Q1 2023 Dell Technologies Inc Earnings Call
Good afternoon, and welcome to the fiscal year 'twenty, one cheap three first quarter financial 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. This broadcast is copyrighted property of Dell technologies incorporated.
Any rebroadcast of this information in whole or part without the prior written permission of Dell technologies is prohibited.
<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, Jim Maria 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 I encourage you to review these presentation materials, which include rich content to complement our discussion. This afternoon guidance will also be covered under that.
It's called <unk>.
During this call unless otherwise indicated all references to financial measures refer to non-GAAP financial measures, which include non-GAAP revenue gross margin operating expenses operating income net income earnings per share 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.
Percentages refer to year over year change unless otherwise noted.
Statements made during this call that relate to future results and events are forward looking statements based on current expectations actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and SEC filings, we assume no obligation to update our forward looking statements.
During the call today, Jeff will recap Q1, and innovation highlights from Dell technologies World, along with the current demand and supply chain environment. Chuck will cover detailed Q1 C. S G and ISG operating performance and Tom will cover our Q1 financial results.
Capital allocation and guidance.
Now I'll turn it over to Jeff.
Hello, everybody thanks for joining us.
Following a record FY 'twenty two we continue to execute quite well in a complex macro environment. We are focused on our long term strategy, while continuing to innovate enhancing existing solutions and creating new ones for our customers for Q1, we delivered a record revenue of $26 1 billion up <unk>.
16% with strong balanced growth across ESG in ISG, we also improved our profitability in the quarter and we will continue to focus on disciplined cost management as a result diluted EPS was $1 84, a record up 36% over the last 12 months, we have generated.
Five $8 billion of cash flow from operations, we are grateful to succeed alongside our customers.
At Dell technologies World customers like Cvs Health, USA, a general motors and Boeing talked about reinventing their processes and their industries, while unleashing innovation productivity and sustainability with Dell as a key technology partner.
We highlighted our role in a multi cloud future announcing a steady stream of innovation that places us at the center of our customers' multi cloud world specifically.
We made a series of announcements that demonstrate the work we are doing to build a multi cloud ecosystem that includes all major public clouds.
We shared project Alpine, which brings enterprise class data services into the public cloud for cloud bursting test and development cloud based analytics data and container mobility.
We are all we are also unlocking the power of data through our partnership with Snowflake. The first of its kind that provides direct access to Dell object storage on Prem and we are including cyber security through <unk> and.
In addition, we also announced over 500 software enhancements to our industry leading storage portfolio.
For power Max the world's most secure mission critical storage, we introduced a new intelligent nvme multi nodes scale out architecture, what isolated cyber vault $65 million immutable snapshots and the industry's first data compression for mainframes.
For power store, we added ease of integration significantly boosted mixed workload performance deepened Vmware integration and added Natus metric zinc replication.
And with power Flex, we have the only software defined infrastructure that skills, almost limitless Lee for compute and storage, while supporting bare metal all hypervisor and file and block storage services on a single platform with increased cyber resiliency and multi cloud extensions.
These software driven innovations, enabling continuously modern storage experience with highly adaptable storage architectures comprehensive cyber resiliency and multi cloud ecosystem flexibility and lastly, we announced a range of apex offers that further expand our subscription and as a service case.
Abilities.
To date, the transition towards multi cloud and a highly distributed architecture is playing out much like we thought it is clear our strategy is resonating across our customers and partner ecosystem.
Turning to the supply chain, we experienced a wide range of semiconductor shortages that impacted <unk> and ISG in Q1. In addition to Covid lockdowns in China caused temporary supply chain interruptions in the quarter as a result backlog levels were elevated across ESG and ISG exiting the quarter, we expect that.
Log to remain elevated through at least Q2 due to current demand and industry wide supply chain challenges Q1 component costs were deflationary across key commodities, but logistics spend remained elevated due to higher rates and a mix of expedited parts turning to Q2, we expect component cost.
Turn inflationary in logistics costs remain at elevated levels.
That all said Dell technologies is well positioned to navigate the supply chain challenges just as we have over the past three plus years. The big picture as we've previously noted we are seeing a shift in spend from consumer and Pcs to data center infrastructure.
Demand is currently healthy however, there are a number of uncertainties out in the broader macro that we continue to monitor geopolitical issues.
Inflation ongoing supply chain challenges chip constraints and Covid shutdowns.
We have shown over the years is that regardless of the environment. We are agile and built outperformed we were able to quickly and lean into opportunities and focus on what we can control executing our strategy for growth innovating for our customers motivating our teams building better communities and delivering for our stakeholders.
And with that I'd like to turn it over to Chuck for a deeper dive into our segment results.
Thanks, Jeff Great to be here with all of you and excited to share the details of our Q1 business unit performance starting with ISG. We delivered another record Q1 was 16% growth at $9 3 billion of revenue, it's our fifth consecutive quarter of growth as widespread digital transformation continues to support growth in infrastructure spend.
ISG profitability was up with operating income growing 39% and operating margins expanding 200 basis points to 11, 7%.
Servers and networking revenue grew 22% and storage revenue grew 9% as four consecutive quarters of demand growth has now made its way into the P&L, we were particularly pleased with the breadth of strength in storage in Q1, we saw storage demand growth across our portfolio, including data protection HCI.
Unstructured entry high end power store, our marquee mid range solution and still the fastest growing storage architecture in company history.
