Q3 2021 Dell Technologies Inc Earnings Call

Good afternoon, and welcome to the fiscal year 2021 third quarter results Conference call for Dell Technologies, Inc. I would like to inform all participants on this call is being recorded at the request of Dell technologies. This broadcast is the copyrighted property of Dell Technologies, Inc.

Any rebroadcast of this information in whole or part without the prior written permission of Dell technologies is prohibited.

In prepared remarks, we will conduct the question and answer session. If you have a question simply press Star then one on your telephone keypad any time during the presentation I'd like to turn the call over to Robin Williams <unk> head of Investor Relations Mr. Williams you may begin.

Thanks, Erika and thanks, everyone for joining us with me today are vice Chairman and CEO, Jeff Clarke, and our CFO, Tom Sweet along with our Treasurer, Tyler Johnson, our press release financial tables web deck prepared remarks, and additional materials are available on our IR website the guidance says.

And we'll be covered on today's call. During this call unless we otherwise indicate all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue gross margin operating expenses operating income net income earnings per share EBITDA.

Hi, good EBITDA and adjusted free cash flow.

A reconciliation of these measures to their most directly 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 and that Vmware historical segment results have been recast to include pivotal results. Additionally.

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 can differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and FCC filings, we assume no obligation to update our forward looking statements.

Finally, before I turn it over to Jeff I'd like to touch on the amended 13 D.. We filed in July regarding our exploration on potential alternatives with respect to our ownership interest in being more.

We believe a tax free spin could drive significant shareholder value by simplifying our capital structures and enabling greater strategic flexibility, while maintaining a strong commercial partnership between Dell and Vmware.

Total Dell and be him or her publicly highlighted mutual interest and the potential benefits of such a transaction and have engaged on key work streams, including mutually beneficial commercial arrangements and Dell expectation of a substantial cash dividend to volume were stockholders in connection with such a transaction.

As a reminder, the earliest the transaction could close would be September 2021, with an announcement coming between now and then assuming we can come to an agreement. There is also the possibility that we will not do anything and we would maintain our current ownership structure with that said, we will not address the discussions on any further or to.

Two questions related to this topic on today's call.

Now I'd like to turn it over adjusted.

Thanks, Rob we have now been through three quarters of navigating and uncertain and at times difficult year.

We have been tested across our global society across industries and companies and his team and as individuals like never before I could not be prouder of how the Dell technologies team has responded well growing innovating and delivering for our customers an extraordinary ways when and how they need us most.

Through it all one thing is clear.

On the Mega technology trends that we have long called out are accelerating and these trends are highly favorable to Dell technologies.

We are uniquely positioned to win in the growing markets of 2020, and we're making the right investments and innovating to capture the growing markets up tomorrow.

[laughter] for the vast majority of companies digital transformation is now a must have and accelerating.

We see it on our customers interactions we see it on our data in October we released the third installment of our latest digital transformation index.

Well, we have been tracking digital transformation patterns of more than 4000 customers since 2016.

Our 2020 index revealed that 80% of organizations globally have fast track digital transformation programs and when compared to the 2018 study nearly 25% of respondents have progressed from being digital laggards or followers to a more advanced stage in their digital journey.

This is great news for our customers future and more broadly for the global economy and its also great news for us with major investments going towards edge distributed work and modern consumption cyber security Fiveg infrastructure.

Digital experiences on data management together these trends are taking us to a future that is highly distributed with.

With distributed workforce learning and health care and able to buy distributed technology infrastructure computing analytics and real time outcomes at the edge organizations investing today, well have an advantage tomorrow.

And they are turning to Dell technologies as their strategic partner.

Let me use a real customer examples to talk about the edge.

Fedex CIO, Rob Carter was with me last month, the Dell technologies World.

Well, we talked about how latency.

The centralized computing and data driven insights they need to lead in the Internet of everything Fedex uses an array of our hybrid cloud technology to bring simplicity and speed to the edge, including VX rail Vmware and pivotal and cloud native environments, all to keep our world connected and.

Moving.

Now we are building on that relationship working with Fedex and switch a leading extra scale data center company to develop technology hubs across the United States to bring ITD resources closer to where the applications and data reside.

Enabling the benefits of Fiveg and average technologies.

This is a perfect example of how we take our deep experience and make it easy for customers to manage data and workloads across all of their operations.

We also had another exceptional quarter on CSG.

And what has become a multi quarter trend as customers turn to Dell to enable their remote and hybrid workforce, our wide range of Pcs, including chromebooks are providing students everywhere with the essential learning tool. They need the pandemic has expanded consumers use of online purchasing which is a big area of focus for us.

Yes Walter.

While we did lose share in calendar Q3. This is a result of a strategic decisions. We made earlier in the year, we've moved from retail to our advantage direct and online selling for consumers our strong financial performance reinforces that strategic decision and we believe this is this is the right long.

Long term balance for our business and finally customers are looking for a choice on the way they consume and pay for righty, That's why Dell technologies World, We announced project Capex to unify our as a service and cloud capabilities, we have committed to providing all of our solutions as a service and launch the Dell technologies.

Cloud Council, enabling a consistent cloud operating model across a customers' entire environment from the edge to the core to the cloud.

