Q1 2022 Dell Technologies Inc Earnings Call
Good afternoon, and welcome to the fiscal year 'twenty 'twenty, 2 first quarter results conference call for Dell technologies incorporated.
Like to inform all participants that this call is being recorded at the request of Dell technologies.
<unk> is the copyrighted property of Dell technologies incorporated any rebroadcast of this information in whole or part without the prior written permission of Dell technologies is prohibited following prepared remarks, we will conduct a question and answer session. If you have a question simply press Star then 1 on your telephone keypad.
And at any time during the presentation.
Now I'd like to turn the call over to Rob Williams head of Investor Relations. Mr. Williams, you may begin.
Thanks, Jim Maria and thanks, everyone for joining US with me today are our vice chairman and CEO, Jeff Clarke.
Our CFO, Tom Sweet and our Treasurer Tyler Johnson.
Our press release financial tables web deck prepared remarks, and additional materials are available on our IR website.
The guidance section will be covered on today's call.
During this call and.
Thus, 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, adjusted EBITDA and adjusted free cash flow.
A reconciliation of these measures to their most directly comparable GAAP measures can be found and our web deck and press release.
Please also note that all growth percentages refer to year over year change unless otherwise specified and.
Additionally, I'd like to remind you that all statements made during this call that relate to future events and results are forward looking statements based on current expectations.
Actual results and events could differ materially from those projected due and a number of risks and uncertainties, which are discussed and our web deck and SEC filings, we assume no obligation to update our forward looking statements.
Now I'll turn it over to Jeff.
Thanks, Rob Hi, everyone. Thanks for joining us today, we are coming off a strong first quarter and a successful Dell technologies World, where we connected with more than 60000 customers partners and stakeholders, we made important announcements on apex, our edge strategy and social impact and sustainability commitments and.
The response was fantastic and we are energized by the positive feedback on our strategy innovation and opportunity.
And 1 of the real silver linings of last year is that digital transformation has been accelerated.
Our world is running on day to highways now and we're experiencing everything technology makes possible deeper data driven insights connectivity.
And even a deeper human connection technology is no longer the I T Department, it's the entire organization, it's how you enable everything to deliver better business outcomes.
And customers are looking to Dell technologies as their strategic partner to help run their business deliver their outcomes capture the opportunities and the data era for example.
Large fortune 500 retailer made VX rail and Vmware Cloud Foundation, the hybrid cloud standard for workloads and their data centers and.
Another example is Honeywell, who is helping its customers transform day to day business operations through software as a service solutions for the industrial sector built on Dell infrastructure Honeywell Forge connect is the edge interface for Honeywell Forge enterprise performance management.
Turning to the financial results, we started the year strong delivering record revenue in Q1 of $24.5 billion up 12%.
And these results are driven by day do anything from anywhere economy, where technology enables connectivity and outcomes for all of us.
Instead of going to work school entertainment our shopping it all comes to us through our Pcs that need for connectivity was demonstrated and the record demand last year and has continued into this year. Our client solutions group delivered a record revenue for the first quarter of $13.3 billion up <unk>.
3%.
And our infrastructure solutions group, we are seeing improved demand as customers invest and the solutions they need to power our due from anywhere world.
The improvement we saw at the end of last year continued into Q1.
And with revenue growing 5% to $7.9 billion, we saw growth in Q4 for servers and midrange storage and the momentum continued into Q1 with power edge orders up 7% and mid range storage storage orders up 23% RV.
Our Vmware business also had a strong quarter with revenue of $3 billion up 9%.
Our partnership continues to expand and our ongoing strategic relationship has been formalized with the commercial agreement announced last month. For example, we have a framework in place to identify new areas of first and best joint innovation.
And our unique partnership will continue to deliver highly differentiated integrated solutions that are multi cloud and accelerate digital transformation.
We are pleased with the quarter and we are even more excited about the opportunities ahead, and the long term value proposition for Dell technologies, and our stakeholders with a 4 trillion dollar total market. We are only servicing a portion of that total surface area today and our value creation framework is focused on <unk>.
Key areas that expand that surface area for serviceable market.
We do that by focusing on our core markets, the broader ecosystem, new growth opportunities and our corporate and capital structures I'll cover the first 3 today and then Tom will cover the fourth.
Our strategy begins with growing and modernizing our core businesses.
Our serviceable or addressable market is expanding and 2019, the serviceable Tam for the broader client ecosystem was approximately $600 billion and looking out to calendar year 2025, it jumped to a projected $750 billion.
This expansion and Tam is driven by increased systems per household faster refresh rates with higher notebook mix and investments and a hybrid and remote workforce. Our investments are focused on making the P. C more personal and intelligent, but it's just it's but it's just not about the P. C. It's about providing.
<unk> technology to deliver and experience to customers that allows them to be connected productive and effective no matter, where they are and that's increasingly about software and.
A few recent examples.
We continue to innovate with our built and AI software and Dell Optimizer that learns responds and improves the way you work.
