Q4 2022 Dell Technologies Inc Earnings Call
[music].
Good afternoon, and welcome to the fiscal year 2022 fourth quarter and year end financial results Conference call for Dell Technologies, Inc.
To inform all participants this call is being recorded at the request of Dell technologies is broadcom.
And is the copyrighted property of Dell Technologies, Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies, Inc is prohibited.
<unk> prepared remarks, we will conduct a question and answer session. If you have a question simply press Star then one on your telephone keypad at any time during the presentation I'd like to turn the call over to Rob Williams head of Investor Relations. Mr. Williams, you may begin.
Thanks, Erica and thanks, everyone for joining US with me today are Jeff Clarke, Chuck Witten, Tom Sweet and Tyler Johnson, our earnings materials are available on our IR website and guidance 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 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 in our web deck and press release.
All financial numbers in our earnings materials are now presented on a continuing operations basis, unless otherwise noted see appendix C. In our presentation for a recast of our P&L numbers.
Growth percentages refer to year over year change unless otherwise specified.
Statements made during this call that relate to future results and events are forward looking statements based on current expectations actual.
Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and SEC filings, we assume no obligation to update our forward looking statements during.
During the call today, Jeff will recap FY 'twenty to the demand environment heading into FY, 'twenty, three and supply chain dynamics in PSG.
Chuck will cover ISG, and our growth initiatives and Tom will cover our Q4 financial results capital allocation and guidance now I'd like to turn it over to Jeff.
Thanks, Rob FY 'twenty two was a historic year for Dell technologies in fact, the best in our company's history, we reached more than $100 billion in revenue and grew 17% a huge achievement for a company of our scale and ahead of our long term value creation growth rates and our opportunity continues to.
Grow as we look ahead to FY 'twenty three.
We are more vital than ever to our customers in an expanding market fueled by digital transformation.
It investments remain a top priority for our customers as technology has become even more essential to their business. It is how you turn data into insight and action into better customer experience and competitive advantage.
Customers also want choice and a trusted partner.
Our position at the center of our customers' digital agenda.
And at the center of the technology ecosystem makes del the logical choice.
You can see and how we're winning with the customers like the Miami Dolphins.
<unk> and Vodafone with the world's largest reinsurer Munich re and one of Indias largest manufacturers green panel across data storage hyper converged infrastructure and in adjacent opportunities like multi cloud as a service edge and telecom.
We are continuing to gain share in our core businesses and these emerging opportunities where we can bring our advantages to bear we are.
Have differentiated ourselves through consistent performance across different economic environments unprecedented challenges and unforeseen events and we have leaned into new opportunities always with an eye toward our customers in FY 'twenty two we delivered record revenue of $101 2 billion.
Record operating income of $7 8 billion.
Diluted EPS of $6 22.
And record cash flow from operations of $7 $1 billion truly a record year.
In Q4 was no difference, we saw 17% growth in demand of our products and services in the quarter with broad growth across geos industry vertical and business units.
As a result, we delivered record revenue up 16% operating income was a record up 1%, but slightly below our November guidance as we optimize our performance based on customer needs parts availability and backlog dynamics being trusted partners to our investors and lenders as well as our customers is important to us.
<unk>.
And in FY 'twenty, two we unlock shareholder value by.
The spin of Vmware.
Simplifying our capital structure deleveraging our balance sheet.
Turning to investment grade ratings.
Proving a share buyback program for up to $5 billion and today announcing a quarterly dividend and an initial annual rate of $1 32 a share.
Now, let me shift gears and share a little color on the current supply chain dynamics and then we will move into <unk> performance.
Yeah.
The global supply chain shortage of semiconductors, and global logistics challenges for goods and components continues to impact just about every industry.
We are still experiencing shortages of integrated circuits across a wide range of devices, including network controllers and micro controllers that go into our products and solutions. The result, we are seeing an impact across client systems servers and storage and.
In addition freight costs have continued to rise due to increased logistics rates, a higher mix of air due to Ocean network congestion and increase in part expedites to meet customer needs.
We have reduced our PC backlog over the last two quarters and it is nearing the high end of its normal range. However.
We expect PC backlog to grow in Q1 are higher margin ISG backlog increased again in Q4 to a record level due to a combination of very strong demand and.
And the lack of component availability.
We expect our ISG backlog to remain elevated through at least the first half of the year as part shortages continue as we head into Q1, we do expect component cost to improve with modest deflation while freight costs remain elevated.
We are awaiting information from the recent NAND contamination announcement from <unk> and western digital to evaluate the impact on Dell.
Our supply chain speed agility and flexibility has enabled us to meet customer needs in this environment, though challenges remain.
And our supply chain continues to be a durable competitive advantage as we navigate the unprecedented supply uncertainty.
Turning to <unk>, our PC business logged another record year, we delivered record revenue of $61 5 billion up 27%.
Record operating income of $4 $4 billion or seven 1% of revenue.
Record unit shipments of $59 3 million units in calendar 'twenty, one up 18% growing faster than any of the top III.
In calendar year 2021, commercial share growth was up 70 basis points more than any of the top three and has now been up 470 basis points over the last five years.
Turning to Q4, we delivered our sixth consecutive record <unk> revenue quarter was $17 3 billion up 26% with healthy demand up 21%.
