Q2 2023 Dell Technologies Inc Earnings Call
Please standby.
Good afternoon, and welcome to the fiscal year 2023 second quarter financial results Conference call for Dell Technologies, Inc. I'd like to inform all participants. This call is being recorded at the request of Dell technologies. This broadcast is.
The copyrighted property of Dell Technologies, Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell technologies is prohibited.
Following 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 now like to turn the call over to Rob Williams head of Investor Relations.
Rob you may begin.
Thanks, everyone for joining us with me today are Jeff Clarke, Chuck Witten and Tom Sweet.
Our earnings materials are available on our IR website and I encourage you to review our presentation, which includes rich content to complement our discussion. This afternoon 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 and earnings per share.
A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release 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 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.
On the call today, Jeff will recap Q2, including the current demand and supply chain environment. Chuck will cover C. S. G and ISG operating performance and Tom will cover our financial results and guidance now I'd like to turn it over to Jeff.
Hello, everyone. Thanks for joining us in Q2, we executed well and delivered strong financial results, despite a rapidly changing and challenging macro environment.
We also advanced our long term strategy growing the core while innovating for our customers, enabling their opportunities in the data era.
We delivered a record Q2 revenue of $26 $4 billion up 9% with growth in both C. S G and ISG.
And diluted EPS was $1 68.
14%.
Our differentiated business model and execution enable us to outperform in the segments. We serve and then calendar Q2 regained P C share and expect to gain share in server and storage when IDC releases Q2 results.
I'd like to take a couple of minutes and talk about the macro as it provides important context for our remarks today.
Since we last spoke in late May our view of the demand environment through the back half of FY 'twenty three is changed the demand environment slowed and pushed to the right over the course of the quarter, particularly in C. S. G.
We saw a decline in PC demand as we went through the quarter was higher asp's, partially offsetting a unit decline.
Our supply chain execution was excellent throughout the quarter and we were able to offset the CST demand weakness with backlog reduction in C. S. G.
We saw ISG demand, while still growing slow and pushed throughout the quarter.
The Q2 and second half macro dynamics have become more challenging as customers are taking a more cautious view of their needs given the uncertainty.
We have responded swiftly by managing inventories down and reducing our expenditures now let me turn to the supply chain issues.
Q1, we are still seeing shortage of parts and embedded integrated circuits, including power supplies and Nyx.
ISG backlog, particularly servers remains elevated.
P. C backlog is now at normal levels as Q2, PC shipments significantly outpaced demand and the portfolios on standard lead time across the board.
On the cost front, we expect a modest deflation in aggregate component costs in Q3, while logistics rates are beginning to decline.
Our strength in Asp's over the last year has been a result of Richard configurations, and product mix, but the lower cost environment could have an impact.
Turning to innovation, we are proud of the significant advances we have made in the first half of the year developing new solutions for our customers.
Expanding our multi cloud ecosystem and delivering new cloud experiences that include all major public clouds project Alpine, which brings our enterprise class data services into public clouds for bursting tests in development cloud based analytics and data and container mobility.
The largest release empower store history, and the new Paramax I always 10 software deliver more than 500, new Dell storage software advancements that help customers deliver faster insights.
Achieve better multi cloud data control and increased cyber resiliency.
New apex offerings like Dell apex, cyber recovery services that extend beyond storage compute and data protection and deliver apex is a full stack solution and then <unk>, we continued to deliver new commercial devices for our hybrid world, including the latitude $93 30, the world's first laptop with a collaboration.
Touchpad.
We also recently celebrated 25 years of precision innovation driving many industry first along the way I actually led the workstation business will be launched precision so I'm, particularly proud of this one and our number one position worldwide.
As we've highlighted we're also innovating in strategic growth areas like telecom and I like to provide a few examples of our progress in this important area.
In May we announced that we joined forces with T mobile to make it easier for enterprises and government customers to embrace five G. T mobile <unk> private mobile network combined with Dell edge computing technologies will bring customers the power of five G connectivity on premise where they need it.
In June dish marked a major milestone in building the world's most advanced cloud Native <unk> open ran network.
Now offer <unk> broadband service to over 20% of the U S population.
A cloud native network built on Dell's open infrastructure software and services.
As we think about the second half of the year, we remain focused on what we can control execution relative performance prudent cost management and delivering for our customers and shareholders like we did during Q2.
What we have shown over the years is regardless of the environment. We are agile and built outperformed now let me turn it over to Chuck.
Thanks, Jeff we delivered strong financial results and excellent relative performance in ESG in ISG, while managing the shifting demand dynamics as the quarter progressed, starting with ESG. We delivered record Q2 revenue of $15 5 billion up 9% with operating income at six 3% of revenue consistent.
With our Q1 commentary commercial continues to fare better than consumer commercial revenue grew 15%, while consumer revenue declined 9%.
An important measure of our success in any market environment, it's relative performance and we again drove differentiated share results.
Gained over 200 basis points of worldwide PC unit share and over 100 basis points of display share in calendar Q2. According to IDC. We have now gained PC unit share and 34 of the last 38 quarters.
And then commercial Pcs are focused on the most profitable segment of the market. We gained over 300 basis points of unit share in calendar Q2 to claim the number one spot worldwide.
Turning to ISG, we delivered another record Q2 with ISG revenue of $9 5 billion up 12%, our sixth consecutive quarter of growth with operating income at 11% of revenue.