In the past year, we've seen increased interest in our as a service on flexible consumption offerings and this type of transformation expense recurring revenue, providing even more stability as we navigate industry seasonality mix and demand the.

The accelerated digital transformation, we are experiencing today plays directly to the thesis we had in creating Dell technologies. We are number one in everything all on one place we have the breadth and diversity to lean into pockets of growth when and where they happen and we can deliver consistent long term returns as a result.

No.

Now, let's move on to the third quarter performance on the team's strong execution.

Revenue was $23.5 billion up 3% and operating income was up 12% to $2.7 billion or 11.6% of revenue as I mentioned earlier, our client solutions group had an outstanding quarter delivering record shipments revenue and operating income revenue from.

For Q3 was $12.3 billion up 8%. The P. C is the essential device for this remote everything environment, we're living in today as evidenced by the ongoing demand we are seeing for work and learn from home solutions, along with double digit growth in education government, particularly on our North America Federal Bill.

Net and the consumer vertical.

Demand for notebooks remained strong with orders up 24% driven by double digit orders growth across the majority of our commercial and consumer notebook lines. In addition orders for commercial chromebooks more than doubled.

Our consumer business had another impressive quarter, primarily driven by our premium xps and alienware brands, which combined were up 43% on an orders basis.

The consumer direct business was up 40 percentage was up 47% on orders and our consumer direct on line business was up 62% based on orders as we seized the opportunity. What we believe is a long term multiyear trend towards E commerce.

Infrastructure solutions group revenue was $8 billion down 4%, while the overall market for ice as she has been soft this year, we are seeing improvement.

Okay server demand improved on Poweredge orders were up single digits sequentially large large enterprise remain challenge, but we saw better velocity from our small business and medium business customers storage demand was mixed we were pleased with our relative performance given current market dynamics.

Bright spots included Paramax and hyper converged infrastructure, each growing double digits in the third quarter on an order spaces.

Power store is gaining traction we delivered nearly double the orders revenue achieved in the second quarter, albeit on a small base. We are still early in the ramp.

We're pleased with the power store, we are pleased with power store progress and are seeing early wins as customers transition from existing unity S. C. The index equal logic and extreme Io price products.

And more than 15% of the power store customers, our new storage buyers, we feel great about the future of power store and our storage leadership.

Our view on where business segment had another strong quarter delivering revenue of $2.9 billion up 8% the volume or partnership and teaming remains strong and our cloud capabilities continue to build.

Year to date performance has been amazingly consistent in the line of what has turned out to be an incredibly challenging macro environment.

We have delivered $60.2 billion of revenue flat year on year, as we executed against growth opportunities and we delivered $7.5 billion of operating income and $8.9 billion of adjusted EBITDA in the first quarter, we saw a dramatic surge from large enterprise healthcare and the financial sector.

Our work from home and business continuity solutions.

This drove strong growth in our commercial client and with our Vmware solutions towards the end of that quarter. We started to see signs of a slowdown in small and medium businesses than in Q2 demand shifted to government education and consumer as remote work continued and learn from how needs sword.

Similar to GDP and given our third quarter results, our second quarter appears to be a trough for the year.

In Q3 strength in government education, and consumer continued and it was encouraging to see double digits orders growth from our small and medium business customers given the number of jobs. This sector creates around the world.

And though some companies have moved to the public cloud for certain workloads or immediate business continuity needs hybrid cloud hybrid cloud momentum is building as the longer term answer and new operating model. We're workloads will be distributed between public and private clouds traditional datacenters and increasingly out to the edge.

Like Australia's largest retailer World Wars, where we recently announced a deal to enable their hybrid cloud strategy by bringing together there are public and private clouds onto a single platform utilizing as a service will Dell technologies on demand.

With our hybrid cloud capabilities, the depth and breadth of our portfolio industry, leading global supply chain go to market and services reach we have a significant impediment, we have significant competitive advantages to be the partner of choice put this all together and you get a track record of consistent execution profitable growth just.

Upland share gains innovation and financial returns regardless of the environment looking.

Looking ahead I see an extraordinary opportunity as technology continues to drive our society forward and Dell technologies fulfills its role as the essential technology company for the day to era.

And with Fiveg data, driven insights automation and embedded intelligence, we will see an explosion of edge computing and smart cities and transportation factories hospitals and schools around the world.

We know how to get technology into the real world at scale, providing a consistent approach to infrastructure data applications and security across the entire environment from multiple clouds to the edge what the last nine months is shown as the Dell technologies is resilient ready to meet the needs of customers today.

Okay and for what's to come according to ITC the expected compound annual growth rate for excluding telco through 2024 is 4.7%. It's clear the digital future is bright we are excited about the opportunities that lie ahead now I'll turn it over to Tom to look at the financials.

Thanks, Jeff overall, we have executed well this year navigating through an uncertain macro environment, we've delivered stable and differentiated performance by leveraging our diversified platform and leaning into the current growth opportunities in a disciplined way.

And we are driving value by expanding profitability faster than revenue and generating strong cash flow, which has enabled significant debt pay down.

For the third quarter revenue was better than expected and above our typical seasonality at $23.5 billion up 3% both year over year and sequentially.

FX this quarter did not have a meaningful impact on our financial results on.

Also a reminder, that we completed the sale of Rs say in early September.

Gross margin was $7.8 billion or 33% of revenue.

