Q2 2021 Dell Technologies Inc Earnings Call
Come to the fiscal year 2021 second quota results conference call for Dell technologies eat I'd like to inform all participants. This call is being recorded at the request of down technologies. This broadcast as the copyrighted property Adele technologies eat any rebroadcast up this information in whole or part.
Not the prior written permission Adele technologies is prohibited.
Following prepared remarks, we will conduct the question didn't answer session. If you have a question simply press darn than one on your Touchtone keypad at anytime during the presentation I'd like to turn a call over to Rob Williams head of Investor Relations. Mr. Williams, you may begin thanks, Holly and thanks, everyone for joining us.
With me today, or Vice Chairman and C O O, Jeff Clark or CFO, Tom Sweet and our Treasurer Tyler Johnson.
Press release financial tables web deck prepared remarks, an additional materials are available on our <unk>. Our website the guidance section will be covered on today's call.
During this call unless we indicate otherwise all references to financial measures referred to non gap financial measures, including non gap revenue gross margin operating expenses operating income net income earnings per share EBITDA, adjusted EBITDA and adjusted free cash flow.
A reconciliation of these measures to their most directly comparable got measures can be found in or web deck and press release.
Please also note that all growth percentages refer to year over year change unless otherwise specified and it's Vmware historical segment results have been recast to include pivotal result.
Additionally, I'd like to remind you that all statements made during this call that relate to future results and events are forward looking statements based on current expectations.
Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed dinner web deck and S. E. C reports, we assume no obligation to update our forward looking statements.
Finally, before I turn it over to Jeff I went to address the amended 13D that we filed on July 15th disclosing that they'll technologies is exploring potential alternatives with respect to it's ownership interested in vmware, including a potential spin off of its ownership interesting to Dell technology stockholders or maintaining the status quo.
We believe a spinoff could benefit both Dell technologies, and Vmware stockholders by simplifying capital structure in corporate structure, and enhancing strategic flexibility, while still maintaining a mutual beneficial strategic and commercial partnership with that said, we will not address to filing or any any further or.
Questions related this topic now I'll turn it over to Jeff.
Thanks, Rob.
We are finishing up day 171, working remotely adult technologies and the novelty of the new normal has worn off.
Michael send a note to our team members earlier this month that captures the situation quite well and I quote this is going to be a marathon and it's going to be uneven and frustrating at times.
What I can't tell you know what you will see in our results today is at our team has continued to deliver an extraordinary ways and this unprecedented environment.
I'd like to provide several examples of our team's resiliency tenacity adaptability. The grit that is inherent in our jail technologies culture.
These examples demonstrate why Romain so optimistic about the future of the company and our ability to consistently deliver no matter the obstacles.
We are still largely working from home or not alone in this dimension as we will highlight and are cute. Your results. We have moved beyond work as a location.
[noise] Cold at 19 has made one thing cleared US work is something you do an outcome not a place or a time.
And it takes teamwork in a culture that prioritizes outcomes and results over effort.
So we have team members juggling many challenges parenting caregiving citizens in countries still grappling with searches of the pandemic are I'm, playing engagement and productivity is that an all time high [laughter], we are seeing a human transformation right before our eyes, emphasizing trust empathy patients and flexibility that will.
[noise] serve society and business long after these tough times are over.
[noise], while working from home and navigating a turbulent market, we continue to drive innovation in new and different ways over the course of nine weeks in Q too, we had nine product and solution launches all working remotely.
We now have completely completed the modernization of the ISG portfolio and the pipeline continues to fill with more innovative solutions and products to meet the needs the new normal.
We have not broken strike with with customers, we may even be building deeper relationships than we were pre cove. It customer engagements have become more frequent richard content, while reaching a greater audience within these accounts customers bring more decision makers and technologists, two executive briefings and we respond with.
Deep solution architecture, and engineering to deliver better business outcomes.
And right in the middle of all of this global pandemic, we pause to listen to our team members and society at large you'd given what happened three days before we were at last together the murder of George flooring.
Well, we heard through a series of listening sessions was consistent are black team members want better representation equal opportunity advocacy.
And to see miserable progress against our diversity and inclusion 2030 goals, that's what we all want.
And the work a real change within our now virtual walls as well underway.
I sure. This is a backdrop for the differentiated results we will we will report today.
Our results come from a will competitive real competitive set of advantage, but also a real cultural differentiation and resiliency.
That is why I'm excited about are cute too performance and optimistic about our longterm trajectory.
What we know from our conversations with customers as technology has never been more important similar to what we saw Q1 customers top digital priorities are enabling learn and work from home and creating automation and agility across I T for consistency resiliency of operations.
While the pandemic didn't start the remote learn and work trend. It is certainly accelerating it take the financial sector and it's need to enable secure work from home solutions, a major bank in EMEA had to move 200000 of their 280000 employees to work from home.
To give them to give them the manage access to application and data they needed we implemented a VDI solution based on Vmware Horizon, then work Cloud Foundation VX rail along with 200000, VDI clients and 2000 servers and enter in services all from one partner.
Fully integrated to help the bank get their own plays up and running securely.
