DELL TECHNOLOGIES INC. This management's discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company's annual report on Form 10-K for the fiscal year endedJanuary 29, 2021 and the unaudited Condensed Consolidated Financial Statements included in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and that are subject to numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied in any forward-looking statements.
Unless otherwise indicated, all results presented are prepared in a manner that
complies, in all material respects, with generally accepted accounting
principles in
Unless the context indicates otherwise, references in this report to "we," "us," "our," the "Company," and "Dell Technologies" meanDell Technologies Inc. and its consolidated subsidiaries, references to "Dell" meanDell Inc. andDell Inc.'s consolidated subsidiaries, and references to "EMC" meanEMC Corporation andEMC Corporation's consolidated subsidiaries. Our fiscal year is the 52- or 53-week period ending on the Friday nearestJanuary 31 . We refer to our fiscal year endingJanuary 28, 2022 and our fiscal year endedJanuary 29, 2021 as "Fiscal 2022" and "Fiscal 2021," respectively. Fiscal 2022 and Fiscal 2021 include 52 weeks.
INTRODUCTION
Dell Technologies helps organizations and individuals build their digital future and transform how they work, live, and play. We provide customers with the industry's broadest and most innovative technology and services portfolio for the data era, spanning traditional infrastructure, emerging multi-cloud technologies, and essential technology needed in the "do anything from anywhere" economy. We continue to seamlessly deliver differentiated and holistic IT solutions to our customers, which has driven significant revenue growth and share gains.Dell Technologies' integrated solutions help customers modernize their IT infrastructure, manage and operate in a multi-cloud world, address workforce transformation, and provide critical solutions that keep people and organizations connected, which has proven even more important in this current time of disruption caused by the COVID-19 pandemic. We are helping customers accelerate their digital transformations to improve and strengthen business and workforce productivity. With our extensive portfolio and our commitment to innovation, we offer secure, integrated solutions that extend from the edge to the core to the cloud, and we are at the forefront of the software-defined and cloud native infrastructure era. As further evidence of our commitment to innovation, we are evolving and expanding our IT as-a-Service and cloud offerings through Apex, which will provide our customers with greater flexibility to scale IT to meet their evolving business needs and budgets. InMay 2021 , we announced new offerings within our Apex portfolio.Dell Technologies' end-to-end portfolio is supported by a world-class organization with unmatched size and scale. We operate globally in 180 countries across key functional areas, including technology and product development, marketing, sales, financial services, and global services. Our go-to-market engine includes a 39,000-person sales force and a global network of over 200,000 channel partners.Dell Financial Services and its affiliates ("DFS") offer customer payment flexibility and enable synergies across the business. We employ 34,000 full-time service and support professionals and maintain more than 2,400 vendor-managed service centers. We manage a world-class supply chain that drives long-term growth and operating efficiencies, with approximately$70 billion in annual procurement expenditures and over 750 parts distribution centers. Together, these elements provide a critical foundation for our success, enabling us to offer unparalleled capability to our customers and making us the integrator of choice. 59
-------------------------------------------------------------------------------- Table of Contents Dell Technologies Vision and Innovation - Our vision is to be the essential technology company for the data era and a leader in end-user computing, software-defined data center solutions, data management, virtualization, edge computing, and cloud software. We believe that our results will benefit from an integrated go-to-market strategy, including enhanced coordination across all segments of our business, and from our differentiated products and solutions capabilities. We intend to continue to execute on our business model and seek to balance liquidity, profitability, and growth to position our company for long-term success. We are seeing an accelerated rate of change in the IT industry. We seek to address our customers' evolving needs and their broader digital transformation objectives as they embrace the hybrid multi-cloud environment of today. For many customers, a top digital priority is to build stable and resilient remote operational capabilities. We are seeing demand for simpler, more agile IT across multiple clouds. The pandemic accelerated the introduction and adoption of new technologies to ensure productivity and collaboration from anywhere. In light of this rapid pace of innovation, we continue to invest in research and development, sales, and other key areas of our business to deliver superior products and solutions capabilities and to drive long-term sustainable growth.
Spin-off of
OnApril 14, 2021 ,Dell Technologies entered into a Separation and Distribution Agreement withVMware, Inc , in whichDell Technologies owns a majority equity stake. Subject to the terms and conditions set forth in the Separation and Distribution Agreement, the businesses ofVMware, Inc. will be separated from the remaining businesses ofDell Technologies through a series of transactions that will result in the pre-transaction stockholders ofDell Technologies owning shares in two separate public companies: (1)VMware, Inc. , which will own the businesses ofVMware, Inc. and its subsidiaries, and (2)Dell Technologies , which will ownDell Technologies' other businesses and subsidiaries (the "VMware Spin-off").VMware, Inc. will pay a cash dividend, pro rata, to each of the holders ofVMware, Inc. common stock in an aggregate amount equal to an amount to be mutually agreed by the Company andVMware, Inc. between$11.5 billion and$12.0 billion , subject to the satisfaction of certain conditions of payment. Immediately following such payment, the separation ofVMware, Inc. from the Company will occur, including through the termination or settlement of certain intercompany accounts and intercompany contracts and the other transactions. Upon the closing of the transaction,Dell Technologies intends to use net proceeds from its pro rata share of the cash dividend to repay debt. The transaction is expected to close during the fourth quarter of calendar year 2021, subject to certain closing conditions, including receipt of a favorable private letter ruling from the Internal Revenue Service that the transaction will qualify as tax-free forDell Technologies stockholders forU.S. federal income tax purposes. EitherDell Technologies orVMware, Inc. may terminate the Separation and Distribution Agreement if the VMware Spin-off is not completed on or beforeJanuary 28, 2022 , among other termination rights. In connection with and upon consummation of theVMware Spin-off, Dell Technologies andVMware, Inc. will enter into a Commercial Framework Agreement (the "CFA"). The CFA will provide a framework under whichDell Technologies andVMware, Inc. can continue their strategic commercial relationship after the transaction. The CFA will have an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and conditions.
The transaction announcement did not have any impact on
Products and Services
We design, develop, manufacture, market, sell, and support a wide range of
comprehensive and integrated solutions, products, and services. We are organized
into the following business units, which are our reportable segments:
•Infrastructure Solutions Group ("ISG") - ISG enables the digital transformation
of our customers through our trusted multi-cloud and big data solutions, which
are built upon a modern data center infrastructure. ISG works with customers in
the area of hybrid cloud deployment with the goal of simplifying, streamlining,
and automating cloud operations. ISG solutions are built for multi-cloud
environments and are optimized to run cloud native workloads in both public and
private clouds, as well as traditional on-premise workloads.
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Our comprehensive portfolio of advanced storage solutions includes traditional as well as next-generation storage solutions (such as all-flash arrays, scale-out file, object platforms, and software-defined solutions). We have simplified our storage portfolio to ensure that we deliver the technology needed for our customers' digital transformation. We continue to make enhancements to our portfolio of storage solutions and expect that these enhancements will drive long-term improvements in the business. InMay 2020 , we released our new PowerStore offering, a differentiated midrange storage solution that enables seamless updates using microservices and container-based software architecture. This new offering allows us to compete more effectively within midrange storage and, as a result, we are seeing early signs of improving revenue velocity. Our server portfolio includes high-performance rack, blade, tower, and hyperscale servers, optimized for artificial intelligence and machine learning workloads. Our networking portfolio helps our business customers transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes. Our strengths in server, storage, and virtualization software solutions enable us to offer leading converged and hyper-converged solutions, allowing our customers to accelerate their IT transformation by acquiring scalable integrated IT solutions instead of building and assembling their own IT platforms. ISG also offers attached software, peripherals, and services, including support and deployment, configuration, and extended warranty services.
Approximately half of ISG revenue is generated by sales to customers in the
•Client Solutions Group ("CSG") - CSG includes branded hardware (such as
desktops, workstations, and notebooks) and branded peripherals (such as displays
and projectors), as well as third-party software and peripherals. Our computing
devices are designed with our commercial and consumer customers' needs in mind,
and we seek to optimize performance, reliability, manageability, design, and
security. In addition to our traditional hardware business, we have a portfolio
of thin client offerings that we believe will allow us to benefit from the
growth trends in cloud computing. For our customers that are seeking to simplify
client lifecycle management, our PC as-a-Service offering combines hardware,
software, lifecycle services, and financing into one all-encompassing solution
that provides predictable pricing per seat per month through Dell Financial
Services . CSG also offers attached software, peripherals, and services,
including support and deployment, configuration, and extended warranty services.
Approximately half of CSG revenue is generated by sales to customers in the
•VMware - TheVMware reportable segment ("VMware") reflects the operations ofVMware, Inc. (NYSE: VMW) withinDell Technologies .VMware works with customers in the areas of hybrid and multi-cloud, virtual cloud networking, digital workspaces, modern applications, and intrinsic security, helping customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments.VMware's portfolio supports and addresses the key IT priorities of customers: accelerating their cloud journey, modernizing their applications, empowering digital workspaces, transforming networking, and embracing intrinsic security.VMware enables its customers to digitally transform their operations as they ready their applications, infrastructure, and employees for constantly evolving business needs.
