increase in cost of net revenue and foreign currency exchange rate fluctuations, which were not entirely offset by pricing adjustments as we balanced profitability with competitive positioning. Non-GAAP operating income as a percentage of net revenue decreased 30 basis points to 7.4% and was flat at 7.8% during the second quarter and first six months of Fiscal 2023, respectively, driven by declines in gross margin as a percentage of net revenue offset by decreases in operating expenses as a percentage of net revenue. Cash provided by operating activities was$0.5 billion and$4.0 billion during the first six months of Fiscal 2023 and Fiscal 2022, respectively. During the first six months of Fiscal 2022,$2.1 billion of the$4.0 billion total represented cash provided by operating activities attributable toVMware . Cash provided by operating activities during the first six months of Fiscal 2023 reflected continued profitability, partially offset by working capital dynamics. See "Liquidity, Cash Requirements, and Market Conditions" for further information on our cash flow metrics. We continue to see opportunities to create value and grow in response to 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 second quarter and first six months of Fiscal 2023, our net revenue increased 9% and increased 12%, respectively, due to growth 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 second quarter and first six months of Fiscal 2023, our product net revenue increased 10% and 13%, respectively, driven by growth within both CSG and ISG. CSG product net revenue increased primarily due to growth within our commercial offerings partially offset by a decrease within our consumer offerings. ISG product net revenue growth was primarily attributable to growth in net revenue from sales of servers and networking and, to a lesser extent, an increase in net revenue from sales of storage. 71
-------------------------------------------------------------------------------- Table of Contents •Services Net Revenue - Services net revenue includes revenue from our services offerings and support services related to hardware products and software licenses. During the second quarter and first six months of Fiscal 2023, services net revenue increased 6% and 8%, respectively, driven principally by strength in hardware support and maintenance and third-party software support and maintenance within CSG. A substantial portion of services net revenue is derived from offerings that have been deferred over a period of time, and, as a result, reported services net revenue growth rates will be different than reported product net revenue growth rates. From a geographical perspective, net revenue generated by sales to customers in all regions increased during the second quarter and first six months of Fiscal 2023, driven by both CSG and ISG.
Gross Margin
During the second quarter of Fiscal 2023, our gross margin decreased 1% to$5.4 billion and our non-GAAP gross margin remained flat at$5.7 billion , driven by declines in CSG and other businesses gross margin that were mostly offset by growth in ISG gross margin. During the first six months of Fiscal 2023, our gross margin increased 5% to$11.2 billion and our non-GAAP gross margin increased 4% to$11.6 billion . These increases were driven primarily by an increase in ISG gross margin due to continued strength in net revenue growth attributable to both storage and servers and networking. During the second quarter of Fiscal 2023, both our gross margin and non-GAAP gross margin percentages decreased 200 basis points to 20.6% and 21.4%, respectively, while during the first six months of Fiscal 2023, gross margin and non-GAAP gross margin percentages decreased 160 basis points to 21.4% and 170 basis points to 22.1%, respectively. These decreases were primarily due to the impacts of an overall increase in cost of net revenue and foreign currency exchange rate fluctuations, which were not entirely offset by pricing adjustments as we balanced profitability with competitive positioning. Increased cost of net revenue was principally driven by a net increase in input costs, as compared to the second quarter and first six months of Fiscal 2022, which broadly impacted our product offerings. •Product Gross Margin - During the second quarter of Fiscal 2023, product gross margin and non-GAAP product gross margin decreased 2% to$3.1 billion and 3% to$3.3 billion , respectively. These decreases were primarily due to a decline in CSG product gross margin, principally related to our consumer offerings, which was partially offset by an increase in ISG product gross margin. ISG product gross margin increased primarily due continued strength in product net revenue growth for our server and networking offerings. During the first six months of Fiscal 2023, product gross margin and non-GAAP product gross margin increased 5% to$6.6 billion and 4% to$6.8 billion , respectively. These increases were attributable to growth in ISG product gross margin, which was driven primarily by strength in product net revenue growth for our server and networking offerings coupled with product net revenue growth in our storage offerings. Growth in ISG product gross margin was partially offset by a decrease in CSG product gross margin driven primarily by our consumer offerings. During the second quarter of Fiscal 2023, product gross margin percentage and non-GAAP product gross margin percentage decreased 190 basis points to 15.1% and 210 basis points to 15.7%, respectively, while during the first six months of Fiscal 2023 product gross margin percentage and non-GAAP product gross margin percentage decreased 120 basis points to 16.0% and 150 basis points to 16.6%, respectively. The decrease during the second quarter of Fiscal 2023 was primarily due to a decline in product gross margin percentage for both CSG and ISG. For the first six months of Fiscal 2023, product gross margin percentage decreased primarily due to a decline in CSG product gross margin percentage and, to a lesser extent, a decline in ISG product gross margin percentage. 