Q2 2022 Dell Technologies Inc Earnings Call
[music].
Good afternoon, and welcome to the fiscal year 'twenty 'twenty, two second quarter results conference call for Dell technologies incorporated.
I'd like to inform all participants.
This call is being recorded at the request of Dell technologies.
Broadcast is copyrighted property of Dell technologies incorporated any rebroadcast of this.
In whole or part without the prior written permission of Dell technologies is prohibited.
Following prepared remarks, we will conduct a question and answers.
Session. If you have a question simply press Star then one on your telephone keypad at any time during the presentation.
Like to turn the call over to Rob Williams, Mr. Williams, you may begin.
Thanks, Jim Maria and thanks, everyone for joining US with me today are Jeff Clarke, Chuck Witten, Tom Sweet and Tyler Johnson.
Our press release financial tables web deck prepared remarks, and additional materials are available on our IR website.
This section will be covered on today's call.
During this call unless otherwise indicated all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue.
Margin operating expenses operating income net income earnings per share EBIT.
Adjusted 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.
Gross also note that all growth percentages refer to year over year change unless otherwise specified. Additionally.
Additionally, I would like to remind you that all statements made during this call that relate to future results and events are forward looking statements based on current expectations.
Actual results and events could differ materially from those projected due to a number.
<unk> of risks and uncertainties, which are discussed in our web deck and SEC filings, we assume no obligation to update our forward looking statements now ill turn it over to Jeff.
Thanks, Rob Hi, everyone. Thanks for joining us today.
We've made it through the first half of the year and in this incredibly unpredictable environment we delivered.
<unk> delivered our best second quarter ever.
That's because whether we are reopening are we closing eating in restaurants or ordering out returning to the office. We are staying at home. The one constant has been an unprecedented demand for technology. Another constant is our ability to execute against our stated strategy and delivered.
<unk> consistent performance no matter the market dynamics.
And the last week of June we released an investor presentation, where we outlined our differentiated strategy to drive growth and value creation post the spinoff.
As we've engaged with investors there are a number of key points I want to reiterate today from.
That presentation.
This can also be found on slide four of today's earnings earnings web deck.
First we have leadership positions in large stable and expanding markets with strong underlying fundamentals.
Q2 was an exceptional example of how we've leveraged our leadership.
Chip positions to seize the opportunities in these growing markets in Q2.
We set a second quarter record with revenue up 15% to $26.1 billion.
And our record second quarter EPS of $2.24 up 17%.
We have talked previously.
About our ability to quickly pivot the business, where the demand is strongest and that was evident in these results the need for better technology connectivity and productivity and the new do anything from anywhere economy has driven strong spending across multiple industries and customer sizes from large enterprises.
And businesses to small business and consumers and we're leaning in to capture our share of the strong it spending.
Our client solutions group delivered record revenue of $14.3 billion up 27% as we leaned into commercial along with solutions in the broader client ecosystem.
Some including software and peripherals, where we are number one in displays and we believe we gained more than 100 basis points of share in calendar Q2.
There are positive secular trends at play and client, especially in the areas. We are most focused notably the commercial market premium price bands and gaming that.
That should enable stable growth over the next few years the infrastructure solutions group continued growth with revenue up 3% to $8.4 billion, primarily driven by growth in servers and networking as customers modernize their it infrastructure.
To enable data driven AI and machine learning technology.
<unk>. We're also encouraged by the strengthening of storage during the quarter and the overall demand for hyper converged infrastructure and midrange storage, Tom will dive into more of the financial details of Q2 in just a moment.
The second point is that we have durable competitive advantages that uniquely position.
Position us to win in our core and adjacent markets.
A few I would call out that drove our Q2 performance.
We have built an end to end innovation engine that delivers engineered solutions and software enhancements based on our unparalleled market reach and ability to see across a customer's full set of needs.
Include management, and orchestration embedded intelligence automation predictive analytics proactive support telemetry and intrinsic security.
A key example is power store or micro services based midrange storage solution, which is ramping faster than any new architecture, we've released with double digit increases.
These net new storage buyers for both Q1 and Q2.
We are utilizing our industry, leading scale and differentiated supply chain to successfully navigate through the operational challenges caused by the unprecedented demand that is way ahead of supply right now.
Despite industry supply shortages.
<unk> and shipped a record number of Pcs and displays in the second quarter.
The third point is that we are driving a differentiated strategy to seize the tremendous growth potential ahead.
We are focused on winning the consolidation and modernizing our core businesses by driving ongoing share gains and improving margins.
As we scale engineering innovation and product mix shift.
We are the clear number one in external storage number one in hyper converged infrastructure number one in mainstream servers number one in data protection appliances, and our client solutions business is number one in revenue we have demonstrated the ability to adapt to the market dynamics.
<unk> time as evidenced by our commercial client share gains and 30 of the last 34 quarters and we have gained more than 700 basis points of share over that period.
Additionally, we have gained more than 700 basis points of share for mainstream servers, and approximately 200 basis points of share for externally.
<unk> over the last five years.
As of calendar Q1, 2021, according to ice IDC data.