Approximately half of
Our other businesses, described below, consist of products and services offerings of Secureworks, Virtustream, and Boomi, each of which is majority-owned byDell Technologies . These businesses are not classified as reportable segments, either individually or collectively, as the results of the businesses are not material to our overall results and the businesses do not meet the criteria for reportable segments. 61 -------------------------------------------------------------------------------- Table of Contents •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. •Boomi specializes in cloud-based integration, connecting information between existing on-premise and cloud-based applications to ensure that business processes are optimized, data is accurate and workflow is reliable. InMay 2021 , we announced our entry into a definitive agreement withFrancisco Partners andTPG Capital to sell Boomi and certain related assets from the Company in a cash transaction valued at$4 billion , subject to certain closing adjustments. The transaction is expected to close in the third quarter of Fiscal 2022, subject to customary closing conditions. See Note 1 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about this transaction. OnSeptember 1, 2020 , we completed the sale ofRSA Security to a consortium of investors for total cash consideration of approximately$2.082 billion , resulting in a pre-tax gain on sale of$338 million . The Company ultimately recorded a$21 million loss net of taxes. The transaction was intended to further simplify our product portfolio and corporate structure. Prior to the divestiture,RSA Security's operating results were included within Other businesses. See Note 1 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about this transaction. Our products and services offerings are continually evolving in response to industry dynamics. As a result, reclassifications of certain products and services solutions in major product categories may be required. For further discussion regarding our current reportable segments, see "Results of Operations - Business Unit Results" and Note 16 of the Notes to the Condensed Consolidated Financial Statements included in this report.
DFS supports our businesses by offering and arranging various financing options and services for our customers primarily inNorth America ,Europe ,Australia, and New Zealand . DFS originates, collects, and services customer receivables primarily related to the purchase or use of our product, software, and service solutions. We also arrange financing for some of our customers in various countries where DFS does not currently operate as a captive enterprise. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. The results of these operations are allocated to our segments based on the underlying product or service financed. For additional information about our financing arrangements, see Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Strategic Investments and Acquisitions
As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm,Dell Technologies Capital , with a focus on emerging technology areas that are relevant to all segments of our business and that will complement our existing portfolio of solutions. Our investment areas include storage, software-defined networking, management and orchestration, security, machine learning and artificial intelligence, Big Data and analytics, cloud, edge computing, and software development operations. As ofJuly 30, 2021 andJanuary 29, 2021 ,Dell Technologies held strategic investments of$1.5 billion and$1.4 billion , respectively. In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives.
Business Trends and Challenges
COVID-19 Pandemic and Response - InMarch 2020 , theWorld Health Organization ("WHO") declared the outbreak of COVID-19 a pandemic. This declaration was followed by significant governmental measures implemented inthe United States and globally, including travel bans and restrictions, shelter-in-place orders, limitations and closures of non-essential businesses, and social distancing requirements in efforts to slow down and control the spread of the virus. 62 -------------------------------------------------------------------------------- Table of Contents The health of our employees, customers, business partners, and communities remains our primary focus. During Fiscal 2021, we took numerous actions in response to COVID-19, including a swift implementation of our business continuity plans. Our crisis management team remains actively engaged to respond to changes in our environment quickly and effectively, and to ensure that our ongoing response activities are aligned with recommendations of theWHO and theU.S. Centers for Disease Control and Prevention , and with governmental regulations. We are adjusting restrictions previously implemented as new information becomes available, governmental regulations are updated, and vaccines become more widely distributed. Most of our employees were previously equipped with remote work capabilities over the past several years, which enabled us to quickly establish a work-from-home posture for the majority of our employees. Further, we implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with customers. We are deploying return-to-site processes in certain regions based on ongoing assessments of local conditions by our management team. We will continue to monitor regional conditions and utilize remote work practices to ensure the health and safety of our employees, customers, and business partners. We continue to work closely with our customers and business partners to support them as they expand their own remote work solutions and contingency plans and to help them access our products and services remotely. Our agility, our breadth, and our scale has and will continue to benefit us in serving our customers and business partners during this period of accelerated digital transformation, evolution of the "do anything from anywhere" economy, and uncertainty relating to the effects of COVID-19. Notable actions include the following:
•Our global sales teams continue to successfully support our customers and partners remotely.
•We are helping to address our customers' cash flow requirements by expanding our as-a-service and financing offerings.
•Our close relationships and ability to connect directly with our customers through our e-commerce business have enabled us to quickly meet the immediate demands of the work- and learn-from-home environments as well as the long-term demands of in office, remote, and hybrid workforce environments. •The strength, scale, and resiliency of our global supply chain have afforded us flexibility to manage through the significant disruption in the supply chain environment. We continue to adapt in real time to events as they unfold by applying predictive analytics to model a variety of outcomes to respond quickly to the changing environment. We continue to optimize our global supply chain footprint to maximize factory uptime, for bothDell Technologies and our suppliers, by working through various local governmental regulations and mandates and by establishing robust safety measures to protect the health and safety of our essential team members. •We continue to drive innovation and excellence in engineering with a largely remote workforce. Engineers and product teams have delivered several critical solutions, including cloud updates, key client product refreshes, PowerStore midrange storage and software, and recently announced IT as-a-Service and cloud offerings within the Apex portfolio. During Fiscal 2021, we took precautionary measures to increase our cash position and preserve financial flexibility. We also took a series of prudent steps to manage expenses and preserve liquidity that included, among others, global hiring limitations, a reduction in consulting, contractor and facilities-related costs, global travel restrictions, and a temporary suspension of theDell 401(k) match program forU.S. employees. EffectiveJanuary 1, 2021 , we resumed theDell 401(k) match program, and in the fourth quarter of Fiscal 2021, we began to reinstate selected employee-related compensation benefits. We will continue to invest in long-term projects to support our growth and innovation initiatives, while focusing on operating expense controls in certain areas of the business. All of these actions are aligned with our strategy, which remains unchanged, of focusing on gaining share, integrating and innovating across theDell Technologies portfolio, and strengthening our capital structure. The impact of COVID-19 is accelerating digital transformation, and we continue to see opportunities to create value and grow through the remainder of Fiscal 2022 in response to resilient demand for our IT solutions driven by a technology-enabled world. We will continue to actively monitor global events and pursue prudent decisions to navigate in this uncertain and ever-changing environment. 63
-------------------------------------------------------------------------------- Table of Contents Supply Chain -Dell Technologies maintains limited-source supplier relationships for certain components because the relationships are advantageous in the areas of performance, quality, support, delivery, capacity, and price considerations.
We continue to be impacted by industry-wide constraints in the supply of limited-source components in certain product offerings as a result of the impacts of COVID-19. The acceleration of the "do anything from anywhere" economy, coupled with overall macroeconomic recovery, has led to growth in demand that has outpaced supply causing an increase in orders pending fulfillment and elongated lead times for our customers for certain products.
The aforementioned supply constraints coupled with increasing demand is causing increases in component costs and, during the second quarter of Fiscal 2022, component costs increased in the aggregate. We expect the overall component cost environment to remain inflationary for the remainder of Fiscal 2022. 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. Further, we continue to experience increased freight costs for expedited shipments of components and rate increases in the freight network as capacity remains constrained. We expect to continue navigating supply chain dynamics in to Fiscal 2023. ISG - We expect that ISG will continue to be impacted by the changing nature of the IT infrastructure market and competitive environment. During the first six months of Fiscal 2022, ISG benefited from improvements in the macroeconomic environment which are forecasted to continue through the remaining six months of Fiscal 2022. The cost environment will continue to fluctuate depending on supplier capacity and demand for certain components. For the remainder of Fiscal 2022, we expect overall component costs to remain inflationary, most notably for servers, which will impact pricing and operating results as we seek to balance profitability and growth. With our scale and strong solutions portfolio, we believe we are well-positioned to respond to ongoing competitive dynamics. Within servers and networking, we will continue to be selective in determining whether to pursue certain large hyperscale and other server transactions. We continue to focus on customer base expansion and lifetime value of customer relationships. The unprecedented data growth throughout all industries is generating continued demand for our storage solutions and services. Cloud-native applications are expected to continue as a primary growth driver in the infrastructure market. We believe the complementary cloud solutions across our business position us to meet these demands for our customers. We benefit from offering solutions that address the emerging trends of enterprises deploying software-defined storage, hyper-converged infrastructure, and modular solutions based on server-centric architectures. These trends are changing the way customers are consuming our traditional storage offerings. We continue to expand our offerings in external storage arrays, which incorporate flexible, cloud-based functionality. 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. During the first six months of Fiscal 2022, CSG net revenue continued to be strong across product offerings driven by ongoing high demand as customers seek improved connectivity and productivity in the "do anything from anywhere" economy. While we expect that the CSG demand environment will continue to be subject to seasonal trends, we anticipate continued strong CSG demand through the remaining six months of Fiscal 2022, in line with industry demand forecasts. The cost environment will continue to fluctuate depending on supplier capacity and demand for certain components and, for the remainder of Fiscal 2022, we expect overall component costs to remain inflationary. The cost environment coupled with competitive dynamics continue to be a factor in our CSG business and will impact pricing and operating results as we seek to balance profitability and growth. 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. 64 -------------------------------------------------------------------------------- Table of Contents Recurring Revenue and Consumption Models - Our customers are seeking new and innovative models that address how they consume our solutions. We offer options including as-a-service, utility, leases, and immediate pay models, all designed to match customers' consumption and financing preferences. Our multiyear agreements typically result in recurring revenue streams over the term of the arrangement. InMay 2021 , we announced new offerings within our Apex portfolio to evolve and expand our IT as-a-Service and cloud offerings. We expect that our flexible consumption models and as-a-service offerings through Apex will further strengthen our customer relationships and provide a foundation for growth in recurring revenue. Macroeconomic Risks and Uncertainties - The impacts of trade protection measures, including increases in tariffs and trade barriers, and changes in government policies and international trade arrangements may affect our ability to conduct business in some non-U.S. markets. We monitor and seek to mitigate these risks with adjustments to our manufacturing, supply chain, and distribution networks. We manage our business on aU.S. dollar basis. However, we have a large global presence, generating approximately half of our revenue by sales to customers outside ofthe United States during both the second quarter and first six months of Fiscal 2022 and Fiscal 2021. As a result, our revenue can be, and in such periods has been, impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts.
Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted earnings
before interest and other, net, taxes, depreciation, and amortization ("adjusted
EBITDA"), and cash flows from operations, which are discussed elsewhere in this
management's discussion and analysis.