Turning to client solutions CSC also delivered a record Q1 with revenue of $15 6 billion.
Up 17% on top of a strong prior year comp of 20% growth. This was outstanding absolute and relative performance. We gained 190 basis points of PC unit share in calendar Q1 based on IDC results. The most among the top four industry vendors. We have now gained unit share and 33.
Of the last 37 quarters, but as we've highlighted not all PC units are created equal our focus on the commercial segment paid off in Q1 as commercial demand was solid and we saw softness in consumer in chrome as expected.
Commercial CSP revenue grew 22%, while consumer grew 3%.
We also saw continued strength in software and peripherals as customers continue to seek exceptional PC experiences and do anything from anywhere world our market leading display business. For example grew 20% and gained 370 basis points in calendar Q1, According to preliminary IDC data that net.
A strong commercial performance peripheral growth and disciplined cost management with strong profitability. The business delivered an operating margin of seven 2% and we have delivered roughly $1 billion of op, Inc, or better over the last seven quarters.
Looking ahead, we are seeing a rotation in it spending from CST to ISG, Despite economic uncertainty digital transformation and automation efforts are being used to solve the pressing challenges at the moment as technology and business strategies emerge benefiting our infrastructure business, we expect ISG growth for the full.
Fiscal year.
And Pcs are now a C suite issue and the world of hybrid work and in a fiercely competitive talent market. The PC as the gateway to the employee experience and a visible symbol of a company's commitment to technology. We do however, expect <unk> growth to moderate over the course of the year as the consumer portion of the market slows.
Q1 is proof of the benefits of having a strong geographically and sector diverse business covering the end user to the edge to the core data center to the cloud we are central to our customers' technology agenda is creating predictability durability and flexibility in our business to pursue growth wherever it materializes in the it market.
As Jeff stated there are some macro uncertainty right now, but we have shown time and time again, the ability to navigate any market environment by focusing on our customers our employees, our long term strategy and our stakeholders with that let me turn it over to Tom.
Thanks Chuck.
<unk> highlighted earlier, we delivered record Q1 revenue of $26 1 billion up 16% driven by strong growth in both CST and ISG.
We have previously highlighted that we thought fiscal year 'twenty three we see a more robust infrastructure investment cycle, while PC growth would shift back towards historical patterns to date. This appears to be how fiscal year 'twenty three is shaping.
Gross margin was $5 9 billion up 9% at 22, 7% of revenue.
Gross margin as a percentage of revenue was 150 basis points lower primarily due to increased component and logistics cost.
However, it was up 190 basis points sequentially due to improvement in both <unk> and ISG gross margin percentages as more of our prior pricing actions took effect. We also saw a richer PC and server configurations and stronger storage performance in the quarter.
Operating expense was $3 8 billion up 3% at 14, 5% of revenue.
As a result of investments in our team members and targeted investments in our growth areas, including capabilities to support our evolving business model.
We will balance these investments with prudent cost discipline, given the uncertainties in the current environment.
Operating income was a Q1 record of $2 1 billion up 21% at eight 2% of revenue.
Net income was $1 4 billion up 36%, primarily driven by growth in operating income and a decline in interest expense due to our lower debt balances.
Our tax rate was 19, 3% fully diluted earnings per share was $1 84.
Up 36% with diluted share count decreasing sequentially to 780 million shares as a result of repurchases.
Our recurring revenue was approximately $5 3 billion a quarter up 15%.
Our remaining performance obligations or <unk> is approximately 42 billion up 14% and includes deferred revenue plus committed contract value not included in deferred revenue.
Dell financial services originations were $2 1 billion up 9% and GFS ended the quarter with $13 2 billion in total managed assets.
Turning to our cash flow and balance sheet, our use of cash from operations was $300 million in Q1, primarily driven by our annual bonus payout and seasonal revenue decline.
As a reminder, Q1 is often a use of cash given the seasonality in our business and the timing of our annual incentive compensation payments.
Team did a nice job on working capital management in the quarter minimizing the increase in inventory due to supply chain challenges and reducing receivables.
Our core debt balance of $16 5 billion and we ended the quarter with $8 5 billion in cash and investments.
$2 $8 billion sequentially, principally due to seasonally low free cash flow and $1 75 billion in shareholder capital returns.
We repurchased $28 8 million shares of stock in Q1 for $1 5 billion and issued $250 million in dividends.
Going forward, we will continue our balanced capital allocation approach repurchasing shares programmatically to manage dilution, while maintaining flexibility to be opportunistic like we were in Q1.
Turning to Q2 in fiscal year 'twenty three digital transformation is a top priority for our customers and it's fueling our growth as our customers look for a partner in their multi cloud journey.
Global it spend is projected in the mid single digits and with what we see today the current demand environment supports this.
Against that backdrop, we expect Q2 revenue between $26 1 billion and $27 1 billion up 10% at the midpoint with both CST and ISG growing we.
We expect foreign currency to be a headwind for both Q2 and for the full year.
We do expect gross margin rates to decrease sequentially as CSD mix increases and we managed through inflation and currency dynamics with an elevated backlog.
Opex will remain roughly flat to Q1 as a percentage of revenue.
For our non-GAAP tax rate, you should assume 20% plus or minus 100 basis points.
We expect diluted share count to be roughly $760 to 765 million shares.
Netting this out.
