Q3 2020 Earnings Call

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Following prepared remarks, we will conduct a question and answer session. If you had a question simply press Star then one on your telephone keypad at anytime during the presentation.

I'd like to turn the call it <unk> William head of Investor Relations Mr. Williams you may begin.

Thanks, Eric and thanks, everyone for joining us with me today, our Vice Chairman, Jeff Clark, Our CFO , Tom Suite, and our Treasurer Tyler Johnson.

During this call unless we indicate otherwise all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue gross margin operating expenses operating income net income ESS EBITDA, adjusted EBITDA and adjusted free cash flow.

A reconciliation of these measures store most directly comparable comparable GAAP measures can be found in our web deck and press release.

Please also note that all growth percentages refer to year over year change unless otherwise specified.

Finally, I'd like to remind you that all statements made during this call that relate to future results in a bad or forward looking based on current expectation.

Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and as he reports we assume no obligation to update our forward looking statements now I'll turn it over to Jeff. Thanks, Rob.

Better September business update with investors I talked about our to focus areas first.

Innovating and integrating a cross Dell technologies to create the technology infrastructure at the future.

Second innovating to win in the industry consolidation.

We're making solid progress on both which is what I will update you on today plus I'll give you my take on the demand environment.

Customers are looking for two Dell technologies to help them reinvent and automate all parts of their business essentially help them build the infrastructure of the future. So they can quickly respond to market trends customer needs and drive business outcomes.

This drives long term value for our customers and for us.

It also drives us to innovate and invest a new technologies that are simpler faster and more capable even autonomous.

All designed to be consumed away customers want based on their business needs. We continue to invest in our power portfolio across I guess G, which represents our best innovation capabilities for the data era.

We shipped paramax with storage class memory and industry first to market and it's now 50% faster in September we announced the power protect D series, but now features a modern software stack was 38% faster backups and 36% faster stores.

[noise]. Most recently that are dealt technology summit earlier. This month, we introduced our all in one autonomous infrastructure power one.

Part of the Dell technologies cloud portfolio power, one helps customers simplify their path to hybrid cloud combining poweredge compute paramax storage.

However, switch networking power project data protection and being more virtualization all in a single system with intelligence built in to automate thousands of manual steps during its lifecycle.

Further we made the industry book made the industry's brought us infrastructure portfolio simpler to consume with Dell technologies on demand letting customers pay for infrastructure as they use it freeing up resources money time and people too focused on their tranche to focus on transforming their business in today's on demand economy.

This gives customers the ability to plan and predict around peak data consumption and I T spin cycles.

We're excited about what these new innovations make possible for our customers and what they represent in terms of how we use readied. The I asked you have the future over the or how are we ready to iris chief for the future over the past two years, we've stabilized the business reclaimed share simplified and powered up the portfolio and added sales resources to field.

Yes.

[noise] that'd be dealt technology summit, Michael unveiled our ambitious new goals for 2030, focusing on inclusion sustainability transforming lives through technology and data privacy. For example by 2030. Our goal is that 100% of our packaging will be made for recycled or renewable material.

And more than half of our product content will be made from recycled and renewable material.

And for every product a customer buys we will reuse or we cycle an equivalent products.

These initiatives follow what we've achieved over the past 10 years like recovering more than 2 billion pounds of used electronics via responsible recycling and really and we're using 100 million pounds of recycled content other sustainable materials and our new products, we had a strong record strong track record.

Sure to build on which helps us when in the marketplace.

[noise], we've made several important social impact commitments that are increasingly important to our customers team members and investors I encourage you to learn more on our website and through the replay of the cement event.

Before I get to the done that demand environment I want to remind you of our operating framework that remains unchanged, we expect to outperform the market and take profitable share. We have gained 375 basis points is stored share over the last two years.

580 basis points of mainstream server revenue share over the last three years and approximately 600 basis points of PC share over the last six years now shifting to the two demand.

From a customer set in geographic perspective, we see solid demand in small medium and commercial accounts with weakness in China and some softening in the large enterprise space for my business unit perspective, we see softness in energy infrastructure solutions demand driven by servers walk client solutions and Vmware.

Our our solid let me share a few examples our storage business grew 7%, we saw strong Q3 demand and data protection and hyper converge with VX real orders up 82%.

We expect to gauge storage share in North America in calendar Q3, more importantly, our customers in sales teams are optimistic about our portfolio and position.

The server demand environment remains challenged as many customers continue to digest last year's unprecedented growth, excluding greater China. Our Q3 server order revenue was down mid to high single digits.

While the server market remains soft we continue to focus on growing our server buyer base, which was up 5% growing year over year for the fifth consecutive quarter.

In addition, our server business benefited from increasing mix of high value workload platforms increase memory and storage content and component cost decreases we expect to gain share in north American in EMEA and retain our number one share positions and Xeighty six mainstream server revenue and units.