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-------------------------------------------------------------------------------- Table of Contents NON-GAAP FINANCIAL MEASURES In this management's discussion and analysis, we use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include non-GAAP product net revenue; non-GAAP services net revenue; non-GAAP net revenue; non-GAAP product gross margin; non-GAAP services gross margin; non-GAAP gross margin; non-GAAP operating expenses; non-GAAP operating income; non-GAAP net income; EBITDA; and adjusted EBITDA. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net revenue, gross margin, operating expenses, operating income, or net income prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. Management considers these non-GAAP measures in evaluating our operating trends and performance. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful and transparent information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, and non-GAAP net income, as defined by us, exclude amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, other corporate expenses and, for non-GAAP net income, fair value adjustments on equity investments and an aggregate adjustment for income taxes. As the excluded items have a material impact on our financial results, our management compensates for this limitation by relying primarily on our GAAP results and using non-GAAP financial measures supplementally or for projections when comparable GAAP financial measures are not available. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. The discussion below includes information on each of the excluded items as well as our reasons for excluding them from our non-GAAP results. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual. The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures: •Amortization of Intangible Assets - Amortization of intangible assets primarily consists of amortization of customer relationships, developed technology, and trade names. In connection with our acquisition by merger ofEMC onSeptember 7, 2016 , referred to as theEMC merger transaction, and the acquisition ofDell Inc. byDell Technologies Inc. onOctober 29, 2013 , referred to as the going-private transaction, all of the tangible and intangible assets and liabilities ofEMC andDell , respectively, were accounted for and recognized at fair value on the transaction dates. Accordingly, for the periods presented, amortization of intangible assets primarily represents amortization associated with intangible assets recognized in connection with theEMC merger transaction and the going-private transaction. Amortization charges for purchased intangible assets are significantly impacted by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Impact of Purchase Accounting - The impact of purchase accounting includes purchase accounting adjustments related to theEMC merger transaction and, to a lesser extent, the going-private transaction, recorded under the acquisition method of accounting in accordance with the accounting guidance for business combinations. This guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities on the date of the transaction. Accordingly, all of the assets and liabilities acquired in theEMC merger transaction and the going-private transaction were accounted for and recognized at fair value as of the respective 66
-------------------------------------------------------------------------------- Table of Contents transaction dates, and the fair value adjustments are being amortized over the estimated useful lives in the periods following the transactions. The fair value adjustments primarily relate to deferred revenue and property, plant, and equipment. Although the purchase accounting adjustments and related amortization of those adjustments are reflected in our GAAP results, we evaluate the operating results of the underlying businesses on a non-GAAP basis, after removing such adjustments. We believe that excluding the impact of purchase accounting for purposes of calculating the non-GAAP financial measures presented below facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Transaction-related Expenses - Transaction-related expenses typically consist of acquisition, integration, and divestiture related costs and are expensed as incurred. These expenses primarily represent costs for legal, banking, consulting, and advisory services. From time to time, this category also may include transaction-related gains on divestitures of businesses or asset sales. During the first quarter of Fiscal 2021, we recognized a gain of$120 million on the sale of certain intellectual property assets. 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 provides more meaningful period to period comparisons. •Stock-based Compensation Expense - Stock-based compensation expense consists of equity awards granted based on the estimated fair value of those awards at grant date. We estimate the fair value of service-based stock options using the Black-Scholes valuation model. To estimate the fair value of performance-based awards containing a market condition, we use theMonte Carlo valuation model. For all other share-based awards, the fair value is based on the closing price of the ClassC Common Stock as reported on the NYSE on the date of grant. Although stock-based compensation is an important aspect of the compensation of our employees and executives, the fair value of the stock-based awards may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. We believe that excluding stock-based compensation expense for purposes of calculating the non-GAAP financial measures presented below facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Other Corporate Expenses - Other corporate expenses consist primarily of impairment charges, incentive charges related to equity investments, severance, facilities action, and other costs. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives. We continue to optimize our facilities footprint and may incur additional costs as we seek opportunities for operational efficiencies. Other corporate expenses vary from period to period and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures presented below facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Fair Value Adjustments on Equity Investments - Fair value adjustments on equity investments primarily consist of the gain (loss) on our strategic investment portfolio, which includes the recurring fair value adjustments of investments in publicly-traded companies, as well as those in privately-held companies, which are adjusted for observable price changes and, to a lesser extent, any potential impairments. Given the volatility in the ongoing adjustments to the valuation of these strategic investments, we believe that excluding these gains and losses for purposes of calculating non-GAAP net income presented below facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. •Aggregate Adjustment for Income Taxes - The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments described above, as well as an adjustment for discrete tax items. Due to the variability in recognition of discrete tax items from period to period, we believe that excluding these benefits or charges for purposes of calculating non-GAAP net income facilitates an enhanced understanding of our current operating performance and provides more meaningful period to period comparisons. The tax effects for the adjustments described above are determined based on the tax jurisdictions in which the items were incurred. See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our income taxes. 67 -------------------------------------------------------------------------------- Table of Contents The table below presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for the periods indicated: Three Months Ended Six Months Ended July 30, 2021 % Change July 31, 2020 July 30, 2021 % Change July 31, 2020 (in millions, except percentages) Product net revenue$ 19,394 16 %$ 16,737 $ 37,428 14 %$ 32,775 Non-GAAP adjustments: Impact of purchase accounting - 2 - 6 Non-GAAP product net revenue$ 19,394 16 %$ 16,739 $ 37,428 14 %$ 32,781 Services net revenue$ 6,728 12 %$ 5,996 $ 13,181 11 %$ 11,855 Non-GAAP adjustments: Impact of purchase accounting 11 40 23 84 Non-GAAP services net revenue$ 6,739 12 %$ 6,036 $ 13,204 11 %$ 11,939 Net revenue$ 26,122 15 %$ 22,733 $ 50,609 13 %$ 44,630 Non-GAAP adjustments: Impact of purchase accounting 11 42 23 90 Non-GAAP net revenue$ 26,133 15 %$ 22,775 $ 50,632 13 %$ 44,720 Product gross margin$ 4,023 18 %$ 3,407 $ 7,843 18 %$ 6,641 Non-GAAP adjustments: Amortization of intangibles 275 374 551 746 Impact of purchase accounting 1 3 2 10 Stock-based compensation expense 12 6 21 10 Other corporate expenses 1 1 4 3 Non-GAAP product gross margin$ 4,312 14 %$ 3,791 $ 8,421 14 %$ 7,410 Services gross margin$ 3,962 6 %$ 3,749 $ 7,800 6 %$ 7,368 Non-GAAP adjustments: Amortization of intangibles - 1 - 1 Impact of purchase accounting 11 40 23 84 Stock-based compensation expense 51 44 100 80 Other corporate expenses 6 1 16 8 Non-GAAP services gross margin$ 4,030 5 %$ 3,835 $ 7,939 5 %$ 7,541 68
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Three Months Ended Six Months Ended
July 30, 2021 % Change July 31, 2020 July 30, 2021 % Change July 31, 2020
(in millions, except percentages)Gross margin$ 7,985 12 %$ 7,156 $ 15,643 12 %$ 14,009 Non-GAAP adjustments: Amortization of intangibles 275 375 551 747 Impact of purchase accounting 12 43 25 94 Stock-based compensation expense 63 50 121 90 Other corporate expenses 7 2 20 11 Non-GAAP gross margin$ 8,342 9 %$ 7,626 $ 16,360 9 %$ 14,951 Operating expenses$ 6,613 10 %$ 6,020 $ 12,896 6 %$ 12,171 Non-GAAP adjustments: Amortization of intangibles (436) (472) (869) (955) Impact of purchase accounting (8) (10) (20) (22) Transaction-related expenses (60) (83) (111) (159) Stock-based compensation expense (436) (363) (813) (693) Other corporate expenses (142) (84) (248) (170) Non-GAAP operating expenses$ 5,531 10 %$ 5,008 $ 10,835 7 %$ 10,172 Operating income$ 1,372 21 %$ 1,136 $ 2,747 49 %$ 1,838 Non-GAAP adjustments: Amortization of intangibles 711 847 1,420 1,702 Impact of purchase accounting 20 53 45 116 Transaction-related expenses 60 83 111 159 Stock-based compensation expense 499 413 934 783 Other corporate expenses 149 86 268 181 Non-GAAP operating income$ 2,811 7 %$ 2,618 $ 5,525 16 %$ 4,779 Net income $ 880 (20) %$ 1,099 $ 1,818 42 %$ 1,281 Non-GAAP adjustments: Amortization of intangibles 711 847 1,420 1,702 Impact of purchase accounting 20 53 45 116 Transaction-related expenses 48 83 99 39 Stock-based compensation expense 499 413 934 783 Other corporate expenses 149 86 268 181 Fair value adjustments on equity investments (168) (8) (325) (102) Aggregate adjustment for income taxes (228) (952) (529) (1,236) Non-GAAP net income$ 1,911 18 %$ 1,621 $ 3,730 35 %$ 2,764 69
-------------------------------------------------------------------------------- Table of Contents In addition to the above measures, we also use EBITDA and adjusted EBITDA to provide additional information for evaluation of our operating performance. Adjusted EBITDA excludes purchase accounting adjustments, stock-based compensation expense, transaction-related expenses, and other corporate expenses. Due to the nature of these transactions, we believe that it is appropriate to exclude these items. As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance. EBITDA and adjusted EBITDA do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. In particular, EBITDA and adjusted EBITDA are not intended to be a measure of free cash flow available for management's discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.