After all of this investment to enable remote everything we will never go back to the way things were before here at Dell, We expect an an ongoing basis that 60% of our workforce, we'll stay remote or have a hybrid scheduled.
Where they work from home, mostly and come into the office, one or two days a week.
And we are not alone recent data shows that work from home is likely to increase by 20 points across all sized companies across all sectors I think that is understated and.
And it will take more technology to ensure productivity and collaboration from anywhere.
And our 10 years is a connected workplace, we've learned that it's a combination of technology, there right tools for workforce enablement and culture.
And we are sharing these best practices with our customers as they embark on this journey.
A journey that will be transformational for customers and is the only player to be able to bring real solutions that connect the edge corn cloud will benefit Dell technologies.
Also showing up in our performance has demand for simpler more agile I T across multiple clouds companies rush towards the flexibility and he's a public cloud, but are now looking to hybrid cloud for longer term answered.
[noise] essentially customers want a new operating model one that consistently delivers the best of all clouds private public and edge.
One large hospital system missing great illustration this customer wanted a modernized or environment to better support electronic medical record and imaging needs. They were happy with their public cloud implementation, but needed seamless integration with their storage solutions to pull down data from the public cloud quickly and affordably.
We delivered power Macs empowered scale and a managed service facility connected to their public cloud, allowing them to better manage and control their data because the storage is directly and securely connected to the public cloud at the source data cost a reduced in latency issues are nearly eliminated. This is a great example.
[noise] of how we're building our entire portfolio for customers cloud needs.
What the outcome decision without come based decision, making top of mine similar to cloud customers also want to consume more technology as a service letting them pay for only what they use.
And to move fixed cost to variable costs, which is critically important right now given the environment. We continued offer Dell technologies cloud on the most broadest infrastructure portfolio with the new Dell AMC power scale of storage substance.
Storage systems and del EMC ready solutions on V and work Cloud Foundation.
Customers are finding immense value in del technologies on demand flexible consumption models customer demand for these models promptness to expand our offerings to include Brazil, Chill, a Columbia, India and China that is why we're doubling down on both Dell technologies cloud and del technologies on demand.
Now, let's move to our second quarter results. Despite a dramatic deceleration in U S. GDP during the second calendar quarter of the year. Our team stayed focus on the customer and deliver.
[noise] overall, we had a solid quarter relative to the macro environment with revenues of 22 $8 billion down three per cent and operating income of two $6 billion or 11 five per cent of revenue.
Clients solution group delivered revenue of 11 $2 billion down 5%.
And our consumer business, we outperformed fuelled by another outstanding quarter from our consumer direct business that was up 56% based on orders.
And our consumer direct online business was up 79% based on orders, we saw strong double digit growth across all consumer notebooks and gaming systems, driven by our premium X P. S. An alienware brands, which were up 25% on an order spaces overall notebook momentum continues with orders up eight per.
Sent driven primarily by growth and consumer.
And commercial notebook needs at home and for remote.
Work and learning.
Infrastructure solution revenue was eight 2 billion.
Down 5%, we saw double digit orders growth for data protection and <unk> and the second fiscal quarter and mid single digit orders growth for a high and storage.
These are all sectors, where you hold the number one sure position by a large margin and continued to have opportunity for growth.
And while it's a little while it's a little early to comment on power store performance. We continue to hear a positive feedback and feel confident that the pipeline will drive profitable share gains specifically in mid range segment. This year.
Our Vmware business segment had another strong quarter delivering two $9 billion of revenue up 10%. In addition to the depth and breath of our portfolio a big driver of her differentiated performance is our distinctive direct and channel coverage model of the entire ITT market and the second quarter demand from government state.
Strong while education demand ramped with orders up double digits for both verticals small and medium business demand improved through the second quarter is businesses open backed up once government restrictions for lifted.
Take these results and combine them with the demand that we saw from large enterprises health care and the financial sector and <unk>.
And our first half was strong we delivered 44 $7 billion of revenue for $8 billion of operating income and five 7 billion a adjusted EBITDA, we made the appropriate tough decisions around our cost environment in the first have to limit spending and to protect liquidity given the uncertainty of the <unk>.
And environment.
Or track record of consistent profitable growth share gains innovation and financial returns reinforces our strategy is working and doesn't change even and missed.
The uncertainty we're focused on winning the consolidation on our core markets innovating and integrating across Dell technologies to create the next generation of infrastructure.
And to do both while strengthening are distinct advantages as a company.
Go to market capabilities, and global services footprint, our supply chain, our product breath and integration our financing and they're strategic work, we do with Vmware.
Over the last three fiscal years alone C. S. G N I S. G have delivered a combined $230 billion in revenue and $18 billion an operating income.
Over the last three calendar years, we have gained 330 basis points of sharing commercial client 510 basis points of sure in mainstream servers, and 120 basis points of sure and mid range storage, we have the right portfolio and the go to market plans in place and the teams are focused on driving relative sure.
Back to why I'm, so optimistic the long term trends in our business are favorable and our sources of advantage are real.
There is a high degree of uncertainty right now are street.