72 -------------------------------------------------------------------------------- Table of Contents •Services Gross Margin - During the second quarter and first six months of Fiscal 2023, services gross margin increased 1% to$2.3 billion and 3% to$4.6 billion , respectively. During the second quarter and first six months of Fiscal 2023, non-GAAP services gross margin increased 3% to$2.4 billion and 4% to$4.7 billion , respectively. These 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. During the second quarter and first six months of Fiscal 2023, services gross margin percentage decreased 190 basis points to 41.0% and 200 basis points to 41.1%, respectively. These decreases were driven in part by declines in services gross margin percentage for ISG and, to a lesser extent, a shift in mix towards CSG. The impacts of the divestiture of Boomi during the third quarter of Fiscal 2022 coupled with asset impairment costs associated with exiting ourRussia business also contributed to the declines. During the second quarter and first six months of Fiscal 2023, non-GAAP services gross margin percentage decreased 110 basis points to 42.4% and 160 basis points to 42.1%, respectively, driven by the same ISG, CSG, and Boomi divestiture impacts discussed above.
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 second
quarter and first six months of Fiscal 2023 and for the second quarter and first
six months 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 Six Months Ended
July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021
% of Net % % of Net % of Net % % of Net
Dollars Revenue Change Dollars Revenue Dollars Revenue Change Dollars Revenue
(in millions, except percentages)
Operating expenses:
Selling, general, and
administrative $ 3,543 13.4 % (6) % $ 3,761 15.5 % $ 7,096 13.5 % (4) % $ 7,419 15.9 %
Research and development 626 2.4 % (10) % 697 2.9 % 1,307 2.5 % (1) % 1,316 2.8 %
Total operating expenses $ 4,169 15.8 % (6) % $ 4,458 18.4 % $ 8,403 16.0 % (4) % $ 8,735 18.7 %
Three Months Ended Six Months Ended
July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021
% of Net % % of Net % of Net % % of Net
Dollars Revenue Change Dollars Revenue Dollars Revenue Change Dollars Revenue
(in millions, except percentages)
Non-GAAP operating
expenses $ 3,698 14.0 % (3) % $ 3,805 15.7 % $ 7,504 14.3 % - % $ 7,499 16.0 %
During the second quarter and first six months of Fiscal 2023, total operating
expenses decreased 6% and 4%, respectively, primarily driven by a decrease in
selling, general, and administrative expenses in both periods.
•Selling, General, and Administrative - Selling, general, and administrative
("SG&A") expenses decreased 6% and 4% during the second quarter and first six
months of Fiscal 2023, respectively. The decreases in SG&A expenses were
primarily attributable to a decrease in amortization of intangible assets and a
decrease in employee compensation and benefits expense primarily resulting from
a reduction in performance-based compensation and disciplined cost management.
•Research and Development - Research and development ("R&D") expenses are
primarily composed of personnel-related expenses related to product development.
R&D expenses decreased 10% and 1% during the second quarter and first six months
of Fiscal 2023, respectively. The decrease in R&D expenses during the second
quarter of Fiscal 2023 was driven by the same employee compensation and benefits
dynamics discussed within SG&A above. As a percentage of net revenue, R&D
expenses for the second quarter of Fiscal 2023 and Fiscal 2022 were 2.4% and
2.9%, respectively, and, for the first six months of Fiscal 2023 and Fiscal
2022, were 2.5% and 2.8%, respectively. These decreases were driven by revenue
growth which outpaced our R&D investments coupled with disciplined cost
management. We intend to continue supporting R&D initiatives to innovate and
introduce new and enhanced solutions into the market.
During the second quarter and first six months of Fiscal 2023, non-GAAP
operating expenses decreased 3% and were flat, respectively. The decrease in
non-GAAP operating expenses during the second quarter of Fiscal 2023 was
principally due to a decline in employee compensation and benefits expense
primarily resulting from a reduction in performance-based compensation and
disciplined cost management. For the first six months of Fiscal 2023, a decrease
in employee compensation and benefits expense was offset by increases in other
selling, general, and administrative expenses.