We are focused on the mid range segment of storage and are pleased with the momentum we are seeing but we know we still have work to do.
When server and storage calendar Q2 share data is released in September we expect.
Spec share gains in both markets.
We are also prioritizing customer outcomes and modernizing our business model with apex, which provides an incremental growth opportunity as we introduce more as a service solutions and gained traction with current offers for example in July.
Hi, we announced GE is using.
Using apex data center utility to blend automation and software architecture to support its increasing workloads from traditional applications of the data analytics.
Apex, GE can scale up or down its data center storage and compute resources on demand as the company executes an approach that adapts to each.
Each business unit strategy, we are innovating integrating and partnering to create the technology ecosystem of the future for our customers with our unique partnership with Vmware as the centerpiece.
We continue to drive new product innovation and business opportunities with Vmware for instance in Q2, we launched new VX rail systems with the.
The latest power edge servers, and new software advancements that deliver faster performance as well as simplified deployment and management. Additionally, we introduced VX rail dynamic nodes that expand how customers can use existing Dell technology storage resources to support new multi cloud workloads.
VIX rail continues.
Continues to be an area of growth and one of the fastest growing segments in storage with orders up 34% in Q2.
We are also pursuing adjacent high value growth opportunities, where we are uniquely positioned to win areas like multi cloud edge Telecom data management, then open up adjacent multibillion.
Markets, we are investing in these opportunities and expect meaningful contribution from them in years to come and we're already seeing powerful customer use cases today for example.
Our disruptive bet in telecommunications has led to multiple flagship wins to build open radio access networks or open ran.
We are working.
Working with Vodafone to build Europe's first commercial opener in bringing more broadband access to European businesses and communities with Orange to launch Europe's first <unk> Standalone fully end to end cloud network and with Deutsche Telekom Who's.
<unk> multi vendor open ran network and node Brandon.
<unk>, Germany is now alive. These are just a few examples and we are excited about the progress we are making in this space.
With these leading market positions durable competitive advantages in a differentiated strategy I believe we can drive consistent growth and significant value creation.
I'm really excited about the opportunities.
<unk> ahead, and I look forward to talking in more detail at our virtual Securities Analyst meeting on September 23.
Before we go to Tom and our financial performance, let me introduce Chuck <unk>.
As most of you are aware in June we announced Chuck was joining me as co Chief operating officer.
And I have worked together for many years.
Alongside of the rest of the leadership team to help shape <unk> strategy and growth initiatives and welcome Chuck.
Thanks, Jeff and Hello, everyone I'm thrilled to join the Dell Technologies' leadership team and look forward to regularly engaging with investors as Jeff said I've worked for more than a decade with Michael Jeff and the rest of the leadership.
On the company's strategy and positioning the company has tremendous opportunity ahead, and we're focused on executing the strategy laid out in the June investor presentation, and we have never been more optimistic about our ability to innovate delight customers deliver growth and create value for all shareholders in the coming years.
Their ship, we operate in large growing markets with ample headroom the markets. We target totaled one three trillion today with core markets growing in the low single digits and adjacent markets growing faster through 2024 as widespread digital transformation drive sustained technology investment.
But beyond share side those markets are evolving in ways that play to our market positions and the durable competitive advantages Jeff mentioned.
As technology becomes ever more essential more distributed more hybrid and more multi cloud customers need a scale trusted and global partner, who can help them simplify and create business value.
<unk> from the PC to the core data center to the cloud to the edge in short. This company was built for this moment and technology and there are substantial growth opportunity in both our core markets and in high value adjacent markets, where our competitive advantages matter.
And the spinoff of Vmware will unlock the opportunity for us.
To pursue a balanced capital allocation strategy and invest in sustained profitable growth for years to come our strategy. It's good for customers employees and shareholders and our first half results are proof, it's clear to us that our strategy will drive sustained value creation post spinoff and Thats what were focused.
On executing every day as a team I look forward to speaking with you in more detail at the analyst meeting, let me now turn the call over to Tom.
Thanks, Chuck and glad you're with us.
I am pleased with our performance and the execution of our strategy as we delivered another quarter of consistent growth for revenue and profit.
<unk> ability.
Over the last four fiscal years, we've grown operating income faster than or equal to revenue every year.
Secular trends such as work and learn from anywhere digitalization of businesses and governments and real time decision, making with edge data leads us to be optimistic on our long term.
Growth prospects.
Revenue for the second quarter was a Q2 record at $26.1 billion up 15% driven by growth in all three business units led by outstanding performance in <unk> and growth in ISG.
Demand was ahead of revenue growth as we manage supply.
Supply constraints, which should not come as a surprise to anyone.
Gross margin was $8.3 billion up 9% at 31, 9% of revenue.
Gross margin as a percentage of revenue was 160 basis points lower primarily due to a 540 basis point revenue mixed.
Shift to C G.
We are navigating the inflationary cost environment and have adjusted prices for the higher input cost, while being mindful of our competitive positioning.
Operating expense was $5.5 billion up 10% as we invest for long term growth and we.
We have certain costs come back from the depressed levels, we saw last year.
Given our strong performance our variable costs, such as sales compensation and bonus are running ahead of prior year levels.