We expect diluted earnings per share of $1 to $1 15, and non-GAAP diluted earnings per share in the range of $1 55 to $1 70 up 10% at the midpoint.
As you know, we're coming off a record fiscal year 'twenty, two and a good start to fiscal year 'twenty three.
Last quarter, we talked about our long term value creation framework of 3% to 4% of revenue growth and EPS growth of 6% or better as a starting point for the year.
As we look at the balance of fiscal year 'twenty three we're watching a few macroeconomic dynamics, including the geopolitical environment inflation interest rates slowing economic growth currency and continued COVID-19 impacts disrupting supply chains and business activity, while we believe these <unk>.
Macro dynamics will have some impact on overall investment spending with what we know today. Our updated framework is revenue growth of approximately 6% with both DSG in ISG growing for the year and earnings per share growth faster than revenue in the range of 12% or better.
In closing, we delivered a strong quarter with record Q1 revenue operating income and diluted earnings per share.
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.
Now I'll turn it back to Rob to begin Q&A. Thanks.
Thanks, Tom let's get to Q&A, we ask that each participant ask one question to allow us to get to as many of you as possible Jamario can you. Please introduce the first question.
We will take our first question from Chris <unk> with Cowen and company.
Yeah, Hi, Thanks for taking my question I just had a clarification of the question just wanted to make sure you said FY 'twenty three revenue growth of 6% and EPS 12, plus percent and then the question is either for Jeff or Chuck.
<unk> makes sense due to the consumer and you said you're monitoring macro data points, but are you confident on the strength in ISG, especially in an environment that companies are slowing hiring so I'm kind of curious when you talk to your customers just CEO and CIO.
What gives me confidence in continuing these items spending into the back half or is this more.
A thought spending.
Spending so I'll get that could change as the macro thank you.
Hey, Krish, it's Tom let me I will confirm that I did say for fiscal year 'twenty three revenue growth.
Approximately 6% and then the EPS growth of 12% or better. So yes, you heard that properly.
Jeff Chok.
I'll jump in on the ice for your question.
The macro question was kind of <unk>, making sense.
Slowing down and then the implications to ISG, maybe break those down as we think about those particular businesses.
And <unk>, we I think we've called out before that we thought heading into this year that we would see in the growth rate in <unk> timber.
And what we thought is indeed happening and it's happening in the areas that we happen to be less.
We participate less in most notably chrome, which is down significantly and the low end and mid range price bands and consumer which are down with what we see today, we see.
Good growth in commercial or enterprise Pcs, whatever you prefer to call them.
We continue to see that as we look forward, but it is a much lower growth rates than last year. There is no question.
I don't know what else to add to that Theres categories. We would tell you what why would that be the case, while we certainly have people going back to the office. We have this notion of a hybrid worker requiring a more capable and powerful machine, we have still a number of folks.
That are working in this hybrid market that need more mobility I E. More notebooks, we would tell you that not all Pcs are created equal meaning that the commercial enterprise generally have higher asps, Richard content and configuration greater opportunity to attach things thats what drives our business.
And then if we flip it over to the.
ISG side look I'd be remiss, if I didn't call out we just posted a 22% growth in servers and 9% growth in storage.
That's the sixth consecutive quarter of server growth and fourth consecutive quarter of orders growth for storage. The first P&L that we've been indicating we thought it would flip.
And we saw that flip in our P&L for P&L growth of 9% in storage after four quarters of orders growth.
What's fueling that continued digital transformation the fact that in there.
This data economy and data world, you need more compute assets and storage assets to be able to accelerate that digital transformation. We continue to see that certainly the demand environment. We see today indicates that continues I.
I hope that helped krish.
Thanks, Chris.
Next question, we will take our next question from Aaron Rakers with Wells Fargo.
Yes, Thank you very much and congratulations on a really solid results and guide.
I guess, what really stands out to me is the growth that youre seeing in servers, and especially given some of the recent concerns that we've heard from I think one of your peers actually this morning talking about supply chain constraints. So.
I guess, maybe you can help us appreciate what you are seeing particularly around the server piece of the business and how the companies manage kind of the pass through how much of the growth is driven by pricing versus maybe unit growth. Thank you.
Sure, let me check and I'll Ham and egg this together, but if you take a look at that 22% server growth that I, just alluded to and mentioned.
Sixth consecutive quarter.
You look at where some of that growth is coming from.
It's coming from content expansion, it's coming from a ASP expansion.
It's coming from mix of the portfolio, which are all good signs one that we're penetrating deeper into the enterprise, we're taking on more higher value high value workloads.
Our G P GPU, our AI accelerator of growth rate was.
Very strong in the quarter and that's continued to bolster the performance of our server business.
I think that leads to some of that Chuck anything that no I mean, I think building off of the prior question. We just see continued strength in the infrastructure markets right now.
Set it in our prepared remarks, and you mentioned in your first answer Jeff There's a rotation right now budgets from client to infrastructure and that's across the board in our portfolio, whether it's our fifth consecutive overall growth in ISG, our sixth consecutive quarter of server P&L growth for this question, 9% storage revenue growth after four consecutive.
There's a demand growth and so despite the macro uncertainty that is out there right now what we don't see as an immediate move to go after a reduction in it budgets I mean right now it is a very healthy infrastructure environment.
And I think maybe to put a bow on it I think our supply chain team has done a very good job of positioning our company.
With the available parts that are out there, which there is a shortage of parts for servers and we've been able to work our way through that and be able to deliver for our customers.