Gross margin dollars were flat, which I believe is a good result, given the demand that we've seen from education government and consumer customers typically tends to deliver less margin dollars.

Operating expense was $5 billion up slightly 1% sequentially and better than expected as we continue to benefit from the cost containment actions, we instituted earlier this year.

Operating income was up 12% to $2.7 billion or 11.6% of revenue driven primarily by our ongoing operating expense controls and strong profitability and CSG.

Consolidated net income was $1.7 billion up 18% and EPS was $2 on three cents a share up 16%.

Adjusted EBITDA was $3.2 billion up 13% 13.7% of revenue.

For the trailing 12 months adjusted EBITDA was $12.1 billion.

Total deferred revenue was 28.7 billion up 11% year over year, our recurring revenue, which includes deferred revenue amortization utility and as a service models is now approximately $6 billion per quarter up 13%.

As announced at Dell Technologies World, We will broaden our as a service solutions for our customers across our entire portfolio over the next year, giving them more flexibility to scale their I T to meet their business needs and budgets.

We're seeing adoption of our portfolio delivered as a service through flexible consumptions consumptions for Lucerne and.

We expect this to continue to grow over time.

Turning to the business units, our client solutions group results were above our expectations driven by ongoing strong demand for work and learn from home solutions, along with gaming systems.

C history revenue was a record $12.3 billion up 8% as we delivered record shipments in the quarter.

Commercial revenue was up 5% to $8.8 billion as we saw strong growth in latitude and precision notebooks and commercial chromebooks not.

Not surprisingly given the remote nature of this years working on learning environment, We continued to see reduced demand in commercial desktops.

Consumer revenue was $3.5 billion up 14% driven by strong growth across all of our consumer notebooks in gaming systems, our premium consumer products Xps Alienware combined saw strong double digit revenue growth for both notebooks and desktops.

C. Operating income was also a record at $1 billion up 36% and 8.2% of revenue.

The strong profitability was driven by a record shipments product mix and our operating expense discipline.

This has been a great year for our client solutions business and it's clear that the PC is still the platform of choice to.

The revenue stability of this business has been beneficial and has consistently generated strong cash flow that has enabled us to weather different cycles and demand fluctuations over.

Over the past five fiscal years CSG revenue has grown at a 3% CAGR well.

Well the CAGR for operating income was nearly tripled that rate.

IC revenue was $8 billion down 4%.

Disappointed in the decline the overall server and storage market has been softer than we expected coming into this year give.

Given the dynamics in the macro environment, we executed against the growth opportunities within these markets, while delivering solid profitability.

Storage revenue was $3.9 billion down 7% power Max and HCR, specifically VX rail were highlights as both were up double digits based on orders, we continue to see softness in other areas of course storage, including mid range as Jeff described power stores trending in the right drew.

Direction, and we expected to ramp through the rest of this year and into fiscal year 22.

Servers, and networking revenue was $4.2 billion down 2%.

Overall server demand was softer than expected, but we did see improvement in orders with the remained stream service growing sequentially.

We also saw improved transactional demand for our mainstream servers as we move through the quarter.

We continue to look for balance growth being disciplined and selectively lenient moving into opportunities that make economic sense for instance, our high value server scope for artificial intelligence and machine to machine learning workloads had another quarter of positive growth with orders up mid single digits and as are growing piece of our.

Server revenue mix.

I asked you operating income was $882 million or 11% of revenue, which was down 90 basis points as higher component cost per servers, and networking and product mix more than offset lower operating expense.

Good day on where business unit had another strong quarter delivering revenue of 2.9 billion up 8% and operating income up 837 million or 28.9% of revenue.

Based on volume were Standalone results subscription and software as a service revenue grew 44%.

The business saw a better than expected growth in the volume were cloud provider program modern applications and Vmware cloud on a W. EPS.

C and were cloud on eight of US continue to show great traction in Q3 with triple digit revenue growth.

Dell financial services growth continued in the third quarter with originations up 4% to 2.1 billion.

GFS ended the quarter with $12.6 billion in total managed assets of $1.9 billion year on year.

DFS enables sales drives profitable growth in retained customers through a number of traditional financing an innovated innovative payment solutions, including consumption as a service offerings.

Moving to our capital structure and balance sheet.

Cash flow from operations was quite strong and above typical seasonality at approximately $3 billion driven by improvement in net income and diligent working capital management.

Adjusted free cash flow in Q3 was $2.7 billion and on a trailing 12 month basis adjusted free cash flow was $8.8 billion.

We ended the quarter with $13 billion of cash and investments our liquidity position is strong and we made excellent progress on de levering.

During the third quarter, we paid down approximately 4.6 billion of debt, including $3.1 billion of core debt and $1.5 billion of volume were debt.

With the debt payments made in Q3, our total debt balance ended the quarter at $50.4 billion and includes DFS related debt of 10.1 billion and subsidiary debt of 4.8 billion.

Our core debt ended the quarter at 31.4 billion, we are on track to reduce corporate debt by approximately $5.5 billion in fiscal year 2001.

As we expect to pay down at least 2.4 billion in Q4.

With our continued debt paydown on strong profitability. Our core leverage is now below three times debt at the top end of our target core leverage range of two to three times.