We recently updated Dell hybrid client that gives users access to their applications and data whether delivered from the public cloud private cloud or on the device and we introduced the new safe shutter unselected devices. The industry's first automatic web can that knows when to open or close by syncing.
To your video conferencing applications. It's all of these things combined devices software services and peripherals and a higher profitability profile that have us excited about the future opportunity.
The serviceable Tam for our infrastructure business is also growing.
From approximately $150 billion and 2019 to a projected $200 billion by 2025 that means growth and areas like servers storage and networking, where we are strong and growth and areas like hyper converged infrastructure, where we are innovating for the future.
Just a few weeks ago, we launched software updates to power store, improving workload performance by up to 25% by automating data processes, we are saving customers money, while lowering latency by 15%. We also introduced the cost effective entry level power store of 500 to the lineup power store.
Now serves all mid range price bands.
Power storage the industry's first modern mid range storage architecture, and a decade, it's a container based micro service software allows for rapid deployment of new capabilities with no disruption. It continues to ramp faster than any new architecture, we've ever released and accelerates our opportunity and midrange storage we re.
And we launched a new line of AI enabled power edge servers that help customers meet the challenge of digital transformation with a secure infrastructure that supports modern workloads.
We are leading with innovation and taking share where we are strong but we also know long term success means doing more than just winning in the consolidation and it also means delivering a leading customer experience, including modernize consumption. This is where apex comes in and to look to deliver the scale.
All of the cloud with the ease of as a service. It's a critical component to how we modernize and grow our core businesses grow private and hybrid cloud and when the edge building on our long history of offering it as a service earlier this month at Dell technologies World, We launched the new <unk>.
Portfolio offerings data storage services cloud services and custom solutions.
Apex helps customers simplify digital transformation and by increasing flexibility at <unk>.
Guilty and control via a cloud based service model, we are seeing increased customer interest customers like GE are turning to Dell 4 and as a service approach that assist the industrial giant and delivering solutions that make the world of work more efficiently reliably and safely and Magellan.
Health and looking for better control of their infrastructure to help serve patients faster and more effectively.
And we're building the technology ecosystem of the future.
We are innovating and integrating with Vmware and our partner ecosystems to create and automated intelligent infrastructure for 5 G and the data era.
And this includes our better together solutions with Vmware that customers have embraced such as VX rail Vmware cloud on Dell EMC Velo cloud SD Wan as well as our security and end user computing with Dell technologies, and Vmware customers have consistent infrastructure and operations from the public cloud.
Good to the private cloud co locations and the edge it's.
It's estimated that 75% of data will be processed outside of a traditional data center or cloud by 2025 and that data will be generated and the real world at the edge.
1 of the ways, we're helping customers make decisions at the edge and real time is with our streaming data platform. This is an open platform that offers powerful real time analytics at the edge with a smaller footprint.
Like putting compute storage and analytics at the edge, where the data is created we deliver insights and real time and create new opportunities for business.
We also.
Continue to support customer choice through an ecosystem of value added partnerships like what we're doing with PTC thing works for smart manufacturing at the edge and with Equinix for hybrid cloud and as a service offerings and next month, we will announce and open network ecosystem that brings together infrastructure technology partners and services to create a.
More agile and profitable ways for communication service providers to transform their operations and modernize 2 and open cloud native <unk> networks.
Together with Vmware and our partner ecosystem, we are the hybrid and multi cloud platform for the digital future and we will deliver it all through a consistent cloud model and as a service with apex as we think about future areas of growth will leverage our leading capabilities or relationship with Vmware and the broader partner ecosystem.
System to capitalize on new large addressable markets and emerging technologies spaces multi.
Multibillion dollar markets today that are projected to grow exponentially by 2025.
Here, we will pursue logical and closely adjacent opportunities, where we have the unique opportunity to win.
And areas such as hybrid cloud edge telco as a service and data management to drive high value growth we.
We are confident and our ability to drive high valued growth for 2 reasons, 1 our differentiated strategy grow and modernize the core with software and leading with our unique Vmware partnership innovate integrate and partner to build the technology ecosystem of the future when the next technology frontier at the edge.
Deliver the scale of the cloud with ease of as a service with apex and 2 are competitive operational advantages.
And our direct sales force and customer intimacy.
Global services capability, Dell financial services, and industry, leading scale and supply chain.
Combined we have a more focused business with the right formula to consistently deliver annual revenue growth and the GDP or better range over the long term with strong profitability and predictable cash flow, it's an incredible time to be and the business of delivering technology solutions that deliver experiences inside.
<unk> and outcomes, we are optimistic about the opportunities ahead.
Before I turn it over to Tom for a closer look at the financials, a quick comment on the global supply situation that extends well beyond hardware as we have mentioned the pandemic accelerated the adoption of digital technology and every industry and when coupled with an improving global economy with a greater demand for everything.
There is and overall shortage of semiconductors, we are executing our strategy as we work through this environment just as you've seen us do before and what you've come to expect from US now over to Tom.
Thanks, Jeff.