Ultimately that's.
The name of the game in our I think our supply chain continues to distinguish itself and being able to fulfill and meet the commitments, we give to our customers.
Alright, thanks, Darren Thank you.
We'll take our next question from stomach chatter G with J P. Morgan.
Oh, Great Hey, Thanks for taking my question and congrats on the strong results here.
I just wanted to ask on the margins you had very strong margins in both segments.
Sort of how should we think about sustainability of these margins I know you pointed out.
Corporate costs going up but I can also think about sort of pricing that property finds us in a bigger magnitude through the P&L through the years. So maybe just help us through.
So thinking about sustainability of these margins on a segment basis and what are the sort of different drivers to keep in mind you.
Hey, <unk>, it's Tom Let me, let me sort of walk you through how we think about margin frameworks as we as we move forward. So we've talked about obviously, we're very pleased with our margin performance in Q1, which when we talked to you recall back in the queue for conversation we had at the end of February we talked about the fact that we thought we would see margins move up.
Word coming out of Q4, we did see that driven by.
I think the strong performance in the client business, particularly the commercial business also the strong storage.
You know growth that we saw 9% revenue growth.
And the pricing actions that we had been talking about and commenting on the fact that those needed to work their way through the backlog starting to manifest themselves in Q1, and so really pleased with the margin performance in Q1.
I think the dynamic as we look at Q2 is this that you know.
We do expect that we are going to get a heavier mix of <unk> in the second quarter. We are going to continue to work quite through inflation right. So we do expect higher overall input cost in Q2, which will have to price for and you know that with an elevated backlog that that can take that will take some <unk>.
To work its way through.
And then we also think about the FX environment that we're going to be and where currency is going to be a headwind up somewhere between roughly 400 basis points for the quarter saw so that.
It's gonna be.
Something we're gonna have to price for it but again you don't get all of that pricing dynamic in the current quarter and so.
So the macro has some some headwinds that we're gonna have to continue to execute our way through I think at an individual business unit level as we think about a client that.
We should see a bit more commercial client in.
In the quarter.
Coming back from the elevated backlog, but that's going to have some headwinds on cost as we've talked about and pricing and then the server storage mix I think is going to continue to be an interesting area. We do expect elevated backlogs in Q2, so, particularly in the ISG spaces as Jeff mentioned this absurd.
<unk> supply chain continues to be challenging and I'll say, it like that with shortages in Knicks and power supplies and others components and so that will be something we'll have to work our way through.
We're cautiously optimistic about storage, but we had a very strong storage quarter and we've just got to go out and continue to execute itself overall that that's the dynamic that we're looking at as we think about Q2, you fast forward through the rest of the year and I would tell you that we would expect.
If margins are dipping a bit in Q2, we expect them to be relatively flat in Q3 and come back a bit in Q4, as we think about how the mix of the business shifts towards an ISG mix at the end of the year.
Given some of the seasonality of the business so.
That's a broad stroke at what margins look like from our perspective, but again I would just tell you that look we're going to have to work our way through inflation for the year.
Price. It is appropriate we will have to watch the market positioning on pricing and currency is going to be a headwind roughly somewhere between three to 400 basis points for the year. So those are all with some of the dynamics that we're working our way through.
Great very helpful. Thank you.
We'll take our next question from Sidney Ho with Deutsche Bank.
Yes.
Thanks for taking my question and congrats on a great quarter.
Let's take a quick bigger picture question on customer behavior, while there isn't a lot of cross current in terms of the supply constrained environment, but also in terms of macro uncertainty have you seen any change in customer order behavior in terms of volume commitment because of supply constraints, but at the same time they'd be shifting away from on Prem to cloud.
And how do you manage those transform our supply chain and R&D, maybe just generally speaking opex perspective for the year. Thanks.
Okay.
Well, maybe I'll start and just say.
Okay.
The environment that we've been in the last six months, we have not seen a fundamental change in customer behavior in terms of order pattern. So you know despite.
Long lead times, we haven't seen material differences in our cancellation rates, whether that's across our CSD business or our ISG business.
And the long term trend.
Where am I choosing to put a workload per our conversations that we had at Dell technologies World. Most recently is almost entirely with customers around the multi cloud opportunities. So while there are certainly workloads continue to go to the public cloud increasingly the conversation that we have with customers is about operating in a multi cloud.
<unk> they see the right workload in the right place.
At the right cost is the objective of their of their environment and so broadly that's the trends that we're seeing in infrastructure in terms of how we.
Manage it from a supply chain standpoint, obviously I'll defer to Jeff on that portion, yes look like.
Maybe a slightly different perspective, I think the order pattern has changed slightly but not in a way that you described people are coming to Dell because there's confidence on our supply chain to deliver.
If you think about our performance now six quarters in a row of.
Server growth and the shortage of parts and servers as customers are working to build out on prem to build out their digital transformation as Chuck said build out there.
Multi cloud infrastructure, and certainly our architecture and strategic.
Drive to be at the center of that customers continue to.
Well, because our commitment to a delivery date is pretty darn high as Chuck mentioned, our cancellation rates have not moved over a long period of time, which while we may not give the exact date. They want because we have products on extended lead time. The date, we give customers as the date the product shows up.