The table below presents a reconciliation of EBITDA and adjusted EBITDA to net income for the periods indicated:
Three Months Ended Six Months Ended
July 30, 2021 % Change July 31, 2020 July 30, 2021 % Change July 31, 2020
(in millions, except percentages)Net income $ 880 (20) %$ 1,099 $ 1,818 42 %$ 1,281 Adjustments: Interest and other, net (a) 359 636 747 1,202 Income tax expense (benefit) (b) 133 (599) 182 (645) Depreciation and amortization 1,240 1,340 2,479 2,656 EBITDA$ 2,612 5 %$ 2,476 $ 5,226 16 %$ 4,494 EBITDA$ 2,612 5 %$ 2,476 $ 5,226 16 %$ 4,494 Adjustments: Stock-based compensation expense 499 413 934 783 Impact of purchase accounting (c) 11 42 27 90 Transaction-related expenses (d) 60 83 111 159 Other corporate expenses (e) 149 86 268 181 Adjusted EBITDA$ 3,331 7 %$ 3,100 $ 6,566 15
%
____________________
(a)See "Results of Operations - Interest and Other, Net" for more information on the components of interest and other, net. (b)See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on discrete tax items recorded during the second quarter and first six months of Fiscal 2022 and Fiscal 2021. (c)This amount includes the non-cash purchase accounting adjustments related to theEMC merger transaction and the going-private transaction, excluding depreciation. (d)Transaction-related expenses consist of acquisition, integration, and divestiture related costs. (e)Other corporate expenses include impairment charges, incentive charges related to equity investments, severance, facilities action, and other costs. 70
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RESULTS OF OPERATIONS
Consolidated Results
The following table summarizes our consolidated results for each of the periods
presented. Unless otherwise indicated, all changes identified for the current
period results represent comparisons to results for the prior corresponding
fiscal period.
Three Months Ended Six Months Ended
July 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020
% of % % of % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Net revenue:
Products $ 19,394 74.2 % 16 % $ 16,737 73.6 % $ 37,428 74.0 % 14 % $ 32,775 73.4 %
Services 6,728 25.8 % 12 % 5,996 26.4 % 13,181 26.0 % 11 % 11,855 26.6 %
Total net revenue $ 26,122 100.0 % 15 % $ 22,733 100.0 % $ 50,609 100.0 % 13 % $ 44,630 100.0 %
Gross margin:
Products (a) $ 4,023 20.7 % 18 % $ 3,407 20.4 % $ 7,843 21.0 % 18 % $ 6,641 20.3 %
Services (b) 3,962 58.9 % 6 % 3,749 62.5 % 7,800 59.2 % 6 % 7,368 62.2 %
Total gross margin $ 7,985 30.6 % 12 % $ 7,156 31.5 % $ 15,643 30.9 % 12 % $ 14,009 31.4 %
Operating expenses $ 6,613 25.3 % 10 % $ 6,020 26.5 % $ 12,896 25.4 % 6 % $ 12,171 27.3 %
Operating income $ 1,372 5.3 % 21 % $ 1,136 5.0 % $ 2,747 5.4 % 49 % $ 1,838 4.1 %
Net income $ 880 3.4 % (20) % $ 1,099 4.8 % $ 1,818 3.6 % 42 % $ 1,281 2.9 %
Net income attributable to
Dell Technologies Inc. $ 831 3.2 % (21) % $ 1,048 4.6 % $ 1,718 3.4 % 44 % $ 1,191 2.7 %
Non-GAAP Financial Information
Non-GAAP net revenue: Products$ 19,394 74.2 % 16 %$ 16,739 73.5 %$ 37,428 73.9 % 14 %$ 32,781 73.3 % Services 6,739 25.8 % 12 % 6,036 26.5 % 13,204 26.1 % 11 % 11,939 26.7 % Total non-GAAP net revenue$ 26,133 100.0 % 15 %$ 22,775 100.0 %$ 50,632 100.0 % 13 %$ 44,720 100.0 % Non-GAAP gross margin: Products (a)$ 4,312 22.2 % 14 %$ 3,791 22.6 %$ 8,421 22.5 % 14 %$ 7,410 22.6 % Services (b) 4,030 59.8 % 5 % 3,835 63.5 % 7,939 60.1 % 5 % 7,541 63.2 % Total non-GAAP gross margin$ 8,342 31.9 % 9 %$ 7,626 33.5 %$ 16,360 32.3 % 9 %$ 14,951 33.4 % Non-GAAP operating expenses$ 5,531 21.2 % 10 %$ 5,008 22.0 %$ 10,835 21.4 % 7 %$ 10,172 22.7 % Non-GAAP operating income$ 2,811 10.8 % 7 %$ 2,618 11.5 %$ 5,525 10.9 % 16 %$ 4,779 10.7 % Non-GAAP net income$ 1,911 7.3 % 18 %$ 1,621 7.1 %$ 3,730 7.4 % 35 %$ 2,764 6.2 % EBITDA$ 2,612 10.0 % 5 %$ 2,476 10.9 %$ 5,226 10.3 % 16 %$ 4,494 10.0 % Adjusted EBITDA$ 3,331 12.7 % 7 %$ 3,100 13.6 %$ 6,566 13.0 % 15 %$ 5,707 12.8 % ____________________ (a) Product gross margin percentages represent product gross margin as a percentage of product net revenue, and non-GAAP product gross margin percentages represent non-GAAP product gross margin as a percentage of non-GAAP product net revenue. (b) Services gross margin percentages represent services gross margin as a percentage of services net revenue, and non-GAAP services gross margin percentages represent non-GAAP services gross margin as a percentage of non-GAAP services net revenue. 71
-------------------------------------------------------------------------------- Table of Contents Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, EBITDA, and adjusted EBITDA are not measurements of financial performance prepared in accordance with GAAP. Non-GAAP financial measures as a percentage of net revenue are calculated based on non-GAAP net revenue. See "Non-GAAP Financial Measures" for additional information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Overview
During the second quarter and first six months of Fiscal 2022, our net revenue and non-GAAP net revenue both increased 15% and 13%, respectively. These increases were due primarily to growth in net revenue for CSG and, to a lesser extent, increases in net revenue for ISG andVMware . CSG net revenue benefited from increased sales volume of commercial and consumer offerings driven by strong demand as customers seek improved connectivity and productivity in the "do anything from anywhere" economy. ISG net revenue benefited from overall improvements in the macroeconomic environment and a shift towards investment in IT infrastructure.VMware net revenue increased primarily due to continued growth in sales of subscriptions and software-as-a-service ("SaaS") offerings. During the second quarter and first six months of Fiscal 2022, our operating income increased 21% and 49%, respectively, and our non-GAAP operating income increased 7% and 16%, respectively. The increases in our operating income and non-GAAP operating income were primarily due to increases in operating income for CSG, driven by both commercial and consumer offerings during the second quarter and first six months of Fiscal 2022. Operating income also benefited from decreases in amortization of intangible assets during both Fiscal 2022 periods. Cash provided by operating activities was$4.0 billion and$2.5 billion for the first six months of Fiscal 2022 and Fiscal 2021, respectively. The increase in operating cash flows during the first six months of Fiscal 2022 was driven by strong profitability coupled with favorable working capital dynamics, compared to unfavorable working capital impacts related to the COVID-19 pandemic during the first six months of Fiscal 2021. See "Market Conditions, Liquidity, and Capital Commitments" for further information on our cash flow metrics. We continue to see opportunities to create value and grow in Fiscal 2022 in response to resilient demand for our IT solutions driven by a technology-enabled world. We have demonstrated our ability to adjust as needed to changing market conditions with complementary solutions across all segments of our business, an agile workforce, and the strength of our global supply chain. As we continue to innovate and modernize our core offerings, we believeDell Technologies is well-positioned for long-term profitable growth.
Net Revenue
During the second quarter and first six months of Fiscal 2022, our net revenue and non-GAAP net revenue both increased 15% and 13%, respectively, driven primarily by increases in net revenue for CSG, and to a lesser extent, increases in net revenue for ISG andVMware . See "Business Unit Results" for further information. •Product Net Revenue - Product net revenue includes revenue from the sale of hardware products and software licenses. During the second quarter and first six months of Fiscal 2022, both product net revenue and non-GAAP product net revenue increased 16% and 14%, respectively. These increases were driven primarily by growth in CSG product net revenue due to increases in sales volume of both commercial and consumer product offerings as a result of continued strength in the demand environment. •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 2022, both services net revenue and non-GAAP services net revenue increased 12% and 11%, respectively. These increases were driven primarily by growth in CSG services net revenue and, to a lesser extent, growth in bothVMware and ISG services net revenue. CSG services net revenue increases were primarily attributable to CSG hardware and software support and maintenance whileVMware services net revenue increases were primarily driven by growth withinVMware subscriptions and SaaS offerings. A substantial portion of services net revenue is derived from offerings that have been deferred over a period of time, and, as a result, reported services net revenue growth rates will be different than reported product net revenue growth rates. 72 -------------------------------------------------------------------------------- Table of Contents 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 2022, driven by strong CSG performance.