Operating income was a record of $1 $2 billion, we shipped a record $17 2 million Pcs in calendar Q4 up 9% and now have gained share in 32 of the last 36 quarters.
Our leading innovation continues to build a strong foundation for future <unk> results.
We won 47 awards at CES in January where we introduced our new Xps 13.
Our thing is ever gaming notebook, the alienware 14, and an advanced commercial notebook concept built around sustainability recyclability and reuse.
Hybrid work learning shopping Socialising entertainment and travel is all here to stay.
And we expect commercial PC and premium consumer growth in FY, 'twenty, three, albeit moderating rate relative to a record year.
Clearly <unk> had a fantastic year, and we are well positioned heading into FY 'twenty three as the client systems Tam has reset to a higher level.
I am very proud of our FY 'twenty two results.
Our team and the accompanying the culture, we've created and I'm incredibly excited about the road ahead with all of you. We expect another year of growth as we modernize the data center with automation and intelligence deploy at the edge and simplify multi cloud for our customers and with that I'll turn it over to Chuck for some color on ISG and our.
Initiatives Chuck.
Thanks, Jeff FY 'twenty two was indeed, one for the record books were in a privilege strategic position. We ended the year with great momentum and we're incredibly optimistic about FY 'twenty three and beyond turning to full year ISG results fiscal 'twenty. Two revenue was $34 4 billion up 4% for the year and underpinned by four consecutive quarters of <unk>.
<unk>.
Widespread digital transformation continues to accelerate growth in infrastructure spend and we are encouraged by growing demand across our portfolio of ISG solutions, specifically FY 'twenty two storage orders grew at the fastest rate since the EMC acquisition and all geographies grew storage for the year midrange storage orders were up double.
<unk> digits, and FY 'twenty, two and power store remains the fastest ramping storage product in our company's history and demand for our leading server products accelerated over the course of the year, culminating with record server demand in Q4, ISG operating income was $3 7 billion flat year over year as both ISG revenue and margin were gated.
By supply constraints and corresponding backlog growth as Jeff highlighted we will continue to navigate the challenging supply environment with our differentiated business model, our advantaged supply chain, our product design flexibility and our unique direct go to market, which creates a high quality demand signal and gives us the ability to shape demand to where we have supply.
Turning to Q4, our final fiscal quarter of FY 'twenty, two was a microcosm of isg's year with strengthening demand across our storage and server portfolios ISG demand was up 17% with revenue up 3% to $9 2 billion storage demand growth was up for a third consecutive quarter and in the high single.
<unk>.
Our leading storage portfolio, where we're number one in high end mid range entry unstructured object, all flash HCI and data protection enabled us to capture growth across a variety of storage architectures and customer sizes for.
For example, we saw double digit demand growth in the high end driven by select enterprise customers, 25% demand growth for our unstructured storage solutions and 8% growth for HCI, Despite a tough year over year comparison.
Within mid range power store demand continued to ramp in Q4 up 34% sequentially and now approximately 50% of our mid range sand mix encouragingly, 26% of power store buyers are new to Dell storage and 29% were repeat buyers important leading indicators of future growth.
Servers and networking revenue was up for a fifth consecutive quarter up 7% storage revenue was roughly flat year over year due to the aforementioned backlog build and storage software and services content that gets deferred and amortized over time.
ISG operating income was $1 1 billion down 7% due primarily to backlog growth component inflation and logistics costs. We continue to take pricing actions to mitigate cost increases the component shortages and turbulent logistics markets remain risks that we are actively managing.
In summary, FY 'twenty two was a solid year for ISG as infrastructure markets rebounded. The business returned to growth are leading indicators of server and storage demand. We're ahead of revenue and our integrated business model continues to deliver despite challenging supply dynamics ISG is poised for a strong FY 'twenty three given the momentum in the <unk>.
<unk>, Tom will share thoughts on forward guidance in a moment.
Before handing over to Tom Let me touch briefly on our priority growth initiatives at our September analyst meeting, we highlighted multiple growth opportunities, both inside and outside our core business, including over $650 billion Tam adjacent to our core where our asset positions and durable competitive advantages give us the right to win.
These are distinct markets like edge and telco, but also growth opportunities like our apex branded as a service solutions that provide a modern consumption experience to our customers.
Customers can buy our solutions subscribe to our solutions and select from different types of services, including fully managed service offerings, depending on their needs.
<unk> 22 was an important year as we launched solutions in these spaces engage customers and made investments have positioned us for future growth. We were pleased with our strategic technical and commercial momentum in these businesses in particular, we saw rapid acceleration of our apex flex on demand subscription offering as the year progressed and important market indicator that our apex.
Strategy is resonating with customers. We also delivered a steady stream of innovations and customer wins, an edge in telco in FY 'twenty, two giving us conviction in our long term strategy noteworthy in Q4 was the expansion of our apex cloud services portfolio with two new offers apex multi cloud data services, which deliver store.
<unk> and data protection as a service with simultaneous access to all major public clouds through a single console. The solution allows customers to access to cloud services. They want while maintaining control of their data on premise avoiding lock in and egress fees and enabling customers to meet regulatory and compliance requirements and apex.