We have been disciplined in our decisions and we will continue to be prudently managing our expenses going forward.
Operating.
Operating income was also a second quarter record at $2.8 billion up 7% and 10, 8% of revenue.
Our our interest expense was down approximately $134 million given the progress on debt reduction contributing to the expansion of our consolidated net income to $1 nine.
And earnings per share of $2.24.
Up 17%.
Adjusted EBITDA was $3.3 billion up 7% at 12, 7% of revenue for the trailing 12 months adjusted EBITDA was $13.6 billion up 16%.
Our recurring revenue is approximately $6 billion a quarter up 14%.
Our remaining performance obligations or <unk> is approximately 46 billion up 24% and includes deferred revenue plus committed contract value not included in deferred revenue.
The growth was driven by an expanded backlog given that demand is ahead of supply. In addition to solid performance in hardware and software maintenance.
Excluding Vmware Dallas, our appeal is approximately 35 billion up 30%.
Turning to the business units, we had another.
For a very strong performance by our client solutions group, despite industry wide supply chain challenges.
<unk> revenue hit a new record at $14.3 billion up 27%.
On the strength in demand for devices and solutions that offer improved connectivity and productivity.
We continued to see strength across notebooks, but we also saw strong double digit growth in commercial and desktop orders.
As Jeff mentioned, we leaned into commercial where more than 70% of our <unk> revenue comes from.
Commercial also contributor to a returned to share gains per Idc's calendar Q2.
Correlates.
Commercial revenue was up 32% to a record $10.6 billion as businesses look to upgrade devices and productivity solutions for their long term in office remote and hybrid workforce environments consumer.
Consumer revenue was a second quarter record at $3.7 billion.
Up 17% as digital entertainment and E Commerce are still driving strong demand for upgraded experiences.
<unk> operating income was $995 million up 39% and it was 7% of revenue we.
We saw solid profitability, primarily due to stronger.
Strong shipments a mix shift to commercial and a balanced pricing environment.
Moving to ISG, where revenue was up 3% to $8.4 billion, we saw a strong demand environment for compute and positive momentum in storage cut.
Customers across all regions are investing in it.
Infrastructure focused on multi cloud solutions and accelerating digital transformation.
Servers and networking reported its third consecutive quarter of positive growth with revenue of $4.5 billion up 6% with strong demand across all customer segments and geographies.
Storage revenue was 4 billion down 1%.
On an orders basis, we were encouraged to see positive overall storage growth of 2% with ongoing demand in high growth areas like hyper converged infrastructure, where <unk> orders were up 34% and in midrange storage where orders.
<unk> were up 17%.
Power store continues to ramp nicely, making up approximately 38% of our mid range storage portfolio.
23% of power store customers in Q2 were net new to Dell storage.
ISG operating income was flat at 970.
It was 11, 5% of revenue.
The Vmware business unit revenue was $3.1 billion up 8% and operating income was $849 million or 27% of revenue.
Dell financial services originations were $1.9 billion down.
27% due to the tougher comparison last year as more customers leveraged financing during the early stages of the pandemic.
DFS ended the quarter with $12.6 billion in total managed assets.
<unk> flat year over year with global portfolio losses at historic lows.
Turning to our capital structure and balance sheet, we generated strong cash flow in Q2 and are making good progress on delevering.
Cash flow from operations was $1.7 billion, although cash flow was slightly lower sequentially impacted partly by working capital dynamics, our cash flow from operations was 4 billion.
Through the first half of the year, which was up 56% compared to the same period last year.
On a trailing 12 month basis cash flow from operations was $12.8 billion and excluding Vmware It was $8.4 billion.
Over the last three years on a trailing 12 month basis.
Cash.
<unk> operations grew at a 15% CAGR.
Cash and investments ended the quarter at $13.6 billion and approximately $7.5 billion for Dell excluding Vmware.
During the second quarter, we paid down $3 billion of the $4 billion margin loan that was outstanding as of the beginning.
In the quarter and we paid down the remaining $1 billion earlier this week.
We have now paid down approximately $5.5 billion of debt year to date and expect to pay down at least $16 billion for the full fiscal year.
Our core debt ended the quarter at $27.6 billion and our core leverage.
<unk> ratio was approximately two two times versus our long term core leverage target of one five times.
We expect to achieve an investment grade corporate family rating once the Vmware spin is finalized.
Once we get to IAG, there will be opportunity for a more balanced capital allocation policy include.
<unk> shareholder capital return investments to grow the business and value enhancing M&A.
We will provide more details on our post spin capital allocation policy at our analyst meeting next month.
Now to our outlook.
From a macro point of view the global economic.
<unk> recovery is driving broad demand across multiple sectors, including <unk>.
As a result demand for integrated circuits and components that are fundamental building blocks of today's modern.
Automotive industrial solutions and home appliances are in tight supply.
One of our durable advantages.
<unk> is our industry, leading scale and supply chain expertise. This is serving us well in this environment and we are actively managing demand and it's ahead of the industry's ability to deliver Ics and components.
For Q3, we now expect an above normal sequential revenue growth pattern and year over year growth up mid.