Gross Margin
During the second quarter and first six months of Fiscal 2022, our gross margin increased 12% to$8.0 billion and 12% to$15.6 billion , respectively. Our non-GAAP gross margin increased 9% to$8.3 billion and 9% to$16.4 billion during the second quarter and first six months of Fiscal 2022, respectively. Both gross margin and non-GAAP gross margin benefited from an increase in gross margin for CSG and to a lesser extent, increases for both ISG andVMware . These increases were partially offset by the impact of the divestiture ofRSA Security during the third quarter of Fiscal 2021, which resulted in a decrease in gross margin for other businesses during the second quarter and first six months of Fiscal 2022. During the second quarter and first six months of Fiscal 2022, our gross margin percentage decreased 90 basis points to 30.6% and 50 basis points to 30.9%, respectively. Decreases in gross margin percentage during the second quarter and first six months of Fiscal 2022 were primarily due to unfavorable impacts in gross margin percentage fromVMware coupled with a shift in mix towards CSG. For the first six months of Fiscal 2022, gross margin percentage was further impacted by a decrease in gross margin percentage for ISG. These unfavorable impacts were partially offset by an increase in gross margin percentage for CSG and a decrease in amortization of intangible assets during both the second quarter and first six months of Fiscal 2022. Non-GAAP gross margin percentage decreased 160 basis points to 31.9% and 110 basis points to 32.3% during the second quarter and first six months of Fiscal 2022, respectively, driven by the same ISG, CSG, andVMware dynamics discussed above. •Products - During the second quarter of Fiscal 2022, product gross margin increased 18% to$4.0 billion and product gross margin percentage increased 30 basis points to 20.7%. The increase in product gross margin was primarily driven by growth in CSG product gross margin coupled with a decrease in amortization of intangible assets. The increase in product gross margin percentage was driven by the same dynamics, partially offset by a shift in mix towards CSG. During the same period, non-GAAP product gross margin increased 14% to$4.3 billion and non-GAAP product gross margin percentage decreased 40 basis points to 22.2%. The increase in non-GAAP product gross margin was driven by an increase in CSG product gross margin. The decrease in non-GAAP product gross margin percentage was primarily driven by a shift in mix towards CSG. During the first six months of Fiscal 2022, product gross margin increased 18% to$7.8 billion and product gross margin percentage increased 70 basis points to 21.0%. Non-GAAP product gross margin increased 14% to$8.4 billion and non-GAAP product gross margin percentage decreased 10 basis points to 22.5%. The changes were driven by the same dynamics as in the second quarter of Fiscal 2022 as discussed above. •Services - During the second quarter of Fiscal 2022, services gross margin increased 6% to$4.0 billion and services gross margin percentage decreased 360 basis points to 58.9%. The increase in services gross margin was primarily driven by growth withinVMware subscription and SaaS offerings and, to a lesser extent, ISG and CSG services gross margin. The decline in services gross margin percentage was driven by decreases acrossVMware , ISG, and CSG. Non-GAAP services gross margin increased 5% to$4.0 billion during the second quarter of Fiscal 2022, and non-GAAP services gross margin percentage decreased 370 basis points to 59.8% as a result of the same dynamics discussed above. During the first six months of Fiscal 2022, services gross margin increased 6% to$7.8 billion and services gross margin percentage decreased 300 basis points to 59.2%. During the first six months of Fiscal 2022, non-GAAP services gross margin increased 5% to$7.9 billion and services gross margin percentage decreased 310 basis points to 60.1%. The changes were driven by the same dynamics as in the second quarter of Fiscal 2022 as 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.
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-------------------------------------------------------------------------------- Table of Contents 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 2022 and Fiscal 2021 were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost. We are not aware of any significant changes to vendor pricing or rebate programs that may impact our results in the near term.
Operating Expenses
The following table presents information regarding our operating expenses for
the periods indicated:
Three Months Ended Six Months Ended
July 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020
% of % % of % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Operating expenses:
Selling, general, and
administrative $ 5,145 19.7 % 8 % $ 4,761 21.0 % $ 10,105 20.0 % 5 % $ 9,647 21.6 %
Research and development 1,468 5.6 % 17 % 1,259 5.5 % 2,791 5.5 % 11 % 2,524 5.7 %
Total operating expenses $ 6,613 25.3 % 10 % $ 6,020 26.5 % $ 12,896 25.5 % 6 % $ 12,171 27.3 %
Three Months Ended Six Months Ended
July 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020
% of Non-GAAP % % of Non-GAAP % of % % of
Dollars Net Revenue Change Dollars Net Revenue Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Non-GAAP operating
expenses $ 5,531 21.2 % 10 % $ 5,008 22.0 % $ 10,835 21.4 % 7 % $ 10,172 22.7 %
During the second quarter and first six months of Fiscal 2022, total operating
expenses increased 10% and 6%, respectively. Non-GAAP operating expenses
increased 10% and 7% for the second quarter and first six months of Fiscal 2022,
respectively. These increases were primarily driven by employee-related expenses
as a result of performance-based compensation associated with strong operating
results, coupled with the reintroduction of expenses that were temporarily
reduced during Fiscal 2021 in response to the COVID-19 pandemic.
•Selling, General, and Administrative - Selling, general, and administrative
("SG&A") expenses increased 8% and 5%, respectively, during the second quarter
and first six months of Fiscal 2022. The increases were primarily due to an
increase in employee-related compensation and benefits expense as well as an
increase in advertising and promotion expense.
•Research and Development - Research and development ("R&D") expenses are
primarily composed of personnel-related expenses incurred to develop the
software that powers our solutions. R&D expenses as a percentage of net revenue
were approximately 5.6% and 5.5% for the second quarter of Fiscal 2022 and
Fiscal 2021, respectively, and 5.5% and 5.7% for the first six months of Fiscal
2022 and Fiscal 2021, respectively. We intend to continue to support R&D
initiatives to innovate and introduce new and enhanced solutions into the
market.
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-------------------------------------------------------------------------------- Table of Contents We continue to make targeted investments designed to enable growth, marketing, and R&D, while balancing these investments with our efforts to drive cost efficiencies in the business. We also expect to continue to make investments in support of our own digital transformation to modernize and streamline our IT operations. Operating Income During the second quarter and first six months of Fiscal 2022, our operating income increased 21% and 49% to$1.4 billion and$2.7 billion , respectively, primarily due to an increase in operating income for CSG. Operating income during the second quarter and first six months of Fiscal 2022 also benefited from a decrease in amortization of intangible assets. Non-GAAP operating income increased 7% and 16% to$2.8 billion and$5.5 billion during the second quarter and first six months of Fiscal 2022, respectively. The increases in non-GAAP operating income for both Fiscal 2022 periods were primarily attributable to increases in operating income for CSG.
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 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020
(in millions)
Interest and other, net:
Investment income, primarily interest $ 10 $ 12 $ 21 $ 36
Gain on investments, net 168 8 325 102
Interest expense (483) (617) (993) (1,289)
Foreign exchange (64) - (113) (99)
Other 10 (39) 13 48
Total interest and other, net $ (359) $
(636) $ (747)
During the second quarter and first six months of Fiscal 2022, the change in interest and other, net was favorable by$277 million and$455 million , respectively. The favorability in both periods was primarily due to decreases in interest expense resulting from debt repayments and increases in net gains on our strategic investment portfolio.
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 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020
(in millions, except percentages) (in millions, except percentages)Income before income taxes $ 1,013 $ 500 $ 2,000 $ 636 Income tax expense (benefit) $ 133$ (599) $ 182$ (645) Effective income tax rate 13.1 % -119.8 % 9.1 % -101.4 % For the second quarter of Fiscal 2022 and Fiscal 2021, our effective income tax rate was 13.1% and -119.8%, respectively. For the first six months of Fiscal 2022 and Fiscal 2021, our effective income tax rate was 9.1% and -101.4%, respectively. The changes in our effective income tax rate were primarily driven by lower discrete tax items on higher pre-tax income and a change in our jurisdictional mix of income. For the first six months of Fiscal 2022, our effective income tax rate includes discrete tax benefits of$131 million related to stock-based compensation. In comparison, for the first six months of Fiscal 2021, our effective income tax rate includes discrete tax benefits of$746 million related to an audit settlement that was recorded in the second quarter of that period. The effective income tax rate for future quarters of Fiscal 2022 may be impacted by the actual mix of jurisdictions in which income is generated, as well as the impact of any discrete tax items. 75 -------------------------------------------------------------------------------- Table of Contents Our effective income tax rate can fluctuate depending on the geographic distribution of our worldwide earnings, as our foreign earnings are generally taxed at lower rates than inthe United States . The differences between our effective income tax rate and theU.S. federal statutory rate of 21% principally result from the geographical distribution of income, differences between the book and tax treatment of certain items, and the discrete tax items discussed above. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and lower tax rates is attributable toSingapore andChina . A significant portion of these income tax benefits relates to a tax holiday that will be effective untilJanuary 31, 2029 . Our other tax holidays will expire in whole or in part during Fiscal 2022 through Fiscal 2030. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. As ofJuly 30, 2021 , we were not aware of any matters of non-compliance related to these tax holidays.
For further discussion regarding tax matters, including the status of income tax audits, see Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income
During the second quarter of Fiscal 2022, net income decreased 20% to$0.9 billion , while net income increased 42% to$1.8 billion during the first six months of Fiscal 2022. The decrease for the second quarter of Fiscal 2022 was primarily attributable to an increase in tax expense, partially offset by an increase in operating income and a favorable change in interest and other, net. The increase during the first six months of Fiscal 2022 was as a result of an increase in operating income coupled with a favorable change in interest and other, net partially offset by an increase in tax expense. Non-GAAP net income increased 18% to$1.9 billion and 35% to$3.7 billion during the second quarter and first six months of Fiscal 2022, respectively. The increase in non-GAAP net income during both the second quarter and first six months of Fiscal 2022 was primarily attributable to an increase in non-GAAP operating income coupled with a favorable change in interest and other, net.