Backup services, which provides scalable secured data protection with centralized monitoring and management for SaaS applications endpoints and hybrid workloads. The solution offers all in one protection with backup disaster recovery and long term data retention and 100% SaaS based offering with no infrastructure to manage.
FY 'twenty three will be about continuing to push the innovation agenda in apex telco edge and multi cloud as these growth initiatives become more financially material. We will provide more detail in closing we enter FY 'twenty, three and a solid demand environment across our businesses and with a lot of confidence and with that I will turn it.
Over to Tom.
Thanks, Chuck and.
In Q4, we delivered record revenue of 28 billion up 16% driven by another record quarter for <unk> and continued growth in ISG with demand for servers and storage while ahead of revenue.
Gross margin was five 8 billion flat year over year at 28% of revenue.
Gross margin as a percentage of revenue was 320 basis points, lower primarily due to higher than anticipated component and logistics costs and higher <unk> mix.
We continue to take pricing actions to manage the impact of commodity and logistics cost variability.
Part shortages in supply chain risk remain across the economy, and we expect to ISG backlog to remain elevated through at least the first half of fiscal 'twenty three.
Operating expense was $3 6 billion roughly flat year over year at 13% of revenue with the full year of fiscal year 'twenty two opex rate at 14, 7%.
We continue to invest for long term growth, but did benefit from lower compensation and benefits in the period.
Looking ahead to fiscal year 'twenty, three we expect opex as a percentage of revenue to be slightly higher than fiscal year 'twenty two as we invest in the business employees returned to work and we engage in more business related travel.
Operating income was a record $2 2 billion up 1% at seven 8% of revenue.
This was slightly lower than our November guidance, given the impact of supply chain disruptions.
Net income was $1 4 billion up 2% with growth in operating income and a decline in interest expense due to the reduced debt balances offset by an increase in our effective tax rate.
Our tax rate was 25, 1% higher than we expected at the time of our Q3 earnings call. The higher rate was driven by corporate transactions, including the refinancing and Tinder, we executed in December .
The combined effect reduced income in higher tax jurisdictions, resulting in lower utilization of available tax credits.
The total tax impact was a reduction of approximately 19 to diluted non-GAAP EPS.
Fully diluted EPS was $1 72.
One, 2% with diluted share count increasing to 810 million shares as a result of the Vmware spin.
Adjusted EBITDA was $2 7 billion up 3% at nine 6% of revenue and was $9 7 billion up 12% for the full year.
Our recurring revenue is approximately $5 billion, a quarter up 12%, our remaining performance obligations or <unk>.
As approximately $42 billion.
Up 20% and includes deferred revenue plus committed contract value not included in deferred revenue.
Dell financial services originations in Q4 were $2 7 billion up 12%.
<unk> ended the quarter with $13 5 billion in total managed assets.
Turning to our cash flow and balance sheet, we generated strong cash flow as our cash flow from operations was $3 1 billion in Q4, mainly driven by topline growth and $2 7 billion of adjusted EBITDA.
Q4, adjusted free cash flow was $3 billion.
We are happy with the disciplined management of our working capital, although we continued to see higher inventory levels, given the supply chain dynamics and component availability.
We expect inventory balances to come down as the supply chain situation improves over the coming year.
We repaid $10 $6 billion of debt in Q4 funded primarily with $9 3 billion and Vmware dividend proceeds and retired $1 7 billion and existing long dated high coupon notes funded through to two 5 billion in new bonds and balance sheet cash.
The refinancing activity will save approximately $70 million in annual interest expense, we exited Q4 with our core debt balance of $16 $1 billion.
And our cash and investments balance of $11 3 billion.
Turning to capital allocation as we have previously mentioned, we intend to return on average 40% to 60% of our adjusted free cash flow to shareholders over time.
We repurchased 11 6 million shares of class C common stock in Q4 totaling $659 million.
And our intent is to continue buying shares going forward programmatically as we manage dilution and Opportunistically return capital to shareholders consistent with our capital allocation framework.
Additionally, since the end of Q4 and through the close of business last Friday, we have repurchased an additional $4 2 million shares for $248 million.
Program to date, we have repurchased approximately five 4% of the outstanding class C common stock.
To complement our share repurchase program. Our board has approved a Q1 dividend of <unk> 33 per share.
We expect the cash impact of our quarterly dividend payments to be approximately $1 billion.
Our roughly $1 32 per share for the full year.
And we expect to have the opportunity over time to grow our dividend at least consistent with our long term EPS growth in each case subject to future board approvals.
For more details on the dividend announcement. Please review today's press release and form 8-K.
Alongside capital returned to shareholders, we will continue to invest in the business delever toward our one five times gross core leverage goal and pursue targeted M&A.
Before I provide thoughts on Q1 and full year guidance I would like to invite just back for a few comments on Ukraine.
Thanks, Tom regarding Ukraine, first and foremost.
Our thoughts are with those families who have lost loved ones and all who are impacted our top priority. At this time is supporting our Ukrainian team members as they attempt to relocate to a safe and secure environment. We are closely monitoring things and are working with employees to address their personal and family situations.
As for business operations in the region the situations rapidly evolving and we will share more details as they become available back to you Tom.
Thanks, Jeff.
Turning to Q1 and fiscal year 'twenty three we're optimistic about the overall macro economic environment with global it spending projected in the mid single digits.