Mid to high teens for <unk>, we expect high single digit growth sequentially.
For ISG, we expect low single digit growth sequentially and for Vmware you should factor in their standalone revenue guidance, which is roughly flat sequentially.
Given this we expect Q.
Revenue overall to be up mid single digits sequentially versus a normal 2% decline.
For Q3 operating income, we expect a mix shift to CSD sequentially ongoing component cost dynamics, a modest increase in opex as we invest for growth and we.
Q3, centering the impact of Vmware Standalone guidance.
With all of these factors and our view operating income dollars will be up 1% to 2% sequentially.
Below the operating income line, we will continue to benefit from lower interest expense as we reduce our debt, but do keep in mind, the majority of our $16 billion plus.
We are can targeted debt paydown will occur at the time of the Vmware transaction, which we now estimate to be to close in early November.
For non-GAAP tax rate, you should assume 17% plus or -100 basis points and.
In the absence of share repurchase activity diluted share count should also increase.
Slightly sequentially.
Yes.
In closing, we have a track record of consistent execution across any economic or spending cycle, given our durable competitive advantages and we are investing in innovation and software development to differentiate our solutions and appliances, we are optimistic.
<unk> took about the long term growth prospects for our businesses.
I'm confident in our ability to deliver consistent and predictable financial performance from.
From fiscal year 18 through fiscal year 'twenty. One we grew revenue at a 6% CAGR and grew adjusted EBITDA at a 12% CAGR and we've.
<unk> nearly $28 billion in operating cash flow.
We are well positioned and have the right strategy to create long term value for our stakeholders.
We look forward to sharing more about our plans for Codell with all of you on September 23.
With that I'll turn it back to Rob to begin Q&A.
Generate thanks, Tom let's get to Q&A.
We will ask that each participant ask one question to allow us to get to as many of you as possible Tomorrow can you introduce the first question.
We will take our first question from Chris <unk> with Cowen and company. Please proceed.
Yes. Thank you for taking my question.
I had a question on the PC side, it looks like a U S company that had some operational missteps.
And based on the above seasonal.
Equivalent guidance with BSG are you gaining market share in this environment all component constraints the mitigate and also in regards to the industry shortages can you say again exactly.
Jamie Youre seeing those constraints is it like followed management Ics and display drivers.
Any other component of any color there would be helpful. Thank you.
Sure Chris Let me first answer your question not sure in the most recent IDC published share data, Delaware as the top share gainer of the top five Manny.
<unk> in the marketplace, we took share in total Pcs, we took share in commercial Pcs. Our focus we took more share than any of our other competitors in those spaces. So to answer. Your question. Yes, we're taking share we took a 120 basis points of share for example in the commercial PC market in calendar Q2.
We have a specific question.
Manufacturer of the shortages in the industry.
As we've I think mentioned through several of these calls now its semiconductors, the industry demand and industry being.
Consumer.
<unk> automotive industrials for electronics for semiconductor continues to be strong.
<unk> that is the area that is challenged certainly for US we continue to work through it I think we are working through it reasonably well the execution of our supply chain team is I think quite impressive with record shipments for the quarter for Pcs record shipments for displays.
But the types of devices would be scalar T.
T cons Microcontrollers power IC driver Ics those types of devices are the ones that we see consistently challenged at different times I hope that helped.
Yes, thanks, Thanks, Chris Thanks, Jeff.
Our next question is from Rod Hall with Goldman Sachs.
Yes, hi, guys. Thank.
The question I guess I wanted to ask something on Pcs as well.
Competitor has signaled that they are reducing their promotional and marketing spend assumptions substantially and that had a big impact on margins in the quarter.
Assuming it will have a large impact on their PC margins looking forward.
I'm just curious if you guys are seeing that kind of promotional and marketing spend reduction in the market today and what you're thinking in terms of your own expenditures in that respect in the in the back end of the year given the demand dynamics against the supply dynamics. Thanks.
We have not.
<unk> lowered our marketing or compensation for whether it's our direct sellers of our channel partners.
We've seen the demand of the market continue to pick up it's been pivoting or moving towards commercial.
Which generally has a lower marketing cost in it as well, but the selling costs are fairly consistent.
And while we don't have any plan changes, we like where our businesses.
We think we are executing at a very high level, we saw a tremendous rebound in our premium products, whether that be our workstation products. Our commercial desktop products. We continue to see strong demand for our commercial notebook products.
Brian I don't know any other way to say this other than demand was strong through the quarter I think you probably saw that in.
Our backlog growth that Tom alluded to before and this was good hey, Rod I would also add that.
I think Jeff and I have a lot of scar tissue over the years.
There.
One of the things that we believe is that you have to have a consistent presence in the market in terms of driving demand and driving your message and when you pull back.
C.
The impacts of that one to two quarters out so we like where we are we like what we're doing.
And we're being disciplined in our spin.
But we also want to make sure that we are positioned thoughtfully in the market relative to the demand signals that we're seeing.
Hey, Thanks Rod.
Our next question is from Amit <unk> with Evercore.
Good.
Good afternoon. Thanks for taking my question I guess my question is on the storage side and Jeff I would love to get your perspective, yet because.