Strategic position and the secular technology trends create long term growth opportunities for us.
We've been talking about the fourth industrial Revolution for Awhile and now the pandemic has accelerated it's arrival.
Organizations have had to pivot quickly first to work from home and learn from home and now businesses are taking this opportunity to reinvent their models for a more connected digital automated data intensive and distributed future.
That is hybrid theory imagination of work as an outcome not a place reinforces the value of hybrid cloud and physicians hybrid as the optimal cloud model to meet the new demands of a fluctuating world.
Essentially creating a hybrid cloud for a hybrid workforce utilizing cloud as the modern I T Foundation to deliver consistent experiences in economics across many places workloads and people reside.
Dallas uniquely position to deliver in this hybrid reality public cloud sure, but but also a real growth and resiliency in private clouds and on premise infrastructure.
We have a history of investing in new businesses in technology solutions that layer into our portfolio and spur growth.
Emerging technologies around a widespread connectivity with five G data driven insights at the edge and expanding workloads and a hybrid cloud future, we'll each create opportunities for a long term growth in value creations at Dell Dell technologies.
Increasingly customers are turning to Dell technologies to shape. This digital future given the unique advantages we've talked about combine these advantages with our purpose driven culture and track record of consistently growing our core business as well investing in the long term future I like our hand, now I'll turn it over to Tom for.
Look at our financials.
Thanks, Jeff <unk>.
Overall, we were pleased with our performance, especially given the current environment.
Despite depend demick, an economic headwinds, we're executing on our strategy driving long term value creation for Dell technologies and our stakeholders.
And relative growth and winning and the consolidation.
We're creating differentiated del technology solutions through innovation and integration.
And we're generating strong cash flow, enabling us to delever and create value for shareholders.
Revenue for the second quarter was 22 8 billion down 3% year over year.
<unk> continues to be a headwind, particularly in Brazil, India, and China impacting our growth by a growth rate by approximately 150 basis points.
Revenue was up 4% sequentially, which was below our historical Q2 seasonal revenue range, but wasn't in line with our expectations as we discussed on our Q1 earnings call.
Gross margin was seven 6 billion are 33, 5% of revenue.
Like Jeff said, we saw demand growth in education state and local government and consumer during Q too, which impacted gross margin given these customer verticals tend to deliver less margin dollars.
The majority of cost actions taken in the first quarter remain in place and help drive operating expenses down 4% year over year and down 3% sequentially to 5 billion.
Some of these cost benefits are shorter term reductions that will phase out over time for example.
Lower employee benefit claims during the government shelter in place periods.
Lower facilities related costs, and reduced advertising and promotional spending in certain verticals.
We believe some of these costs benefits will normalizes removed through the remainder of the year as we prepare sites to bring team members back to the office and benefit utilization normalizes.
Operating income was two 6 billion or 11, 5% of revenue.
Well down 5% operating income was up 21% sequentially driven primarily by the strong operating expense controls and business unit mix dynamics.
Consolidated net income was one 6 billion down 7%.
<unk> was $1 and 92.
Down at 11% year over year, but up 43% sequentially.
Adjusted EBITDA was three 1 billion down 2% at 13, 6% of revenue.
For the trailing 12 months adjusted EBITDA was 11 a billion.
Total deferred revenue was 28 8 billion up for 2% year over year.
Our recurring revenue, which includes deferred revenue amortization utility and as a service models is now approximately 6 billion a quarter up 15%.
Is Jeff mentioned, we will continue to focus on providing as a service solutions for our customers are cross our portfolio.
Given them more flexibility.
Cloud like economics.
Shifting to our business unit results client solutions group delivered revenue of 11 2 billion down 5% <unk>.
Demand for remote work and learning solutions from our education government and consumer customers drove strong consumer client and notebook performance.
Consumer revenue was three 2 billion up 18% driven by the strong double digit growth across all of our consumer notebooks and gaming systems.
Our focus on premium consumer products is paying off our xps, an alienware product lines saw combined orders growth of 25%.
Is expected commercial client was more challenged in Q2 with revenue of a billion down 11% is double digit growth and latitude notebooks and commercial chromebooks was offset by reduced demand and commercial desktops.
<unk> operating income with $715 million or six 4% of revenue.
<unk> profitability was down from cue to record levels last year, primarily due to less deflationary component cost environment compared to a year ago.
But we are pleased with the improved operating margin profile versus Q1.
We continued to be very pleased with our client solutions group performance. It as a stable business that consistently deliver strong cash flow and provide scale, helping us whether the different cycles urine and you're out.
<unk> revenue was 822 billion down 5%.
Storage revenue was 4 billion down 4% year over year, but 5% sequentially and a bright spot given the macro environment.
Strong demand for VX rail continued with double digit orders growth again this quarter.
Other storage highlights included triple digits ordered growth and our high and power mix solution and double digit orders growth and data protection.
We saw softness in other areas of course storage, including mid range <unk>.
We continue to build pipeline for power store and are pleased with the customer receptivity, we expect it to ramp through the second half of this year and heading into fiscal year 22.
Servers and networking revenue was for 2 billion down 5% year over year, but up 12% sequentially.