Clients solution demand client solutions demand remains healthy with tell tale tailwinds from the Windows 10 refresh cycle expected to continue and then fade into the first half of next year.

You see is projecting in a declining post windows 10, which will be a headwind to CSG and fiscal 21 overall in Q3 CSG delivered strong results across commercial going forward, we remain focused on direct growth and optimizing our channel relationships. We have invested in our sales forces and both small and.

Medium businesses and continue to accelerate growth there and consumer we will focus on direct sales and high end premium Pcs, including Xps and gaming as well as increasing our attach of services software and peripherals.

We expect the component cost, we expect component cost remain deflationary aggregate through Q1 of next year.

But at a significantly lower rate than the last three quarters, we're now seeing inflation and ssds was 20% and inflation expected in Q4 and DRAM inflation beginning in Q2 of 2020 per industry analysts estimates.

We clearly have captured the operating benefits from the significant cost declines in fiscal 2000, and it will be our job to mitigate these expected increases for our customers and for gel in fiscal 2001.

And finally until CPQ shortages have worsened quarter over quarter. The shortages are now impacting our commercial PC and premium car Mart consumer PC Q4 forecasted shipments.

Now I will turn it over to Tom to take you through our financial results and guidance.

Thanks, Jeff.

We have executed relatively well this year and again in Q3, as we balanced revenue and profitability give more challenging market conditions.

Revenue was 22.9 billion up 1%.

FX remained a headwind this quarter impacting growth by approximately 110 basis points, our deferred revenue balance increased to 25.9 billion up 17% driven by our services and software businesses, adding revenue and cash flow stability.

Gross margin was up 11% to 7.8 billing and was 33.9% of revenue.

300 basis points, driven by lower component cost in pricing discipline.

Operating expenses were 5.3 billion up 8% due in part to investments we have made in sales coverage to broaden solution sales capabilities in expand buyer base.

Operating income was up 18% to 2.4 billion or 10.7% of revenue.

Our consolidated net income was 1.4 billion up 21%, primarily benefiting from strong operating profitability.

Our EPS was $1.75 cents for the quarter.

Adjusted EBITDA was 2.9 billion or 12.5% of revenue and 11.6 billion on a trailing 12 month basis.

We generated 1.6 billion of adjusted free cash flow in Q3, driven by strong profitability in working capital discipline.

Our Q3 adjusted free cash flow includes the impact of an approximately 400 million dollar payment for tax settlement.

And our trailing 12 month adjusted free cash flow is now 7.7 billion.

We repaid approximately 1.1 billion of gross debt in the quarter and 3.5 billion year to date and we're positioned to repay approximately 5 billion of gross debt in total in fiscal year 20.

We have now paid down 18.1 billion of gross debt since the CMC merger.

Shifting to our business unit results infrastructure solutions group revenue was 8.4 billion down 6%.

George revenue was 4.1 billion up 7% with strong growth in data protection in our industry, leading HCR business, given our strong velocity with or VX rail solutions.

Servers and networking revenue was 4.2 billion down 16% due to a soft market, particularly in China and in large enterprise customers.

In Europe .

As Jeff mentioned ex China server order revenue was down mid to high single digits.

We continued to be selective on larger deals when we see very aggressive competitor pricing.

We're also focused on enhancing our coverage models have been building sustainable long term customer relationships.

I SG operating income was $1 billion or 11.9% of revenue.

Operating income percentage was up 140 basis points, largely due to our business and geography mix.

Our view on where business unit had another good quarter with revenue of 2.5 billion up 11%.

Operating income was 717 million or 28.9% of revenue.

On a standalone basis, Q3 volume or growth in revenue plus the sequential change in deferred revenue was 18%.

Or an increase of 12% excluding unearned revenue assumed from the acquisition carbon black.

NSX license bookings grew 50% well DCM license bookings grew over 35%.

Do you Vmware close the carbon black acquisition in Q3 and expects to close the pivotal transaction before the end of Q4.

Client solutions group delivered strong Q3 revenue growth and profitability.

Revenue was 11.4 billion up 5%.

Commercial revenue was 8.3 billion up 9%, including double digit growth in commercial desktops and workstations.

Consumer consumer revenue was down 3.1 billion.

I was down 6% as we continue to prioritize our commercial business and are focused on more profitable higher end consumer Pcs.

So you see operating income was 739 million or 6.5% of revenue.

Profitability was driven by component cost declines commercial consumer mix and pricing discipline.

Expect us to continue to balanced revenue and profitability against market dynamics.

We have previously discussed we are seeing and do expect operating margins turn back to more historical norms, given the changing cost environment.

Joe Financial services originations were 2 billion up 27% with managed assets of 10.7 billion.