Digital transformation is a top priority for our customers and it is fueling our growth as our customers look to <unk> as their partner and their multi cloud journey.
Against that backdrop, we expect Q1 revenue between $24 5 billion and $25 7 billion.
11% at the midpoint with CST and ISG growing.
For non-GAAP tax rate, you should assume 20% plus or minus 100 basis points driven by higher overall U S tax on foreign earnings and lower interest expense going forward.
This guidance assumes U S rates are not affected by any tax reform.
And based on my earlier share repurchase commentary, we expect Q1 diluted share count between 785 to 790 million shares.
Netting this out we expect non-GAAP diluted EPS in the range of $1 25 to $1 50 up 2% at the midpoint.
I recognize that our EPS range is slightly wider than normal, but given a more dynamic component availability and logistics environment and elevated backlog, particularly in ISG.
Believe it as appropriate.
For fiscal year 'twenty, three we're coming off a very strong year with record performance in fiscal year 'twenty two as a starting point, we suggest you align fiscal year 'twenty three financial expectations with our long term value creation framework and we will provide an updated perspective on the year as we move forward.
As a reminder, that's revenue growth in the 3% to 4% range and EPS growth at 6% or better over the long term. We also expect to deliver solid free cash flow and returned significant capital back to shareholders with our announced dividend and share buybacks.
As we think about Ukraine, I will reiterate that first and foremost our thoughts are with everyone who has been impacted in support and supporting our team members in region as we closely monitor the developing news there.
While our direct revenue exposure to Ukraine, and Russia is minimal on a percentage basis. It is too early to determine any broader potential impact to our Q1 guidance and our initial thoughts on fiscal year 'twenty three.
In closing, we delivered an extraordinary year with record revenue operating income EPS and cash flow, we delivered significant shareholder value through the spinoff of Vmware the sale are booming and discipline and consistent debt pay down resulting in an investment grade rating.
We also introduced a comprehensive capital allocation framework and began shareholder capital return actions with share buybacks and the announcement of the dividend.
We remain focused on executing our strategy to consolidate and modernize our core and build new growth engines that enable our customers multi cloud future, while delivering revenue and EPS growth with strong free cash flow to our shareholders over time.
With that I'll turn it back to Rob to begin Q&A.
Thanks, Tom Let's go to Q&A, we ask that each participant ask one question to allow us to get to as many of you as possible Erica can you introduce the first question.
We will take our first question from Shannon Cross with Cross research.
Thank you very much for taking my question.
If you can talk about how in general how youre managing price increases and given the pressures youre seeing on components.
Obviously.
Geopolitically and everything that's going on right now.
How should we think about timing of the benefit of these price increases to winter, both ESG and ISG.
And also if you could talk about whether or not you think the moves will be sufficient enough to offset inflation and the component costs or is there some.
Alright, maybe nobody knows but at some point you start to see some pushback.
Pushback because of the elasticity of demand. Thank you.
Hey, Shannon let me.
Let me chat a little bit about that then I'll ask Jeff and potentially Chuck talk to weigh in as well. So look in general as you think about management.
Price increases what we have been doing as we see costs that are that have been moving upward on us effectively given the volatility we're seeing particularly in the semiconductor space and the dynamics of when parts are arriving at our various factories.
We have been adjusting prices as appropriate I think part of the dynamics that we're seeing right now though is that given the fact that we do have elevated backlog.
Any price increases youre seeing are generally somewhat muted as you think through the impact to the P&L given that its got to flow through backlog and so to the extent you have elevated backlog, which we clearly do in ISG and we're at the upper end of what we would characterize as.
The new normal and CST.
It's going to be a bit of a headwind in terms of the pricing activities.
Ultimately manifesting itself in the P&L, but our perspective is this look.
To adjust prices as appropriate we're always mindful of the market dynamic to your point around elasticity.
But we're also in an inflationary environment, which we're in and we see that across.
Multiple.
Multiple industries.
You would all know.
Appropriate that we adjust readjust pricing and make sure that we're getting appropriate value for our solutions, Jeff or Chuck I don't know if you would add anything to that.
Maybe a couple of comments Shannon one is as we look at total input costs. We just went through an inflationary period in Q4, we think component costs go down slightly.
In Q1, offset by a flat to probably slightly increasing logistics costs to move material around to the factories when they are delivered.
One of our biggest challenges that we've been working through is chasing those costs that are associated with the volatility of the uncertainty of when part show up out of factories that we can move them to our sub assembly facilities to turn them into finished products.
That volatility if you will or uncertainty that were.
Certainly as catching us a little bit maybe.
Surprised we didn't see as much expedites and moving material around which led to some of the compression in gross margin that we've talked about and so it's that precise thing that we're trying to get even more accurate about when you look at the pricing environment that we're operating in today as.
As costs go up it's being transferred into price, whether that's commercial Pcs, whether thats the premium consumer side of our business. We're seeing the same thing broadly across the server.
And the same is true on our storage base.
That cost is being transferred into price as efficiently as we can where we understand it and it could be planned for and mindful. It said volatility and uncertainty that is I don't know if thats the right word to describe it.
Planned for it and we're responding as fast as we can and the higher levels of backlog, it's less efficient at capturing it I hope that helps.