Overall servers were still challenge with some improvement orders for mainstream servers.
Our high value servers built for order official intelligence and machine learning workload solved mid single digits orders growth.
Both this is still a small piece of the overall server revenue mix.
ISG operating income was $973 million or 11, 9% of revenue, which was down 30 basis points, primarily due to lower server profitability is component cost were higher compared to Q2 of last year.
Given the dynamics and the macro environment <unk> results have been softer than we expected coming into this year.
However, it is a critical component of our portfolio and one that we expect to improve is the overall economy, an I T spending rebound.
Over the last five fiscal years, we have grown this business organically and inorganically by more than 18 billion and is now on a greater than 30 billion dollar run right.
It delivers excellent profitability and gives us a seat at the table during all of our customers most critical.
Infrastructure decisions.
The Vmware business unit had another strong quarter delivering revenue of two 9 billion up 10% and operating income of $894 million are 37% of revenue.
Based on Vmware Standalone result, subscription it as a service revenue grew 44% and comprised 22% of total revenue.
The largest revenue contributors included the Vmware cloud provider program modern applications and user computing and carbon black.
Vmware cloud AWS once again headed triple digit revenue growth rate.
Before I moved to the capital structure I want to highlight tell financial services, which continued it's growth trajectory I've had an outstanding second quarter.
<unk> originations were up 31% to two 6 billion driven by strong Vmware and EMEA performance.
The introduction of the DFS payment flexibility program in April has been very well received across all lines of business and customer segments.
Earlier this month, we extended the program through the end of October with payment deferrals until 2021.
As we continue to work together with our customers and partners to enable their businesses through these challenging times.
Turning to cash flow generations are balance sheet, we generated cash flow from operations of approximately three 3 billion.
Driven by strong profitability and improved working capital dynamics.
Some of the Covid 19 related impacts on collections in inventory partially normalized.
Adjusted free cash flow and Q2 was three 6 billion and on a trailing 12 month basis adjusted free cash flow of seven 8 billion.
Our liquidity position as strong and we are comfortable with our capital structure.
We ended the quarter with 12 3 billion of cash in investments and five 9 billion Undrawn revolver capacity.
From that perspective, we paid down approximately three $5 billion a total of that during the second quarter, including two 2 billion of core that.
125 billion of Vmware that.
Our total that balance ended the quarter at 54 5 billion. This includes GFS related that of $10 billion subsidiary that a six 3 billion. In addition to our core that margin loan.
Ah corrugate enter the quarter at $34 1 billion.
Over the last four years since the EMC transaction closed our core that has been reduced by nearly 15 billion demonstrating our commitment to pay down debt.
While the total debt balances decreased by a lesser amount over that period. This is primarily due to the that added by Vmware to support its own strategic initiatives and that we have added specifically to fund DFS growth is customers increasingly value that payment flexibility at our financing solutions offer.
As a reminder, a majority of the DFS that is secured by financing receivables.
And.
And is service by the cash flow generation from these receivables.
Delevering continues to be the priority for our capital allocation and we are committed to achieving investment grade ratings.
Or attempt remains to reduce cord that by approximately five 5 billion fiscal year, 21, which would be incremental $2 billion to $3 billion, we've already paid year to date.
Let me provide a few comments on the rest of the year.
As you know as you know we withdrew fiscal year 21 guidance during the first quarter.
There continues to be a high degree of uncertainty for the remainder of this year.
The latest global GDP, an industry data indicates continuing but moderating declines for the second half of the year.
Similar to cue to we expect Q3 revenue to be seasonally lower than prior years, which has predict typically been flat to down 2% sequentially.
As a reminder, we are currently on track to close the RSA transaction in early September.
Historically, RSA contributed roughly $800 million, an annual revenue and approximately $200 million of operating income with similar back in loaded seasonal trends to ISG.
Turning to operating income there are a few items that need to be considered <unk>.
We saw component inflation and the second quarter and anticipate inflation again in Q3 <unk>.
We are seeing DRAM and SSD prices potentially softening as we move through the second half with the benefit from this not showing up until later in the year.
In addition, normal sequential point towards a higher mix of consumer P. C. As in Q3.
And a recent IDC forecast reflect a higher mix towards consumer PC and chromebook units and Q3.
Considering these items along with the lower revenues sequentially general macro challenges and Vmware operating income expectations <unk>.
We expect our operating margins will be lower sequentially.
We are proud of our operating heritage, we will continue to manage the business driving above market performance. We are focused on what we can control while navigating through the macro.
Adjusted for the dynamic Kosten currency environment, while also balancing appropriate cost actions with necessary investments.
And closing we are winning the consolidation and we're executing that are long term drivers of value creation for Dell technologies and our core markets.
We are taking the appropriate corporate structure steps to optimize value simplify in the line or focus areas as evidenced by the Vmware merger with pivotal ongoing simplification of operations, the announced divestiture of RSA and the exploration of alternatives with Vmware.
We will continue to create differentiated del technology solutions through innovation and integration across the entire family.
Our goal is to create longterm value for all the lines shareholders by outgrowing our competitors.