And networking grew 16% and storage grew 6%, our seventh consecutive quarter of servers and networking growth and our fifth consecutive quarter of demand growth in storage. The breath of our storage portfolio continues to be a competitive advantage with number one positions across storage categories, the breath of leading capabilities.
There is a real differentiator for us as one size fits all architectures simply do not meet customers' diverse needs in the data era.
In Q2, we saw modest storage demand growth with strength in the high end and in our Marquis midrange product power store, which grew double digits and has grown every single quarter since launch and in servers, we saw demand growth in most geographies, albeit at a moderating pace.
As Jeff mentioned earlier, we expect to gain server and storage sharing calendar Q2, when IDC releases results in September .
Finally in ISG I'd call out our momentum on apex, our offerings for customers looking to buy infrastructure as a subscription or apex <unk> is now over $1 billion.
And we grew orders 78% year on year in Q2, while adding almost 200 new customers.
Customers like Federal home loan bank in San Francisco, who is using apex private cloud to support its growth and cloud strategy and realizing significant cost savings as the financial institution serves its members and customers like montage health, who is using apex private cloud to provide clinicians better access to critical applications and.
Formation for patient care and staff collaboration.
Stepping back the near term market outlook is marked by mixed signals as Jeff highlighted in his macro comments.
Third we remain confident in the long term health of our markets and then our competitive position there has been a clear and significant increase in the size of the PC market from pre pandemic levels as hybrid work has become the default approach for companies worldwide and automation and digital transformation remain the backbone of our customers' strategies.
Necessary for productivity and growth done right technology investments are key to competitive advantage in the data era and can reduce costs, while combating an environment with high inflation and labor shortages. So we remain confident in the long term attractiveness of our core markets and our opportunity to build meaningful new businesses in the day.
And multi cloud era, and then our durable competitive advantages that enable us to out compete in any environment now I'll turn it over to Tom for the financials.
Thanks, Chuck we delivered record Q2 revenue of $26 4 billion up 9% driven by strength in both <unk> and ISG.
We highlighted in late May that we thought fiscal year 'twenty three we'd see a more robust infrastructure investment cycle, while PC growth would moderate.
While we did see modest infrastructure demand growth in Q2, we now see a more challenging ISG demand environment as we head toward the back half of the year.
And in <unk>, we are seeing demand weakness in both consumer and commercial.
Overall gross margin was $5 7 billion, roughly flat and 21, 4% of revenue.
Gross margin as a percentage of revenue was 200 basis points lower than last year, primarily due to an increase in our cost and FX headwinds.
Yet entirely reflected in pricing as we balanced profitability with competitive positioning.
Operating expense was $3 7 billion down, 3% and 14% of revenue.
During the quarter, we instituted a number of cost reduction measures, including a slow down the external hiring.
Operating income was $2 billion up 4% at seven 4% of revenue.
Our tax rate was 19, 9% and net income was $1 3 billion up 9%.
Primarily driven by growth in operating income and a decline in interest expense due to our lower debt balances.
Fully diluted earnings per share was $1 68 up 14% with diluted share count decreased sequentially to 755 million shares as a result of repurchases.
Note that our GAAP profitability was impacted by a $255 million net adjustment to the value of our strategic investment portfolio given market conditions.
And $189 million charge related to exiting our business in Russia.
So which are primarily noncash items.
Our recurring revenue is approximately $5 $2 billion, a quarter up 8% our remaining performance obligations or RPI is approximately 41 billion up 2%.
It includes deferred revenue plus committed contract value not included in deferred revenue.
Dell financial services originations were $2 3 billion up 24% driven in part by our technology rotation solutions.
We have historically seen stronger originations when the macroeconomic environment slows and.
In DFS ended the quarter with $13 $5 billion in assets.
Turning to our cash flow and balance sheet.
Our cash flow from operations was $700 million in Q2, and it's $5 7 billion on a trailing 12 month basis.
Q2 cash flow was primarily driven by growth in profitability, partially offset by a use of working capital.
Working capital was impacted by an increase in receivables due to the timing of sales later in the quarter, partially offset by a $400 million sequential reduction in inventory.
The quality and aging of our receivables is strong and the team did a nice job on inventory this quarter, which will remain a focus as we move through the rest of the year.
Our core debt balance of $16 1 billion and we ended the quarter with $7 $1 billion in cash and investments down $1 4 billion sequentially, principally due to $900 million in capital returns and a $300 million strategic investment portfolio write down on a gross basis.
We repurchased 13 6 million shares of stock in Q2 for $608 million and paid $242 million in dividends.
Going forward, we will continue our balanced capital allocation approach.
Purchasing shares programmatically to manage dilution.
While maintaining flexibility to be opportunistic like reward in Q1 and in Q2.
Turning to guidance as Jeff highlighted we're seeing customers become more cautious given the current macroeconomic environment.
We saw a softening in <unk> specific to consumer and chrome in Q1.
In Q2, the decrease in demand velocity extended to commercial clients and we are seeing more cautious spending within our ISG business.
Currency also continues to be a headwind for us roughly 500 basis points for Q3, and roughly 400 basis points for the full year.
Against that backdrop, we now expect Q3 revenue between $23 8 billion and 25 billion down 8% at the midpoint with <unk> declining in the high teens and ISG growing in the low teens.
We do expect gross margin rates to increase sequentially as mix shifts to ISG.
Given the cost controls we have in place, we expect opex spend to be down versus Q2.