Overall sales on storage, but I think down 1% compares with fairly easy and I think the company appears in that space that you had double digit double digit growth yesterday, So I'd love to understand how do you think storage performed versus your own internal expectations. This quarter.
And then what do you think is fundamentally needed with delta start gaining share on the storage side over the next few quarters.
Sure. Thanks for the question, maybe sometimes I think we.
Don't do a good job of describing our storage business and let me start with <unk>.
First we have the broadest portfolio in the Mark.
Place second to none were the leader in high end storage midrange storage industry level storage unstructured storage object storage, all flash as well as modern storage software defined HCI hyper converged space our share position in calendar Q1 was 32, 3%, which is larger the number two three.
Three.
Three four and five combined.
Our business in town I think referenced it in our prepared comments.
Comment our business grew in the mid range our business grew in HCI and we believe we grew and unstructured as fast or faster than any of our competitors in those spaces in the midrange.
Which is defined as the 25000 to 255000 price bands, which is about 60% of the marketplace. We grew 17%.
That's very competitive against the numbers that you mentioned from yesterday against our pure play competitors in the mid range market space in Q1.
Or I should.
Say and this marks the third consecutive quarter with that 17% that we've grown the mid range. So for the last three quarters. We grew 8% in Q4, 23% in Q1, 17% in Q2, our mid range of businesses growing our midrange business taking share.
We've recently added the.
The power store of 500, which allows us to cover the entry level price spend so we now cover all price spends in the midrange marketplace.
We also added new performance upgrades to our product and a seamless upgrade that happened earlier this year.
Our storage buyer base grew double digits as we mentioned in our prepared comments power.
<unk> remains the fastest growing new storage product in the history of the company through its first five quarters.
3% of ours.
Power store buyers are new to our storage business and 20% of them are repeat buyers.
So we are executing at a very high level degree of performance or execution.
Execution in our mid range.
That said you called out.
One of our challenges that our orders growth was 2% our P&L growth was negative 1%.
We have a very large business.
That large high end business is cyclical in nature, it was down year over year, and that's down year over year after a very solid.
<unk> first half of last year.
So we like our hand, we like our execution today, we do have this broad portfolio that is subject to the cyclical nature of some segments, but in the high growth space of HCI, our VX raw product grew 34% and mid range at 17% we are growing very competitively against.
Our pure play.
Competitors, there and we like the momentum as I've said is a trained engineer three data points makes it we now have a trend of three growth data points in midrange storage.
Amit I would also add that Jeff mentioned in his prepared remarks.
<unk> 200 basis points of storage.
George share over the last five years, so we'd like to gain more share.
But we do cover all segments of the storage market.
The players that are more narrowly focused.
And we're going to keep working on it and our focus is how do we grow grow profitably.
To make sure that works.
Satisfying our customer demands.
Alright, I appreciate the question Amit.
Our next question is from Aaron Rakers with Wells Fargo.
Yes, thanks for taking the question.
I wanted to ask you about the <unk> balance and I think you guys noted that your RP O excluding Vmware.
It was up about 30% if I put that in context.
FERC revenue ex Vmware grew about 11% year over year. So.
Clearly the <unk> balance is expanding much faster than core Dell deferred revenue.
Help me appreciate how much of that is just the backlog bill due to supply constraints.
Relative to kind of software deferred software, our apio growing or subscription growing I'm, just trying to understand the backlog build that youre seeing right now.
Yeah, Hey, Aaron.
Let me take that it's so you saw a quarter on quarter that over our overall RPM.
So it's up roughly.
Roughly about $3.9 billion, the vast majority of that.
Principally related to backlog growth.
So that's how you should think about the <unk> growth Q1 to Q2.
Okay, maybe just add to that.
If you think about that backlog growth and the momentum that we saw in our business at least from our RC that indicate strong demand for our products and our services.
Backlog built our cancellation rates didn't change over the quarter.
Our ability to deliver for our customers or to our customer commitments I.
I think is indicative of that cancellation rate.
Not changing at all again, we shipped a record number of Pcs and displays as we had.
The building backlog and our supply chain team continues to be agile in this dynamic marketplace, we are maneuvering to maximize shipments for.
Our customers and probably just a little plug here.
There are 200 skus available today on Dell Dot Com with next day ship.
Ready to go.
Alright I appreciate the question go to the next question. Please. Our next question is from Katy Huberty with Morgan Stanley.
Yes. Thank.
Good afternoon, the guidance for above seasonal <unk> growth is particularly impressive given market concerns around slowing PC growth and the supply constraints that you've talked some about so can you just give more specifics around the products or end markets within CSD and any notable trends in ISG.
That's driving the the more bullish outlook. Thanks.
Yes, Katy look I.
As we step back we.
We like the demand environment that we're seeing right now, yes, it's challenging from a supply chain. There clearly were constrained on certain parts as Jeff and his team worked your way through that.
That.
But the demand signals that we see from our end customers.
It looks promising and so as we think about the business and our positioning within the.
What we're trying to drive as Jeff mentioned very strong client demand.
We are as you know are more heavily oriented towards commercial Pcs.