I am pleased with our performance as we started the year strong with double digit revenue growth operating income growing faster than revenue and strong cash flow generation, given the strength and the business.
Revenue for Q1 was a first quarter record of $24.5 billion up 12%.
Driven by growth and all 3 business units, especially C S G and and improving ISG business.
Gross margin was 8 billion up 9% and 32, 7% of revenue.
Gross margin as a percent of revenue was 70 basis points lower primarily driven by a 370 basis point revenue mix shift to C. G.
Operating expense was $5.3 billion up 3% year over year, we are continuing to prudently manage our expenses, but as we've talked about last quarter. Some costs are coming back into the P&L.
Operating income was also a first quarter record at $2.7 billion.
Up 26% and 11, 1% of revenue.
We saw improved profitability and all through segments led by <unk>.
Given the progress we've made on paying down debt. Our interest expense was down approximately $162 million contributing to an even stronger growth of 59% and consolidated net income to $1.8 billion.
Earnings per share was $2.13 up 59%.
Our recurring revenue, which includes deferred revenue amortization utility and as a service models is approximately $6 billion a quarter up 12% year over year.
And our remaining performance obligation is approximately 42 billion.
And about 15%.
Which includes deferred revenue plus committed contract value not included in deferred revenue.
And the growth was driven by a solid performance and hardware and software maintenance and custom as a service solutions.
Excluding Vmware sales remaining performance obligation is approximately 32 billion up 18%.
Turning to the business units, our client solutions group delivered another quarter of outstanding results despite industry wide supply chain challenges.
<unk> revenue was up 20% to $13.3 billion, driven by ongoing high demand for remote work and learning solutions, along with gaming systems.
Commercial revenue was up 14% to $9.8 billion.
We saw double digit orders growth for latitudes precision systems and commercial chromebooks.
And we are starting to see improved demand for desktops as orders for our commercial desktops returned to growth.
Our consumer business delivered revenue of $3.5 billion.
42% as demand remains strong from consumers looking for upgraded experiences and today's world of digital Entertainment and E Commerce.
On and orders basis, our xps notebooks were up 21%.
Alienware, and notebooks were up 76% and our consumer online business was up 58%.
And we are riding a wave of growing asp's and the consumer business as more consumers are choosing high and systems.
<unk> operating income was up 84% to a record of $1.1 billion and was 8.2% of revenue.
We saw better than expected profitability, primarily due to strong shipments a stable pricing environment and some component cost deflation.
We also had a strong quarter for client solutions software and peripherals and services.
This highlights the points, Jeff made earlier about the broader opportunity for our client business as we innovate across the ecosystem to deliver and enhanced experience for our customers.
Going to work and play effectively from anywhere.
Total solution focus along with our differentiated competitive advantages and strategy have enabled us to deliver margin expansion over the last 5 fiscal years.
Over that period <unk> revenue has grown at a 7% CAGR, while operating income has grown by a CAGR of 18%.
Moving to ISG, we are encouraged by the positive momentum we've seen and this business over the last 2 quarters.
For Q1 revenue was up 5% to $7.9 billion.
Driven by an improving demand environment for compute and.
And building momentum and storage.
We believe demand will continue to improve as we move through the year as customers accelerate their it investments with focus on hybrid cloud solutions.
Servers and networking revenue was $4.1 billion up.
Up 9% as we saw increased demand for infrastructure compute across our customer base.
Storage revenue was $3.8 billion.
Flat compared to last year highlights for the quarter were hyper converged infrastructure and midrange each up 23% based on orders and as VX rail and power store continued to deliver strong growth storage buyers were up 12% driven by power store.
ISG operating income came in at $788 million or 10% of revenue, which was up 30 basis points as we benefited from continued operating expense discipline and and improving demand environment.
We have a significant presence with many of the leading cloud based companies and the world and fact, we provide infrastructure to nearly 80% of the largest cloud service providers and the world.
And looking at our top 1000, ISG customers demand from SaaS companies cloud hosting companies telco consumer web Tech and Fintech companies was up double digits over the trailing 12 month period and currently accounts for nearly 30% of orders from that top 1000 customer set.
The Vmware business unit also performed well delivering revenue of $3 billion up 9% and operating income of $841 million or 28, 1% of revenue.
Based on Vmware Standalone results subscription and software as a service revenue grew approximately 29%.
The largest revenue contributions were from Vmware cloud provider program modern applications and end user computing.
Geographically, we have seen and encouraging rebound in demand across most of the countries and regions and which we operate.
And our top markets, the United States was up 9%.
China was up 36% and Germany was up 19% based on orders.
Dell financial services first quarter originations were $1.9 billion.
Up 5% driven primarily by continued strength and our Americas business.
GFS ended the quarter with $12.7 billion and total managed assets up $1.4 billion.
Year over year.
We had a good quarter for our apex custom solutions flex on demand and datacenter utility, where we saw bookings of $164 million.
These offerings are key and we will continue to contribute to our as a service and growth and our remaining performance obligations.