For our non-GAAP tax rate, you should assume 20% plus or minus 100 basis points.
We expect diluted share count to be roughly $750 to 755 million shares netting.
Netting this out we.
We expect diluted earnings per share in the range of $1 53 to $1 79 flat year on year at the midpoint.
The environment, we saw in late May translated to a 6% growth expectation for the full year with diluted earnings per share growing 12%.
Given the change in the demand environment, our current view for fiscal year 'twenty three as revenue flat to up 2% with diluted earnings per share between $6 60.
And $7.
Up 9% at the midpoint.
In closing, we delivered strong second quarter financial results, but are more cautious as we enter the second half.
We are actively managing our cost and spending and we remain focused on what we can control executing our strategy to consolidate and modernize our core and build new growth engines that enable our customers multi cloud future.
And we expect to deliver revenue and earnings per share growth with strong free cash flow to our shareholders over time.
Now I'll turn it back to Rob to begin Q&A.
Hey, Thanks, Tom Let's go ahead and get to Q&A, we're going to ask each participant to stick to one question. So we can get to as many analysts as possible.
Operator can you go ahead and take the first question.
Thank you.
Our first question comes from Tony <unk> with Bernstein.
Yes. Thank you.
I'm just wondering if you can.
Elaborate on the kind of linearity you saw in the quarter.
Specifically like was the book to Bill greater than one in the first month and well below one and months two and three and in your demand outlook seems strikingly more cautious than some other enterprise peers like Cisco and net App and I'm wondering why you.
You.
Mike think.
That your view is somewhat different from what they're seeing.
Hey, Tony look let me, let me start and I'll ask Jeff and Chuck too could chime in as appropriate look as it relates to Q2 and how the quarter flowed.
What we saw shortly the typical pacing in a quarter is that.
Builds pipeline builds and converts as we go through the quarter more so as we get to the mid and late late in the quarter. What we saw in Q2 was pipeline, particularly in the client business did not build and our iron ore pushed to the right.
And we also saw ISG demand our pipeline pushing to the right. So from a linearity perspective.
Typically the month two of the quarters, when we typically would see.
Bigger velocity growth in the pipeline and we quite frankly did not see it this quarter.
And what we saw as we highlighted in our talk track is just.
And overall cautiousness with our customer base as they're sorting through the macro dynamics. So as a result of that I mean clearly.
As we talked about in May we had expected that we would see softer CSU demand, but we actually saw softer.
Demand actually.
Much softer than what we had seen particularly for commercial clients.
And because of that as we've talked about.
Although we had elevated <unk> backlog.
We did we did reduce backlog as part of our shipment profile for client in Q2.
Look as it relates to our cautiousness around enterprise demand or infrastructure. You know all we can tell you is what we see as a reminder, since we have the largest direct selling organization.
Of all of the technology companies, we feel like we have a pretty good pulse on sort of current demand.
In an environment and we're just seeing more cautiousness on the.
On behalf of our customers as they're sorting through.
Spend as they're thinking through projects.
We are seeing projects come to fruition, they are taking longer to close and the size of the projects are somewhat reduced from what we've seen in the past.
Jeff Chuck I don't know if you'd add anything to that yes, maybe Tony I'll add a little observation from what we're hearing from customers on enterprise dynamics I think looked textually, if I start with the PC business.
Commercial customers are just citing multiple reasons for sort of delaying purchases.
Caution around future hiring tradeoffs within their it budgets given the macroeconomic uncertainty customers, reducing the size of orders and buying for only a media requirements, but the net was we saw a meaningful shift in corporate sentiment over the course of the quarter.
I think ISG dynamics were a bit different so we saw demand growth in both servers and storage, but at a moderating rate as just more caution energy environment.
We are a commercial PC spending paused infrastructure spending slid companies are putting more scrutiny on spend as Tom said deals took longer to close throughout the quarter and we generally just saw more deliberate customer behavior. So what you see is calling out today.
US trusting that better demand signal of that.
Tom side, it in and what we're hearing from customers.
Thanks, Tony.
Next question.
Our next question will come from Erik Woodring with Morgan Stanley .
Hey, guys. Thanks, so much for taking my question.
Wanted to get your take on on your ability to main kind of pricing power as some of these demand trends now start to flow through the business do you believe you have pricing power and more so in one business versus the other.
Maybe by product would love to just have you guys too that the question I have a little bit more thank you.
Sure. Eric This is Jeff maybe a couple of comments I'll start with Pcs and work our way through that product line.
I think it's important in Pcs when you look at our mix of business being commercial versus are more weighted towards commercial versus consumer we get a natural uplift there.
And we're seeing wall, we commented demand slowing Richard configurations, we saw consistently through the quarter.
Primarily from our premium products like our latitude notebooks our precision.
<unk> workstation, so we're seeing a higher mix of our higher end products as well as Richard configuration.
And I think that bodes well long term when you think about where we play than in addition, because of how we do business that you know very well, but I think its worthwhile mentioning.
Our ability to attach software and peripherals, our ability to attach services and financing options to those Pcs I think is a differentiated capability over anyone else in the marketplace.
So while the market may be softening as we are referring to our ability to continue to outperform with the quality of mix the quality of our business the mix towards commercial and Richard configurations, we feel good about.
Similar trend in servers, if you think about the growth of our ASP.
Over time in servers, they've expanded driven by our ability to drive richer content.
By selling deeper into the data center selling higher value workloads solutions around GP Gpus as an example, driving artificial intelligence related workloads across our servers were getting richer and greater content in each and every server.