Okay. Thank you, yes, thanks Shannon.
Well take our next question from David Ross with UBS.
Great. Thanks, guys for taking my question. So just maybe when we think about the context of the full year from a demand perspective, and all of the different moving pieces from a supply chain.
I think Tom.
And Jeff and Chuckle I mentioned, the second half of the year at the earliest youre going to see some improvement is.
Is that sort of underpinning some of the long term framework sort of reiteration that we're thinking about it.
And if so is.
Is there a way to quantify potentially what that revenue impact is from supply chain right. Now I know, it's sort of a difficult question to answer, but just trying to get a sense for.
How revenue is being held back by the supply chain at this point.
Hey, David I think you have to think about it like that and.
As we think about the year right now and let me reiterate that we're optimistic about the year from a demand environment perspective, with what we know today.
That we do expect.
The guidance I gave you around Q1 revenue in a mid point of 11% year over year growth.
We will continue to work our way through the supply chain dynamics, but particularly within.
First with ISG, we do expect those headwinds to be with us at least through the first half of the year.
And so.
So I think you've got is related as we laid out the long term guidance for you.
I want you to think about how your sequential interact as we go through the year, but I think a good starting point is the long term framework and clearly as the situation.
Becomes clearer in terms of the logistics dynamics and supply chain that we're seeing and we'll update you. The other point I would like to make is around <unk>.
We've talked about ISG backlog.
Being an elevated level I, we do expect quite frankly, a little bit of headwind in the <unk> space in Q1, with particularly with desktops given some of the component shortages were seeing so.
Those are the navigation that we're going to have to do as we work our way through the first quarter and quite frankly, I think the first half, but optimistic about the year.
And as you work your way through your modeling I think just keep in mind that.
The concept of perhaps normal sequential arent quite as.
It's been a few years of variability as we've worked our way through the year, but again I think the year as we see it today, we're optimistic about the full year framework that we've laid out.
Hi.
Thanks, David.
Thanks, Rob.
We will take our next question is from <unk> Mohan with Bank of America.
Yes. Thank you Jeff you noted growth in commercial PC and premium consumer or to continue into fiscal 'twenty. Three I was wondering how youre thinking about the growth. How concerned are you about inventory levels I know you noted that.
<unk> backlog is expected to improve.
<unk> here in the near term and.
Any help you can give us about how youre thinking about ASP trends as well given given the moving pieces on the commodity environment. Thank you.
<unk> I think that was.
Different questions I'll try to get to.
So first of all if we step back and we look at the environment.
We've just gone through three consecutive years of growth getting the PC industry back to roughly 350 million units in the Tam. We believe has been reset and if you look at where a large percentage of that growth has come from it's come from commercial Pcs and consumer Pcs.
Generally an area that we're very strong in commercial Pcs represent roughly 75% of our revenues.
Our view is those two premium sectors continued to grow in.
Count on calendar 'twenty, two our fiscal 'twenty three we have commercial Pcs growing mid single digits, and we have premium consumer Pcs growing low single digits.
We obviously expect to take share on top of those numbers, where the pressure will be is in low end and mid consumer price bands and in chromium.
Heard us probably talk about this not all units are created equal some units are more valuable than others. We believe we play in the most valuable space commercial Pcs and premium consumer Pcs.
So we're optimistic that we grow those valuable sectors of the market grows and those valuable sectors and we can continue to be a consolidator there.
We look at the ASP.
Key trends of the ASP trends have continued to move up as the commodity basis been inflationary.
And then clearly what I've mentioned earlier the increased cost in moving material moving parts associated with logistics costs have certainly driven a pricing action as well.
The pricing environment that we see today that I mentioned, a little bit earlier is there is pressure as inventory levels come back to norm on.
Mid range to low end consumer price bands and the new chrome.
We still see challenges in getting all of the material for the premium price points and consumer and in commercial so that's why Tom just made a reference for example in desktops and displays we actually see backlog building.
Demand ahead of supply if you will in Q and as we've spent the last two quarters, reducing the backlog of RPC business and in terms of absolute inventory. We've continued to take material. We know that we need because if you don't take it it's going somewhere else that environment largely exist and the most valuable <unk>.
<unk>.
Think I got all of those answered.
Well done Jeff.
Your next question comes from the line of Tom <unk> with Bernstein.
Hi, its Tony Carnegie.
Hi, Tony.
I've had my last name mass occurred a lot, but now my first name.
Thanks for taking the question I just wanted to Peel back the guidance a little bit more so if I look at Q1, youre guiding for down about 11% sequentially, you're typically down a tightening because the average over the last five years.
It sounds like Youre going to build backlog and Pcs are you anticipating that your.
Your ISG backlog is also going to grow or is there or is it.
It solely attributable to Pcs, and then again thinking about the full year, if youre guiding for 11% growth in Q1.
And you have kind.
Kind of normal seasonality in Q2, it calls for negative growth in the second half.
And it sounds like ISG will get stronger over the course of the year. So that means pretty negative growth in Pcs overall is that the message you're trying to communicate or what's wrong with my logic there.
Yes look I don't think we see negative growth in Pcs overall toning.
I think the second half.
Right.
I just think as I.
I said, we expect ISG and CSC to grow in Q1, yes, there are headwinds and we do expect ISG backlog to expand in Q1.