And that mix was up this quarter and we've seen continued strength in commercial commercial PC demand.
So we're encouraged by that even as consumer demand was was.
It was double digits this quarter.
And pleased with how that's growing as well so look I think from a from a parsing the guidance I would tell you. We're pleased with <unk>, which is what I mentioned in my guidance comment from an ISG perspective strong compute opportunity.
We're encouraged by the improving storage performance there I don't want to.
So we saw that there is work to do in storage, but.
We're pleased with the environment and the spin we're seeing in the data center. So.
For us the dynamics is going to be the supply chain framework around.
Ken Jeff get the appropriate Jeff and team get the appropriate parts in.
Overseas.
In their configurations that we need to be able to ship right and so but overall I think the demand environment. Our perspective for Q3 looks healthy we've talked about the fact that we've got we've talked about and the fact that we saw some component cost inflation.
Beginning in.
And do we component costs will are inflationary in Q3.
And so we are working our way through that we've adjusted pricing accordingly.
And it does not at this point seem to have impacted any of the demand signals that we're seeing so.
I think we're well positioned we've got to go execute but overall.
<unk>.
I think we feel pretty good about where we are at this point.
Can you maybe just two points of color to emphasize what Tom said, we saw the movement in <unk> towards commercial away from consumer and away from chrome to commercial and we believe we positioned our supply chain to capture.
Overall.
And then secondly, I think we've talked about this with our growing several momentum now three quarters in a row of server growth that we're seeing a return to investment into the data center that a couple of years of delayed investments in aging installed base, new product transitions with the new processors that are available.
That marketplace some of the supply uncertainty is having customers prioritize their projects to transform modernized and protect their digital businesses and we're seeing that momentum build.
Awesome.
Appreciate the question Katy.
Our next question is from Tony <unk> with.
<unk> seen.
Yes. Thank you I was wondering if you could help quantify either the book to bill or the magnitude of your prevailing backlog.
In response to a prior question you said.
<unk> was up most of it was backlog growth so three plus billion sequentially thats about a week and a half.
With a backlog I'm wondering if you.
Can help dimension, either book to bill or size of backlog.
<unk> Q2 in terms of weeks of backlog by business and then secondly, when you related to that when you talk about the above seasonal guide what.
Assuming for backlog in Q3 or are you, assuming youre, drawing some down and how much of the above seasonal growth is driven by pricing <unk> expect a change in backlog.
Well Tony there is like three questions in that question Matt.
<unk> five.
<unk>.
Look I.
I don't really want to unpack backlog or parse backlog I will tell you that it has expanded on us as you might imagine given the.
The demand dynamics that we're working our way through the supply constraints.
Unlike some of our competitors I'm not going to tell you how many weeks of backlog we have I'll just tell you that it.
And in that it has expanded and we need to work our way through it as we think about Q3 I think what you should.
Need to think about is that look we believe the demand environment remains healthy. We are we did adjust pricing for higher input costs. So there is obviously.
Its extent translation to higher Tru.
But the overall prevailing free.
Framework that we're going to have to work our way through for Q3 or is around what are our shipment mix, what's our shipment mix look like Brian and Thats. The work that Jeff and his team are doing right now around.
<unk>.
<unk> out what the mix of products goes out.
But overall, we feel good about their ability to execute on that.
And hence the revenue guide that we provided to you.
Alright, I appreciate it Tony.
Our next question is from Steven Fox with Fox.
<unk>.
Hi, Thanks, good afternoon.
I understand and it's well documented where we are with the component constraints I was curious.
How you would describe sort of the path out of this for the company how much more can you control your own destiny going forward.
And just to be clear what is the impact.
Are you seeing like this quarter versus last quarter.
Okay.
Well thanks for the question look in aggregate the semiconductor industry needs more capacity.
We've talked about this before but.
We're seeing the same thing it's constrained I think the constrained certainly last or go into next year.
The most constrained nodes are the trailing nodes, most particularly the parts that come off the eight inch network quite frankly, no. One is investing in a lot of new eight inch capacity if any.
There is a wafer and substrates shortages, we have assembly and test wire bonding lead frame areas of challenge. So I think these are consistent things.
Things that we've talked about as we've got into the semiconductor challenge broadly across multiple industries.
The path out of this is ultimately more capacity.
It takes a long time to build these different fabs anywhere from a couple of years to three years, depending on the prospect process technology, we're talking.
Talking about and obviously.
Lots of capital is required to do that our job is thats. The environment were playing and we have been directly managing our components for a very long time in this company, we have long standing relationships and partnerships. We continue to let people know what our long term demand is it's how.
We plan this company and what we have found is those partnerships over a long periods of time and consistency in those partnerships and the agreements that we have in place certainly help us navigate these types of situations. That's what we're focused on.
Youre not going to see us get into the semiconductor business. It certainly.
Certainly not a core competence and something that we wouldn't touch we're working with.
Our partners to continue to understand what the demand characteristics long term look like for these marketplaces.
I think as we've been consistent we believe the PC market long term continues to grow we believe the server industry continues.
To grow long term as we believe the same to be true of the storage business and letting our partners know that there'll be long term demand is the best thing we can do to ensure there will be capacity in the future.