And because of the challenges that we've had with supply for the better part of six quarters now we've been able to pass through the incremental inflation, that's been associated with servers to end users.
And similar in storage, we think storage is an opportunity for us to continue to drive higher revenue, we have the broadest portfolio in the marketplace. We cover every aspect of the storage market from a high end to the mid range to the entry level to the structured space to the data protection space all highly valuable.
Categories, and storage, which allows us to drive a differentiated revenue in our storage business.
Okay, Alright, thanks, Jeff sure.
Next question.
Certainly our next question will come from Simon Leopold with Raymond James.
Thanks, Jonathan.
Yes.
<unk>.
What kind of actions you might be taking in response to the slowing.
Whether its maiden increasing promotions.
Can see E cutting prices or whether youre looking to reduce your opex and I guess part of this is that I'm trying to get a better sense on that other one will take a five minute break.
Okay.
Hey, Justin.
You hear us on urine, yes, yes, Sir I can hear you I can hear you loud and clear are you are you able to hear us.
The last question dropped out we're going to take a five minute break and shift to another phone. So we're going to pick this call back up at three minutes after the hour approximately.
And we will just pick it up with the next question in the queue.
The apps.
Absolutely everybody to stand please stay on the line and we will resume shortly.
And once again, we are just taking a brief break with Dell technologies. Please standby and we remain on the line and we should resume shortly we do thank you.
To be Frank.
Okay.
Justin you there.
Yes, Sir we are back in the call.
Okay can we continue with Simons question, absolutely just one moment.
Yes.
Alright, and your line call. Your line is open again, please resume with your questions. Thank you.
Great. Thanks, hopefully you can hear me.
I wanted to ask about what actions you might be taking in response to the weakening environment.
Specifically, whether you are looking to cut operating expenses I know you guided for sequentially, lower but something more permanent or whether you're adding promotions to bce's cutting prices trying to get a better sense of what your responses to the weakness from from that perspective. Thank you.
Okay. Thanks, Simon it's Tom So let me just I'll start and ask Jeff our Choctaw to chime in as appropriate so look.
First let me just say Simon as you know we've.
We are seeing economic cycles, before and I think the teams and the company's ability to navigate it is okay.
It's pretty much.
We've got a long track record track record of doing so and so optimizing the business as we go so as we think about sort of sets of actions that we're driving right. Now obviously, we saw the weakening environment. We have instituted a number of cost measures as a result of that including.
Effectively.
The limit teen external hiring we looked at discretionary spending have pulled that back all the normal type things that you would do from an opex perspective quite frankly, when you see an environment starting to soften.
We will continue to monitor that as we shaped the P&L to the best of our ability to make sure we deliver profitability that's in line with our expectations.
On a pricing perspective, though in terms of how do you think about what do you do from a price perspective, our promotional perspective.
I think we're going to be very.
Very thoughtful as we as we do that only around the fact that in the environment as we see right now, particularly in consumer we don't see a lot of elasticity and so.
We're gonna be very direct and directed in any promotional spend that we do principally focused on how do you think about.
Product in the channel and things of that sort that we that we have some although clearly not as much as our competitive set so I do think youre going to see us continue to be disciplined in pricing.
B you know.
I am pretty low to test elasticity right now given what I think the environment looks like but we also need to remain competitive and so we'll be watching the market dynamics are pretty costly from a pricing perspective.
Jeff I would add you asked me to add.
I would add.
And Simon I think we have demonstrated.
And pricing.
Our product portfolio I don't get it all across the three price positions our win loss.
Each type of segment, whether it's small business medium business large corporation globals.
Remains consistent and consistently good it's really set our share gains over the past decade.
So we're going to remain disciplined there and Pcs.
Consumer is aggressive as Tom said, given what is happening in the marketplace.
We are not.
Hopefully, if you will or a bias towards consumer and where we play in consumer tends to be in the premium side in the gaming side, which tends to be competitive.
T a area, where we have a differentiated advantage. The same is true on the commercial side as I mentioned in the last question.
When we move our way toward servers, the pricing environment is relatively benign pricing environment. We have large backlogs. We have demand ahead of supply because the supply chain has gone through for the past six plus quarters.
We see that pricing environment, the pricing environment, there enables us to pass along our increased cost as I mentioned and the same is true in storage and then as we step back I'd ask all of us to reflect back.
No I'm being ushered down here sorry.
We work our way through this change in demand we are unbelievably optimistic about the long term hybrid work is here to stay.
Which drives higher mobile mix, which drives greater configurations and more peripheral.
Pcs are more pervasive in the education system worldwide.
Whereas approaching the three year replacement cycle of what we put in to respond to Covid and Triaging. The work from home event from three years ago, and we're still staring at a market thats larger than it was pre COVID-19, which we're excited by it and then you look at what's happening on the infrastructure side.
The World continues to digitize it a non linear rate data is being created at unprecedented levels, we get data gravity pulling the infrastructure resources.
Out to the edge, the new digital highways being dealt with five G. So we absolutely are very bullish and optimistic about the long term characteristics of the marketplace.
Thank you Greg.
Next question.
Thank you. Our next question will come from Shannon Cross with credit Suisse.
Thank you very much I wanted to ask about project apex, and you know you're over $1 billion now I'm curious as to the the the response from customers.
Seems that ratable or infrastructure as a service might be something that would be more attractive. If we are going into a downturn, which apparently are so.