Non-controlling Interests
Net income attributable to non-controlling interests consists of net income or loss attributable to our non-controlling interests inVMware, Inc. and Secureworks. During the second quarter of Fiscal 2022 and Fiscal 2021, net income attributable to non-controlling interests was$49 million and$51 million , respectively. The decrease in net income attributable to non-controlling interests during the second quarter of Fiscal 2022 was primarily due to a decrease in net income attributable to our non-controlling interest inVMware, Inc. During the first six months of Fiscal 2022 and Fiscal 2021, net income attributable to non-controlling interests was$100 million and$90 million , respectively. The increase in net income attributable to non-controlling interests during the first six months of Fiscal 2022 was primarily due to an increase in net income attributable to our non-controlling interest inVMware, Inc. For more information about our non-controlling interests, see Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income Attributable to
Net income attributable toDell Technologies Inc. represents net income and an adjustment for non-controlling interests. During the second quarter of Fiscal 2022 and Fiscal 2021, net income attributable toDell Technologies Inc. was$0.8 billion and$1.0 billion , respectively. The decrease in net income attributable toDell Technologies Inc. during the second quarter of Fiscal 2022 was primarily attributable to a decrease in net income for the period. During the first six months of Fiscal 2022 and Fiscal 2021, net income attributable toDell Technologies Inc. was$1.7 billion and$1.2 billion , respectively. The increase in net income attributable toDell Technologies Inc. during the first six months of Fiscal 2022 was primarily attributable to an increase in net income for the period. 76
-------------------------------------------------------------------------------- Table of Contents Business Unit Results Our reportable segments are based on the following business units: ISG, CSG, andVMware . A description of our three business units is provided under "Introduction." See Note 16 of the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income, respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
Three Months Ended Six Months Ended
July 30, 2021 % Change July 31, 2020 July 30, 2021 % Change July 31, 2020
(in millions, except percentages)Net revenue: Servers and networking$ 4,462 6 % $ 4,196 $ 8,571 8 % $ 7,954 Storage 3,970 (1) % 4,011 7,772 (1) % 7,822 Total ISG net revenue$ 8,432 3 % $ 8,207 $ 16,343 4 % $ 15,776 Operating income: ISG operating income$ 970 - % $ 973 $ 1,758 3 % $ 1,705 % of segment net revenue 11.5 % 11.9 % 10.8 % 10.8 % Net Revenue - During the second quarter and first six months of Fiscal 2022, ISG net revenue increased 3% and 4%, respectively. These increases were due to improvements to the macroeconomic environment and a shift towards investment in IT infrastructure, focused on multi-cloud solutions and accelerating digital transformation, compared to a weaker demand environment during the second quarter and first six months of Fiscal 2021 as a result of COVID-19, when customers shifted their investments toward remote work and business continuity solutions. Net revenue from sales of servers and networking increased 6% and 8% during the second quarter and first six months of Fiscal 2022, respectively, due to growing demand for our PowerEdge servers, partially offset by a decline in average selling price as a result of a mix shift within PowerEdge servers. Storage revenue decreased 1% during both the second quarter and first six months of Fiscal 2022 primarily as a result of a weaker demand environment for our high-end storage offerings. We are seeing improvements in the overall demand for our storage business, particularly in our midrange storage offerings, driven primarily by growth in our PowerStore storage array as well as hyper-converged infrastructure. ISG customers are seeking new and innovative models that address how they consume our solutions. We offer options including as-a-service, utility, leases, and immediate pay models, all designed to match customers' consumption and financing preferences. Our multiyear agreements typically result in recurring revenue streams over the term of the arrangement. We expect 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 2022.
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Operating Income - During the second quarter of Fiscal 2022, ISG operating
income as a percentage of net revenue decreased 40 basis points to 11.5%. The
decrease was driven by an increase in ISG operating expenses as a percentage of
net revenue, which was primarily attributable to employee compensation and
benefit expense.
For the first six months of Fiscal 2022, ISG operating income as a percentage of
net revenue remained flat at 10.8%. ISG gross margin percentage decreased as a
result of a mix shift within ISG towards servers and networking as well as a mix
shift within storage towards midrange offerings. The gross margin percentage
decrease was offset by a decrease in operating expense as a percentage of net
revenue.
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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 30, 2021 % Change July 31, 2020 July 30, 2021 % Change July 31, 2020
(in millions, except percentages)
Net revenue:
Commercial $ 10,573 32 % $ 8,039 $ 20,376 22 % $ 16,673
Consumer 3,690 17 % 3,164 7,192 28 % 5,634
Total CSG net revenue $ 14,263 27 % $ 11,203 $ 27,568 24 % $ 22,307
Operating income:
CSG operating income $ 995 39 % $ 715 $ 2,085 60 % $ 1,307
% of segment net revenue 7.0 % 6.4 % 7.6 % 5.9 %
Net Revenue - During the second quarter and first six months of Fiscal 2022, CSG net revenue increased 27% and 24%, respectively, driven by continued strong demand across the majority of product offerings as customers seek improved connectivity and productivity in the "do anything from anywhere" economy.
Commercial revenue increased 32% and 22% during the second quarter and first six months of Fiscal 2022, respectively, primarily due to an increase in sales of commercial desktops and notebooks driven by continued strong demand as customers invest in in-office, remote, and hybrid workforce environments.
Consumer revenue increased 17% and 28% during the second quarter and first six months of Fiscal 2022, respectively, primarily due to an increase in demand across the majority of consumer product offerings.
Average selling price also increased for both commercial and consumer offerings as we navigated through supply chain shortages and managed pricing in response to the shift to an overall inflationary component cost environment.
From a geographical perspective, net revenue attributable to CSG increased across all regions during the second quarter and first six months of Fiscal 2022.
Operating Income - During the second quarter and first six months of Fiscal
2022, CSG operating income as a percentage of net revenue increased 60 basis
points to 7.0% and 170 basis points to 7.6%, respectively, which was primarily
driven by both commercial and consumer gross margin percentage. The increases in
gross margin percentage were primarily driven by disciplined pricing as we
managed through the component cost challenges discussed above. For the second
quarter of Fiscal 2022, the increase in gross margin percentage was further
driven by a shift in mix towards commercial offerings.
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VMware The following table presents net revenue and operating income attributable to
Three Months Ended Six Months Ended
July 30, 2021 % Change July 31, 2020 July 30, 2021 % Change July 31, 2020
(in millions, except percentages)
Net revenue:
VMware net revenue $ 3,148 8 % $ 2,908 $ 6,139 8 % $ 5,663
Operating income:
VMware operating income $ 849 (5) % $ 894 $ 1,690 1 % $ 1,667
% of segment net revenue 27.0 % 30.7 % 27.5 % 29.4 %
Net Revenue - VMware net revenue primarily consists of revenue from the sale of
software licenses under perpetual licenses and subscription and SaaS offerings,
as well as related software maintenance services, support, training, consulting
services, and hosted services. VMware net revenue for both the second quarter
and first six months of Fiscal 2022 increased 8% primarily due to growth in
sales of subscription and SaaS offerings, driven by increased demand for cloud
offerings, coupled with growth in software maintenance revenue which continued
to benefit from maintenance contracts sold in previous periods.
Operating Income - During the second quarter and first six months of Fiscal 2022,VMware operating income as a percentage of net revenue decreased 370 basis points to 27.0% and 190 basis points to 27.5%, respectively. These decreases were due to a decline inVMware gross margin percentage and an increase in operating expense as a percentage of net revenue.VMware gross margin percentage declined in part due to a transition towards subscription and SaaS offerings. Operating expenses increased as a result of higher employee compensation expense primarily attributable to investments in key R&D initiatives, coupled with the reintroduction of expenses that were temporarily reduced in Fiscal 2021. 80 --------------------------------------------------------------------------------
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$12.9 billion and$12.8 billion as ofJuly 30, 2021 andJanuary 29, 2021 , respectively. We maintain an allowance for expected credit losses to cover receivables that may be deemed uncollectible. The allowance for expected credit losses is an estimate based on an analysis of historical loss experience, current receivables aging, management's assessment of current conditions and reasonable and supportable expectation of future conditions, and specific identifiable customer accounts that are deemed at risk. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. As ofJuly 30, 2021 andJanuary 29, 2021 , the allowance for expected credit losses was$98 million and$104 million , respectively. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We will continue to monitor the aging of our accounts receivable and take actions, where necessary, to reduce our exposure to credit losses.
Dell Financial Services and its affiliates ("DFS") supportDell Technologies by offering and arranging various financing options and services for our customers globally, including through captive financing operations inNorth America ,Europe ,Australia, and New Zealand . DFS originates, collects, and services customer receivables primarily related to the purchase of our product, software, and service solutions. DFS further strengthens our customer relationships through its flexible consumption models, provided through Apex, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. New financing originations were$1.9 billion and$2.6 billion for the second quarter of Fiscal 2022 and Fiscal 2021, respectively, and$3.8 billion and$4.4 billion for the first six months of Fiscal 2022 and Fiscal 2021, respectively. DFS leases are classified as sales-type leases, direct financing leases, or operating leases. Amounts due from lessees under sales-type leases or direct financing leases are recorded as part of financing receivables, with interest income recognized over the contract term. On commencement of sales-type leases, we typically qualify for up-front revenue recognition. On originations of operating leases, we record equipment under operating leases, classified as property, plant, and equipment, and recognize rental revenue and depreciation expense, classified as cost of net revenue, over the contract term. Direct financing leases are immaterial. Leases that commenced prior to the effective date of the current lease accounting standard continue to be accounted for under previous lease accounting guidance. As ofJuly 30, 2021 andJanuary 29, 2021 , our financing receivables, net were$10.3 billion and$10.5 billion , respectively. We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. Our allowance for expected credit losses in future periods may vary from our current estimates. For the second quarter of Fiscal 2022 and Fiscal 2021, the principal charge-off rate for our financing receivables portfolio was 0.5% and 0.8%, respectively. For the first six months of Fiscal 2022 and Fiscal 2021, the principal charge-off rate for our total portfolio was 0.5% and 0.9%, respectively. The credit quality of our financing receivables has improved in recent years due to an overall improvement in the credit environment and as the mix of high-quality commercial accounts in our portfolio has continued to increase. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables without recourse to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved. 81 -------------------------------------------------------------------------------- Table of Contents We retain a residual interest in equipment leased under our fixed-term lease programs. As ofJuly 30, 2021 andJanuary 29, 2021 , the residual interest recorded as part of financing receivables was$319 million and$424 million , respectively. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. We assess the carrying amount of our recorded residual values for expected losses. Generally, expected losses as a result of residual value risk on equipment under lease are not considered to be significant primarily because of the existence of a secondary market with respect to the equipment. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. To mitigate our exposure, we work closely with customers and dealers to manage the sale of returned assets. No material expected losses were recorded related to residual assets during the second quarter and first six months of Fiscal 2022 and Fiscal 2021. As ofJuly 30, 2021 andJanuary 29, 2021 , equipment under operating leases, net was$1.4 billion and$1.3 billion , respectively. Based on triggering events, we assess the carrying amount of the equipment under operating leases recorded for impairment. No material impairment losses were recorded related to such equipment during the second quarter and first six months of Fiscal 2022 and Fiscal 2021. DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing. For DFS operating leases, which have increased under the current lease standard, the initial funding is classified as a capital expenditure and reflected as an impact to cash flows used in investing activities.
See Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our financing receivables and the associated allowances, and the equipment under operating leases.
Off-Balance Sheet Arrangements
As ofJuly 30, 2021 , we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations. 82 -------------------------------------------------------------------------------- Table of Contents MARKET CONDITIONS, LIQUIDITY, AND CAPITAL COMMITMENTS
Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties. We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized credit rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments. We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than theU.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our use of derivative instruments. We are exposed to interest rate risk related to our variable-rate debt portfolio. In the normal course of business, we follow established policies and procedures to manage this risk, including monitoring of our asset and liability mix. As a result, we do not anticipate any material losses from interest rate risk. The impact of any credit adjustments related to our use of counterparties on our Condensed Consolidated Financial Statements included in this report has been immaterial.
Liquidity and Capital Resources
To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our business and strategic initiatives. In addition to internally generated cash, we have access to other capital sources to finance our strategic initiatives and fund growth in our financing operations. Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost-effective manner.
The following table presents our cash and cash equivalents as well as our available borrowings as of the dates indicated:
July 30, 2021
(in millions) Cash and cash equivalents, and available borrowings: Cash and cash equivalents (a)
$ 11,719 $ 14,201 Remaining available borrowings under revolving credit 5,463 5,467 facilities (b) Total cash, cash equivalents, and available borrowings$ 17,182
$ 19,668
____________________
(a) Of the$11.7 billion of cash and cash equivalents as ofJuly 30, 2021 ,$5.9 billion was held byVMware, Inc. (b) Of the$5.5 billion of remaining available borrowings under revolving credit facilities,$1.0 billion was attributable to the VMware Revolving Credit Facility. Our revolving credit facilities as ofJuly 30, 2021 consist of the Revolving Credit Facility and the VMware Revolving Credit Facility. The Revolving Credit Facility has a maximum aggregate borrowing capacity of$4.5 billion , and available borrowings under this facility are reduced by draws on the facility and outstanding letters of credit. As ofJuly 30, 2021 , there were no borrowings outstanding under the facility. Borrowings under the Revolving Credit Facility are used for general corporate purposes on a short-term basis. 83 -------------------------------------------------------------------------------- Table of Contents The VMware Revolving Credit Facility has a maximum capacity of$1.0 billion . As ofJuly 30, 2021 , there were no outstanding borrowings under the facility. None of the net proceeds of borrowings under the VMware Revolving Credit Facility will be made available to support the operations or satisfy any corporate purposes ofDell Technologies , other than the operations and corporate purposes ofVMware, Inc. andVMware, Inc.'s subsidiaries.
See Note 5 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about each of the foregoing revolving credit facilities.
We believe that our current cash and cash equivalents, together with cash that will be provided by future operations and borrowings expected to be available under our revolving credit facilities, will be sufficient over at least the next twelve months and for the foreseeable future thereafter to fund our operations, debt service requirements and maturities, capital expenditures, share repurchases, and other corporate needs.
Debt
The following table summarizes our outstanding debt as of the dates indicated:
Increase
July 30, 2021 (decrease) January 29, 2021
(in millions)
Core debt
Senior Secured Credit Facilities and First $ 24,761 $ (16) $ 24,777
Lien Notes
Unsecured Notes and Debentures 952 (400) 1,352
Senior Notes 1,625 (1,075) 2,700
EMC Notes 1,000 - 1,000
DFS allocated debt (700) (34) (666)
Total core debt 27,638 (1,525) 29,163
DFS related debt
DFS debt 9,557 (109) 9,666
DFS allocated debt 700 34 666
Total DFS related debt 10,257 (75) 10,332
Margin Loan Facility and other 1,392 (2,843) 4,235
Debt of public subsidiary
VMware Notes 4,750 - 4,750
Total public subsidiary debt 4,750 - 4,750
Total debt, principal amount 44,037 (4,443) 48,480
Carrying value adjustments (443) 53 (496)
Total debt, carrying value $ 43,594 $ (4,390) $ 47,984
During the first six months of Fiscal 2022, the outstanding principal amount of our debt decreased by$4.4 billion to$44.0 billion as ofJuly 30, 2021 , primarily as a result of principal repayments, including$3.0 billion principal amount of the Margin Loan Facility paid in the second quarter of Fiscal 2022. We define core debt as the total principal amount of our debt, less DFS related debt, our Margin Loan Facility and other debt, and public subsidiary debt. Our core debt was$27.6 billion as ofJuly 30, 2021 . During the first six months of Fiscal 2022, the decrease in our core debt was driven by principal repayments, including$1,075 million principal amount of our 5.875% Senior Notes dueJune 2021 and$400 million principal amount of our 4.625% Unsecured Notes dueApril 2021 . There are no scheduled maturities of core debt for the remainder of Fiscal 2022. See Note 5 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our debt. 84 -------------------------------------------------------------------------------- Table of Contents As ofJuly 30, 2021 , Margin Loan Facility and other debt primarily consisted of the$1.0 billion Margin Loan Facility. As described above, during the first six months ofJuly 30, 2021 , we repaid$3.0 billion principal amount of the Margin Loan Facility. Subsequent toJuly 30, 2021 , we repaid the remaining$1.0 billion principal amount. See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information. DFS related debt primarily represents debt from our securitization and structured financing programs. The majority of DFS debt is non-recourse toDell Technologies and represents borrowings under securitization programs and structured financing programs, for which our risk of loss is limited to transferred lease and loan payments and associated equipment, and under which the credit holders have no recourse toDell Technologies . To fund expansion of the DFS business, we balance the use of the securitization and structured financing programs with other sources of liquidity. We approximate the amount of our debt used to fund the DFS business by applying a 7:1 debt to equity ratio to the sum of our financing receivables balance and equipment under our DFS operating leases, net. The debt to equity ratio used is based on the underlying credit quality of the assets. See Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our DFS debt. Public subsidiary debt representsVMware, Inc. indebtedness.VMware, Inc. and its respective subsidiaries are unrestricted subsidiaries for purposes of the core debt ofDell Technologies . NeitherDell Technologies nor any of its subsidiaries, other thanVMware, Inc. , is obligated to make payment on the VMware Notes. None of the net proceeds of the VMware Notes will be made available to support the operations or satisfy any corporate purposes ofDell Technologies , other than the operations and corporate purposes ofVMware, Inc. and its subsidiaries. See Note 5 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information aboutVMware, Inc. debt. In connection with the planned VMware Spin-off announced onApril 14, 2021 ,VMware, Inc. intends to pay a cash dividend, pro rata, to each of the holders ofVMware, Inc. common stock in an aggregate amount equal to an amount to be mutually agreed byDell Technologies andVMware, Inc. between$11.5 billion and$12.0 billion . Subsequent toJuly 30, 2021 ,VMware, Inc. completed a public offering of unsecured senior notes in the aggregate principal amount of$6.0 billion , and expects to fund the cash dividend, in part, with proceeds from its new indebtedness for such purpose. The transaction is expected to close during the fourth quarter of calendar 2021, subject to certain closing conditions. Upon the closing of the transaction, we intend to use the net proceeds from our pro rata share of the cash dividend to repay debt as part of our capital strategy to positionDell Technologies for investment grade ratings. See Note 1 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about the planned VMware Spin-off. See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about theVMware, Inc. debt issuance. We have made steady progress in paying down debt and we will continue to focus on deleveraging. We believe we will continue to be able to make our debt principal and interest payments, including the short-term maturities, from existing and expected sources of cash, primarily from operating cash flows. Cash used for debt principal and interest payments may also include short-term borrowings under our revolving credit facilities. Under our variable-rate debt, we could experience variations in our future interest expense from potential fluctuations in applicable reference rates, or from possible fluctuations in the level of DFS debt required to meet future demand for customer financing. We or our affiliates or their related persons, at our or their sole discretion and without public announcement, may purchase, redeem, prepay, refinance, or otherwise retire any amount of our outstanding indebtedness under the terms of such indebtedness at any time and from time to time, in open market or negotiated transactions with the holders of such indebtedness or otherwise, as appropriate market conditions exist. 85 -------------------------------------------------------------------------------- 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 30, 2021 July 31, 2020
(in millions)
Net change in cash from:
Operating activities $ 3,963 $ 2,536
Investing activities (1,188) (1,409)
Financing activities (5,311) 827
Effect of exchange rate changes on cash, cash equivalents, and (21) (52)
restricted cash
Change in cash, cash equivalents, and restricted cash $
(2,557)
Operating Activities - Cash provided by operating activities was$4.0 billion for the first six months of Fiscal 2022 compared to cash provided by operating activities of$2.5 billion for the first six months of Fiscal 2021. The increase in operating cash flows during the first six months of Fiscal 2022 was primarily driven by strong profitability coupled with favorable working capital dynamics, compared to unfavorable working capital impacts in the first six months of Fiscal 2021 related to the COVID-19 pandemic. DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing activities. For DFS operating leases, which have increased under the current leasing standard, the initial funding is classified as a capital expenditure and reflected as cash flows used in investing activities. DFS new financing originations were$3.8 billion and$4.4 billion during the first six months of Fiscal 2022 and Fiscal 2021, respectively. As ofJuly 30, 2021 , DFS had$10.3 billion of financing receivables, net and$1.4 billion of equipment under operating leases, net. Investing Activities - Investing activities primarily consist of cash used to fund capital expenditures for property, plant, and equipment, which includes equipment under operating leases, as well as capitalized software development costs, acquisitions, strategic investments, and the maturities, sales, and purchases of investments. During the first six months of Fiscal 2022, cash used in investing activities was$1.2 billion and was primarily driven by capital expenditures. In comparison, cash used in investing activities was$1.4 billion during the first six months of Fiscal 2021 and was primarily driven by capital expenditures and acquisitions of businesses by our public subsidiaries. Financing Activities - Financing activities primarily consist of the proceeds and repayments of debt, cash used to repurchase common stock, and proceeds from the issuance of common stock. Cash used in financing activities was$5.3 billion during the first six months of Fiscal 2022 and primarily consisted of debt repayments and repurchases of common stock by our public subsidiaries, partially offset by net proceeds of DFS debt. In comparison, cash provided by financing activities of$0.8 billion during the first six months of Fiscal 2021 primarily consisted of cash proceeds from the issuances of multiple series of First Lien Notes and VMware Notes, partially offset by debt repayments and repurchases of common stock by our public subsidiaries.