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.
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Operating Income
During the second quarter and first six months of Fiscal 2023, our operating
income increased 25% to $1.3 billion and 41% to $2.8 billion , respectively.
These increases were primarily due to the favorable impact of a decrease in
amortization of intangible assets and growth in operating income for ISG. Growth
in ISG operating income for the second quarter of Fiscal 2023 was driven by our
server and networking and storage offerings while, for the first six months of
Fiscal 2023, ISG operating income growth was primarily due to strength in our
storage offerings. During the second quarter and first six months of Fiscal
2023, our non-GAAP operating income increased 4% to $2.0 billion and 12% to $4.1
billion driven by the same ISG dynamics discussed above.
Operating income as a percentage of net revenue increased 60 basis points to
4.8% and 110 basis points to 5.4% during the second quarter and first six months
of Fiscal 2023, respectively. These increases were primarily driven by a
decrease in operating expenses as a percentage of net revenue due to continued
disciplined cost management and the favorable impact of a decrease in
amortization of intangible assets. The effect of these factors was partially
offset by declines in gross margin as a percentage of net revenue primarily due
to the impacts of an overall increase in cost of net revenue and foreign
currency exchange rate fluctuations, which were not entirely offset by pricing
adjustments as we balanced profitability with competitive positioning. Non-GAAP
operating income as a percentage of net revenue decreased 30 basis points to
7.4% and was flat at 7.8% during the second quarter and first six months of
Fiscal 2023, respectively, driven by declines in gross margin as a percentage of
net revenue offset by decreases in operating expenses as a percentage of net
revenue.
Interest and Other, Net
The following table presents information regarding interest and other, net for
the periods indicated:
Three Months Ended Six Months Ended
July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021
(in millions)
Interest and other, net:
Investment income, primarily interest $ 16 $ 10 $ 31 $ 20
Gain (loss) on investments, net (255) 166 (241) 359
Interest expense (298) (416) (563) (849)
Foreign exchange (66) (67) (155) (119)
Other (32) 15 (44) 9
Total interest and other, net $ (635) $ (292) $ (972) $ (580)
During the second quarter and first six months of Fiscal 2023, the change in
interest and other, net was unfavorable by $343 million and $392 million ,
respectively. The unfavorable change in both periods was primarily attributable
to the net loss on investments as a result of fair value adjustments on our
non-marketable strategic investment portfolio discussed above, which were
partially offset by a decrease in interest expense on lower average outstanding
debt balances.
Income and Other Taxes
The following table presents information regarding our income and other taxes for the periods indicated:
Three Months Ended Six Months Ended
July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021
(in millions, except percentages)
Income before income taxes $ 635 $ 725 $ 1,848 $ 1,424
Income tax expense $ 129 $ 96 $ 273 $ 136
Effective income tax rate 20.3 % 13.2 % 14.8 % 9.6 %
75
-------------------------------------------------------------------------------- Table of Contents For the second quarter of Fiscal 2023 and Fiscal 2022, our effective income tax rate was 20.3% and 13.2%, respectively. For the first six months of Fiscal 2023 and Fiscal 2022, our effective income tax rate was 14.8% and 9.6%, respectively. For the second quarter and first six months of Fiscal 2023, the changes in the Company's effective tax rates were primarily attributable to changes in discrete tax items. Other increases in our effective income tax rates were driven by a change in our jurisdictional mix of income and higherU.S. tax on foreign operations, the effects of which were partially offset by higher benefits from foreign tax credits. HigherU.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 onDecember 22, 2017 , research and development expenses incurred for tax years beginning afterDecember 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 theU.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 a significant reduction to our deferred tax liabilities. Our effective income tax rate can fluctuate depending on the geographic distribution of our worldwide earnings, as our foreign earnings are generally taxed at lower rates than inthe United States . The differences between our effective income tax rate and theU.S. federal statutory rate of 21% principally result from the geographical distribution of income, differences between the book and tax treatment of certain items, and 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 toSingapore andChina . A significant portion of these income tax benefits relates to a tax holiday that will be effective untilJanuary 31, 2029 . Our other tax holidays will expire in whole or in part during Fiscal 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 ofJuly 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.
See "Introduction - Business Trends and Challenges - Inflation Reduction Act" for a discussion of recent tax legislation.
Net Income from Continuing Operations
Net income from continuing operations was$0.5 billion and$0.6 billion during the second quarter of Fiscal 2023 and Fiscal 2022, respectively. The decrease was driven principally by an unfavorable change in interest and other, net, partially offset by an increase in operating income.