Recognizing leverage is only one metric used by the rating agencies based on our calculations. We believe this puts us inside the current investment grade target range for S&P.

We are pleased with the progress we made against our Delevering plan and debt Paydown will continued to be our capital allocation priority as we work toward investment grade metrics.

Moving now to our outlook for the fourth quarter.

Go the latest global GDP industry data from infrastructure demand indicate gradual improvement into the next year. There continues to be a high degree of uncertainty as COVID-19 infections increase globally.

In some geographies have implemented new restrictions.

Given the macro backdrop and the trends that we've seen in our business. We expect Q4 revenue to be up 3% to 4% sequentially, which is slightly below typical seasonality of 5% to 6% sequentially.

We expect strong CSG results with revenue expected to be slightly above normal seasonality of plus 2% to 3% sequentially.

For I.S.G., we expect revenue to track slightly lower than last year's 4% sequential growth based on the continued softness and data center spending.

From an operating income standpoint, we expect CSG margins to remain strong and above historical averages, but lower sequentially due to a higher mix of consumer Pcs and commercial chromebooks, along with holiday promotions.

We are a bit more cautious on ICICI margin dollars given the uncertainty in the macro well be on where should benefit from typical seasonality in Q4.

Taking all this into account, we expect consolidated operating margin dollars to be slightly higher versus Q3.

Our breadth and diversity of portfolio has driven stability in our performance through the year and we continue to adjust to opportunities we see in the business.

Given the aforementioned risk we believe is still too early to talk about next year.

That said looking at the current global GDP and IVC forecast, we are just really optimistic about the potential for recovery post pandemic related pressures.

GDP expectations, and it's been X telco estimates from both I'd seen Gartner C, 4% to 5% growth in 2021.

We hope to have a better perspective on the global economy in our outlook. After we closed the current fiscal year.

In closing, we have a history of navigating through challenging environments and this year has been a great example of our strong operating heritage.

The steady execution in our core businesses and the ability to leverage our broad portfolio have enabled stability and generated strong cash flow through these on certain times.

The teams are executing our strategy and we're managing the business for long term consistent growth. We are using our unique strengths to win on the consolidation of the markets in which we compete running the business to outgrow the industry and we're creating differentiated Dell technologies solutions through innovation and integration across the entire family.

This year is also been a good example of maximizing value creation for all shareholders.

We've outgrown our competitors growing profitability faster than revenue and generated strong cash flow we've.

Weve made good progress on our Delevering goal and are committed to getting back to investment grade.

And we've taken the appropriate corporate structure scripts as evidenced by the ongoing simplification of operations the divestiture of our US say in the exploration potential tax free spin of volume where.

We're focused on what we can control and leaning into the areas of growth, which will continue to be the way, we navigate through any environment our cycle.

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

Thanks, Tom let's get the queuing day we.

We ask that each participant ask one question to allow us to get to as many of you as possible Erika can you. Please introduce the first question.

Your first question is from Tony from Kennedy with Bernstein.

Yes. Thank you I'm wondering if you can comment a little bit about the forces at work on margins in both your PC and your enterprise business. So specifically how much is sort of cyclically lower opex spending things like less travel less promotion, helping both side.

To the business second.

Secondly, what are you seeing on components DRAM, so essential to both.

We're seeing record margins in Pcs, and we're not really we're seeing kind of weak margins and enterprise.

And then thirdly, what are you seeing in the pricing and competitive environment should we be reading into the weak margins on the sequential deterioration in margins in enterprise being a function of incremental price competition given continued softness in the market. Thank you.

Hey, Tony It's Tom Let me start and then Jeff Ken.

Jeff can jump in here as well so low.

Book, as we think about sort of the margin dynamics, the operating margin dynamics across the various segments of the business I'd characterize it like this.

Obviously the cost can strength.

Actions that we did earlier in the year have been helpful from a from an operating margin perspective.

I would remind everybody that those were put in EPS at the time when there is significant uncertainty on the cobot impacted and obviously, we're still on through the navigation of that.

But we will think our wave two how do we think.

Think about the long term sustainability or lack thereof of some of those opex actions as we get into next year, but.

But as we think about Pcs for instance, rider clearly component cost hub at work in.

Inflationary for most of the year the dynamic go Tony has been that cash.

Component.

Some of the parts shoulders, and parched dynamics hub hub have I would say prevented a bit of.

Our sort of encouraged rational pricing on PC space and so.

You know when we're in some of the sales for instance screens are in short supply you don't see extraordinarily aggressive pricing, it's still price competitive but not as competitive.

And then on the enterprise mix, our enterprise side of the house.

Clearly data center.

Softer this year and as a result of that we have seen on we've talked about in the past calls pricing pressure, particularly on the large bid business.

Generally on the computer server space storage is a little less sensitive to the pricing just given the IP that's embedded in the in the solution capabilities.

But but net net assets those are the dynamics that we've been navigating our way through on and maybe Jeff you can jump in and add some color sure. Let me start with component pricing Tony might be helpful. So we look at Q3 Q3 from our perspective was slightly inflationary as Tom mentioned driven by DRAM NAND.

And lcds on our structural commodity category as we look in Q4.

Blips to be slightly deflationary, driven by DRAM and NAND offset by the shortages industries encountering around LCD right.