Maybe if you can talk about how you think about growth and then also how we should think about margin potential for that business.
And as it becomes.
Albeit a small part now but a bigger part of your revenue over time. Thank you.
Thanks, Shannon, it's good to hear from you again I'll start and let the team later on look as you said, we're pleased with our momentum on apex and we're excited to share the milestones today.
They are now approximately $1 billion for your orders, 78% year on year in Q2.
And we added 200, new customers, if you dissect it a bit.
<unk>.
<unk> seen a lot of strength in our custom solutions. So our apex flex on demand offer that's effectively customized infrastructure across storage server ACI data protection with committed and then buffer capacity.
Also our apex data center utility offer which is effectively customers that want to move all or part of their data center to.
Dell managed pay per use model and as you said look in the current macro environment, where naturally seeing.
Lots of interest from customers, who are looking to manage cash outlays by pivoting to a pay as they go scale on demand type model.
So really good momentum in the business look from a from a P&L and reporting in growth and margin. We don't want to get ahead of ourselves. We will continue to report out periodically on our progress like we did today and we're going to continue to remain focused on extending the offer set in apex and hitting our technical milestones so more to come from us on it.
Thanks.
Thanks, Chad.
Thank you. Our next question will come from Rod Hall with Goldman Sachs.
Yeah, Hi, guys. Thanks for the question.
As I sit here I think a lot of people are going to look to come away from this call with what they can maybe read across.
Obviously dealt with very important company, both in enterprise and consumer so I wondered if maybe starting with the commercial or the enterprise side of things. If you could give us any further color or double click on the types of customer, maybe where you've seen this slowdown or these large enterprises smaller any kind of trends you see there.
Might help us learn what's going on in the environment and then likewise in consumer even though there's less exposure I know you guys have a lot of good data there.
One thing in particular on consumer we're interested it is higher end consumers do you think that you've seen any evidence that those are weakening thanks a lot.
Yes.
Sure, Jeff I'll take a run at this and then Tom and Chuck can certainly add if we start with just commercial PC or enterprise. As you described I think we said it in a variety of ways, but I'll try to make it crystal clear one of the things that we had seen through the quarter and Tom referenced how the pipeline did not build through that.
Quarter as expected and is it.
Traditional or historically does we saw the buying characteristics of large companies.
Slow or what we call large bids in the large bids bid parts of our business slowed and what large bids we did have or a smaller size.
And as Chuck said in his comments, which I think are very appropriate what we saw with the corresponding.
Corresponding behavior of customers buying to their more urgent needs not their future needs that they were being very cautious because of the macro environment. We're all operating in.
And that made its way down through the large large multinationals to the large corporations and across our customer set.
P and M D or least impacted our least impacted in that way.
On a relative basis, so they performed better on a relative basis, which is encouraging.
But large businesses, primarily in both servers and Pcs.
Who are the ones that slowed as those large bids became less frequent.
And we're a smaller size.
And that was the challenge throughout the quarter.
On consumer.
We didn't really we don't compete in the very low end of that marketplace and Thats certainly what <unk> seen now as I'm sure. Your channel checks tell you that the channel has amped.
Ample inventory.
The competitiveness in consumer has grown because of the ample inventory.
And certainly you're seeing that in some of the other reported earnings through the last couple of weeks.
In terms of the high end gaming and the xps business or premium consumers, we like to call. It I mean, certainly we're impacted you can't have a consumer business that.
<unk> has exposure to those two subcategories.
And not be impacted they were impacted less.
I think that answers your question if I didn't.
Great drops rule here.
Qualified a little more.
Maybe let me add on in terms of you did a great job talking about the PC demand from our enterprise R. I S.
And construction demand perspective, as we said in our talk track that.
But we did see ISG demand moderating across the quarter in terms of overall demand growth.
What we are seeing.
As customers.
Session cycles elongated customer.
Deal size.
Reducing and quite frankly pipeline pushing a little bit.
Obviously digital technologies as an underlying theme in trend is here to stay and we are.
Do you see customers that are continuing to spend at just the overall environment is cautious.
And so as we thought about it quite frankly will inform some of our guide is that.
And we look back and thought about where we were in may versus where we are now, although we still see ISG demand sort of in that low.
Doubled our ISG revenue I should say low double digits for the year.
You know it is a bit softer and quite frankly, as we talked about backlog and elevated backlog within ISG.
Yes, we think about the back half of the year, that's an area that will probably.
Break backlog down as we go through the year, depending upon ultimate demand signals and supply chain.
That's great. Okay. Thanks, guys I'm afraid of Rob So I don't want to break as rules. So I appreciate all that detail.
Okay.
Thanks Pat.
And our next question will come from Jim Suva with Citi.
Thank you and I'm not smart enough to ask more than one question. So I'll stick to one and that is all.
Okay.
With these delays.
Is your sense that there is an opportunity for share shifts that will actually favor Dell are there some actual surprise cancellations, you're having is it.
End of a quarter or two pause here or any sense about share shifts and this pause in duration. Thank you.
We didn't hear the first couple of words of your question is if you could set that up again that would be very helpful. Please.
You bet. So with these caused you said about demand.
Do you think that there is big share shifts occurring or technology transition that companies are pausing on especially on the enterprise side or do you think that companies are all like customers canceling their orders and plans and the duration of Im just trying to get a sense about is it just changing more quickly and more.
<unk>.
Thanks.