During the first six months of Fiscal 2023 and Fiscal 2022, net income from
continuing operations was
Non-GAAP net income was$1.3 billion and$2.7 billion for the second quarter and first six months of Fiscal 2023, respectively, compared to$1.2 billion and$2.2 billion for the second quarter and first six months of Fiscal 2022, respectively. The increases were primarily attributable to an increase in non-GAAP operating income and a favorable change in interest and other, net, partially offset by an increase in tax expense during the current periods. 76 -------------------------------------------------------------------------------- Table of Contents Business Unit Results Our reportable segments are based on the ISG and CSG business units. A description of our business units is provided under "Introduction." See Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income (loss), respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
Three Months Ended Six Months Ended
July 29, 2022 % Change July 30, 2021 July 29, 2022 % Change July 30, 2021
(in millions, except percentages)Net revenue: Servers and networking$ 5,209 16 % $ 4,480 $ 10,257 19 % $ 8,620 Storage 4,327 6 % 4,070 8,564 8 % 7,963 Total ISG net revenue$ 9,536 12 % $ 8,550 $ 18,821 13 % $ 16,583 Operating income: ISG operating income$ 1,046 9 % $ 962 $ 2,128 22 % $ 1,740 % of segment net revenue 11.0 % 11.3 % 11.3 % 10.5 % Net Revenue - During the second quarter and first six months of Fiscal 2023, ISG net revenue increased 12% and 13%, respectively, driven by strength across both servers and networking and storage offerings. Revenue from sales of servers and networking increased 16% and 19% during the second quarter and first six months of Fiscal 2023, respectively. The increases were primarily driven by an increase in average selling price of our server offerings, the effect of which was partially offset by a decrease in units sold. The average selling price for our server offerings increased as a result of a shift in mix within servers, richer configurations, and continued actions to manage pricing in response to increased input costs. During the second quarter and first six months of Fiscal 2023, storage revenue increased 6% and 8%, respectively, due to continued 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 second quarter and first six months of Fiscal 2023.
Operating Income - During the second quarter of Fiscal 2023, ISG operating
income as a percentage of net revenue decreased 30 basis points to 11.0%. The
decrease was principally attributable to the impacts of an increase in cost of
net revenue and foreign currency exchange rate fluctuations which were not
entirely offset by pricing adjustments. The effect of these impacts was
partially mitigated by the favorable impact of a decrease in operating expense
as a percentage of revenue.
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During the first six months of Fiscal 2023, ISG operating income as a percentage
of net revenue increased 80 basis points to 11.3%, primarily due to a decrease
in operating expenses as a percentage of revenue that resulted from strong
revenue growth and disciplined cost management. The favorable impact of the
decrease in operating expenses as a percentage of revenue was partially offset
by the impacts of an increase in cost of net revenue and foreign currency
exchange rate fluctuations which were not entirely offset by pricing
adjustments, coupled with 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 Six Months Ended
July 29, 2022 % Change July 30, 2021 July 29, 2022 % Change July 30, 2021
(in millions, except percentages)Net revenue: Commercial$ 12,141 15 % $ 10,577 $ 24,112 18 % $ 20,385 Consumer 3,349 (9) % 3,691 6,965 (3) % 7,194 Total CSG net revenue$ 15,490 9 % $ 14,268 $ 31,077 13 % $ 27,579 Operating income: CSG operating income $ 978 (1) % $ 986 $ 2,093 1 % $ 2,066 % of segment net revenue 6.3 % 6.9 % 6.7 % 7.5 % Net Revenue - During the second quarter and first six months of Fiscal 2023, CSG net revenue increased 9% and 13%, respectively, primarily driven by an increase in revenue attributable to our commercial offerings, partially offset by a decline in consumer net revenue. Commercial net revenue increased 15% and 18% during the second quarter and first six months of Fiscal 2023, respectively, principally as a result of an increase in the average selling price of our commercial offerings. Consumer net revenue decreased 9% and 3% during the second quarter and first six months of Fiscal 2023, respectively, primarily due to a decrease in units sold, partially offset by the effect of an increase in the average selling price of our consumer offerings.
Our average selling prices increased as a result of a shift in mix towards commercial offerings, richer configurations, and continued actions to manage pricing in response to the macroeconomic environment.