Growing EPS faster than revenue in generating strong cash flow over time.
And as we continue to Delever and get back to investment grade, we will look for other opportunities to returned capital to shareholders with that I'll turn it back to Rob to begin Q&A.
Thanks, Tom let's get the Q&A, we ask that each participant ask one question to allow us to get to as many of you as possible Holly can you introduce the first question.
We'll take our first.
Morgan Stanley.
Thank you. Good afternoon last November you guided tour and operating margin. This year that would be roughly in line with physical 19, but just looking at the first half of the year your tracking about 100 basis points above that level. So is that still a fair target.
And how do you see the operating margins playing out for the next couple of quarters. Thank you.
Hi, Katie Thanks for the question.
This is obviously, Tom so look I think as we think about the first half of the year I think we generally I have been pleased with the operating performance of the organization given the dynamics and the macro.
And obviously a lot of that has to do with.
The cost dynamics that we've been able to to drive in terms of the constraints, we put on spending whether that was the <unk>.
The reductions in teeny that headcount freeze.
And those other cost actions that we talk.
Sit here at the midpoint of the year and look forward into the back half where there are some dynamics highlighted in in my guidance section that I just want to keep you keep your centered on which is around we are seeing if you think about our seasonal pattern Q2 Q4 are generally are bigger quarters Q1, Q3 are generally ours are season.
A little bit softer than Q2 Q4, there are a couple of dynamics as we will look at Q too.
I'm sorry, a Q3 as we think about the the demand environment. The mixed dynamic with with our client business <unk> business, where we typically trend towards consumer in Q3, as we get ready for the holiday season.
Going to have the additional dynamic this year I think of a bit more education and chromebook dynamic.
Mixed in there so that's going to that has some dynamics around our margin and then I'll also would remind you that.
With the RSA divestiture, which is targeted right around the beginning of September.
I will drop some operating income and revenue out of the other the consolidated total so look I do think that we might see a bit more downward pressure on operating margin in the back half of the year right now well obviously have to watch it.
And part of that would be dependent upon how does the.
How does the mixed dynamics, how does the mixed dynamics play out as well as the component cost environment, which we still believe is inflationary in Q3 so.
I think.
We will continue to look at it first have a strong we'll see how the back or or solid I should say, we'll see how the back half plays out.
Tom is it still realistic, though that you could see us 10% margin for the year like an Tesco 19.
Yeah, I don't think so knocked out I don't think it gets to that level.
Okay, great. Thank you for the color.
Thank you David next question.
Raymond James.
Hi, guys.
Victor two Incher Simon Leopold.
Could you provide us with some color around the performance.
Vertical as maybe where you saw better demeaned in quarter and it just kind of want to get a sense for.
Pieces.
That's it takes the surprise T relative to your expectations.
Yeah, I'll look maybe I'll, let let me say a few Eli.
Hi level comments, maybe Jeff could jump in and talk about some of the business unit dynamics that we saw.
I would remind you that as we.
Our call in Q1, we highlighted the fact that if you think about the seasonal pattern or the linearity pattern. We saw on Q1, we saw.
February March quite strong clearly March spiked with their work from home dynamic is businesses.
And education Houston shifted to work from home learn from home, but then as you recall and are talking points. We also talked about the fact that we have seen April softened.
That demand dynamic of April softening that.
Linearity continued on into May with.
Thought may from a demand perspective was or was quite saw June began to recover.
And then by the time, we get late June and July we saw we cover week strength.
Prove demand all those still negative as we got through the order from.
From a demand.
Perspective, and so there are some dynamics within that within the context would be used.
Terms of.
Each of those be used performed during as we went through the quarter.
And maybe with that I'll turn it over to Jeff maybe you can give some highlights and what we saw and the ISG space and then in the P. C space, Yeah happy to Victor.
Build on what Tom said clearly there were a couple of trends that we saw from a vertical orientation. We saw education in government pro double digits.
We saw as Tom Shindy improvement over the quarter, we saw the S b and B verticals, our businesses and prove week over a week from early June through the end of the quarter still below normal seasonal rates, but they improve from the the quarter.
We solve the largest transformational.
A world continue to invest in digital transformation and continued to move forward.
Will agendas.
If you look at up from a product perspective is Tom mentioned I'll learn from home and work from home continue through the quarter, particularly towards the latter part of the quarter as many countries for preparing to send their youth back to school, which in many cases is going to be a online learned from home environment.
And we saw many institutional.
Customers, who have historically been in the public sector, a desktop based or.
See asset moving to a notebook based asset.
Lying more notebooks throughout the quarter and then lastly, we saw demand on the ISP died for our data protection products are high and storage products and our VX rail products data protection and VX railroad double digit in the quarter on an order of spaces and we had good demand for a high and storage and the single.
Digits I hope that helps.
It's very helpful. Thank you.
You're welcome Thanks, Victor next question.
I'll take our next question from.
With a credit Suisse.
Thank you very much.
<unk> I Wonder if you talk a little bit more about what pricing dynamics looked like across both storage in servers and the quarter and just to be comment on if you've seen any changes in the wider competitive environment the demand environmental a little more difficult.