So I think thats, the kind of component driven cost environment. There are a couple of sub categories that are I think important free to think about one would be lcds and then, particularly the components that go into the LCD most notably.

T cons and drivers I see those are on short supply driving up the cost of Lcds and then likely there's going to be challenges in the freight network towards the very end of the year as airplanes get filled up on vaccines and we're all competing for a limited amount of space. So.

That's how we look at the cost environment, Tom it across pricing if I went by specific product notebook prices have generally firmed up around the industry. We have the demand supply dynamics that Tom talked about desktop pricing is a little more competitive than normal given that the demand.

Demand for desktops has fallen considerably over the year, if I were to look at servers servers, we still see the aggressiveness in the very big deals, although as we mentioned on our prepared remarks, there is less of those and we mentioned that in Q2 as well, but nothing out of the ordinary beyond that into big deals and servers.

And the same is true on storage, we're not seeing anything out of the ordinary obviously when we're doing competitive swap those bids are fairly aggressive our discounting has been stable we've not seen any major price move in the industry since July so that's.

In detail, how we look at the price environment that we're operating in today I hope that was helpful.

That was all helpful. If you could just comment on the on the cyclical opex reduction because of travel et cetera does that become a headwind at some point.

Yeah, Hey, Tony It's Tom look I mean, as I mentioned we.

We did do a number of cost containment actions and we think our way through next year as we build the LP from our operating plan for next year.

Obviously, there is a number of those cost containment actions that are not going to be sustainable long term. So we are going to have to work our way through.

How do we reset or rethink some of the Opex framework, but that's no we're always having to do a bit of that and so we'll have to work our way through the piano framework for next year and make sure everything holds together the way we wanted to book.

We'll have to address it but we recognize some of the costs moves. We made this year are not sustainable as we head into next year's plan.

Hi, Thanks, Thanks, Tony.

Your next question is from loans.

With bank of America.

Yes, Thank you Jeff.

Can you talk about the enterprise spend outlook and Jeff you open the call talking about digital transformation and sort of this hybrid cloud transition over time, how that should help why it's about creating a better uplift in server revenues. If you could just talk about it.

Hi, USG potentially on a trajectory of growth as we as we look into the next fiscal year and I have a quick follow up.

Of course, Wamsi I'll take a swing at and then Tom Im sure will come over the top on it we step back and kind of look at this on the macro halfway 19 for US was an extraordinary enterprise you're specifically for servers F. Y 20 was a year free digestion on quite honestly a year ago. When we were planning the business for EPS why 21.

We thought there was a modest growth opportunity pandemic heads, we see companies risk.

Respond to the pandemic by really pushing their budgets towards three specific areas work from home.

Business continuity and strategic digital transformation activities broad base enterprise deployment or buys have been slowed as weve mentioned over the previous calls and we mentioned in on marks.

So if I start there that the pandemic is really changed the profile of this year and it really slowed down investments in those budgets are under pressure and those budgets are increasingly are have been increasingly been used over the year for things that certainly weren't contemplated a work from home environment, where a large.

Percentages of company's workforce is still remain at home and Thats, where the that's where the investments have gone.

If you look at our business on our remarks, we talked about enterprise continues to be challenged with a very large businesses. The very large bids continues to be challenged area for us, but we did see signs where our small and medium businesses did grow we saw sequential improvement in our server business, which we are encouraged by.

We continue to keep the product line fresh we keep the product line and price position.

And probably maybe to close on it before I turn it over to Tom look we're optimistic about what ITC in the other industry pundits talk about for next year. So this year, we're weathering through a server marketplace, that's down 6% as storage marketplace, that's down somewhere on the same ballpark, 7% if I remember.

Correctly, and we're looking into a calendar year 21, our fiscal 22 with servers being up nearly 4% in storage being.

Yes, Jeff the only I would add is obviously part of our thinking around the eyes juice space.

As evidenced in our guidance that we just talked about incentive we still expect Q4 to be relatively soft and if you look at on a on a day.

From an on is you perspective, if you look at storage their forecasts idcs forecasting.

Storage at a minus 6% in Q4 and servers at a minus roughly minus four and a half mainstream server said is and so we do think that we've got to work our way through the remainder of the year and then we are cautiously optimistic obviously watch sales the macro uncertainty plays out, but we do think debt investments.

Michael sets itself up.

On next.

Next year, given some of the indications we're seeing and then again the ITC trends over the next three years or so far are encouraging but there is work to do clearly.

Well, thanks for that Jeff if I could in the prepared remarks.

You guys noted the Vmware spend what happened on September 21, if.

If you came to an agreement I value.

On limited in what you can say on this but any chance you can comment on the moving pieces that agreement hinges on in terms of perhaps.

Debt levels are ownership structure or high voting share conversion there what are the what are the pieces to think about that that would make you. The return on reach an agreement.

Yeah, Hey, more on did throb appreciate the question and we're going to we're going to pass on that and we're just going on keep the comments specific to what I had in the lead and so.

Well, if we have an update we'll we'll definitely let.

Thanks, Let's go to the next question.

We'll take our next question from a net Darien on with Evercore.

Hey, Thanks for taking my question.

Yes, Jeff I was hoping you could talk a bit more on the storage side I think it was down 7% this quarter, which is the locks line youve seen in the last two and a half years I think on the despite power source on like it's been fairly well. So maybe just reconcile the storage declined versus a new product momentum and then when I think about this 4% number that you saw.