And as we've talked about at Dell Tech World Apex's, The next evolution and what we've been building and on for decade, aligning us even more closely with customer outcomes and result.
The pace of adoption will be driven by customer acceptance, but we are seeing increased interest we believe what will drive incremental revenue growth and the future.
Turning to our capital structure and balance sheet, we had a strong quarter of cash flow generation and continued our focus on delevering.
We generated positive cash flow from operations of $2.2 billion, despite typically using cash and our first quarter due to P&L seasonality and bonus payouts.
On a trailing 12 month basis cash flow from operations was a record $14.4 billion.
And excluding Vmware and was $10.1 billion.
We have a history of generating strong cash flow with our core business, averaging more than $6 billion of cash flow from operations annually over the last 2 years.
Cash and investments at the end of the quarter was approximately $15.9 billion and $10.1 billion for Dell ex Vmware.
Adjusted EBITDA was $3.2 billion up 24% at 13, 2% of revenue for the trailing 12 months adjusted EBITDA was $13.4 billion up 13%.
During the first quarter, we paid down approximately $1.5 billion of debt paying off all of our fiscal year 'twenty 2 maturities. Additionally.
Additionally, we paid $1 billion of the margin loan earlier this month for a total debt paydown of $2.5 billion year to date.
Our debt balance now stands at $47.2 billion and that includes DFS related debt of $10.2 billion and subsidiary debt of $4.8 billion.
Our core debt ended the quarter at $27.9 billion and our core leverage ratio is now approximately 2.3 times adjusted EBITDA.
Given our strong Q1 cash flow performance and in Q1 cash balances and the expected Vmware dividend proceeds of approximately 9.3 to $9.7 billion. We are increasing our full year debt paydown target to be at least 16 billion for fiscal year 'twenty 2.
And our expectation is that once the spin of Vmware is finalized we will be upgraded to investment grade by all 3 credit rating agencies as.
As a reminder, following the announcement of the Vmware spin the 3 rating agencies updated our outlooks to creditwatch positive or put our credit rating under review for a potential upgrade to investment grade ratings.
After achieving an investment grade corporate family rating, we will target a core leverage ratio of 1.5 times adjusted EBITDA.
Given our healthy balance sheet and strong free cash flow along with anticipated booming proceeds there will be opportunity for a more balanced capital allocation policy, including shareholder capital return investments to grow the business and value enhancing M&A.
We will have more to say on this topic as we get closer to the close of the Vmware transactions.
Yes.
Now to our outlook from a macro point of view the pace of the global economic recovery is progressing with regional and country specific puts and takes.
As Covid waves continued to impact many countries and the pace of global vaccine administration progress is uneven.
Additionally, the pandemic drove acceleration of digital transformation across multiple industries and supply as Nick has not kept up with demand for certain components.
Geographically North America, China, and many countries in Europe are seeing stronger economic recovery and related spending.
For revenue it would be appropriate to flow our Q1 revenue upside through your full year models.
After considering the comments I just mentioned it is clearly a fluid environment.
For Q2, our normal sequential revenue increase is about 6%.
Are seeing progress on the economic front, but given ongoing supply constraints, particularly impacted <unk> as well as Vmware Standalone guidance, we expect Q2 revenue to be slightly below our normal sequential pattern over the past few years.
For Q2 operating income there is a few items I'd call out.
As we talked about on prior calls we have some costs coming back as we agree and stated a number of employee related benefits and Q1.
Most notably merit and promotions.
I'd also remind you that the Vmware and Dell core businesses are investing for long term growth.
We will see a mix shift within <unk> and Q2, driven by normal seasonality of stronger education, Pcs and chromebooks sales.
And the component supply situation remains constrained and we expect component component cost to be inflationary and Q2.
Factoring in these items, we expect operating income to be down low to mid single digits sequentially on an absolute dollar basis.
Below the operating income line, we will continue to benefit from lower interest expense for non-GAAP tax rate, you should assume 17, 5% plus or -100 basis points.
In addition, keep in mind the majority of the activity for the new 16, plus billion and debt reduction target will take place in conjunction with the expected close of the Vmware transaction and calendar Q4.
Yes.
In closing we have a set of durable competitive advantages that we believe lead us to a differentiated growth strategy for GDP GDP plus revenue growth.
Strong profitability and predictable cash flow.
We are focused on maximizing long term value creation for all aligned shareholders by continuing to profitably grow and modernize our core markets, adding value beyond hardware and transforming our business through apex, we will leverage our market reach and philosophy of customer choice to bring a broad set of.
<unk> solutions to our customers through our first and best Alliance with Vmware and our broader partner ecosystem.
We will pursue adjacent high growth opportunities like hybrid cloud telco edge and data management through organic and potentially future inorganic investments.
And we have been deliberate and our corporate and capital structure optimization with the announced Vmware spin and gloomy transaction along with the sale of RSA last year, we will continue to evaluate our structure and capital framework as we go forward.
With that I'll turn it back to Rob to begin Q&A.