And with what we understand about PC component availability, we do expect.
Some PC backlog growth Thats the reason for some of the caution.
One and the revenue dynamics I gave you, but more importantly in some of the EPS spread that I gave you just given some of the variability that we see.
As we work our way if you think about sort of the midpoint of that guidance.
I think that we see positive growth through the remainder of the year overall with what we know today. So we can we can.
Can take this offline from a modeling perspective.
That's our thinking right now we are optimistic about the year the trends are in our favor. There is some short term navigation, we need to do with the supply chain dynamics.
Alright, Thanks, Tony.
We will take our next question from Jim Suva with Citigroup.
Thank you I just have one question and that is you commented in your prepared comments about assessing the western digital situation I just wanted to get some color.
Assume it's not that you got some contaminated bad drives.
Onto your inventory into the system I assume you have some more to do with <unk>.
<unk> availability and maybe even pricing is that right and I assume.
Now that you have more than one supplier for that kind of what you buy those commentaries about one quarter's outcomes. Thank you happy to answer Jim Yes, we have multiple partners in the world, our NAND and SSD for both client and enterprise class products.
The reference that I was making is the announced it by two and.
And western digital about the contamination that occurred in their factories.
Which means product in the factories today is contaminated and sometime in the future. There is going to be a gap typically when there is a gap of supply in a commodity that is.
And great demand do you see pricing pressure.
So what we're trying to communicate is.
Unknown of a reasonably large size those two companies represent a large percentage of output and that output is at risk with the contaminated factories that will have a supply impact in the future and we're just signaling that going forward I hope that I answered I think I did.
That was great color. Thank you so much for the details my pleasure alright, Thanks, Tim.
We will take our next question from Simon Leopold with Raymond James.
Thanks for taking the question.
You've made this comment about having drawn down some of the backlog in Pcs, but then expecting backlog.
To build after the quarter and I guess I'm trying to really split hairs and understand is the.
The rebuild up a backlog the result of demand or supply constraints or a combination if you could unpack, what's leading to backlog rising again. Thank you.
You want may take us once you start to ethanol if you look at each of the categories. What we're signaling is the semiconductor shortage that we've been talking about for a long time persists.
Trailing nodes, whether it would be a 40 nanometer node at 55 nanometer node 16 nanometer node et cetera, a plethora of parts that go across all of our devices continue to be in short supply the output of that supply is non linear.
Meaning it sometimes it comes in sometimes it doesn't sometimes it shows up on time, sometimes its delayed working through that and taking advantage of our assembly capacity is ultimately the challenge in timing and the optimization that we're running through so what we're signaling is that semiconductor shortage continues to hit our <unk>.
Most notably in our high end display business and desktops as Tom called out.
And demand, we see demand continuing and our supply is short of that demand, hence the backlog growth on the server side same sort of thing with network controllers in Microcontrollers and power Ics those have been the ones that I've called out into the past they continue to be in short supply and demand is.
Head of that supply, hence the backlog build and then a very similar trend, which we saw in Q4. We believe continues through the first half of this year.
Notably around the FPGA and <unk> all of the high speed programmable logic devices that are in those controllers that we need again.
Demand ahead of supply backlog built up.
So that's what we're signaling we're signaling I think in Chuck's remarks, and my remarks growth in our businesses.
But it's a challenge but the supply.
So just to paraphrase to make sure we all understand demand is stable supply chain worse.
Sure.
Supply chain continues to be challenged.
Its pretty dynamic there's a fair amount of uncertainty it has worsened in Q4 and servers and in storage. We think that continues into the first half and after two year two quarters excuse me of backlog burn down on the PC side.
These categories have displays and desktops has worsened.
Thank you.
Welcome.
Thanks.
Next question Erica.
We will take our next question from Amit <unk>.
With Evercore.
Thanks for taking my question I guess, one as well.
If I think about the EPS growth in fiscal 2003 in front of them.
Long term playbook of six months.
How does that break up you think in 2018 between stock buybacks versus operating profit dollar growth and maybe on that operating profit dollars. Maybe you could just talk about do you.
<unk> and Iot modules.
We up in 23 of what other puts and takes that that'd be helpful.
Yes, Hey, Amit as it relates to the EPS growth that we chatted about are 6% plus right. So look I think you've got to think about like this when we introduced if you remember the capital Alex as you recall, our capital allocation framework, which is 40% to 60% shareholder capital return.
Through a combination of share buyback and dividends.
Obviously, we've enacted that we are we are using the share buyback program to manage dilution principally coming out of the LTI programs and the.
And the dilution that came out of the DMR spin and so.
From our perspective as you move forward.
If you think about our Q1 guidance for instance.
I do think that you should expect that we're in the quarter somewhere around $785 to 790 million shares from EPS or share count perspective.
And then we'll be somewhat programmatic as we move forward.
And so well.
I don't want to get into forecasting share buyback I will tell you that we will be we will be thoughtful about how we do that.
We do expect.
As it relates to operating profit margin look I think overall on a.
On a.
And overall annual basis somewhere in the.
I think if you look at consistently we've been around 7778 over the last number of years from an Op Inc perspective.
I think we're probably somewhere.
707, maybe slightly right around that range as you look for the year I don't want to get into.