Well I think we can't underestimate the impact of the macro environment that we're operating I think companies being being cautious.
And that cautionary.
The view.
Impacting how fast things will be built up in the future again, I think our characterization would be.
Companies are buying to their urgent and immediate needs.
I won't say, they're postponing their longer term build outs, but theyre actually reevaluating the timing of those and I think thats, probably an important way to think about it.
The notion of digital transformation the world digitizing the things that I referenced a few moments ago are still here.
We're going to live in a world that is clearly more connected more distributed building data everywhere with data driven insights and that's going to require technology to bring to life.
I think in the immediate opportunity I think our direct model and the way that we operate and how agile and nimble. We are we typically do well when markets are up and we typically do well when markets are down so our direct models allowed us our belief with our listening posts to see this early position our company appropriately.
And we intend to take share in the marketplaces, we serve.
And we think we're positioned to do that.
And the ability to help if you will soft land some of the unit slowdown by having a model that or access to the market that allows us to sell higher end configurations across Pcs servers, and storage and attached peripherals services and financing I think gives us a.
An advantage in a marketplace that may be I'll use your word pausing, we would prefer the word slowing for the reasons that I outlined I hope that helped.
Thank you so much.
Yes.
Can't help myself, but to stay on the buildup Toms prior conversation.
What we can control in our playbook in these times of economic uncertainty look we have a playbook that has worked over multiple cycles.
It is basically we're going to focus on what we control and we're going to position to play offense in this market and that is we intend to accelerate our strategic position in both our core businesses and in these adjacent businesses.
Yes.
Thank you Alan.
Yes.
Sure.
Thanks, Mike.
Yeah go.
Yes, sorry, just to finish.
Look I think I think the cost actions that we took in Q2 that were incredibly prudent were also strategic and not uniformly applied. So we maintained our critical innovation investments, we made critical investments in our priority growth businesses like telecom edge and multi cloud and we stay externally focused.
As Jeff said, we're a company that is gained.
570 bps of commercial unit share over the last five years.
Almost 600 in mainstream servers and.
The number one leader in storage.
This is an opportunity for us and that's how we're trying to position.
Alright, great. Thanks, Jim next question please.
Our next question comes from Aaron Rakers with Wells Fargo.
Yeah, Hey, thanks for taking the question I wanted to go back to kind of rods question, a little bit I guess, if I were to look at the guidance I think you said low teens on the ISG segment this quarter I'm, assuming that implies year over year growth.
It doesn't seem like that's really just similar to normal seasonality actually I think you could even argue it's a little bit above seasonality. So I.
I guess my question is as we look at this next quarter and even the quarter after that.
Should we think about like backlog burning down relative to demand deteriorating.
Just help me bridge that.
Bridge between whats going on with backlog versus what Youre actually seeing as far as.
Slowing.
<unk> demand.
Yes, Hey, that's actually what I was alluding to right.
Setup of this conversation you have to think about what we just talked about in Q2 was moderating ISG demand.
Where he went through the quarter.
Our expectation is that moderating demand continues.
I think if you look overall for it.
In the back half of the year.
Particularly in the IFC space, you've got to think about these things separately, we are a bit more optimistic about storage demand and we are about server demand at this point.
And my comment around how we framed the guidance and the components of the guidance, particularly within ISG.
ISG growing sort of in that.
High single digits low double digits to look back half of the year principally vault through whenever the current demand generation is in that quarter, and then with elevated backlog using backlog.
<unk> journey to drive incremental shipments all of this obviously predicated on the supply chain being there.
I think we have.
More confidence and the availability of the supply chain, particularly in the ISG supply chain, Jeff I don't know if you'd add anything to that.
No I think you called it out correctly.
We look at the second half.
The demand environment that we've been talking about from a supply chain perspective, the things that have.
Impeded us to be able to ship, what we sell in any given quarter. We believe our clearing the way in the second half of the year, which is what we're supposed to do on the supply chain organization. So working through the things that I've called out in the past that voltage regulators embedded controllers, the associated Ics with power supplies in the <unk>.
Next our line of sight to them in the second half of the year continues to improve in.
We're in a good supply position.
Okay. Thank you.
And our next question will come from <unk> Mohan with Bae.
Bank of America.
Yes. Thank you.
Last quarter, you thought Pcs could be about 330 million units I was wondering if you could give us an update on your current view in 'twenty, two and maybe any early thoughts into 'twenty three.
And if we look at your free cash flow RIDEA LTM free cash flow is very impressive but over the last six months. It's been negative as you look to this weakening demand environment, and particularly declining revenues in PSG.
I know you've got elevated levels of inventory as well. So there are quite a few moving pieces. So.
Any any help you can give us in trying to think through as you burn through that inventory in.
Look at that.
Elevated backlog the rate and pace of that.
Leaning off.
How we should be thinking about your.
Potential free cash flow generation over the next couple of quarters.
No one's you're all dressed since I'm, the one that put $3 30 out there on our last call where our current thinking you see I'm sure you saw last night that IDC came out with their new forecast.
Certainly a significant change second half, obviously, particularly change in a market now in their definition of roughly 305 million units, which I believe takes the market down on their side or just under 13% our view.
So tying it to the $3 30 that I talked about last time. Our view is built on a proprietary model that proprietary model uses many industry sources. It uses what we learned from our supply base and what we hear from our customers and our model is a little more pessimistic than that we're sitting here.
Being around 290 million units for the.
The year.