And they can count on it they can count on their integration and deployment of technology in their build out of their projects. So probably not the answer you are looking for an order pattern, but I think it's a reinforced reinforced sort of what's been happening in our business and then we take that demand signal, which is the beauty of our direct model and we act upon that.
In our supply chain I think I've made mention in before this notion that we have digitized our supply chain, where we have.
Put together advanced planning and modeling techniques data transparency and the ability to do predictive analytics and anticipate the needs of what we have and I think we respond faster and.
Ask quicker than perhaps others and that puts us in a better position to ensure we have the supply what's available for our customers.
Thats the linkage between and how our model works, it's very different than perhaps others as the connection between the demand signal the supply signal and quite frankly, what we designed.
And that tightly coupled ecosystem is a differentiator for the Dell business model and clearly in these times when there is stress in the supply picture, we're able to use our early indication of what demand is be able to schedule that planned out in the supply chain and then ultimately if we have to pivot to requalify our added different part in.
Our designs, we're able to quickly do that.
Okay. Thank you.
Of course.
Well take our next question from David vote with UBS.
Thanks, guys for taking the question I have a clarification question and a bigger picture question. So clearly you know 90 days ago, you guys were really optimistic about the outlook.
What has changed since then and it appears that you guys have handled sort of the disruptions in April better than most companies that we've talked to you over the last couple of weeks can you kind of share with us kind of what you saw in April kind of what set you apart where the component issues were and how you guys navigated that better than most.
Then on a clarification issue I think last quarter, you talked about a potential make whole payments in the fiscal fourth quarter of $150 million to $200 million do you still expect that in the fourth quarter and is that sort of factored into the guidance that Tom gave for the full year.
Sure, maybe I step into the supply chain component of that.
Well look.
Sure.
It's very important for us I think we've consistently communicated this.
Whereas we are encountering what everybody else is encountering in this industry.
There is a wide scale semiconductor shortage across a vast number of components I think I rattled off all sorts of components.
Earnings calls through the same the most stress networks tend to be the trailing nodes 40 nanometer $55 60 nanometer the agent network.
Increasingly interesting is now the new factories are being delayed in their deployment because they can't get the equipment needed. This cascades itself into categories of servers or automotive that's growing very fast that's taking the very same components that we all need which tend to be around the microcontrollers the power sub systems.
You needed to build certainly the devices. We have that's for everybody. We are encountering that I think we've talked about our long term relationships I just mentioned in the previous answer our ability to plan and anticipate and do predictive modeling.
We act with speed.
I think one of the things that separates our ability in the supply chain is to see this earlier and decide quicker and.
Adapt and provides and overcome with what is thrown at us in terms of what happened in April we all read about lockdowns by the way. They started in March mid March with Shenzhen. They can made their way into Shanghai with various stages of Lockdown, we had our own challenges here in the state of Texas with some border crossing issue. So we can.
Continued to adapt and improvise along the journey, it's what we do.
Fortunately or unfortunately, depending on your perspective, we've had three plus years of practice at this or getting good at our game and our team is nimble. It's flexible we're able to move material, we're able to use our vast network of 25 factories 50 different fulfillment centers around the globe that allow us essentially to move any order to any.
Factory to be able to build it.
Now we can't do that instantaneously overnight you Gotta get materially you got to move orders, but our ability to use our global network and to see it I think quicker than others is why I think we're able to.
Continually deliver and then again I'd be remiss to say I didn't do my job, we built backlog.
We did not build more than we sold.
I think you did your job really well, Jeff I'd just also underscore per your last.
Answer it's also our business model integrated to that incredible supply chain performance. So our sales engine thats able to not just take that take a demand signal and feed it back to the supply chain, but also shape to availability, which we have been doing for the last couple of years and we certainly did since March it's our <unk>.
<unk> teams that are designing modularity and being able to respond to the parts that are available. So we'd like to say, it's not one thing it's our integrated business model.
Hey, let me take David Let me just com.
Comment on the make whole payment question that you put there at the end of the question I think youre, referring to we talked about last quarter. The fact that as we thought about it.
Capital allocation framework for the year and the fact that we might do some incremental debt pay down during the course of the year that if we were to do so some of those some of that that would have a make whole payment on it.
And so one of them.
And so as we think about it now.
We've sort of ethanol for the year Modelled at right around $1 5 billion, which so you think about Q1 at 348 times four plus we've stuck in $100 million make whole.
Scott if you will into the ethanol for the year.
We'll have to work as we go through the year, we'll we will keep looking at does that makes sense to do and set the right use of capital at the time, but.
So that's that's the context around that.
Got it that's helpful. Thanks, Tom.
We will take our next question from Simon Leopold with Raymond James.
Thanks for taking the question.
On the call Broadcom posted.
They talked about a strategy to take more of the Vmware sales direct.
Focus on the top 1500 customers now you've got a meaningful chunk of Vmware revenue that flows through your business I just wanted to get a better understanding of how you see the potential for Vmware being part of Broadcom affecting your topline and I assume it doesn't do much to the bottom line.
But just want to understand what you are expecting thank you.
Well Hey, Simon.
Let me start with just saying look odd.
Obviously, we're not part of the transaction between Vmware and Broadcom, if that has to come to fruition, we have a 20 year relationship with Vmware.
As you know.
With all of the work that's been done with them and the close collaboration over the last five five years, and so and the whole posture around.
Vmware is first invest as we lead.
Our expectation is is that relationship continues we have a commercial framework agreement that we negotiated with Vmware as we did the spin.