Overall op margins by business, that's not something we give guidance on but I will tell you that look I mean part of what's going to be interesting for us as we continue to.
Drives storage demand there is opportunity for operating margin in ISG to continue to expand.
Obviously from a <unk> perspective, the last couple of years have been quite strong from an operating margin perspective more historically they have not been quite as strong. Some of this very there'll be some variability this year as we work our way through supply chain the.
The mix of the business and the demand dynamics, but overall, we think.
Profitability should be reasonable.
Alright.
Thank you.
Yeah.
We will take our next question from Rod Hall with Goldman Sachs.
Yeah, Hi, guys. Thanks for the question I just wanted to ask about the the implied margin trajectory into fiscal Q1, and the guidance it looks like youre guiding at least down at the EBT level that margin down a little bit and I wonder.
Whether at least you'd be willing to say that that's kind of where you see the bottom on margins or do you think there is potential for margins to deteriorate further than I have a follow up to that.
Hey, Rod I would think as you think about.
Our guidance for Q1 I think.
If I walk the P&L for you a little bit we gave you a revenue range, obviously of 24, 5% to $25 seven.
We did talk about a tax rate of 20%.
I gave you some indication of where we think opex needs is probably going to trend in <unk>.
For the year, but I would think in Q1, that's pretty consistent as you bring opex up.
From that 14 seven.
By roughly call it.
40, 40 basis points 40 to 50 basis points as we move through the year and.
And then you think about the EPS I gave you <unk> gotten the tax rate I think interest and other is an area that we should chat about quickly just because if.
If you did Q4 times four given the amount of debt repay you get somewhere around a $1 3 billion.
Interest and other.
I do think there'll be at some point during the year, probably later in the year as we continue to focus on Delevering as we've talked about Trinity moving to one eight times down to one five times quarter core leverage.
We will do some debt repayment, that's probably since I've used I don't have any more pre payable debt, that's probably somewhere there's there'll be a make wall premium there so somewhere in the probably safe to say somewhere in the $150 million to $201 million for the full year.
And also you are closer to one five I think if you put all of those pieces together, we're going to come up to an operating.
Gross margin in Q1, that's slightly higher than where we ended Q Q4.
Given some of the mix of business as we look at it today. So that's.
That's generally how we're thinking about Q1.
Hey, Brad.
Try and keep moving here just in the interest of.
Folks get on the call for a question. So I appreciate your questions. Thanks, Rob.
You bet.
We will take our next question from your next Chatterji with J P. Morgan.
Hi, Thanks for taking my question My question was on the <unk>.
Our relationship with them you said the relationship here if im doing my math right. It does look like the revenue strong leading to the profit line.
Operating loss in the quarter of about $17 million or so so just wanted to check if I'm doing the math right.
Is that the bookings run rate, we should be assuming going forward or is there's some seasonality that we should be mindful of and quickly how to think about getting back to a positive run rate in the future.
What we.
We should be thinking about.
Yeah, Hey, Nick it's.
70 is whats the total of that other business, which includes both principally Vmware resell also has <unk>.
Virtually stream and secure works in it.
I think on the broader frame in terms of Vmware and what that resell relationship looks like we've spent the last five years growing that business and that relationship with Vmware and we've taken.
Vmware revenue.
The Dell contribution of Vmware revenue up to somewhere roughly sort of in the 30 mid 30% range in terms of the Vmware total contribution.
As we've talked about in the past.
Our focus over that last period of time was about velocity of Vmware and in terms of.
Driving revenue and margin.
On the Vmware solution capability, so with that said as we now have.
Separated if you will through the Vmware spin, we do have work to do on pricing and on.
Working our way through the five years of those Vmware relationships and contracts with our customers and we are focused on resetting pricing and process over time. So I do think that it's going to take us a bit of time to move the needle in terms of the operating loss Youre seeing which just to be fair principally a lot of that is the.
Most of that is the Vmware resolve dynamic.
And so I think that's probably at least.
24 month journey as we think about how do we move that forward.
View it as an opportunity we've got opportunity to improve that.
And drive better profitability, there over time, but that will.
It's going to take it's going to take some work there.
Alright, thank you.
I appreciate it.
We will take our next question from Chris <unk> with Cowen and company.
Yeah, Hi, Thanks for taking my question.
My question is more about like the whole pad.
<unk>.
I've been jetblue.
Charles you mentioned about 2% to 4% revenue growth and given the fact that.
Demand exceeding supply.
On the screen and you kind of missed the gross margin numbers.
Curious like.
<unk> is thought to be known for excellent inventory management.
How much of the demand forecast actually tightened the supply.
With supply.
In fact, the demand forecast at this point thank you.
Alright. Thanks.
Well look I.
Jeff and Chuck should jump in here.
I tend to think about it like that supply is constrained right now but.
Our job working with our work, our selling organization and working with our customers to try and capture demand and bring demand in house.
And make sure we're selling their configurations that we believe we have component availability for so and I think the team does a great job with that and if you think about our model being roughly 50% direct and 50% through the channel we have the opportunity to shape demand.
That said I mean, there are.
Supply constraints throughout the industry.
That are impacting us and are causing incremental cost as Jeff highlighted as given the logistics chain is parts are arriving later and we're having to move product around so there has been some pressure on gross margin and you noticed that in Q4.