Talk about infrastructure.

Infrastructure on John how do you how did that stock up across storage and service.

Sure I think Tom on I'll parse that on I'll take the first part talk about storage. What we are seeing and then maybe a few comments about power story than Tom can link debt to our guidance and look forward being.

I mean, clearly we talked in our prepared remarks, and you'll see it on the web deck, our storage business was down 7% for the quarter.

We were disappointed with that result.

We talked about two areas, where we have seen growth in fact strong double digit growth with our power mix business on our VX rail business and then we talked about its inability or it's implied it's an ability to offset what's happening in the mid range, which is why power store is so important for us getting our mid range to inject.

Sorry on a take share trajectory, which quite frankly, it's not with our performance we're encouraged.

By the.

First two quarters of power store I think I mentioned in my remarks. It was up nearly twice the revenue in Q2 and Q3, 15% of the customers are new storage buyers to the company.

And that makes us feel very good that we are on the right trajectory with our store, but remember it's on a base of starting to literally zero two quarters ago. It has to build momentum we expected to continue to ramp in Q4, and all through next year and that ramp is.

The key to our success in growing our storage business as we have strong success in the above $2050 segments and it actually taking share there.

And then comment one on its Tom why don't I, just take a car maker comment on your second part of that question, which I think was around the good Q4 framework that we laid out.

With the seasonality that we called out with per is GE, which we said last year was.

On a 4% on we expected to be slightly lower than that on a sequential basis. This year book I think the dynamics are pretty much what I just chatted about which is we do continue to see softness in the data center space.

Typically Q4 is a larger storage quarter and so we do expect some uplift in storage. Although you don't worry we are slightly cautious about how this data center spending.

Play its way out through Q4, so it makes sense to us given some of the dynamics that were C.

You know that.

And by the way that our Q3 results for us per servers were sort of buoyed up by the federal mix in the government space. We don't we won't have that in Q4. So were just slightly cautious about what we see pork.

For Q4 is to spend at this point.

Yes.

All right I appreciate it let's go to the next question.

We'll take our next question from Rod Hall with Goldman Sachs.

Yes. Thanks for the question I wanted to start off Tom and go back to your comments on investment grade you said that you're into that territory now and I Wonder if you could talk about what other pieces of data or evidence you think the rating agencies are waiting for to potentially make a change there and also if you could.

Give us any kind of an idea on what the next chance for that timing wise might look like and then I have a follow up.

Yes, Hey, Rod, it's time, and then I'll, let Tyler jump in here as well.

She is on the call look good.

The leverage ratio on we've made great progress on core leverage ratio. So as we highlighted as I highlighted on on the prepared remarks were down slightly below the three X three times adjusted EBITDA flow through a leverage ratio.

That we have been on that we've talked about now you know the leverage ratio is only one element of what the rating agencies look at in terms of the totality of the of the of the credit. If you will so drops it can thoughtful about the macro environment the pandemic.

We've got some news out there around a potential Vmware spin so on.

I'm, assuming they're also trying to be trying to sift through what that looks like so we're holding regular conversations with them and we continue to share our perspective, but.

But we recognize that it's ultimately their call on when they might make that determination.

And we'll continue to provide them our point of view and we will continue to stay focused on.

On our capital allocation policy, which is centered around debt repayment at this point Tyler.

Tyler why don't you jump in and add some thoughts there or if you would please.

Yes, I think I think.

Pretty much covered on me.

We're happy with where we are I mean, if you go back and and book of where we were really projecting when we were going on across over.

We were thinking it was going to be more of the ended the year on that was really a pre cobot projections. So I think the fact that we were able to do this on the face Cove. It really speaks highly to the to the power.

Cash flow generation that the business throws off.

Look I think the rating agencies, and specifically S&P, which is the one that gives us credit for cash.

As we mentioned in the talking points, they're going to want to see sustainability. So.

So us staying under their of their targets for a reasonable period of time.

And I think Tom called out I mean, I think in the face of co located also the potential of the on where transaction that's something that's.

On the top on top of their buying so sort of great progress, we'll keep doing what we're doing.

And.

We'll go from there.

Okay. Thank you and then I wanted to my follow on my follow up just ask Jeff about the.

Power store range and maybe some of the feature functionality. There are some of your competitors have called out.

Things like clustering storage efficiency technologies as lacking in needing development, but I know you guys.

Roll this thing out of the inner containerized sort of solutions that you can rapidly evolve. It I'm. Just wondering do you think the ramp and now requires additional feature adds or do you think you've got everything you need is just more question attraction in the market and maybe cobot slowing it down and so on.

Sure. Good question, Ryan, let me try to break that down so if I think about what the coal that slowing it down I think we last we talked last call about the things we're doing to ensure that the products in front of our customers. We've clearly made a lot of progress in Q3 in doing that.

We put a large number of seed units in front of our largest channel partners across the globe, there, 95% up and running in front of customers that on channel partners. Today, we put an active try and buy program in place.

We have our team out delivering units to customers, we have an internal team that's out helping customers ramp their proof of concept all with the.

Desire to help drive assessment and the proof of concept that go along with the new category on a new architecture that we put in the marketplace. We've done for example, 6000 virtual debt.