Well I think mad if we till or to look at servers, we were of Maine disciplined throughout the quarter as we mentioned in Q1 as well.
Three discipline to what we see in the marketplace. There are some aggressive pricing for server deals without question, but we're not out chasing sure. We don't think that's good for a business.
We want to be disciplined and returned profitable gains in the business.
Clearly the pressure, we're seeing an ISG is more of a macro one the macro demand of the isg's sector. Both storage in servers certainly different than we thought when we planned the year and started the calendar year back in January.
We've continued to see customers slow down their investments in some cases sweat their current infrastructure.
Through the first half of the year to navigate through the pandemic.
As I mentioned in the previous question, we've seen those largest customers continued to invest in infrastructure.
We've categorize we would categorize them as the digital leaders those digital leaders continue to invest in infrastructure, they're digital transformation programs and projects and we saw healthy demand in the largest companies around the world continuing to buy servers and continuing to buy storage class products.
As we look downfield, if you will and we think about what happens.
Towards the second half of the year, you've probably seen the same forecast that we have IDC is shown the external storage market in the mainstream server market under pressure and the second half of the year, specifically changing their forecast by roughly 600 basis points more negative and we think we can whether the storm throughout the rest of.
The year and as we look into next year, we see growth and the server market and the external storage market.
I believe the server forecast or roughly 7% growth next year. We believe we have the right portfolio to be able to.
[noise] advantage of the growth environment that'll be around over a rebound if you prefer I think about the opportunities that we have and cross selling and our buyer based or storage customers buying servers are server customers buying storage the opportunity that we have on high value workloads and the server marketplace. I think is still an untapped opportune.
<unk> for us, while we've made progress and solve growth in that area of this quarter. There remains to be good opportunity for US and then we believe there is emerging opportunity as the telecom industry Standardizes on an open.
Platform, what's going to happen in edge and the date of intensive workloads it'll evolve on the edge and clearly the continued migration of the hybrid in private cloud world that we've seen throughout the last six quarters. We think that continues as hybrid cloud is the norm going forward I hope that helped.
Alright.
Thanks, Matt Alright next question please.
I'll take our next question from Tony.
Arnstein.
Yes. Thank you.
Just wondering if you can comment.
And in your guidance.
You talked about week sequentially, improving in terms of growth rate.
And yet your guiding four below normal.
Sequential grow for fiscal Q3.
Most companies are not moster guiding for in line are better than normal sequential growth unless they had a unique backlog.
Relief.
Or higher revenues and Q2 from backlog, which I don't think was the case with Dell.
And I also recall last quarter, you seem relatively optimistic about the ISG business.
You sound a.
A bit more cautious about it now I think server growth, even Q1, a cue to was.
No seasonal despite the fact that it sounds like you're being quite aggressive with financing.
So maybe you can just comment.
Why are you incrementally negative.
Around ISG relative to 90 days ago.
Why are you not guiding for at least sequential growth if weekly order patterns are.
Ultimately getting better.
And why do you think you were below normal sequential server growth from Q1 Q too despite.
A financial promotion as evidenced by how much financing.
Went up in the corner.
And your commentary around sequential improvement thank you.
Hey, Tony It's time, so look let me let me set the stage tried a few look at our normal seasonal pattern.
Q1 to cue to is generally a growth pattern right were Q has always been for us a strong.
Education State and local government buying season Q3, Q2 to Q3 is traditionally been a a negative sequencing growth pattern for us as we come out of that strong Q too.
We start seeing mixed dynamics within the Csgo business with consumer starting to ramp, which generally as a lower AOSP.
And then we step back up and Q4 generally from a sequential pattern or perspective. This year with what we know today and I'll comment on the fact, yes, we did comment about the fact that as we got.
Went through Q2, we saw improved demand coming into July, but the dynamics tend to two.
Do changes should go into the next quarter buying season patterns change and so we are.
Think thoughtfully cautious around how do we think about demand in Q3, given the dynamics within the macro.
And are normal historical patterns here that we that we think we're going to be slightly softer.
As you look at the I S G space in particular.
Normally see a sequential fall off Q too.
The three year averages around negative too negative through sequential in Tony for ISG and don't forget RSA comes out other so I, just think and you look at that <unk>.
<unk> D C forecast for Q3, which has mainstream server revenue X China minus 12.
Sternal Strawberry minus 10, essentially I think we just.
Even though I pattern and given what were seen in the environment.
We want to make sure that were thoughtful about how we frame a quarter.
And obviously, we're going to push on this appropriately but.
That's I think about from our perspective.
The frame that we're providing makes sense relative to what we're seeing jump I don't know if the only thing I would add to this the comment I made with mad as well as the market is has more headwinds and the second half and ISG from 90 days ago. The most recent forecast have changed I've become more negative on both external storage and.
Clearly, we're going to continue to operate and execute at a premium to however, the market.
Whatever the market outcomes are but they are certainly more negative as we look at the second half of the uncertainty that Tom talked about.
We're going to focus on the growth programs of our marketing is our power up program that I talked about I believe in our last earnings call continuing to work and grow our customer base continue to focus on the opportunities we have an cross selling across the portfolio, we're going to continue to focus on ramping our power.