Okay, I think that's something that we're pricing for as long as we see it.
Pricing efficiency as long as you have an elevated backlog will.
Is a bit challenging, but ultimately that pricing will manifest itself through the P&L.
As we clear backlog, so look I think overall I think.
As we think about gross margin for the year I do think that our perspective is that it does tend to trend up gradually over the course of the year or not.
But there is work to do to get it there.
I think Tom maybe.
In addition to that is look we spent a quarter looking at the park profile and optimizing shipments taking care of our customers in these amendments.
<unk> to our customers, we know we incurred incremental cost to do that there's no question and we were chasing chasing cost with price and with a building backlog with the demand that we spoke to we didn't catch it but we know we made the right decision in the best long term interest of the company by serving our customers are.
<unk>, our Dell model will work through this this is what our supply chain team does.
Model is differentiated.
We believe the tourist demand signals in the marketplace, we transmit that to our supply chain quicker and better than most in the industry. We're capable of demand shaping with our direct selling model and our product leverage in product development model allows us to move on qualify more material, which is what we've been doing I think we've navigated.
The last two years quite well.
As much as we may be saying backlog wins are headwinds in front of us our supply chain team loves. This stuff. This is what they do and we're going to serve our customers and we will find a way to overcome.
Sure.
Okay very helpful. Thank you very much.
I appreciate it Greg.
We will take our next question from Aaron Rakers with Wells Fargo.
Thanks, Thanks for taking the question.
I wanted to ask a little bit about backlog I know in the in the slide deck you talk about I think it was 41 or 42 billion of remaining performance obligations.
And if I look at that number.
Last quarter, I think you actually disclosed that that was 36, but today youre disclosing that was 41, so I guess I'm curious of what the differences if theres a change in the accounting of that and then when I look at that that difference of that RPM relative to deferred that $14 billion. That's up from $9 4 billion a year ago is that.
How we should think about the backlog that you've built and do you think that you exit. This next year at a more normalized backlog level and what would that maybe look like.
Well look hey, Aaron it's Tom So as you think about <unk>.
If I look at Q3 backlog, our Apio I apologize.
It was 41 billion moved to 42 billion right. So.
And when you look at the.
And out of that which is.
We had talked about the fact that backlog build was pretty significant at the end of Q3. What you saw happen. In Q4 was we actually took we were actually able to reduce backlog in the client space, but we built backlog in the ISG space and as you might imagine that has those businesses have different Martin.
And profiles.
One of the sort of constraints or impacts on Q4.
Gross margin and profitability.
That was recorded in the P&L in terms of what's in the <unk> I mean, there is backlog change plus theirs.
Deferred revenue component of that plus.
No.
Long term contracts that we have not yet recognized and deferred revenue, but where we have performance obligations remaining so theres a mix up.
Of.
Types of services and capabilities in there.
And so we can take that we can further grow through that with you if that would be helpful. So yes.
Yes, Okay I appreciate the question, Eric Eric, Let's let's get one last question in here to our newest lead analyst in this space, who joined a little late here.
We will take our final question from Eric Woodrich of Morgan Stanley .
I appreciate it guys. Thank you thanks for fitting me in here.
Maybe I'll just end with Q&A.
With the question on cash flow, maybe how should we think about cash flow growth tracking relative to operating or net income next year I realize you don't guide to it but just any any any qualitative or quantitative thoughts that you can share there and then any specific puts and takes we should be thinking about as we go through the year either on a seat.
That'll basis or just overall for the year.
But that's it for me thanks, guys.
Yeah, Hey look we are.
And Eric Eric is welcomed by the way but.
As we think about cash flow, we don't guide on cash flow, but if you remember our long term.
Financial framework, where you talked about adjusted free cash flow being at least a 100%.
Better from net income I think that trend holds true if you look at our historical performance.
See somewhere around one.
One to $1 three sort of ratios there over the last number of years.
A reasonable proxy to think about for the coming year.
Look I think we do have seasonal patterns in our cash flow I think you I think you realize that Q1.
Typically as are our weakest cash flow quarter, Q2, and Q4 have generally been our stronger cash flow quarters based upon seasonal patterns of revenue in Q3 has been relatively a little bit softer those are historical patterns, having said that I'll tell you that over the last few years some of those patterns have changed.
Just given the how demand has flown in the piceance given the effects of the pandemic, but I think overall, we feel really good about our cash flow generation ability. If you look over the last four years.
Our on average.
We've grown adjusted free cash flow by roughly 9% CAGR over that period of time, while growing revenue at a 6% CAGR and growing EPS at a 16%, 16% CAGR. So our cash flow generation I think is quite strong I think the team has done a nice job of managing their way with the balance sheet or managing and disc.
<unk> and the balance sheet.
And so.
I feel good about our cash flow generation I don't know if Tyler if you'd add anything to that.
Thank you.
Pretty good overview.
Nothing to add alright, alright, thanks, everyone. We'll see you in two weeks and Morgan Stanley in San Francisco, and Raymond James in Orlando and look for information from US on a technology based discussion from Dell technology World in early May that wraps it talk to you soon.
This concludes today's conference call. We appreciate your participation you may now disconnect at this time.
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