Those and proof of concepts to help our customers through this so we're very encouraged by that.

So much that it's ramping you probably know our product line quite well extreme Io the groundbreaking all flash architecture VX rail groundbreaking H C architecture power store at this point in time through its first three quarters is ahead of both of the ramps.

So I don't know what competitors say I know what customers say customers say, we have a very competitive product. We have a product that is meeting their needs its revolutionary and it is actually a modern storage product to the point that the number of competitive Takeouts. We had in Q3 over Q2 nearly doubled.

So we like our momentum.

We're on patient we want it to be more we want to grow faster, but we like what we've done.

When I look at architectural features.

You know from my seat, it's the highest performance storage array and its price bands today in the mid range. It has the best data reduction.

In the marketplace today.

It has features that are competitive today with more features coming.

The fact that we can run an application on the array makes it a very differentiated architecture and we're we're very pleased with its competitiveness from a feature performance and capability point of view to the point that is the first modern array in the marketplace. So I like our hand, we just have to ramp.

Thomas Meyer in patient with the team, we want to see a more accelerated ramp but again.

It's ramped a day is faster than the two groundbreaking last two groundbreaking architectures and our company extreme Io and VX rail. So the early signs remain good.

Thank you.

Hi, just a quick reminder, if you could limit your questions to one will help us to get through a few more analyst day. Thanks.

Erika next question.

We'll take our next question from Katy Huberty with Morgan Stanley.

Thank you. Good afternoon can you just talk about the shape of demand recovery. If any that you saw on the enterprise and SMB market separately on October quarter on whether there were any material changes in these trends in the month of November as some of the country's rolled back there reopening plans.

Hey, Katy it's Tom So look as we think about the SG space in particular and.

Within the <unk> and within the SMB markets, both the small and medium business. We did see improved transactional velocity as we went through our quarter started you know sort of soft and improved I don't want to overstate it because it's still a bit of book of tough Slog book.

A smaller portion of the business, so, yes, and but it's a good indication of how we think about transactional velocity in the business.

And in that case, what we saw was.

Think of the.

Steve the demand velocity, improving as we went through the quarter from something like a minus say mid teens type of down too.

You know a much better performance as we got through the through month through the quarter.

Now remember that I'm not going to comment on November, but which is our Q4, obviously, but we're encouraged by that but we're also realistic to.

As we think our way through.

How does EISG in infrastructure spending frame out in Q4.

Our thinking is reflected in the results that are the guidance that we provided.

Yes, I think Thomas spot on.

Over the quarter month over month, we saw improvement in the absolute demand profile quite honestly in both server and storage.

The small and medium business comments, he made or small spot on.

Some more quote activity in that area conversion rates improved a little bit in that area.

That's the trend, but again, we see.

Budgets have tightened they've been really redirect it over the over the year to ensure the workforce is unable to work from home.

Net certainly delayed or pushed bigger spend projects over the course of the year and Theres No reason to believe that doesn't continue into Q4.

Thank you.

Of course.

Our next question from Jim Suva.

Investing.

Thank you. My question is just on shares like share losses or share gains.

Sounds like your PC.

Segment, you went through a shift to direct and lost some share are you now on stabilization point.

Or still some more to transition away then on the server side well.

Was it.

On the storage on the storage side wasn't mis execution was it not having the right product line up as like time wasn't coal would you could reach.

And customer seems like on storage, you really having some challenges there.

Well I think there's.

Certainly the Devil's in the detail here. If you look at PC will start there in Q3, we did lose absolute share the market certainly shifted to consumer and the consumer growth was extraordinary our consumer.

Business, if I recall correctly was up 14%, but that was certainly behind the marketplace.

And I know on making a slight compare between the fiscal quarter ended calendar quarter, but you get the point.

You know strategically we have been working particularly with the CPQ shortages over the past two plus years of prioritizing our business with commercial and premium consumer on both of those businesses continue to on well but.

But the commercial marketplace was soft in Q3, and consumer was significantly up in Q3, and our share losses largely on the consumer side, we did lose some share in timing in the commercial but it's largely on the consumer side.

We made a strategic shift actually the end of last year of migrating to our heritage and advantage in the marketplace, which has been reinforced by the buying trends in the pandemic of our online direct business.

That's serving us well I think I made comments that our online business was up about 62% and our consumer direct business was up 47% if memory serves me right.

That's encouraging.

We want to participate on the broad swath of the marketplace for those Inc.

Fully participating in the range and above were not I think I mentioned, our chromebooks doubled on a year over year basis, and we'll continue to participate and catch up to the marketplace. I think our fiscal results are on our calendar share results, our fiscal results of being 8% Roe.

Revenue growth I think is.

Pretty significantly different than our share results that ended in September in other words, we had a very big October we're encouraged though.

I look at the server side the service side, we expect to take share. We think we've outperformed the market at a minus two I think the market projection for Q3 and servers is minus.

By four something like that if memory serves me right, it's minus five and a half Jeff Thats highly diverse mix of index, China exactly so we're on a share positions there and then on the storage side its non <unk> mis execution per say, Jim. We're we're taking share on consolidating on the high end.

We continue to do that our power Max product continues to do well weve taken share in the hyper converged or softer defined space, it's back to the mid range on.