And we continued to see interest in our flexible consumption solutions, including Dell technologies on demand.

Turning to our balance sheet and capital structure, we ended the quarter with $9.4 billion of cash and investments. After 1.1 billion of gross debt pay down in the approximately 400 million dollar tax settlement payment.

Our core debt balance ended the quarter at 35.9 billion down almost 13 billion since that you'd see acquisition.

Net core debt ended Q3 at 29.6 billion.

We remain focused on maximizing free cash flow in our capital allocation strategy is unchanged.

Given our recent debt paydown in refinancing activity, we have only 2.3 billion of core debt due in the next 15 months.

We will continue to look for additional opportunity to smooth our debt maturity profile and optimize our capital structure.

We still expect to pay down at least 4 billion of gross debt next year and are committed to reducing leverage to achieve investment grade ratings.

Moving to guidance, we continue to monitor the macroeconomic and ifyou spinning environments as well as the ongoing trade discussions between the us in China.

As Jeff mentioned earlier, we do see continued softness in large enterprise customers in China.

Based on Q3 results and the Intel CPQ shortage, Jeff mentioned, we now expect fiscal 2000, <unk> GAAP revenue of 91.5 92.2 billion.

Operating income of 2.9 to two to 3.1 billion.

It's a $5.83 to $5.98.

We now expect our non-GAAP revenue range for the current fiscal year to be beach 91.8 to 92.5 billion.

The reduction of the Rangers, principally due to the until supply dynamic.

Our strong profitability year to date, driven by favorable component cost and disciplined pricing. We are raising the low end of our non-GAAP operating income to EPS guidance ranges.

Our non-GAAP operating income range is now 10 billion to 10.2 billion and our non-GAAP EPS guidance ranges now.

In dollars and 25 cents to $7 and 40%.

non-GAAP tax rate is expected to be 60% plus or minus 1%.

We want to give you some insights into our preliminary thank you for fiscal 21.

We continued to see macro headwinds in China in softening client solutions demand post again 10 refreshed.

That coupled with the Intel CPQ supply constraints in the global macro environment leaves us slightly more cautious on fiscal 21 growth.

We also expect the benefit of the fiscal year 20 component cost deflation to wane as component cost are forecasted to be inflationary in fiscal 2001.

Accordingly, our preliminary view is that operating income margins may trend closer to fiscal 19 levels and we're balancing investments in the business and adjusting spending as appropriate.

We will provide an updated view of fiscal year 21 expectations on our Q2 Q4 earnings call February .

In closing you should expect us to maximize our equity value to all shareholders through the five distinct levers we talked about that are business up today.

Current operations synergies, new opportunities corporate structure and capital structure.

Model was focused on long term profitable growth with the ability to adjust as needed based on market conditions. We are focused on growing faster than competitors in the industry growing operating income in EPS faster than revenue over the long term generating strong cash flow you've seen that from us this year as we maximize cash flow and profit gives.

In the environment, you can expect us to adjust accordingly in fiscal 2001.

With that I'll turn it back to Rob to begin QNX.

Thanks, Tom let's get the QNX, we ask that each participant ask one question to allow us to get to as many of you as possible. Erica can you. Please introduce the first participant.

Well take our first question from Wamsi Mellon with Bank of America.

Thank you appreciate the early fiscal 21 autos curious if you are anticipating any changes in the macro backdrop as you as you look at that and if I could.

Your storage growth of 7% was very solid compared to a lot of peers can you can you talk about particular areas of strength in the quarter and how much do you think was part of the bundled go to market and deal is thank you.

Hey, Wamsi, it's Tom let me start and then maybe Jeff can jump in here as well, particularly on the storage and his view of the the macro as we think about fiscal 21 I just wanted to give you some pull our we wanted to give you some preliminary thinking as we as we see.

Some of the current macro dynamics right principally some of the caution in the environment given the.

The us China trade dynamics, the softness we've seen in large enterprise.

You know consumption, particularly in servers.

And the Intel CPQ shortage is causing some dynamics that.

Our causing us to be a little bit more cautious than perhaps we would have been say three to three to four months ago. So we're going to work our way through that we'll update you as we get through the end of Q4 to give you.

Our view is Q4 earnings call, but I thought it was appropriate that we give you some perspective as we think about next year and clearly still in the midst of working our way through our planning process for next year.

And then Jeff maybe you could talk about storage and your comments on the yes, obviously when I look at storage and highlights and things that they certainly are pleased to see one is the referenced it on our opening remarks, VX rail and its 82% orders growth. We continue to see VX will come back.

And with the more cloud foundation, helping customers build out private cloud and this hybrid world that we look and so that's certainly a highlight that we continue to see the acceptance of our new data protection products has been quite good the integrated the product integrated products as well as the new data domain platforms.