From a geographical perspective, net revenue attributable to CSG increased
across all regions during the first six months of Fiscal 2023. During the second
quarter of Fiscal 2023, net revenue attributable to CSG increased in the
Operating Income - During the second quarter and first six months of Fiscal
2023, CSG operating income as a percentage of net revenue decreased 60 basis
points to 6.3% and 80 basis points to 6.7%, respectively, primarily due to the
impacts of an increase in cost of net revenue and foreign currency exchange rate
fluctuations which were not entirely offset by pricing adjustments, as we
balanced profitability with competitive positioning. The effect of these impacts
was partially offset by a decrease in operating expenses as a percentage of
revenue as a result of disciplined cost management.
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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$13.4 billion and$12.9 billion as ofJuly 29, 2022 andJanuary 28, 2022 , respectively. We maintain an allowance for expected credit losses to cover receivables that may be deemed uncollectible. As ofJuly 29, 2022 andJanuary 28, 2022 , the allowance for expected credit losses was$75 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$2.3 billion and$1.9 billion for the second quarter of Fiscal 2023 and Fiscal 2022, respectively, and$4.4 billion and$3.8 billion for the first six months 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. Upon commencement of sales-type leases, we typically qualify for up-front revenue recognition. Upon origination of operating leases, we record equipment under operating leases, classified as property, plant, and equipment. Over the contract term of an operating lease, we recognize rental revenue and depreciation expense, classified as cost of net revenue. As ofJuly 29, 2022 andJanuary 28, 2022 , our financing receivables, net were$10.3 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 the second quarter and first six months of both 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 ofJuly 29, 2022 andJanuary 28, 2022 , the residual interest recorded as part of financing receivables was$150 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 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 second quarter and first six months of Fiscal 2023 and Fiscal 2022. As ofJuly 29, 2022 andJanuary 28, 2022 , equipment under operating leases, net was$2.0 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 second quarter and first six months 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. 80
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Table of Contents For DFS operating leases, the initial funding is classified as a capital expenditure and reflected as an impact to cash flows used in investing activities.
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, CASH REQUIREMENTS, 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 and commercial paper program, will be sufficient over at least the next twelve months and for the foreseeable future thereafter to 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:
July 29, 2022
(in millions) Cash and cash equivalents, and available borrowings: Cash and cash equivalents
$ 5,507
$ 9,477 Remaining available borrowings under revolving credit facilities
4,999 4,969
Total cash, cash equivalents, and available borrowings
$ 14,446
During the first six months of Fiscal 2023, cash and cash equivalents decreased by$4.0 billion , primarily driven by return of capital to stockholders, through share repurchases and dividend payments, and capital expenditures. Our revolving credit facilities as ofJuly 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 ofJuly 29, 2022 , there were no borrowings outstanding under the facility and remaining available borrowings totaled approximately$5.0 billion . The 2021 Revolving Credit Facility also acts as a backstop to provide liquidity support for our commercial paper program discussed below. During the second quarter of Fiscal 2023, we established a commercial paper program under which we may issue unsecured notes in a maximum aggregate face amount of$5.0 billion outstanding at any time, with maturities up to 397 days from the date of issue. As ofJuly 29, 2022 , we had no outstanding borrowings under the program. We may regularly use our available borrowings from the 2021 Revolving Credit Facility and issuances under the commercial paper program 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. 82
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Debt
The following table presents our outstanding debt as of the dates indicated:
July 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 (1,132) 1 (1,133)
Total core debt 16,120 1 16,119
DFS related debt
DFS debt 9,640 (6) 9,646
DFS allocated debt 1,132 (1) 1,133
Total DFS related debt 10,772 (7) 10,779
Other 311 (26) 337
Total debt, principal amount 27,203 (32) 27,235
Carrying value adjustments (269) 12 (281)
Total debt, carrying value $ 26,934 $ (20) $ 26,954
As of
We define core debt as the total principal amount of our debt, less DFS related debt and other debt. Our core debt was$16.1 billion as ofJuly 29, 2022 andJanuary 28, 2022 . 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 toDell Technologies . To fund expansion of the DFS business, we balance the use of the securitization and structured financing programs with other sources of liquidity. We approximate the amount of our debt used to fund the DFS business by applying a 7:1 debt-to-equity ratio to the sum of our financing receivables balance and equipment under our DFS operating leases, net. The debt-to-equity ratio 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 commercial paper program or 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 we consider appropriate in light of market conditions and other relevant factors. 83 -------------------------------------------------------------------------------- Table of Contents Cash Flows