Thanks, Tom before we start the <unk> portion of our bar call I'm, sorry to share that Jeff will not be able to join us for the Q&A session.
Regretfully, he had an emergency and his extended family and this afternoon.
Next we ask that each participant ask 1 question to allow us to get to as many of you as possible to Maria can you. Please introduce the first question.
We'll take our first question from Jim Suva with Citigroup.
Thank you very much on the supply constraint side as well as higher memory costs going higher and returning back to work can you give us some color on that as far as your orders your books.
Corporations ordering and different things post COVID-19 than pre Covid and the component cost of memory are you able to pass those through or is there like a 1 quarter lag. Thank you very much.
Hey, Jim So look I mean as it relates to component costs I would give you the following thoughts right. So.
And obviously given the.
What.
And what the environment is with the pace of recovery. The supply situation has not kept up with the demand environment as we think about the need for semiconductors and thats an industry wide issue.
And clearly an issue that the technology and industry is dealing with.
Look we do expect and we do and we do expect our component cost or inflation area, and Q2, and probably are going to be inflationary and the second half as we think about it today.
And thats, principally coming out of displays DRAM and NAND.
Not seeing customers at this point and time adjust there.
Configuration frameworks, if you will in terms of the amount of memory or other types of how theyre loading or configuring their systems that has been a pattern we've seen in the past with with past Mem.
Memory cost or price increases and certain components. So it's clearly something we're watching.
I do think as it relates to to pricing and it is our intent that we will price the input cost increases as appropriate keeping a thoughtful eye on the market and keeping and making sure we're and our competitive position. So.
And that's sort of the state of play at this point alright, great. Thanks, Jim next question.
Our next question is with Onesie Mohan with Bank of America.
Yes. Thank you Tom your guidance low to mid single digit decline and operating income for next quarter.
As we as we saw and look at that that would put you roughly.
Lee flattish operating income year on year, but their these inflationary pressures that you spoke about and the second half how should we think about the balance of operating leverage that might kick in because of a recovery and ISG or says these inflationary costs.
<unk> extrapolate what are you talking about into Q further out and the year. Thank you.
Well look <unk>. Thanks for the question I think about it like this 1 I'm really not going to get into the back half of the year other than let me give you a couple of thoughts around.
Reiterating and perhaps what what I, just mentioned and what I do think as we think about component cost increases we will.
And we'll adjust our pricing is appropriate.
We are going to have to work our way through the component supply dynamic situation and that's going to be an area that we're going to have to actively manage as we go through the year.
So as I suggested in the and my comments I would tell you they take the Q1.
Revenue framework and move that bring that forward through your sequential models with some thought around the comments I just gave you around Q2 sequential.
And then look from my perspective, and I don't want to get into the back half. So we'll update you on our Q3 looking at our Q2 call and then we have a scheduled or worse anticipating scheduling an analyst meeting in September where we'll give you more thoughts on the back half of the year and the go forward.
Alright.
Thanks <unk>.
Next question.
Our next question is from Amit.
And with Evercore.
Yes, thanks for taking my question.
Tom I was hoping you could just maybe talk a little bit more on the free cash flow side. There was a lot more positive and the April quarter listen at least what my motto hard which is more neutral maybe so maybe just talk about what drove that performance and April quarter and then.
I don't expect you give me a full fiscal 2022 outlook, but what are the 2 or 3 puts and takes we should consider for the rest of the year from a free cash flow generation basis, especially given how strong April was.
Yes look low.
I'll answer half of that question and I'll ask Tyler Johnson, 2 to jump in as well our treasurer. So.
The performance and cash for Q1 was quite strong and and Youre right. Our seasonal pattern is typically a use of cash and in Q1 given.
Some of the dynamics of the business from a seasonality perspective, and bonus payouts and things of that sort of given the strength and the business, though quarter on quarter, we did see strong cash flow generation and the quarter and I think coupled with working capital management that discipline that we've shown over the last number of years around working capital.
We I was very pleased with the cash performance.
What would you add and common thoughts about.
The environment from a cash perspective, I'd, probably just add we obviously benefit as we get this higher mix of <unk> because that typically has shorter terms.
And so there's a benefit there and look our collections teams did just an outstanding job.
And so that was great just as a reminder, too and as you compare it to a year ago. We did have a COVID-19 impact last year, I think that was somewhere around $900 million.
But as Tom said it was it was a great cash flow quarter.
No. We don't guide forward on cash flow, but as I think about the rest of the year at least as I think about next quarter Q2, and Q4 tends to be our stronger cash flow quarters, and and I am expecting Q2 to be a good cash flow Corp.
Alright, great. Thanks, Tyler Thanks.
Next question please.
Our next question is from Katy Huberty with Morgan Stanley.
Yes. Thank you good afternoon, Tom last quarter, you said, there wasn't yet confident and the pace and timing.
And the ISG recovery, which influenced your view of profit decline for the year can you just update us on where your visibility and confidence and in ISG revenue recovery is today versus 90 days ago and.