Last year, and we would expect that those that continues in.
The mutual benefit that we both received from the commercial framework.
They with their go to go to market reach we have in some of our technology and our and our benefit with some of their solutions technology is should continue so that's our expectation as we look at it today.
Thank you.
Well take our next question from Rod Hall with Goldman Sachs.
Yes, thanks, guys.
Just wanted to clarify that last response, Tom So the commercial framework. The legal framework does it have any kind of an M&A clause in it that would cause it to need to be renegotiated.
Assuming the deal closes and then I had a question on Pcs as well.
I guess I would just tell you that I'm not going to get into all the commercial terms, but there is a change in control provision that allows that the commercial frameworks.
<unk> continues on with the change in control.
Okay. Okay. Thanks for that and then on <unk> I just wanted to ask it sounded like I'm not sure how to interpret your PC commentary in terms of.
Comparison to last quarter, I mean, it sounded a little bit more cautious to me, but commercial is still pretty good could you guys. Just maybe update us on what youre thinking on PC units I know amd's come out and talked about high single digit unit declines now are you onboard with that idea do you think units in the industry or flat just curious what youre kind of thinking about industry units here. Thanks.
Sure.
Takes us and Chuck certainly can and build upon this.
Look I think we can.
Continuing to talk about.
<unk>.
Marketplace that was going to slow down.
Slowing down.
Saw that in the IDC Q1 results, which mind you I think we outperformed the market significantly in that calendar Q1 period.
Our own internal modeling.
IDC just came out with a new set of projections last night, our modeling is a little more positive.
Or a little bigger than that if you want to say I'll be very specific with you we have the market somewhere around 330 million units.
We have chrome falling fast we have consumer in the high single digits and we have in a unit basis, we had the commercial.
Hanging in there.
That's how we get to 330 units when you look at the composition of our business.
The places where the market is strongest is the places we have the greatest exposure.
Our mix of commercial was 77% in Q1, which is up three points year over year, some more exposed to the place that's doing better.
That's what we clearly where we've built our product portfolio, where our relationships and customer basis.
That's how we tend to look at the market.
Yes, Jeff I think net the forecast the IDC forecast our forecast.
They do reflect the structural reset of the PC market to a higher level that we've talked about and as you said given our focus on the commercial segment, which we think.
Fares better than chrome and consumer the rest of the year, we feel well positioned no matter no matter that sort of the unit market environment, obviously part of our view that we would see moderating growth this year coming off a 27% growth.
<unk> last year as we're lapping some pretty strong strong compares in second half performance, but again to just underscore our commentary we expect <unk> to grow for the year, we expect CSC to grow at a multiple to our long term growth framework and we expect to keep gaining share.
That's great. Thanks, a lot for all the color I appreciate that.
We will take our next question from Romsey Mohan with Bank of America.
Hi, Thanks for taking my question, it's rupal filling in for <unk> today.
They are a way to quantify how much the supply chain issues, including the component shortages and logistics costs, how much that negatively impacted your revenues and margins in fiscal <unk> and is there an estimate for the impact on the top line for the full year and Tom you're guiding fiscal 'twenty three revenues now to be to grow higher.
At 6% year on year does that come with higher working capital requirements and so do you think free cash flow in fiscal 'twenty three now can be higher than what you thought 90 days ago. Thank you.
Hey, Roop loosens, we're probably not going to answer your first question, Greg We will focus on the second question I was going to answer. The first question is look we have a backlog. It's elevated we're going to continue to work through it as we always do we wont disclose or parse it down into the impact of this quarter or any future period in time. They are elevated you can see.
That in our Rps level, when you look at that versus previous periods.
Our job on the supply chain to get supply matched up with demand actually catch up a little bit that's what we're going to try to do.
I was going to answer it but I mean.
Yeah.
Your working capital question.
Look we are we did adjust our framework upward.
We had told you we would continue to look at that as we go through the year.
So right now we see the total year at 6% with both CFC in Irish ISG growing sort of mid single digits for the year.
If you do the math on that you would you would obviously see that we do expect the back half to be slower than the first half.
<unk>.
We think there continues to be.
We're lapping from a <unk> perspective, some pretty tough comps in Q3, and Q4 of last year, So that will.
I think be a bit of as you think about the performance of the business that would be something to consider.
I do think.
From a <unk> perspective that we expect sort of asps to be flat to slightly declining as we go through the year, but we don't see significant movement there given some of the inflationary pressures.
But again, we'll have to monitor that relative to the to the pricing environment and what's going on in the market. I think we think we're very optum. We're optimistic about this the ISG space infrastructure spending is holding up as well with what we can see today.
Implicit in my guidance when you would think about the fact that I am slowing ISG in the back half of the year, some still growing but at sort of low to mid single digits Q3 to Q4.
But I think thats, just being prudent given the uncertainty that's out there in the market right now and we will continue to update you as we go through the year as it relates to working capital, but we have a if you haven't looked at our balance sheet lately, we have a lot of inventory right now so I'm up to $4 billion year over year in fact, Jeff and I were just talking about that.
And remind me I remind you that it needs to come down right. So.
And look so I don't see a specific need for incremental working capital actually what I'm challenging the organization to begin to bring that inventory down as.
That's going to be obviously very much dependent upon how the supply chain sort of behaves in the second half, but I think there's opportunity to actually squeeze that down some.