Oh, okay.
Thanks, Steve.
Our next question is from Thomas <unk> with J P. Morgan.
Hi, Thanks for taking my question I guess I just wanted to follow up on the price increases that you've talked about previously and you mentioned this.
Well.
Are we starting to see those kind of impact your guidance for the next quarter or when do we kind of typically with the lag to the channel when do we talked we expect Brooklyn.
The impact of that and how are you.
Are you thinking about like the magnitude in terms of that benefit between ISG and ESG.
Yes, so the way I would think about it is we have adjusted our pricing given the higher costs, we're seeing Jeff as mentioned some of the constraints.
<unk>, we have in that space.
I mentioned earlier that we expect.
Q3 is inflationary from a component cost perspective, we expect Q4 to be inflationary with what we know today.
We've talked for a while now about the fact that with our broad diverse portfolio as.
Is pricing and it does take a little bit of time for that to flow through I think we've been pretty proactive on at this point.
We expect.
<unk>.
Some of those price increases a portion of those price increases.
Will impact Q3, and then obviously on into Q4 the challenge in the die.
Dynamic that.
We're working our way through or are they the mixed dynamic I should say were working our way through is the fact that I'm coming into I've got backlog, that's priced at different price points, given where reward and the cost curves at the time of the transaction. So there's some mixed dynamics within backlog that will work.
Way too, hence why I guided like I guided while we're bullish.
We like our revenue guidance.
I think guidance wasn't quite as expansive in fact, our EPS and you just think about our EPS is probably.
Guidance is being similar to how <unk> guided on operating income.
And that's just we've.
We've got some mixed dynamics there that we're working our way through and obviously the gating factor again comes back to what can we get shipped.
And within the quarter so.
Look I think the teams reacted well.
The encouraging news.
Currency perspective that I have is that even with the price increases.
We have not seen demand signals change excuse me change and I think that's very encouraging we watch our transactional velocity quite quite closely that has not really moved on us even with the price increases. So again it comes back to.
Yes, we've got some we've got building backlog cancellation.
<unk> rates or Havent changed at all so we feel good about the overall environment and look for.
Customers have generally been accepting of the price increases given.
There is inflation in the environment broadly in many different commodities in areas and so.
There.
Dave and quite frankly with the.
The lack of supply in the industry, there's not a lot of places.
Well.
Hey, Thanks Aman.
Your next question will come from Shannon Cross with Cross research.
Thank you very much I'm curious.
On the PC side, how are you thinking about 111 and.
Commercial demand.
How long that will last I don't know it seems like we've had so many.
Different wins willing at the PC market predominantly tailwind I'm wondering how much of a benefit do you think it will have thank you.
Hi, Shannon, Jeff Good to hear your voice again.
Look we're bullish on Windows 11, our industry has a history of new operating systems driving an upgrade cycle.
The upgrade cycle when the product is formally released into the marketplace. We believe is there.
I think.
Windows 11 brings a lot to end users from anywhere from a new user interface to the ability to see some productivity enhancements run multiple.
Desktops and such.
A higher hardware specification, which is good for business, we have a large installed base that will continue to need to be refreshed.
Against that we believe that this is really a replacement of a PC not an upgrade of Nols on an old PC, so that generally drives demand in our industry.
You couple that with what we believe is a general change in usage patterns that the PC has become more essential in this.
Work from home.
Home learn from home game from home buy from home entertained from home World and we think that we're on the verge of new models, where a long time ago. We thought success was one PC per household now we're seeing multiple Pcs per household we're seeing a more mobile PC base, which required.
Acquires a more frequent upgrade or replacement cycle is the right word.
Think that future is pretty.
Pretty bright for the PC and the phrase that we've been kicking around the organization is all signs point to a stronger and longer demand cycle for.
For Pcs, and we think commercial Pcs.
<unk> in particular will benefit from that.
Alright.
Thanks, Jeff Thanks Shannon.
Next question. Our next question is from Wamsley Mohan with Bank of America.
Yes, Thank you and congrats on the solid quarter and guide.
Jeff can you update us maybe on the specific milestones.
<unk> for the Vmware spend that youre tracking any timing or milestones that you can share here at all outside of us on that potential close in November and.
Can you also tell us if you'll receive decelerating the tax free spin ruling from the IRS. Thank you.
Hey, <unk>, it's Tom let me take that.
There is.
As we've tracked the track towards the potential Vmware spin date of early November we are still awaiting the private letter ruling from the IRS. So that is one major milestone out there.
And so we're continuing to work very closely with them and.
No.
<unk>.
It's tracking as expected so that's the remaining.
Major hurdle, if you will everything else is moving as planned and the teams are working very closely together as they continue to as we continue to sort of.
Worked through our workflows and work streams around.
Post spin.
Work.
Innovation targeted innovation areas is to go to market motions are all in place. So we feel good about where we are but we do obviously need to close and get the successful ruling of the profit from the IRS on the private letter ruling in and that remains on track as of this date.
Yeah, Hey, thanks for the question ones in.
I would also just say that we intend to continue to provide information we've been pretty transparent to the best of our abilities as we move through this process and we'll continue to do that along with Vmware.