Capital Commitments
Capital Expenditures - During the first six months of Fiscal 2022 and Fiscal 2021, we spent$1.3 billion and$1.1 billion , respectively, on property, plant, and equipment and capitalized software development costs. Product demand, product mix, and the use of contract manufacturers, as well as ongoing investments in operating and IT infrastructure and software development, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2022 are currently expected to total between$2.7 billion and$2.9 billion , of which approximately$0.9 billion is expected to be expended for equipment under operating leases and approximately$0.3 billion for capitalized software development costs. 86 -------------------------------------------------------------------------------- Table of Contents Purchase Obligations - Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be canceled without penalty. We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for our production.
As of
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Summarized Guarantor Financial Information
As discussed in Note 5 of the Notes to the Condensed Consolidated Financial
Statements included in this report, Dell International L.L.C. and EMC
Corporation (the "Issuers"), both of which are wholly-owned subsidiaries of Dell
Technologies , completed private offerings of multiple series of senior secured
notes issued on June 1, 2016 , March 20, 2019 , and April 9, 2020 (collectively,
the "First Lien Notes"). On May 17, 2021 , the Issuers launched an exchange offer
of the outstanding First Lien Notes for registered senior secured notes with
substantially similar terms (the "Exchange Notes"). In June 2021 , the Issuers
completed the exchange offer and issued an aggregate of $18.4 billion principal
amount of Exchange Notes in exchange for the same principal amount of First Lien
Notes. As of July 30, 2021 , the aggregate principal amount of unregistered First
Lien Notes remaining outstanding following the settlement of the exchange offer
was approximately $0.1 billion .
Guarantees - The Exchange Notes are guaranteed on a joint and several unsecured
basis by Dell Technologies and on a joint and several secured basis by Denali
Intermediate, Inc. ("Denali Intermediate"), Dell and each of Denali
Intermediate's wholly-owned domestic subsidiaries that guarantees the Issuers'
Senior Credit Facility obligations (collectively, the "Guarantors"). Not all of
Denali Intermediate's subsidiaries guarantee the Exchange Notes, including none
of Denali Intermediate's non-wholly-owned subsidiaries, foreign subsidiaries,
receivables subsidiaries and subsidiaries designated as unrestricted
subsidiaries under the Senior Credit Facility (such non-guarantor subsidiaries,
collectively, the "Non-Guarantor Subsidiaries"). SecureWorks Corp. , Boomi, Inc. ,
Virtustream, Inc. , VMware, Inc. , EMC Equity Assets LLC and VMW Holdco L.L.C.
(collectively, the "Unrestricted Subsidiaries") have been designated as
unrestricted subsidiaries under the Senior Credit Facility and therefore do not
guarantee the Exchange Notes or the Senior Credit Facility obligations. See
Exhibit 22.1 incorporated by reference to this report for a list of subsidiary
guarantors and issuers of guaranteed securities.
The guarantees are full and unconditional, subject to certain customary release
provisions. The indentures that govern the Exchange Notes provide that
guarantees by subsidiaries of Denali Intermediate may be released in the event,
among other things, (i) such Guarantor is sold or sells all of its assets in
compliance with the applicable provisions of the indentures; (ii) such Guarantor
is released from its guaranty under the Senior Credit Facility, including the
declaration of such subsidiary as "unrestricted" under the Senior Credit
Facility; (iii) the merger, amalgamation or consolidation, or liquidation, of
such Guarantor; or (iv) the achievement of investment grade ratings with respect
to the Issuers and the Exchange Notes. In addition, all Guarantors will be
released from their guarantees if the requirements for legal defeasance or
covenant defeasance or to discharge the indentures have been satisfied.
Basis of Preparation of the Summarized Financial Information - The tables below
are summarized financial information provided in conformity with Rule 13-01 of
the SEC'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 the
Obligor Group . To the extent material, the Obligor Group's amounts due from,
amounts due to and transactions with Non-Guarantor Subsidiaries have been
presented separately. The Obligor Group's investment balances in Non-Guarantor
Subsidiaries have been excluded.
The following table presents summarized results of operations information for
the
Six Months Ended
July 30, 2021
(in millions)
Net revenue (a) $ 11,755
Gross margin (b) $ 4,257
Operating loss (c) $ (438)
Interest and other, net (547)
Loss before income taxes $ (985)
Net loss attributable to Obligor Group $ (799)
____________________
(a) Includes net revenue from services provided and product sales to Non-Guarantor Subsidiaries of$1,341 million and$84 million , respectively. (b) Includes cost of net revenue from resale of solutions purchased from Non-Guarantor Subsidiaries of$1,189 million . (c) Includes operating expenses from shared services provided by Non-Guarantor Subsidiaries of$38 million . 88
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The following table presents summarized balance sheet information for the
July 30, 2021 January 29, 2021
(in millions)
ASSETS
Current assets $ 12,579 $ 12,096
Goodwill and intangible assets 15,786 16,213
Other non-current assets 6,621 6,178
Intercompany loan receivables 3,477 4,714
Total assets $ 38,463 $ 39,201
LIABILITIES
Current liabilities $ 15,605 $ 15,736
Intercompany payables 4,619 5,527
Total current liabilities 20,224 21,263
Long-term debt 27,917 27,951
Other non-current liabilities 7,925 7,549
Total liabilities $ 56,066 $ 56,763
Summarized Affiliate Financial Information
The equity interests of various affiliates withinDell Technologies' consolidated group have been pledged as collateral for the Exchange Notes.Dell Technologies is therefore subject to Rule 13-02 of theSEC's Regulation S-X, which requires that summarized financial information for the affiliates whose securities are pledged as collateral (collectively, the "Affiliate Group ") be provided on a combined basis to the extent such information is material and materially different than the corresponding amounts presented in the Consolidated Financial Statements ofDell Technologies . The summarized financial information for theAffiliate Group would produce results materially consistent with information presented inDell Technologies' Consolidated Financial Statements and we have therefore not included such information in this report. In particular, the assets, liabilities, and results of operations of theAffiliate Group are not materially different than the corresponding amounts presented in the Consolidated Financial Statements ofDell Technologies , except with respect to the redeemable shares as ofJanuary 29, 2021 . The redeemable shares balance was$472 million as reflected on the Condensed Consolidated Statements of Financial Position included in this report, as compared to no redeemable shares reflected on theAffiliate Group balance sheet as of the respective dates.
Collateral Arrangement - The collateral ("Collateral") securing the Exchange Notes generally consists of the following, whether now owned or hereafter acquired:
•100% of the equity interests of the Issuers,Dell and each Material Subsidiary (as defined in the applicable indenture) that is a wholly-owned subsidiary of the Issuers and the Guarantors (which pledge, in the case of capital stock of any Foreign Subsidiary or FSHCO (each as defined in the applicable indenture), is limited to 65% of the voting capital stock and 100% of the non-voting capital stock of such Foreign Subsidiary or FSHCO); and •substantially all tangible and intangible personal property and material fee-owned real property of the Issuers and Guarantors (other thanDell Technologies ) including but not limited to, accounts receivable, inventory, equipment, general intangibles (including contract rights), investment property, intellectual property, real property, intercompany notes, instruments, chattel paper and documents, letter of credit rights, commercial tort claims, and proceeds of the foregoing. See Exhibit 22.1 incorporated by reference to this report for a list of each affiliate ofDell Technologies whose security is pledged as collateral to secure the Exchange Notes. There is no trading market for the applicable affiliates' securities pledged as collateral.
Delivery of the Collateral securing the Exchange Notes would be required in certain customary events of default, including failure to make required payments, failure to comply with covenants, and the occurrence of certain events of bankruptcy and insolvency.
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The Collateral may be released in certain circumstances, including, (i) to enable the sale, transfer or other disposition of such property or assets, (ii) upon the release of the guarantee of a Guarantor, (iii) upon such property or asset becoming an "excluded asset" as defined in the indentures governing the Exchange Notes, (iv) upon the achievement of investment grade ratings with respect to the Issuers and the Exchange Notes, and (v) to the extent the liens on the Collateral securing the Senior Credit Facility obligations are released (other than in connection with the payment in full of the Senior Credit Facility). The Collateral does not include, and will not include, among other things, (i) a pledge of the assets or equity interests of certain subsidiaries, including the Unrestricted Subsidiaries and their respective subsidiaries, (ii) any fee-owned real property with a book value of less than$150 million , (iii) any commercial tort claims or letter of credit rights with an individual value of less than$50 million , (iv) any "principal property" as defined in the indentures governing the Unsecured Notes and Debentures ofDell and the EMC Notes, and capital stock of any subsidiary holding "principal property" as defined in the indenture governing the Unsecured Notes and Debentures ofDell , or (v) certain excluded assets. 90
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