Our off to good early starts which to me as continued reinforcement as weve modernize the portfolio and guided increasingly more competitive we're seeing the market respond accordingly, and then the other areas that I'd point to is just to continued progress of our Paramax platform and the new unit DXP both of them are growing up.

The double digit just because we as we look at Q3 results. So very strong demand for our new products, which is encouraging the continued build out of on trend private cloud Dx rail plus Bcf are clearly things that are highlights of our storage business in storage demand.

Hey, and Wamsi, it's Tom one more comment I should have added clearly as we think about.

Component cost dynamics, we've enjoyed extraordinary deflation this year and I think most of you know we've talked about it from time to time that our model those works extraordinarily well on a deflationary cost environment, where we pass some of that costs through in terms of pricing, but we hold some of that cost goodness in terms of profitability.

As you flip to a more inflationary environment that that clearly is not the dynamic in.

Well I think part of what we wanted to do as mix, where people are thinking through that component cost dynamic year to year as you set up for next year. So.

Obviously, it's early yet we'll continue to monitor the forecasting our thinking around that but.

There are some dynamics working through our component cost as we speak about next year.

Correct.

Well take our next question from Katy Huberty with Morgan Stanley .

And why do you think.

You are seeing such a bifurcation between continued strong storage segment.

And accelerating declines in servers in recent quarters. It seemed like the China server business was the explanation, but now it looks like the unit weakness in servers has expanded outside of China, and just curious what that dynamics are to create such different trends between those two.

Segments in any comments around how the industry is it's flowing through component costs to pricing and if maybe that's a factor in the results. Thanks.

Sure Kt. This is Jeff a couple of comments and I know Tom will jump in with his thoughts as well I think we've consistently identified large enterprise and large bids in China and our previous quarters. This year as soft spots clearly we saw unprecedented growth.

Industry last year that growth is being digested by the largest companies in the world and we're seeing that primarily in that large enterprise in the United States in EMEA.

China has been a headwind we've called out I think consistently now for the last three orders for sure and that continues to be a headwind in that marketplace. There also signs that we're encouraged by is the progress that we've made in our North America commercial.

The NB sales forces of seeing double digit order growth and those areas and server. So we're encouraged and I mentioned did.

Grilling buyer base in our opening remarks to I believe it was up 5%, which marks the fifth consecutive quarter of buyer base buyer base growth.

It is a competitive market out there in the large bids.

It's an aggressive.

Marketplace from a pricing point of view.

We're competing but those bids are clearly.

Competitive and probably the other thing that is important I noticed there taking longer to close the caution that we're seeing with our large customers is certainly being seen in our ability to close transactions or how long, it's taking to get the order close would be another.

Therapies to color that I would add.

In Kt, it's Tom I would just sort of hinted at it but we clearly see where component cost deflation is being used to price pretty aggressively right now.

And we see that trend generally in the large bids are cross across the globe and in China.

And we've talked about in the past that we're going to be so look we're going to compete where we need to compete and we clearly want to grow.

Customer base, but we want those customer base to be long term there right type of customer for us in terms of.

Profitability cycle that makes sense overtime.

And so we are paying selective.

And so thats just the dynamic that we're in right now I will also add in Japan, it towards that that our transactional server businesses.

Is holding up reasonably well so it's the weakness is principally in those two.

Those two areas I think when you get to storage its a different type of buying situation, where you're you're generally putting our solution out there that is less.

Our price sensitive in this in the sense of its not tied to a commodity cost framework as much in its more of an IP framework that you are selling in terms of capabilities of feature functionality of the storage solution.

It's a different type of its a value sale solution, it's a value selling process.

Versus at times, one might be a more procurement oriented process. So we probably have the dichotomy of what's happening in the industry. We're in this data there the.

The amount of data created is not slowing it's got to be stored which is probably why we're seeing is slightly different trend from the compute side to the storage side.

But I would point to VX rail, which is hyper converged, where we bring compute and storage together in a modern two tier architecture, helping customers drive out there modern infrastructure build on Prem private clouds as a point of it certainly that we're excited about given our position there and the opportunity that.

Presents itself going forward.

Thank you that's helpful.

Well take our next question from Toni Sacconaghi with Bernstein.

Yes. Thank you.

Just wanted to understand this notion of incremental.

Pricing pressure pricing being passed along.

To a customer so perhaps you can help on the server side, what was unit versus ASP growth for server in the quarter and when you talk about operating margins.

I realize it's very preliminary in fiscal 21.

Is is what youre anticipating.

That the benefit of component pricing will be increasingly passed along.

Now or are you actually more worried about prices staying where they are buck component prices going up to the detriment of your margins and perhaps in addressing that.

You can talk about Pope Pcs and servers.

And where you think you are in terms of half way three quarters of the way just starting in terms of prices being passed along.