Our mid range is shrinking I think we've mentioned that each of the previous three quarters. This year and it's why power stores important power store is the catalyst I think we've said this from the past couple of years in anticipation of the product. It is the catalyst for us to change our share trajectory in the mid range, which is the same.

Single largest segment in storage Thats why its important.

That's why it doubling quarter over quarter is a good sign that's why being ahead of our extreme Io and VX rail ramp is key and.

Again, we like our hand, we need we need to continue to ramp up and we believe we can.

Thanks, so much from the details thank you.

Yeah.

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

Yes. Thanks.

Ryan stick to the point question, it's on the storage business and I guess my question fairly simple on that.

We've seen the last couple of quarters I think last quarter, you talked about triple digit order growth in power store this quarter with double digits on just help us understand how we think about the growth of orders.

Relative to when that kind of orders turns into revenue growth I'm, just trying to understand when maybe we could see that those businesses start to inflect and appreciating the power source a big component of that thank you.

On power store would have been a small component in our remarks last quarter Aaron I, Let me just.

From a from a materiality perspective on power storage vehicle, while to ramp to the point where it is.

Going to move the needle on a on a business that's close to $4 billion on a revenue basis right. So it will take a bit of time. That's why you heard me comment on the fact that we're optimistic about power store and we expected to ramp Q4 on into next year. So when we referenced triple digit or double digit.

With orders growth.

Obviously was starting from a base thats pretty small.

And.

On a clearly we're optimistic on we think as we work our way through the year that.

You start to see that inflection point and particularly in the midstream space, Jeff. Let me I just wanted to set that Cardinal I think I think you summed it up well and then we continue to focus on our Paramax performance and growth in the high end, which we continued to be a consolidate or in the high end the most valuable portion of.

The storage marketplace, and we continue to see excellent performance there, but as I mentioned in the low last question on the question before that it's the mid range in changing that trajectory. That's key to Tom's point are in patients. We want to continue to accelerate the ramp of power store because it's the catalyst to change our share.

All right. Thanks, Aaron Inc. Thank.

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

Thank you very much I was wondering if you could talk about from a macro standpoint, how you're thinking about the PC industry and you know we heard from your competitor Tonight, they're talking about one computer per person.

I would assume at some point, we're going to start seeing lapping. The initial win 10 computers that were put out there. So.

So how are you kind of thinking about where this industry is going and this is jane ability.

Because it feels like we keep getting to the point, where investors will say, we're worried Pcs you're going to fall off a cliff from the next couple of quarters. On then obviously, the pandemic and everything to push that back but I'm wondering you know.

What were your thinking.

Well I suspect all of you are working on the DC right now take.

The essential device it was pre pandemic and it's become even more of an essential device for productivity and for learning and if you play that through and you know our industry from belt 1.7 billion units give or take in the installed base $700 million of those are force for older which is a refresh opportunity.

On the public sector, which has been a laggard in terms of its desktop and notebook mix has been 50 50 rapidly moving to 75% notebooks and catching up to the rest of the industry, which is a source of growth.

Education, the one to one initiative.

The data I have would suggest there's still over 10 million children in the United States.

C. The burn on in this learned from home environment, there's $10 million in Japan, there is over $40 million in Western Europe. There is a huge opportunity to get the necessary tools in our global student's hands. So they can stay up and be educated along with everybody else. This notion of.

Household.

Rates going up I think is very real I don't think you can get by having a PC for everyone on the home now we have.

Two parents likely working from home you have multiple children on working from home, that's a multi PC environment in the home today and I don't think that largely change changes as the industry moves towards the 75% or better in notebooks you have a replacement cycle advantage notebooks are generally replaced about a year on.

On a half faster than desktops, so that will feed itself.

Andy you ultimately have again, what I consider the essential device in the stay at home economy, and ultimately, we're bringing the world into the home through the PC.

Maybe that's a long winded way of saying well I'm I'm bullish I think if you look at the prospects from I'd seen Gartner and look at low single digit growth over the next.

Three ish years four years is realistic.

Again last quarter I think the market was 82 million give or take a few that was the biggest quarter and 12 years, you've seen some of the forecasting for Q4, it's in the high teens it'll put the market roughly 300 million units in calendar 20 that will be the biggest year in six years. This thing is far from dead.

It has become far more and essential device for all of US in this work from homes day from home environment.

Hi material is gaming.

And just quickly how how material do you see gaining dean.

I think its huge look at all the young people that's what they do on I know I have one at home that has an active gamer and I think by the way in the stay in home environment Entertainment is key and gaming is a a huge entertainment via or outlet and I think it is a sense.

Total and I think it's key and certainly with our Alienware brand. The success we've had there.

We're quite pleased on love to see more gaming.

On a few promotion on the web site today. If you are interested in getting a great Eylea Geff 17 inch notebook alright, alright, thanks, Jeff Thanks, Shannon and thanks, everyone for joining US today as a reminder, we will be participating virtually.

On a couple of conferences next week, Tom will do a fireside chat on Tuesday at Wells Fargo, and Jeff will do a fireside chat on Thursday at credit Suisse are three sorry. Additionally, we will be attending several other virtual conferences in December and into January so check the IR website for the latest updates and finally, thank you for joining us today.

And we wish everyone in the U.S., a safe and happy Thanksgiving.

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

Yeah.

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