So I think overall I'm not concerned about working capital in the second half Tyler I know I, probably just stepped all over here, but I think we I think that's exactly right and Thats how were thinking about at a time.
Alright, thanks, rude with him.
Yes.
We will take our next question from Amit <unk> with Evercore.
Thanks for taking my question I guess I have two as well.
The first one is if I look at your full year guide what are you gonna do fairly robust growth in the full stop.
But you're sort of implying that back half a little getting flattish for the most part so maybe just touch on why do you think the back half would be flattish that'd be fairly unique if it happens and do you expect to exit the year with a higher backlog than you're sitting on right now or do you are you on.
Working down the backlog, so I'd love to understand kind of the back half assumptions, there and then Jeff I'd love to hear on the storage side. This was a very sizable inflection that you folks had in April .
I guess, one did up on one make a trend, but what's the durability of the growth that you just saw on the storage side and how much of that do you do with share gains versus end market is doing well.
Well, Hey, let me start.
Comment on the full year guide.
If you just break down the piece parts of this clear.
Clearly <unk> was 17% in Q1, we do expect it to grow again in Q2.
But I think we just talked about the fact that.
The environment is slowing and the fact that we have some tougher compares in the back half of the year. When you think about year over year comparison year over year growth.
So I think it's just prudent to be a little bit cautious in and as we think about the back half of the year clearly if there are opportunities to grow faster, we will do so thoughtfully on the ISG side with what we see you know we're sort of looking at sort of mid single digits. If you think about it.
The forecast for <unk> spending in the infrastructure space in the back in the year, it's sort of mid single digits.
Upper single digits, that's how we think about it as well I think the question that we're working our way through as does that how does that manifest itself.
And I just would like to have the year progressed, a little bit further before we think whether theres any incremental strength. There. So right now I've got the year at 6%.
Implies at ISG is a little softer in the second half, we'll watch it and we'll update you again in the Q2 call.
So.
Too many uncertainties out there right now to have to be so exact at this point in the year.
Maybe to build on that with storage.
We've talked about four quarters in a row now of storage orders growth now, 90% P&L growth in Q1.
Our orders growth in Q1 was in excess of the P&L growth.
Yes.
It's call it <unk>.
All geographies grew storage.
We grew storage in our high end price fans are mid range price bands are low and price bands. We grew in HCI. We grew in data protection, most notably in data protection in the area of cyber security.
Have a very advantaged position with our cyber based products.
<unk> continue to look for us to help them in this world that we live in today with cyber and cyber resiliency.
Power Solar group, our store continues to be our fastest growing.
New architecture, we put in the marketplace.
You just got 500, new features into the marketplace across our portfolio.
We have the mainframe refresh that it will come throughout the year and our power Max is unmatched in its capability. One of my favorite features there is the first time, we have mainframe compression in the industry on our product waiting for the mainframe update.
I don't like a lot of whats going on its four quarters in demand.
Chuck can I team we model this.
Tom just mentioned it.
<unk>.
High single digit market growth, obviously, we wanted to take share we're taking share with performance that we just delivered.
Mid range in particular, which is where the largest swath of the market is our unstructured product continues to do well.
It's hard for me Tom.
Tell you that.
Can it continue I like all of the signs four quarters of growth I think of the strategy that we have which is continue to drive the consolidation.
Hi, and innovate and disrupt.
Mid range, which we're doing and take our leadership position in software defined storage and continue to drive.
Our leadership position, even further there whether thats, our VX rail asset our own power flux asset both grew nicely.
And orders in Q1, so I hope that answered the question that's hard for me to have a crystal ball what that means in Q4, but certainly what we've performed to date and as we look at the market as a whole we're positioned nicely.
Alright, that's super helpful. Congrats on the quarter. Thank you. Thank.
Thank you.
We will take our next question from Steven Fox with Fox Advisors.
Hi, Thanks. Good afternoon, just one question from me to.
To the extent you can sort of talk about your own pricing into your customers.
Where do you think you're able to continue to get price and pass on inflation. When we're maybe does it get more difficult, especially if some verticals are facing their own end market challenges going forward any help on pricing, we've recently and what you're thinking about it in the future would be helpful. Thanks.
Maybe I'll take a stab and Chuck and Tom can come over the top we will start with Pcs and if you look at the pricing environment.
<unk> is back to what I mentioned earlier this is kind of a <unk>.
Retails and chrome.
Pricing is largely back to pre COVID-19 normal levels, it's aggressive theres lots of inventory out there, it's an aggressive pricing market.
And those price bands in consumer the low end or the low price points and mid range price points.
Fair amount of inventory out there you saw promos being run through the holidays. They continued into Q1 the pricing towards the burst deals towards the second half of the year are already underway and those price bands in there they are quite aggressive.
And the higher end part of consumer whether that be our xps area or Eileen where things are a little more stable commercial it's a more favorable pricing environment. There is still lots of mismatch sets out there, meaning that there arent enough components.
He doesn't have the right set of components to build a finished our systems. So pricing is more stable more favorable and we're taking the inflation that we see and we're certainly trying to pass it through I think Chuck talked a little bit about this earlier, but if you look at broadly across our PC space.
Asps are boosted by the fact that we have to.
Configuration dynamic.
Those buying Pcs need a more capable PC to working on hybrid modern removal.
Content going up and we're attaching more things with them.