[noise] store product.
Now in the marketplace and off to a good start.
What we're facing a market market conditions that are very different from 90 days ago.
Okay.
If I could just follow up I. Appreciate the fact that luck I T budget, probably been slash a lot of CIO surveys suggest that.
I appreciate the fact that you're always down sequentially, but you said you'd be down more than normal sequential and that just feel somewhat at odds with the fact that your order right was kind of improving in the back half of the quarter. So is there anything you saw a you've seen in August that makes you incrementally more worried or.
Put RSA aside is there anything else fundamentally that you're worried about either competitive wise that would suggest you shouldn't extrapolate some of that order improvement you were seeing throughout the quarter.
I just wanted to be sure we're not missing anything thank you.
Make sure why I think when Tom reference it was an overall number and the one that we haven't talked about that has some headwind as the P C business.
And we see a fundamental mix, while we're seeing an incremental increase in unit demand based on the learn from home and that can continued work from home phenomena that's been underway.
That is largely education, driven that is largely lower and asp's that are associated with it and I believe that some of what Thomas referring to when we look at normal seasonal patterns. This is different.
So if you look at the opportunity and the P. C marketplace and worthy growth is it is heading towards the lower end asp's on that side of the marketplace does that help.
So a combination of increasingly more negative outlook of the ice of the ISG sector, we're going to continue to drive our performance and he saw some good performance in our data protection business as I mentioned high and storage VX rail and then the P. C. Dynamic is another one that is.
It's very different than what we've seen in any other seasonal pattern between Q2 in Q3.
Anything that.
No I think I think you've articulated.
Alright.
Thanks, Tony.
Well. Thank you for next question from Z Mohan with Bank of America.
Yes. Thank you just a follow up on those P. C comments here P. C competitor just called out CPU and panel constrains is there an element on the below seasonal.
A commodity procurement and and supply chain perspective or is that it does not an issue for you guys.
And I will follow up but.
<unk> I think are a couple of things.
Separate I Miss if you think about what's just happened is even IDC with in the calendar quarter Q3 has changed the forecast outlook for the calendar quarter, we're in by 20 points.
Other than at this a while I've never seen that much change in a six week period was seven weeks to go.
Which to me suggest that there is unanticipated demand driven from a learned from home a one to one education initiative.
If I if I recall the comments I may just moments ago about the public sector more of those workers or at home need notebooks that demand wasn't plans. If you think about where the industry's been in word the demand is today, we would've had to call that.
Many months ago, given the lead time for silicon in the lead time for Lcd's.
That's the backdrop avoid that demand is by look at our portfolio. It's a very broad portfolio. As you know we have products on standard lead time across the board, but in these areas where the growth is.
Pink Chromebook at 11 six inch.
Screens.
Education notebooks of 14 inch 15 inch T. N screens. If you look at the supply constraints. There there is 'cause supply constraints of LCD typically on glass itself and the drivers themselves and are aren't enough low core counting cpus for the industry to.
Respond to this demand profile do I think we will solve it in time without question.
These are supply chain responding accordingly, yes.
We're solving this each and everyday the lead times in our products service.
Getting better by the day, but that's the challenge in front of US. It's a good challenge. It's one that I know, we will respond to but it's this unanticipated spike in demand in this particular subsegment that has driven industry shortages, which.
I'm sure you heard from everybody we're responding to.
Okay. That's that's helpful and I was wondering if you might be able to share some color.
How investors should take about the timing to investment grade I mean, we have sort of <unk>.
Prior to your announcement on the alternatives, you're exploring with Vmware.
There was an expectation around this timing and now with.
With this in the mix can can you help us tank through whether that changes the timing on the patio investment grade or how investors should think about that thank you.
He wanted to it's Tyler.
Okay, I think we've talked to them over to about <unk>.
Obviously, we're in kind of.
[noise] environment right.
One thing that I I'm really happy about and I think we're doing a great job is to continue that pay down.
Obviously, <unk> reiterated that private half billion that we're going to pay down this year.
And if you look at our our payout profile Alright, I've got nothing else to do this year.
And probably a piece of at five and a half will be focused on the depth is coming due next year. So I feel really good how long position from a capital structure perfect position and then also have have a that is coming down my conversations with the rating agencies remained good.
I think obviously, they're working through our lives are thinking about the overall macro environment.
And I think it's fair to say that that's going to influence any type of decision, but we're making the right progress and I'm happy to see the direction we're going.
So we will continue to see how the rest of the year plays out.
But I think like I said, we're doing what we need to do.
We're at $34 billion, a court 34, one join of course that right now I think you've done a nice job.
We do from a capital allocation policy Romsey nothing's changed driving since we're going to.
Predominant use a R capital right now is to pay down.
And I think that continues until we get.
Capital structure.
Back into that investment grade range and with the timing of that will be somewhat dependent upon the rating agencies, who consider not only are standalone results will also the overall macro in their perspective around that so.
Pink.
Will continue to be very focused on alright, let's move to the next question. Just a reminder, one question. Please.