We've released some preliminary.
Non-GAAP P&L in conjunction with the Roadshow materials back at the end of June.
We hope to give you some additional information in conjunction with or just prior to the analyst meeting on September 23rd. So I look forward to continue to provide additional insight as we move along here.
Alright. Thanks next question please.
Next question is from Sidney Ho with Deutsche Bank.
Yes.
Thanks for taking my question.
That's on the operating margins by segment ISG.
Margin has improved to now close to a long term trend Conversely.
CFT has come down a little bit, but still very good how do you expect operating margins of both segments to trend for the next few quarters give.
Given the.
Higher input costs, maybe you can choose pick and choose which ones that serve in the supply constrained environment.
Sounds like Q3 is a dip, but how about beyond Q3, especially when it spending continues to improve.
Yeah, Hey, Sidney.
I don't really want to get into long term operating margin.
Guidance on this call, but I would just tell you that look we're pleased overall with the progress we've made with our <unk> performance and strong profitability.
We have talked about in the past that we expect we think that that business run somewhere between.
5% to six points of operating margin on a sort of a long term basis.
As you evaluate that whether that's the appropriate model on a go forward basis.
We'll share some of that at all.
Our analyst meeting on the 20 <unk> of September I think from an ISG perspective, we're pleased with the performance.
Progress, but I think there's more work to do there, particularly as we continue to push on storage growth.
We're generally drives a higher operating margin so look.
Good progress, but always more to do and we'll update you guys on our long term thinking is.
Analyst meeting here in next month.
Awesome.
Question.
Next question is from Simon Leopold with Raymond James.
Thanks for taking the question.
You did talk earlier about price increases, but what im assuming.
Particularly within the CFT segment.
Youre shifting your mix towards your higher profit higher price products and that's a tailwind. So just trying to understand how much of that is.
Revenue trend the revenue growth is driven by mix versus price increases.
If you could just help us break this down.
In terms of kind of what sustainable here and what are the key factors on the overall growth assume it's not just about more unit. Thank you.
Hey, Simon look I think.
Good think about it like this so.
<unk>.
You know having been around this business for a while that.
Some of the Tru dynamics within the business are going to be generated based upon what's the component cost environment and so they will.
No.
Move.
As component cost move right now with the higher input costs. We've raised prices. So yes that does have a <unk> impact.
So we do expect some favorability coming through the tier from Tru is as we look into Q3 and probably into Q4, just given the component cost environment.
Having said that we're also bullish on demand right with what we know today. So we do expect the demand environment to remain.
Favorable absent some sudden change.
So again I think it is going to come down to as you as you're trying to think your way through how do I think about revenue in the future at least in the near term is going to come.
Come down to the shipment mix right and that's the thing that we're continuing to work through in all transparency is the supply chain team continues to work through.
<unk> cost shortages and what they can get into and what does that look like so you know not.
That's about the most straightforward.
Forward answer I can give you right now which is look yes, tru should be somewhat of a benefit.
But the mixed dynamics from the shipment is going to be what's going to really sort of move we will decide how the P&L shake out and we feel good about what we can get done in Q3, hence the guidance. We gave you and we'll update you on Q4 at the appropriate time.
Hey, Thanks Simon.
We will now take our final question from Jim Suva with Citigroup.
Thank you and a lot of my questions have been answered. So I'll just ask one question and that's a follow up on the storage side, you talked about different and.
Segment, you feel pretty proud about and pleased about but when you look at the overall.
Numbers, they look pretty disappointing relative to.
Your competitors out there. So the question is are you guys like disengaging in quite a few markets and we should be aware.
At that or are what you're talking about small slices that youre doing okay. At are those early green shoots of what yet gets to come in the future.
Let me work my way through that Jim So the 17% growth that I mentioned is in the biggest part of the storage market. It represents.
60% of the revenue the mid range.
The price bands that cover 25000 to $250000 that we grew that 17% in the quarter. The third consecutive quarter that we've had growth in the mid range on the back of our new product power store, which we've talked about is a game changer.
In the mid range and it's proven to be that to date, we're excited fastest growing product we've ever launched its first five quarters, we have a growing customer base and we have repeat buyers good science.
Hyper converged.
<unk> fastest growing space and storage will.
We have the privileged position of being the market leader.
Our combined product with Vmware VX rail grew 34%. So the two most important marketplaces mid range and the new two tier architecture modern architecture, we're the leader and we're growing and we're growing at.
Or a faster rate than our competitors in those spaces, but I mentioned before is in the high end, where we have the privileged position of having a share position of in excess of 42% debt market is declining it's cyclical in nature last first half. It grew this first half it's not growing.
That business.
We're obviously exposed to a large percentage of that business being the market share leader with 42 plus percent share is declining and we are declining like the market is declining I hope that helpful color to it.
Alright, I appreciate it Jim appreciate it Jeff Thanks to everyone for joining look forward to seeing you all at our securities Analyst meeting.
It'll be virtual it will be on September the 23rd in the morning, and additional details will continue to head your way. So thanks again take care.
This concludes today's conference call. We appreciate your participation you may disconnect at this time.
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