Component prices being passed along in the form of lower prices to to consumers. Thank you.

That's a heck of a one question.

That infinitely more parts that I got so if I look at the trend of revenue and your specific question Tony about.

Revenue unit trends.

Our revenue growth was greater or our revenue decline was greater than our unit decline, which I know the obvious question is thats an eight patients.

Interesting thing we see is continued progress on high value workloads, which is driving hired DRAM content higher SSD content. Both SSD in DRAM content was up double digits, we actually sold up to Intel CPV stack and servers at the same time, but it did not.

None of those three were enough to offset a modest.

ASP decline.

So I think that answers the first two questions Tom will jump in the second on the long term implications what we're seeing in the marketplace again, if you think of what we've done in the series of price news, we've taken over the first three quarters of this year, we have the product line, specifically servers and price position.

Or quite comfortable with the price position, we're on our historical norms, maybe on the slight.

Hi side of that but in our historical norms of price position in the marketplace and you see the businesses that are very.

[noise] subjected to street price respond well SP and be our North American commercial business, which are good indicators for us.

In the largest business as Tom and I, just mentioned Thats, where the most aggressive and this is and where we see.

I guess, the commodity deflation being passed on to customers John as you think through Tony for its Tom Forever 21 look we're still looking at this but.

If you if you take what Jeff just said, which is particularly for our Pcs and servers that there are certain list price and street price frameworks that we want to run towards.

As component cost deflation.

Stabilizes I'll say it that way our flattens out.

And then you start to get inflation you have this dynamic where.

You will ultimately will make decisions about how you price or how do you adjust pricing too.

Just for those component cost input rises if you decide to raise prices we've talked about this in the past in general.

The only get about 60% of the price increase in any given quarter. So if you make a price increase in the quarter you'd automatically move to that price. So it takes time to digest price increases youre going to balance out relative to competitive dynamics in terms of where are you from a list position Street price position such that you stay competitive.

So.

And our components deflation environment is what we've been in this year.

We've been able to adjust repricing or just pricing downward, but the rate of deflation has been greater than that was such that it has allowed us to to capture some of that deflation in the form of incremental dollars to the bottom as you move to an environment of inflation.

Got opportunity is it's not there and then you're trying to balance.

Pricing.

Versus demand generation and ensuring that you stay in price position, but yet protect the piano as best you can so look we've navigated through these cycles in the past.

The model will adjust the model appropriate, but thats the dynamic we're working our way through we're thinking about as we think about next year right. Now this will get hopefully we'll continue to get more clarity on particularly potentially second half cost frameworks of second half fiscal year 21.

As we go into up by 21, but our view right now is that the cost environment becomes inflationary as you go through the year correct.

And then your question specifically to Pcs, Tony largely the commodity goodness in the first half the year has already passed or in price.

We've got the product line and price position as well.

It's largely you've seen most of the cost Didnt first half pass through.

Do you think we have to.

Work, our way through the supply shortages and what ultimately the market pricing will be.

But there isn't a a bunch of cost being held back it is already push through in price.

We have seen in areas, where there are parts of shortage that obviously, the the pricing competitiveness or the pricing aggressiveness I should say.

Decides to some extent because you are you have a fixed amount on supply that you need to.

You need to allocate known an appropriate way. So we'll just have to work our way through that as we go through.

The early parts of next year.

Thank you all right Eric Let's go to the next question. Please.

Well take our next question from Rod Hall with Goldman Sachs.

Yes, hi, Thanks for the question I guess I wanted to start went by asking whether the trade situation has driven any kind of inventory increases I know, it's probably dominated more by shortages as deep use but just wondering if you guys have seen any inventory changes, particularly in the U.S., but maybe in other parts of the world as well as potential.

Tariffs approach and then I wanted to come back to this unit and pricing answer and just clarify whether that is inclusive of China I guess, it is and I wonder Jeff If you could maybe comment excluding China, what happened to those prices and a you beat on servers. Thanks.

Yes.

Tariffs inventory real simple our inventory levels have not changed we continue to run this business on very low levels of inventory.

To your point, it's the shortages.

Particularly there were specifically CP use that are really driving our position of materials across our global supply chain not tariffs whatsoever.

In terms of unit price, we don't parse it out excluding China.

Certainly well do that today.

It's just the trend that I described we're seeing again those transactionally oriented.

Businesses respond to the price position in the marketplace as I mentioned, our units were down as well not as down as much as the revenue.

We did see increases in content of DRAM and SSD as well as CPQ that I mentioned earlier.

And I think that bodes well longer term as we think about content, we think about high value workloads and ability to offset some of the change in the cost environment going forward. If you recall the front end of this last server.

Buildup, we had commodity increases across the board.