We'll take our next question from it Shannon Cross with Cross research.
Alright, Thank you very much Jeff.
I'm curious how long.
Strategic standpoint, thinking about like the post pandemic work environment for Gal, but also obviously for your customers.
I'm just curious how that's changing while you're you're focusing on your investments I know some out there said after 50%, which seems pretty aggressive of people won't come back to the office, but.
I'm curious as you look sort of a coupla years down the line. How this is changing things. Thank you.
Thanks for the question Shannon.
It's an interesting dynamic that we see in a right now if I look at Dell I think I mentioned this and our prepared remarks.
We see us being a connected workplace now for almost 12 years, a future where 60 plus percent of our professional workforce will work in a remote or slash hybrid environment, where they come to the office one or two days since the definition of a hybrid.
Workplace and that workplace itself will transform rather than have pre described a predetermined work space. The work space is going to be much more highly collaborative much more open to dry that sort of collaborative nature that we think happens in the future of work.
Our belief is that we think.
And I think it's understated that will have a 20 to 30 point increase in remote workers in remote.
Or hybrid type of work environments across all company types all sectors all geography's.
And I think what's interesting is how the P. C industry will navigate how to what we've coined as to three phases do it like do it right and then the new innovation that leads to a modern P C experience.
Given where things are today, we're still much more on that do it light, where we're taking sectors that have historically been behind on the mobile phenomenon public is one of them.
Quite frankly education has been behind and we're just getting compute assets in their hands to enable them to work remotely to work online we will move to a phase we're doing it right is going to take over and we're going to see I think a lot of innovation and play to our fraud and.
And portfolio things such as unified workspace are going to matter, where we can actually take on lifecycle management. We can do provisioning of the P. C via of our cloud capability, we can do app.
And patch updates.
<unk>, we can do proactive in predictive service calls so we can change the dynamic of the asset that's in our customers hands and then how do we make that asset more productive in time, because we still see and I think it's proven time and time again here over the first six months of this calendar year. The P C.
Remains the primary productivity device.
And it's increasingly the essential learning device and an online future way to educate the world tooth.
I think that bodes very well for us as an industry I think we asked to navigate some of the changes and what types of products are in each of those types of end users hands and then we're really excited about the innovation that it will drive long term as we modernized that P C experience and thinker.
[noise]. This even perhaps is more of an as a service experience long term on the P. C site does that help.
Yes. Thank you.
You're welcome.
Well now take our final question from Rottol with Goldman Sachs.
Yeah. Thanks for the question I wanted to come back to the mid range weakness comment you may jobs and.
Hi that back together with power store and understand well first of all of that mainly related to me being week, which I think a lot of companies obscene and then secondly on power or are you seeing it taking people longer to test the product and is there anything you're doing short term with regards to pricing of other products are offering by the products and try to help people out.
While the reevaluate power store and difficult environment.
Sure.
Let me start with.
A couple of spots because I love the question.
One is I think it's important to note. We've completed the journey that I've spoken to you all over the past handful of years now of modernizing are ISG portfolio.
The entire ISG portfolio now is powered up in our definition. If you think about the last three products of those nine products that we launched over the quarter powered store power scale power flexor alone marketplace.
Around the rest of the portfolio next week is an interesting time for us because the world's largest salesforce is going through their annual technical training and will be clearly amped up on our new portfolio and it's competitiveness across.
Each and every sector that we participate in.
Specifically with power store, what we've done is we're doing more demos more virtual demos clearly this virtual world has made it a little more difficult, but it's a long selling cycled to begin with we always thought about our power store ramp and the second half of the year converting the pipeline that <unk>.
About last time, if I was to reflect on what's happened.
Q too I would tell you we're very happy with the early traction we've had with power store and less than a quarter of shipping we've already acquired hundreds of new customers, 20% of them or new Dell.
20%.
Of our powers to our customers are new Dell.
What is probably the more compelling from my point of view is we're seeing a strong correlation with our competitive swaps that are up 32% quarter over quarter.
And we've seen two times the level of competitive displacement revenue than the previous quarter since the launch a power store.
I think about that the largest storage salesforce on the planet.
Their expectations are high they're enthusiastic about the product our expectations haven't changed that all about power store.
That salesforce is out generating hundreds of new opportunities a week, we're doing many virtual demos every week on top of the pipeline that we referenced last time. So we absolutely believe we have winter here our expectations haven't changed yes, we're dealing with a covenant environment that takes a little longer to do some of the <unk> some of the.
<unk>, but our team is being creative helping customers do that and then your last question about pricing, we didn't change our pricing on power story.
We went into the marketplace and we price power store against the competition at the same level on an effective gigabyte.
So in my mind, we put a better product potentially the hands of of the market at the same price is our competitors on an effective gigabyte.
Alright.
That's a window hand.
Alright, thank Melissa.
Thanks, rather pleasure Yep, and thanks, Jeff Alright, that's a wrap on Q&A, we'll see many of you virtually at the city Global Technology Conference on Tuesday September the eighth of thanks for joining.
Today's conference call. We appreciate your participation you may know disconnect at this time.
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