If I look at storage storage as a favorable pricing in place, where we can take the rising input costs and we can pass we are passing that through and that's not unique test. The industry is the same is true on servers, which makes it a lot of sense given there are not enough parts to match the server demand today, hence are growing back.
Log.
And Thats, a favorable environment, where we can pass along.
Cost increased our ASP performance I think we mentioned earlier it up.
By the fact that we have pricing and inflation and then we have this content dynamic.
Selling servers deeper into the enterprise higher value workloads, more gpus, more DRAM or NAND per server that adds up to a higher ASP.
Our teams are making adjustments as we speak Tom referenced this earlier.
Foreign exchange rates. They are changing we have to price pricing is underway to do that we will try to capture as much as we can along the journey he called that out as a perhaps challenge in the quarter.
And then we have a variety of metrics that look at our relative position to our competitors and we largely say with everything that I. Just said we are on price position in the marketplace.
Okay.
Great that's super helpful. Thank you.
Okay.
We'll take our next question from Toni <unk> with Bernstein.
Yes. Thank you I just have a couple of follow up clarification.
You explicitly noted that order growth was stronger than our revenue growth in storage was that also the case this quarter in servers and N P. CS.
Secondly, you noted that.
You were opportunistic in your share repurchases this quarter and bought back one 5 billion.
Your share price, even with the strength in the aftermarket as well below the average price that it was during Q1.
Why Shouldnt, we expect you to be just as opportunistic in terms of buybacks in Q2.
And then finally, just on free cash flow.
Do you expect free cash flow to be higher than net income consistent with your long term model for fiscal 'twenty three.
Yes.
We will take the first two kind of toning.
We don't forecast cash flow. So we'll lay off the last one and I'll take the first two relatively quick hopefully.
Sure.
We mentioned that.
Storage orders were ahead.
Sure.
A server orders in server P&L performance was largely the same.
And Pete CST P&L revenue performance was ahead of orders performance.
What was the second part of that project.
Yeah.
Uh huh.
Thank you.
$5 billion.
Generic versus start athletic look Tony I mean, if you think about what we did here in Q4 Q1. It was all around we had a significant amount of dilution coming through the Vmware spin transaction and since we werent in the market for last year, given the Vmware spin.
We thought it was appropriate and part of our goal with the share buyback is to control dilution and so.
That so that focus plus the fact that share price did obviously all through the quarter was influenced to continue to be into the market that I think what we're trying to balance as we go through the remainder of the year.
The cash balance has obviously come down as we spent a fair amount of cash.
In Q1 on share buyback.
So my point of view on this right now is that we're going to continue to be programmatic.
And I will be opportunistic where it makes sense, but I don't think that pace that you saw in Q1 should be how you model the whole year. So that's how we're thinking about it right now.
I think Tony.
We will now take our final question from Jim Suva with Citigroup.
Thank you, especially for great results and what do you mean bring it home here to the end a clarification question for Tom and more of a strategy question, probably I guess, it would probably be for <unk>.
Jeff or Chuck by Tom a clarification, you talked about pricing in a deflationary environment turning to inflationary through your components I guess everywhere around the world for the past three months I've been seeing pricing going up and you talked about favorable deflationary without like some longer term contracts you had or green.
<unk> that are now kind of being right sized to market or was it like displays are memories are kind of scratching my head here about what really helped you and then more of a strategy question either for Jeff or chalk. It seems like on storage would you touched on earlier.
<unk> had a couple past quarters of kind of flattish growth and now storage was up 9% and you talked about were in a bit of a high performance compute slash mainframe pause before it starts.
<unk> will add a new chapter after several quarters of flattish storage growth actually kicking it into high gear for storage.
But Jim it's Tom Let me take your first part of your question. Let me tell you what I believe I said, which was we expect input cost to be inflationary.
In Q2, right and that's the entire basket of component plus logistics cost. So we do expect that to be an inflationary pressure in Q2.
And somewhat into the back half of the year, depending upon some of the advanced signals, Yeah, and then hate to wrap us on storage look as we've said in the last few quarters.
We've seen healthy storage demand growth.
Translating that to the P&L. It takes time, because we have a significant amount of our storage content that is deferred software and services and so as we've said that.
The key performance indicators, we've been watching is the consecutive quarters of demand growth and so after posting four we are now seeing that start to translate into the P&L at 9% storage revenue growth on the mainframe refresh question or the high end look we did see demand growth in the high end.
In Q1.
And if youll recall, we saw high end growth in Q4 as well.
We would not attribute that right now too.
Mainframe refresh we're number one in high end and have a number of customers that refreshed from time to time and that's really what we've seen over the last couple of quarters, but that said as Jeff called out we are incredibly well positioned for the.
Mainframe refresh that is sort of starting starting right now and we tend to see the benefit in a quarter or two later.
Our business and as Jeff called out the new power Macs that adds the industry's first data compression for mainframes positions us really well for that demand cycle. So.
That's that's where we are in storage, obviously incredibly pleased with both our P&L performance, but more importantly, as Jeff called out the strong demand we saw in all parts of the portfolio Alright, well as a quick reminder, we will be at the Bernstein strategic directions.
<unk> Conference in New York, The Bank of America Global Technology Conference in San Francisco in the Jpmorgan Global leaders Forum in Toronto on June four other events during the quarter check the website. Thanks for joining us today.
Yes.
This concludes today's conference call. We appreciate your participation you may now disconnect.
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