And by the way that was a server comment that was yes, yes that wasn't a PC comp correct.

Yes, I would add rod just on the we have seen some elasticities.

In server transaction volume is particularly in the small and medium business Thats responded well to the price price positioning price moves that Jeff and his team of Darren.

It's just that we've cut a I would say a pretty significant headwind on large enterprise bids in claim that the China business given some of the general macro dynamics over there.

Okay. Thank you.

Okay.

We'll take our next question from Aaron Rakers with Wells Fargo.

Yes, thanks for taking the question and I do have a product.

A question as well.

Component side do you talked about with regard to the client PC business that SSD pricing would be up I think 20%.

Sequentially into calendar fourth quarter, net DRAM pricing would start to trend higher.

In Q2 Q of 2020 can you give us the same kind of framework or commentary of how you're seeing.

Those trends specific to the server or enterprise SSD as well as a server DRAM Mark how are you thinking about.

Those dynamics as you kind of give the commentary with regard to fiscal 2021, and then any update on the mid range.

Next platform on the storage side when is that expected to start to ship and impact of storage business. Thank you.

Sure and real quickly the NAND trends in DRAM trends that I mentioned were across all of our NAND purchases and DRAM purchases, so industry analysts and experts have projected costs that I referenced earlier in the 20% of Ssds now DRAM.

I believe I said Q2 calendar 2020, that's across our broad purchase of both server components as well as PC components and then the mid range, we're still on track.

So the commitment I have made in a number of these calls that we will have the product completed by the ended the fiscal year and it will be released we're pretty excited about that particularly with the momentum we've seen on unity XT, which is the bridge from the old unity product.

Hey performance increase of significant performance increase that we launched over the summer that's take access to the new midrange product.

Out at the end of the fiscal year.

We like what we've done certainly we've talked a little bit about the feature set it's a modern stat containerized capability at some a modular design without getting into pre disclosing what exact product is we're excited about what it means we have the right bridge strategy and we'll be able to help our customers migrate from that.

Current technology to our new midrange storage product.

Thank you.

Of course.

We'll take our next question from Simon Leopold with Raymond James.

Thank you for taking the question I wanted to see if we could double click on the dynamics of of what's happening in China.

Specifically said some context for how how much of the business comes from China, and then in terms of what's going on there how much do you attribute to their weaker economy and how much do you attribute to let's call. It a political aspect of maybe not buying from Dell because your U.S. company in which case one.

One is resolved by trade the other dissolve by resolved by a better economy. Thank you.

Hey, Simon it's Tom let me.

Let me just.

Give you some context here right so.

From a size perspective, we've said this in the past that China business unit is sort of.

High single digits in terms of as a percent of revenue of the total company. So you can do sort of rough math on that.

As we think about the demand environment in China, and Im not going to parse it for you weather.

What we are fully phases, we once we've looked at the businesses that there theres a couple of dynamics happening. One there is an overall through a macroeconomic softening that's happened in the country.

We've seen that and elements of the China business.

It's hard and I'm not an under any ability to sort of say as some of that because of some of the more political dynamics I can't really call that what we're trying to do right now as Im sure that we've got the China business properly frame such that when the Chinese economy comes back into growth mode or more a stronger mode that.

You can take advantage of the opportunities over there and.

You need to supply our customer needs over there. So so look it's not a it's a tough environment. We've done a number of actions was such that business on a framework that makes sense for us.

We'll continue to optimize is to our to the extent, we can't over there and we're in there Werent China for the long term, but we have to mixture of the business model makes sense.

Relative to the opportunity.

Do you feel as if you're losing share are holding share in China.

Alright.

Sure. It's it's a mixed bag, we are taking share in Pcs, we've taken share in storage, we have deliberately walked away from a number of large server deals over there where the pricing just was absolutely.

Make no sense to us wholesale like that with the hyperscalers, principally with a hyperscalers over there and so we have lost server share in China as part of that was by design. Most of that was by design at the same point in time, what we've asked our Chinese USA book, we want you to build a sustainable long term model around there.

Broader set of customers a building their customer base to drive a more what we'd call. They more healthy environment in terms of the server frameworks server business over there.

Thank you for taking the question sure.

We'll take our next question, Amit Daryanani with Evercore ISI.

Thanks, a lot guys I guess two questions for me as well, Jeff first few up how should we think about the broader storage market given all the commentary you made in fiscal 21 and perhaps it in touch on both what do you think the end markets I want to do and does Dell share again narrative become more powerful in fiscal 2001, given some of the comments you made on the unit.

Midrange offering earlier.

Yes, if we look at what the industry analysts are projecting for next calendar year I believe the storage external storage forecast is roughly minus 1% I think is.

Very good consensus.

All of the industry experts and whats there.

My job is to do better than that outperform the marketplace and take share we're going to do that with the industry's broadest storage portfolio.