And if it if it recovers it started 2 and the first quarter does that give you a possible path to profit growth for the year.
Execute to the supply dynamics you talked about.
Yeah Katy.
I was pleased with the progress that we made and ISG and Q1 overall revenue of $7.9 billion up 5% operating income.
You know a little bit up against a year ago, but headed and the right direction, we saw server velocity improving as the demand for compute.
Accelerated and servers and networking were up 9%.
So pleased with that.
C. As you would note has a C.
Slightly positive sort of spin on server.
Revenue growth for the year.
<unk> improvement and storage with.
Flat year on year, which is obvious and from a revenue perspective, but improvement from Q4 really pleased with the progress, we're making and mid range HCI continues to be strong power store receptivity is from a customer base perspective has been good and were seeing.
Net new buyers, increasing and storage. So Q1 was was was positive as we look out to the rest of the year again, while I don't want to forecast for the rest of the year, we'll continue to see.
And how the trends shape, we are reasonably optimistic that too.
That the IDC forecast for servers and storage continues to will continue to be positive as it does and Q2 and we'll continue to see progress. There. So I think as we get to the back half of the year and read through Q2, we'll give you our perspective on the back half in terms of does the ISG velocity continue we do it.
At this point, we believe that it is a positive trend and that we expect it to improve as we go through the year as we have said and the path. So overall cautiously optimistic about about the year for ISG.
Okay, Hey, Thanks, Katie and.
Thanks, Tom next question please.
Question is from Tony <unk> with <unk>.
Bernstein.
Yes, thank you for taking the quarter.
The question.
I have a question about your reselling relationship with Vmware today so.
I think <unk> and your last fiscal year, you resold about $4 billion worth of Vmware product.
Small minority of that was along with Dell product most of it was just distributing VM.
And more product to resellers.
What is the financial arrangement when you resell Vmware products. So on that 3 and a half billion that's not affiliated with Dell product to receive a commission.
And is there any sort of internal revenue.
Transfer deduction, and then when Dell and Vmware are separate will Dell still be receiving commissions or what will be the financial arrangement and incentive for Dell to continue to act as Vmware is largest distributor.
Well, hey, Tony and without getting into a lot of detail there.
As you would note today.
Vmware is consolidated so those the revenue flowing through Dell is effectively eliminated as we consolidate vmware.
I would harken the relationship on the 3 and $5 billion that you referenced to a distributor arrangement, where it's a distributor margin.
Type framework and that's the intent as we move forward, obviously post spin we're not.
And we're not eliminating the vmware revenue and related margin, but.
As highlighted in the commercial agreement framework as we chatted about in April.
We do expect that.
Through our sales and settlement and the sale of southern and organizations that.
We're incentivized to sell Vmware, we still think about Vmware as part of the.
From our first investor relationship given are tightly coupled solution capabilities that we have so we're going to continue to move forward with Vmware and push that as appropriate, but it's effectively a distributor arrangement.
Thanks, Tony.
Next question. Our next question is from Steven Fox with possibly a device.
Hi, Good afternoon, I was wondering if you could dig in a little bit more into the storage orbit energy I think you mentioned up 23% how does that sort of play into your thinking for the rest of the year.
Any other color on and mix or how it is trending with certain customers would be helpful. Thank you.
Yeah, Hey, Steven it's.
But if we just think about <unk>.
Storage storage storage revenue for first quarter reported 8 billion flat year over year, what I, what I highlighted though was as we look at some of the families within the storage framework.
We were very pleased with mid range storage up 23%. We are pleased with our HCI performance we saw.
Slower growth, but still growth and our and our unstructured and our Iceland power scale offerings.
Power and the high end, which is a smaller portion of the market was soft for us and we've highlighted that in the past couple of quarters.
But as you recall, if you think about where from a total Tam addressable market is the mid the mid range storage is the biggest area of opportunity for us and we.
We're pleased with the dynamic and the velocity that we're seeing there.
And I highlighted the fact that storage.
Storage net new buyers was up 12% so pleased with that.
And with empower store, 20% of the buyers are new storage buyers and we've got about 25% more competitive displacements year over year with power stores. So we're pleased with the customer receptivity. We just recently announced a software upgrade in terms of which is our force software release for the family and the last year and.
And that was.
As we begin I'd say, it's a.
And.
Microbes.
Services and container based architecture. So it's a nut and these are non disrupted upgrades, but the 25% faster performance from mixed workloads. So.
More automation and so I think the pace of innovation within the power store framework is continuing to move forward. So having said that look we're cautiously optimistic about storage. So we've got we.
We went from a negative growth in Q4 and storage revenue on a year over year basis. We now have flat, we need to get it to growth and obviously the point here is that it's got to continue to grow on a more consistent basis, but the overall economic environment and the buying.
Environment and the forecast.
Casting would suggest that the storage market should continue to be positive for the year and we will our it's our intention to take advantage of it so cautiously optimistic but there's more work to do we have more work to do on on coverage models, we have more work to do to accelerate consistent.