The following table presents a summary of our Condensed Consolidated Statements of Cash Flows for the periods indicated:
Six Months Ended
July 29, 2022 July 30, 2021
(in millions)
Net change in cash from:
Operating activities $ 455 $ 3,963
Investing activities (1,498) (1,188)
Financing activities (2,752) (5,311)Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(194) (21)
Change in cash, cash equivalents, and restricted cash $
(3,989)
Cash flows for the six months endedJuly 30, 2021 are inclusive of cash flows attributable toVMware . EffectiveNovember 1, 2021 , as a result of theVMware Spin-off, cash flows ceased to includeVMware . 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 provided by operating activities was$0.5 billion during the first six months of Fiscal 2023 and reflects continued profitability partially offset by the impact of working capital dynamics. During the first six months of Fiscal 2022, cash provided by operating activities was$4.0 billion , of which$2.1 billion represents cash provided by operating activities attributable toVMware , and was driven by both strong profitability coupled with favorable working capital dynamics. 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 six months of Fiscal 2023 and Fiscal 2022, cash used in investing activities was$1.5 billion and$1.2 billion , respectively, and was primarily applied to 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$2.8 billion during the first six months of Fiscal 2023 and primarily consisted of repurchases of common stock, payments to settle employee tax withholding on stock-based compensation, and the payment of quarterly dividends. Cash used in financing activities of$5.3 billion during the first six months 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, the initial funding is classified as a capital expenditure and reflected as cash flows used in investing activities. DFS new financing originations were$4.4 billion and$3.8 billion during the first six months of Fiscal 2023 and Fiscal 2022, respectively. As ofJuly 29, 2022 , DFS had$10.3 billion of total net financing receivables and$2.0 billion of equipment under DFS operating leases, net.
Cash Requirements and Expenditures
Capital Expenditures - We spent$1.5 billion and$1.3 billion during the first six months of Fiscal 2023 and Fiscal 2022, respectively, on property, plant, and equipment and capitalized software development costs, of which the funding of equipment under DFS operating leases totaled$0.5 billion and$0.4 billion , respectively. 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$3.1 billion and$3.3 billion , of which approximately$1.1 billion of expenditures are expected to be applied to equipment under DFS operating leases and approximately$0.4 billion to capitalized software development costs. 84 -------------------------------------------------------------------------------- Table of Contents 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 six months of Fiscal 2023, we repurchased approximately 42 million shares of ClassC Common Stock under this program for a total purchase price of approximately$2.1 billion . 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 six months endedJuly 29, 2022 , the Company paid the following dividends: Amount
Declaration Date Record Date Payment Date Dividend per Share (in millions)
0.33 $ 248 June 7, 2022 July 20, 2022 July 29, 2022 $ 0.33 $ 242 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 supplier's 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 ofJuly 29, 2022 , such purchase obligations were$4.0 billion ,$0.5 billion , and$0.8 billion for the remaining six 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. 85
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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 Inc. , 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
Six Months Ended
July 29, 2022
(in millions)
Net revenue (a) $ 4,966
Gross margin (b) 2,185
Operating income 597
Interest and other, net (c) (1,214)
Loss before income taxes (617)
Net loss attributable to Obligor Group $ (439)
____________________
(a) Includes net revenue from services provided and product sales to Non-Obligor Subsidiaries of$440 million and$79 million , respectively. (b) Includes cost of net revenue from resale of solutions purchased from Non-Obligor Subsidiaries and theRelated Party of$487 million and$264 million , respectively. Includes costs of net revenue from shared services provided by Non-Obligor Subsidiaries of$315 million . (c) Includes interest expense on inter-company loan payables of$631 million . 86
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The following table presents summarized balance sheet information for the
July 29, 2022 January 28, 2022
(in millions)
ASSETS
Current assets $ 3,178 $ 3,106
Intercompany receivables 123 988
Due from related party, net 117 59
Short-term intercompany loan receivables 232
-
Total current assets 3,650
4,153
Due from related party, net 609
710
Goodwill and intangible assets 15,119 15,399 Other non-current assets 2,812 2,810 Total assets$ 22,190 $ 23,072 LIABILITIES Current liabilities$ 5,629 $ 4,625 Due to related party 95 192 Total current liabilities 5,724 4,817 Long-term debt 16,016 17,001 Intercompany loan payables 37,582 37,509 Other non-current liabilities 3,445 3,473 Total liabilities$ 62,767 $ 62,800 87
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