Our classic three tier storage architecture, so primarily a raised with high in mid range and the entry level products. We have the advantage in the high end of the.

Marketplace with our Paramax product, our unity XT product as I mentioned earlier is doing well growing double digits.

Bridge to the new product that will be out next year as I mentioned, we've made progress with the entry level product, our broad storage portfolio moves into.

The areas of data protection, which the new integrated data protection appliance and the new data domain products off to a good start as they've been refreshed than we have the H.C. I didn't see portfolios of power one that I just mentioned a leader in the converged infrastructure.

Category and then we certainly than the market leader in the fast growing HC ice phase, so with that broad portfolio and now largely refreshed and modernize.

Optimistic that we can outperform the marketplace as we head into next year. That's certainly the targets that we have in place you combine that with the Salesforce build out that we've put in in place over the last two plus years more storage sellers more storage specialists, we've made progress and what we call the enterprise.

And that business is growing nicely, so I'm optimistic that we have.

Put the right plans together with the REIT portfolio, the right investments to grow our storage business at a differentiated rate to the marketplace at circle back we've largely done that in the last two years, we've taken 375 basis points a share and over the two year period, we've largely grown the external storage business any market thats.

We down.

That's really helpful and I guess, Tom I just wanted me show how would you correct. Initially you said the school 21 operating income margins will be closer to fiscal 19, I think that's the comment you made.

Okay to think about what is free cash flow doesn't that narrative and maybe qualitatively talk about one of the puts and takes a free cash in fiscal 21 versus fiscal 2000 for you guys.

Yeah.

Hey, I'm going to what I said was our preliminary view is that operating income margins may trend closer to fiscal 19 levels.

And you know principally because as you would think profiles and this will also different obviously on what ultimately happens with component cost environment for right now we expected to be inflationary, we don't forecast free cash flow.

Externally I should say, we do forecasted internal it clearly.

Well look that it'll be a function of free cash flows all as a function of profitability in working capital on other dynamics within the company and so it's our job to optimize working capitals, all job optimize free cash flow more importantly, you heard me say on the call that Hey, we're committed to the 1.5 billion ascent.

So the $1.5 billion it definitely down in Q4 to get to the $5 billion target. We've laid out we've paid three and half billion.

$300 billion, a debt down so far year to date and that we're committed to the $4 billion a debt pay down next year, even as we run the sensitivities around that given what we know today that all looks real within the framework of that we're comfortable with so.

Well, we'll continue to update you guys would give you further thinking on that as previous Riggins would come back at the end of Q4, but.

That's that's the framework, we think of right now.

Thank you.

Well take our next question from Shannon Cross with Cross research.

Thank you just one question wanted to go back to Pcs.

You indicated that the shortage is from Intel are going to impact the current quarter and then you talked a bit about.

Perhaps lingering pressure in 2021, so I'm just kind of curious as to what you see the trajectory like and do you expect I think HP just indicated they expect a bit of a push out in terms of our continued I guess stronger demand. The 91 would have thought in the coming here because of some of the next dynamics and pressure from it.

Alan I'm curious as to what you're saying thank you.

Yes, let me leased try to give a couple of data points. One is I think we've talked about this we've largely mitigated the supply challenges to date and we think our direct models allowed us to do that with the speed and flexibility that it gives us to adjust to the output.

Outside of the factory clearly with what we said earlier.

There's been a change in Q4, and we're dealing with that real time.

History would suggest if we can't fulfill demand in the industry that we will.

Spill over into the coming.

Calendar year.

Particularly with Windows 10 were.

Roughly two thirds through the refresh cycle.

And to the point Theres, a delay with that that's going to spill over into the following calendar year.

Perhaps maybe another way to say it as we think that align elongates. The cycle. We've talked about we think it spills over into the first half already I think there is just another validation that it will spill over into the first half of next year, given the continued or.

Increasing challenges within until supply. So that's how we certainly look at it we're certainly dealing with the information that we have real time and making the adjustments accordingly.

Thank you.

Well take our next question from Andrew Adam with Wolfe Research.

Hi, Thank you had one on margins. So if we put aside products gross margin expansion in turn over to services. This is the second consecutive quarter of services gross margin being run 101 hundred 150, bips lower than where it was tracking last year through Q1 of this year can use walk through the puts and takes on that.

An item and whether anything structurally has changed.

Well, there's nothing that has structurally changed on services margin.

The only that here and I don't have the data right in front of me I would offer you a far couple of.

Comments one is.

Overall, we've seen actually good attach rate on services, our services offerings in general in fact to concentrate on our tech on some of our products has increased so we're pleased with that content rate.

As we think about the the margin dynamic the comment I would offer you was.