Consistent performance across the entire portfolio. So those are areas of focus for us.
And so look the industry forecast are for kind of mid 4% growth for the year for the overall storage industry. So we feel pretty good about that opportunity going forward for sure Hey, Thanks, Steve I. Appreciate that question next question. Please.
Our next question is from Shannon Cross with Cross research.
Thank you very much.
Talk a bit about.
And how apex will impact the P&L and and maybe working capital or Capex over time, I realize it's still early but as.
And as you look at how the subscription revenue and that will flow through can you just give us some of your high level thoughts. Thank you.
Hi, Shannon, Yes look I mean, we're very excited about apex and you are right. It is very early and the.
And the journey with apex, we just announced the first set of offerings that Dell Tech World a few weeks ago.
But having said that customer interest has been quite strong.
And we're encouraged by that but you know so but from a from a financial perspective as it relates to the year I mean, it's clearly.
It's just not going to have a material impact on the year as we think about it. This year just given the size of the company that we are.
And what we're going to watch and monitor as number of new customers coming into APAC to make sure that that's ramping as appropriate and within our plans and then as it becomes more relevant to the financial situation.
I'll begin to give you some framework to think about around that but you are right on a subscription and revenue with the subscription based offering clearly revenue and cash flows are impacted as those as that business ramps, but I'm confident given our size our scale our ability and our.
Our strong balance sheet that we'll navigate through that as appropriate but again, we will give you more information on that as the ramp.
At the appropriate time as we see the ramp.
Okay.
Thanks Shannon.
Next question.
Next question is from Sidney Ho with Deutsche Bank.
Thanks for taking my question. My question is on the CST side, clearly very strong result, and the first quarter. How are you thinking about the revenue growth for that business for the remainder of the year and and he if he can comment on your expectations for commercial force as consumer separately that we create and how do you discount the potential impact from component shortage, which C.
CP impacting C as shimon thanks.
Yeah.
Yes look we're very pleased with the CSP C.
G performance and reflect and get those words out.
It's a pretty robust demand environment and we saw that we saw strong demand in Q4, we saw it again in Q1.
Rob.
Overall revenue up 20% to $13.3 billion.
42% growth and consumer revenue up to $3.5 billion and $9.8 billion of commercial revenue up 14% for Q1.
Yeah. So as we think about the future. There is no indication at this point and time that the demand environment remains strong and now what we're what we're carefully watching us.
As we get into Q2 and the remainder of the year is that as you highlighted there are component supply and component cost dynamics that we will have to manage and work our way through by.
And by highlighted in my prepared remarks that there.
Component cost and Q2 are going to be inflationary, we will price that inflation that input cost increase is appropriate.
And we'll have to watch to make sure that the.
We will watch to see have any impact on demand.
And Thats really the framework, we're going to have to work our way through as we go through the year. If you look at IDC forecast there.
Our forecast and a very robust demand environment for.
Calendar 'twenty, 1 I think something appropriately like 355.357 million units.
18% growth, if I recall properly and.
And so we're optimistic about the business, but I do think that there.
The supply dynamic in terms of availability is going to be have to be something we're going to have to navigate and that's going to be with us. Our best point of view is that supply constraint continues on into next year and our supply chain team is working that daily to ensure that we are.
Managing that to the extent possible but.
Sydney, we're very positive about C. S G.
And strong longer term trends were also very strong and <unk> as we think about the Tam expansion as Jeff highlighted in his comments from $600 billion and fiscal and calendar calendar $19 billion to $750 billion and 2025.
And.
Thats all based upon whats happening with the PC in terms of the.
The P C as an essential central unit the density of Pcs within households is increasing.
We're seeing faster refresh cycles, given the migration and notebooks and desktops weeks and so there's just lots of positive indicators and then the ecosystem around the PC itself in terms of some.
Software and support the services element, we've got work, we're doing on making the DPC experience a much more seamless and holistic experience and so we're very optimistic about.
And the opportunity over the next couple.
Coming years, and the PC space as we continue to think about how do we grow and modernize the core business and then how do we build out the ecosystem and take advantage through our direct selling and cross sell motion around the PC unit itself, so, but again, there's work to do and the short term.
We work our way through some of the component component supply dynamics.
Yeah, Hey, Thanks, Tom Thanks, Thanks, Sidney next question.
Our next question is from Rod Hall with Goldman Sachs.
Hey, guys. Thanks for fitting me and I wanted to come back from it.
Net debt to EBITDA target, you mentioned and palm of 1.5 times.
Look at the cash flow glide path and.
And all the other pieces of cash coming to you guys and the deal and gloomy and so on.
It seems like a lot of cash that frees up for Dell technologies shareholders to be distributed or maybe it's M&A.
Wonder if you could just comment a little bit on the timing on that and.
And then also what are your priorities does it do you have any thoughts on the dividend and buyback how do you prioritize the return of that cash.
Yeah, Hi, Rod Hey, Yes, you are right.
Things.
Play out as we presume they will given the Vmware spin and the business performance that we're seeing.