Roughly 151 sold in the first half of the year, we can do the math of how you get or what it would be in the second half. So we have the second half down more than ITC does based on our insight our listening posts in our proprietary model that allows us to at least manage and navigate the business.
So that's our current outlook 290, it'll be wrong tomorrow, all the precision of these tools isn't that.
Specific to the <unk>.
<unk> is an approximation of where we think the market is now in driving our behavior.
Thanks, Jeff. Thanks, <unk> next question please.
And our next question will come from Amit <unk> with Evercore.
Thanks for taking my question I guess, maybe if I think about the back half expectations that you have for ISG.
Can you just maybe talk about what are you seeing in storage versus server that one is more weaker versus the other that'll be really helpful to understand and then Tom.
Tom if revenues are down to what you're alluding to in the back half can be still have positive free cash flow generation backup deal.
Yes, let me take let me take that let me start with just the storage side. So look we.
We're pleased with the storage performance you saw that fifth consecutive quarter demand growth in storage and that streak is now extended to the P&L, where 6% growth in Q2 after 9% growth in Q1, So that's 8% growth for the first half.
I think we saw strength across a number of portions of our portfolio. Our breadth of portfolio continues to be an advantage and so we saw growth in storage around the high end power store continued to grow entry unstructured and I'd sort of call out that as we've.
In the past the storage business can be lumpy in any one quarter and if we pull the lens back to the first half our core storage business data protection hyper converged infrastructure businesses. All grew at a very healthy clip. So looking ahead on storage we would say.
Look we do see demand growth moderating as the caution that enters the environment sort of extends to storage, but from where we sit today, we see more moderation in server buying that in storage buying and so we do expect storage demand growth again, Greg.
Great. Thanks, Thanks for the questions next question. Please.
And our next question will come from Sidney Ho with Deutsche Bank.
Great. Thanks for taking my question. My question is on the margin side of things I think last quarter, you expected gross margins to be kind of flattish in Q3 and up slightly in Q4, given what youre seeing right now and also the incremental foreign exchange headwinds.
You're seeing gross margin trending and also why you added can you talk about what your expectations by operating it by segment in terms of operating margins given your comment on reducing expenditures.
Hey, Cindy let me let me, let me talk about the margin dynamics that we're seeing and I will.
Parse it down to an operating segment level, but at an aggregate level. If you recall, what we said in the guidance when we talked about this and made you expected.
<unk> gross margins to decline given the mix of the business given foreign currency and given some of the backlog dynamics and effectively that's what you saw happen in the Q2 results.
What we just said in the guidance for Q3 rows that we did do we do expect.
Operating or gross margin excuse me to increase in Q3, just given the mix of the business the pricing actions that we've taken to try to offset the currency, although that continues to be dynamic.
But we think the mix of the business is helpful and remix a bit more towards commercial Pcs in the back half of the year as well so.
Our expectation right now with what we know today is that gross margins move upward in Q3.
And then relatively stable as you go through the remainder of the year.
Great All right next question please.
Our next question will come from Steven Fox with Fox Advisors.
Good afternoon.
Just wanted to clarify a couple of things you said on storage or just maybe understand timeline. So I understand what you said looking back on mix and trends and how you're still seeing overall demand growth.
And the broad advantages in the portfolio, but when you think about mix over the next two to three quarters can.
Can you sort of dig into that and what.
Some of these macro pressures might mean for the overall storage mix going forward. Thank you.
Well.
Let me try to work my way through that question. So.
I think we tried to say that as we think about our businesses that we've talked about the PC business and the demand.
The forward looking server part of our Biz.
Business and its associated demand I think Chuck just referenced we expect our storage business storage marketplace to grow in the mid single digits.
And we expect to gain share and outperform the market where are the sources of that performance. The sources of those performance, we're going to be our number one positions across the portfolio, we're a market leader in.
The high end, we just put version four of power Max into the marketplace is unmatched in the market and we continue to believe we can grow that.
Power store Chuck made some references how power stores doing it's nearly half of our midrange mixed now 24% of the customers are new we just put our third software release into the marketplace with a new controller. We now have a feature of that certainly we wish we had had earlier.
But it's now in the marketplace native Metro sync replication.
We don't have any market deficiencies in the mid range and we have the most modern architecture in the marketplace that we expect to lean on that our power scale and structured product as new our powerful <unk> software defined storage product is unmatched in the marketplace. Those are going to be sources, where we go drive differentiated.
And Tim I believe will be successful in outperforming the marketplace, Hey, Jeff I think in addition to that given the product portfolio that we have there's a couple of macro things that helped us as well clearly.
And for a refresh cycle for the high end of our power Max.
<unk> should benefit from that now it's early innings volumes, we do expect there to be some benefit as a result of that.
The reality of the World is that data is still going to be able to do.
Need and the ability of companies test historic data continues to grow and with the solution capabilities that you just outlined and our positioning in the market I think we feel pretty good about the opportunities right.
Think about it I think I've mentioned this before but if you summarize that our priorities in the storage business are really consolidating the highest.
What is the best product in the marketplace innovating in taking share in the midrange, where we are the market leader, but we want to create more space and then leading the HCI in software defined infrastructure business. So we have the leadership position in all three and we continue to lean on them to grow.
Great that's fair thank you.
Thank you. Our next question will come from Selman <unk> with J P. Morgan.