Principally whether we're putting a lot of that services profitability onto the balance sheet, that's getting building up the deferred revenue so you'd like to think about.

That dynamic, but theres nothing structurally that's happened in the in the business or how we're marketing are positioning services.

That was.

I would call out any significant structural issue.

Okay. Thank you.

Okay. All right next question.

Jeremy.

Deutsche Bank.

Thanks.

Question I, just want to understand the bridge.

For fiscal <unk>.

Back to 21, which is going to.

Operating margin.

Think about it.

Number one.

In terms of the downshift in margin.

Yes.

Portion of revenue or perhaps you know component pricing mix driven to drive.

Or another way to think about it would segment base.

How much of the margin degradation.

Yes.

Yes.

Okay.

You're talking Hey, it's how you're talking about fiscal 2021 is that the comment is that a question.

Yes that is yes that is question well I think you've got to go back to what we think good drivers are around potential sort of potential margin pressure operating margin pressure next year and we have been pretty vocal throughout this year are principally in the last couple of quarters on these calls around the profitability profile of our CSG business.

So embedded has.

Trended higher than normal are given some of the component cost deflation, we've seen and so a significant majority on the margin dynamic year to year, assuming that component costs move from deflation drew inflation, which is the forecast that we have right now will impacted profitability profile of Arseus.

The business back towards historical norms.

So I would think about most of that pressure being in our that dynamic there's a big driver of some of the profitability each potential profitability shifts year to year.

You will have a little bit of that dynamic within the server because again you got to think about which swaps are more commodity cost sensitive in terms of pricing dynamics and goes through whilst tend to be our most sensitive.

Impact for ones I know are impacted the most well they are some I think you hit it is if you look at the deflation in COVID-19.

Our model generally captures that more quickly.

And this advantage, we have that deflation and I think you see it.

What was our beginning of the year expectations for profit to where we're at two today.

As Tom said, we had a deflationary period coming.

And those businesses will perform back towards their historical norms.

Well now take our final question from Matt Brown with credit Suisse.

Thank you.

I just talked about China several times, but wondering if you could backup and talk about the demand environment across other geographies around the world.

So just wanted to clarify if you think the macro overhang has actually gotten worse versus where we were in the second quarter or at the drag is more kind of consistent over the last call. It 90 plus days or so.

Yes look it's Tom let me I think the macro overhang is.

Reasonably consistent maybe slightly worse, but.

It didn't fall off the cliff or anything like that but we are just seeing continued caution in the environment continued softness in the environment.

Yeah, we've talked about it a couple of times, but principally in server.

We have seen softness in large enterprise slowness in procurement cycles elongation of procurement cycles I should say.

You know critical projects are still getting done but are they seem to be taking longer from procurement cycle.

You know and I think Thats just.

A function of sort of the macro dynamics that many companies see them oriented in the sense of trying to navigate what is a little bit of an uncertain macro political economic environment right now and so our perspective is there's a bit of caution out there that we're seeing.

Our sales organizations are out there of selling everyday so we've got that brought us reach in the marketplace, we are being disciplined.

On pricing and so I'm not chasing and driving deals that just don't make economic sense to me over the long term. So there is some through some level of that happening within our business as we stepped back and think about your question around jeez, if you're doing other various geographic dynamics will tell you, but in general the U.S. we.

Means reasonably healthy.

Right.

Yes, there's some large some softness at large.

On the large enterprise procurements on servers in particular, but you know our commercial North America business or small and medium of North American businesses are doing quite well. We're pleased with the progress we have seen some softening in Europe Western Europe in particular in Q3.

No I think Japan continues to be strong for us.

India continues to be reasonably strong China's been soft as we've talked about.

Australia, New Zealand has been soft and so in Brazil has been strong. So I mean, if you just bounce around the globe and some of the major economies, it's a little bit of a mixed bag.

Which is I think the message we're trying to send you guys reaches its a bit of a mixed bag look it's our job to navigate through all of that and drive the business forward and ramp confident we'll do that and thats. The navigation that we have to get down here in Q4 on into next year. So I think from an overall positioning I think we're well positioned we've got the broadest.

One portfolio in the market customer receptivity to our offerings is high so it's a matter of us going out there, making sure that we're having the appropriate conversations with our customers every day and helping to drive to there the outcomes that they desire.

All right good well thanks, Tom Thanks, Matt as a reminder will be at the Wells Fargo Summit in Las Vegas, and the Bank of America leveraged Finance conference in Boca Raton on December the third will be a credit Suisse in Scottsdale on December the fourth then the following week will be in New York at the Raymond James Conference on December the 10th and the you'd be US conference on December .

The 11th and finally, we'll be at CES in Las Vegas in January so thanks for joining us today, and we hope you all have a great Thanksgiving.

This concludes today's conference call. Appreciate your participation you may now disconnect at this time.