And there is a substantial amount of cash.
Coming to Dell technologies, and we've highlighted that piece of B R. R.
Our adjusted upward target around debt repayment to 16 billion and plus a debt repayment.
If those play out as we as we think about it.
And we're investment grade posted.
Anticipated Vmware spin transaction. It does open up the opportunity to broaden out our capital allocation framework and we've talked about this a bit as you know.
I think over the last 5 years, roughly about 90% to 90, 95% of our free cash flow has been devoted to debt repayment.
Net pivots, obviously, given the situation or the opportunity. We will have later in the year. So we are going to broaden out our capital allocation strategy part of that will be a program around shareholder capital return and.
That's a balance between as we think our way through <unk>.
Dividend or share buyback or some combination thereof, as well as investment and the business and potentially targeted inorganic M&A activity I.
I would offer up that we will provide some more thoughts on this whole area as we get closer to the Vmware spin transaction day and give you. Some framework to think about at that point and time, Hey, Ryan and just to make sure that I heard you correctly.
You might have said net debt and I just wanted to be clear, it's gross debt at 1.5 times.
Perfect.
Thanks for that clarification, Tyler Alright, and next question. Please.
Question will come from Matt Cabral with credit Suisse.
Got it. Thank you sounded from the prepared remarks that you guys had a really strong quarter and China was wondering if you just remind us how big China is within the portfolio and maybe speak to the areas of strength that you saw during the quarter. There and then just broadly how we should think about sustainability within China going forward.
Yeah, Hey, Hi, Matt So China is roughly from a revenue basis about.
6.7% of consolidated revenue at this point, it's our second largest business unit.
<unk> said that its.
From a percent of operating income generation and it's much less than that.
It tends to be a lower ASP.
Business and.
And the mixed dynamic over there is a bit more skewed towards towards the client.
The sustainability of it look I mean, we've come through a couple of tough years with China in terms of having to reset that business and refocus the business from customer base.
And refocusing on specific segments of customer base, principally focused on the smaller corporate medium business.
And building out the direct selling motion and building out the medium business frameworks over their sustainability continues to be an area that we're thinking our way through.
There's obviously geopolitical dynamics that you have to work your way through but the China market is a big market.
And in China, a long time were there to make sure that we can serve the China market appropriately, but we will continue to watch the cost structure over there and adjust appropriately given the the business.
Business velocity that we're seeing but.
Reasonably optimistic and the long term, but a scenario of continued focus as we as we can make sure that we set the business model over there appropriately.
Alright.
Thanks I appreciate the question Alright next question please.
Our next question is from Simon Leopold with Raymond James.
Thanks for taking the question I wanted to see if maybe you could give us a little bit more help on what Youre thinking is happening currently and in your gross margin and then what.
I'm getting at is really trying to understand what kind of correct you're experiencing from supply chain for Gal from things like expedite. These 4 components are and increased prices.
So just trying to get a better sense of how to quantify the gross margin headwind you would relate to your supply chain issues.
Yeah, Hey, Simon I'm, not really going to parse that a lot for you, but I will tell you that.
I highlighted that we are seeing component cost inflation and Q2 and remind you that from Q1 was a component cost deflationary period for us. So we're moving from deflation to inflation.
We have seen increased logistics cost gets just given the availability of.
Of containers. The overall transport costs are up we have.
Air transports up shipping containers are at a premium so those have all been.
Headwinds into the logistics costs now and this is what we do every day. So we're managing our way through it but to the extent that we're seeing increased cost there we are passing those through as appropriate.
And there are no signs that these are.
And kind of subside anytime soon and I'll say it like that just given the strong economic environment that we see from a demand perspective.
Okay.
Alright. Thanks.
Thanks Simon.
And I believe we've got time for 1 more question.
We'll now take our final question from Aaron Rakers with Wells Fargo.
Yes, thanks for letting me and at the end here.
I wanted to kind of build on Simon's question. There. So as we think about the ISG stack and a lot of other component costs are a lot of component constraints have been kind of centered it seems like on the PC segment have you seen constraints and your ability to meet demand and the ISG segment, particularly servers and if so how would you characterize kind of day.
Lead times on products or for that matter kind of backlog building.
We are seeing constraints.
Hey, Eric I would say I would say it like this for ISG from a server perspective, we really haven't seen significant supply constraint and the server space at this point.
Obviously some of the input costs are going up around DRAM and NAND.
But in terms of our ability to meet demand.
We've been able to navigate through that and our lead times and servers are generally for our generally on standard lead time so.
That environment, the ISG environment to date has been.
Reasonably unaffected by some of the supply straight supply chain constraints as we look at it today.
Okay. Thanks pad, that's going to wrap Q&A I appreciate everyone. Joining us today, we will be participating virtually in a number of investor conferences and events throughout June and July. So please check the IR website and look for press releases from us for announcements of the upcoming events. Thanks for.
Joining us today.
This concludes today's conference call. We appreciate your participation you may disconnect at this time.
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