Oh, Hey, Thanks for squeezing me in I guess, you mentioned a few times on the call that you've obviously manage through economic downturns in the past as well I was just curious if you can talk about box of the business that will be counter cyclical lennar financial services was called out as one and particularly as some of the slowing reverses from your customer.
Was you know hopefully sometime when should we expect to see the rebound first.
The insights on that from your experience. Thank you.
Yes.
Let me, let me start and then the guys can jump in here as you think about what might be counter cyclical in our business.
Rightly pointed out that.
What we have seen in the past with CFS is that in times of macro uncertainty macro weakness customers tend to want to preserve cash balances.
Liquidity opportunities and move towards financing clearly the origination.
Originations that we saw in TFS this quarter are.
Our opportunities for us So I would also talk.
Thank you to thinking about apex's, an opportunity right in terms of the as a service and subscription frameworks.
Many customers are interested in the lack of preservation.
Preservation of capital our Capex.
And as the opportunity to lean into APAC.
Which will be interesting for us if you think about sectors or verticals within the market place and you think about the macro dynamic that's going on right now and where governments in particular are spending money or where.
Vestments are going into think within the government space the defense sector education and healthcare within the government space are interesting opportunities, depending upon budgets get released and how they flow.
You've seen the macro around energy and so on.
Investment flowing into the energy verticals and energy companies will require infrastructure build out. So there are a number of areas within this broad context of a slow the slowing economy that are interesting to us that we are we will explore it as appropriate to try and drive velocity I would also.
Remind you that.
Jeff highlighted in his conversation around supply chain that we expect.
Deflationary component costs in Q3, obviously you guys have been following this industry for a while and know that in times of deflationary component costs. Historically, we've tended to do well in those types of opportunities as we think about the margin opportunity. There. So look we'll have to navigate through it.
It's what we do.
But I have confidence that we'll be positioned to take advantage of any growth vectors that are out there.
Greg We've got one last question and I'll wrap it up.
Thank you our final question will come from Krish Shankar with Cowen and company.
Hi, guys. Thanks for taking my question. This is Steven calling on behalf of Krish.
Just one one question on ISG server refresh sure obviously the Nu.
Next ADC service chips are coming out.
Hi wanted to listen Keybanc product releases can.
Can you talk about your customer feedback on expected demand.
Sure.
In the context of the macro slowing.
I'll take just given that.
AMD based sensor systems had increased as a percentage of the overall market do you anticipate to fulfill to possibly be in line with that.
Well, let me see if I can work my way through that so we talked about a slowing server demand independent of technology and architecture, It's probably worth saying for the last six quarters. We've been in a growth mode. This sector has really grown for us it's been seven quarters in a row and you've seen this massive.
Consumption of infrastructure in this case, we're talking about server servers, we are <unk>.
Benefited from that by taking tremendous share in this marketplace. So as I look forward as we get through the consumption cycle and I'm not here I can't cast how long that consumption cycle is.
Going to be delayed or pause as we go through what's called the digestion period.
We're poised quite well on the consumption button gets turned back on again.
Have refreshed products, both classes of X 86 architectures.
B and our performance position.
Progress, we've made strategically across high value workflows, our ability to sell deeper into the data center, what we're doing in the software defined space across the board I think it positions us quite nicely to take advantage of when that consumption period.
<unk>.
I can't forecast that we talked about the demand slowing.
We didn't say it was stopped so I think thats an important notification in the longer term attributes continue to.
Really drive a demanding multi cloud world.
Decentralize World data intensive world a world that requires more data driven insights automation and embedded intelligence. Those are the things that we built for our customers so longer term I feel really good.
Market forecast or in terms of what happens in the next period of time, but we're positioned quite well.
Hey, good we had a couple of second questions that I intentionally didnt address that were related to cash flow and I just feel like it's probably better that we just hit those.
Questions on cash flow in the second half given the.
Linearity in demand dynamics, yes look.
Obviously.
It was almost that pointed out that.
However, the first half of this core of course half of the year, we've seen free cash flow through a bit softer given some of the sequential dynamics.
<unk> dynamics and revenue type.
Mix in the business so.
So as we think about the back half of the year, we will generate free cash flow.
Yes, you know our model as you guys. All know is when we expand revenue with our negative working capital model, we tend to generate a lot of cash flow.
When revenue demand or revenues flattened.
You tend to have a little bit of a pullback in that we've got a number of actions in place right now, particularly around how do you think about driving working capital down to drive more efficient utilization of working capital you saw with inventory.
Came down $400 million in the quarter and will continue to work our way through that being cognizant of ensuring the continuity of supply and the supply capabilities are there to help us serve our customers.
We did build receivables this quarter doing somewhat.
As a result of some of the sales linearity that we saw.
The receivable aging is in great shape, we're not seeing any signs of stress from the customer base. There at this point and so we'll work hard to get that back into profile Tyler what else would you add to that no I would probably just add I mean look if you look back over the last several years, obviously, it's been a it's been a great demand environment in <unk>.
Benefited from from working capital efficiency and you saw our our free cash flow conversion to net income was well above one times right.
That's our target, although I would say for this year, given where we are and what we're seeing I would expect us to be below that one tax target, but we're obviously migrate back towards that over time.
Alright, Thanks, Tyler that wrap the call today, just as a reminder, we will be a multitude of conferences.
Quarter with additional IR activities in Asia, and Europe . So we look forward to seeing you in or out on the road and thank you for joining us today.
Thank you. This concludes today's conference call. We appreciate your participation you may disconnect at this time.