Q3 2023 Dell Technologies Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the fiscal year 2023 third quarter financial results Conference call for Dell technologies incorporated I'd like to inform all participants that this call is being recorded at the cross at Dell Technologies. This broadcast is copyrighted property of Dell technologies incorporated.
Any rebroadcast of this information in whole or part without prior written permission of Dell technologies is prohibited following.
Following prepared remarks, we will conduct a question and answer session. If you'd like to ask a question simply press Star then one on your telephone keypad at any time during the presentation.
I would now like to turn the call over to Rob Williams head of Investor Relations. Mr. Williams, you may begin thanks.
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 our materials and presentation, which includes additional 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 diluted earnings per share.
A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our 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 our SEC filings, we assume no obligation to update our forward looking statements now ill turn it over to Chuck.
Thanks, Rob we delivered very good results, including strong ISG revenue with record profitability and good DSG profitability. Despite the difficult demand environment that we highlighted in our last earnings call. The net of our disciplined execution was Q3 revenue of $24 7 billion.
Down 6% with record operating income of $2 4 billion and.
And record diluted EPS of $2 30.
ISG revenue was $9 6 billion.
12%, while CSD was $13 8 billion down 17% from a macro perspective Q3 played out as we previewed last quarter soft underlying PC demand and slowing infrastructure demand those storage did hold up fairly well relative to servers with growth in multiple store.
<unk> types, including high end power store, our Q3 performance underscores our strategic focus the advantages of our model and our ability to deliver differentiated results in any market environment. Our unique sales model provides direct real time feedback from customers of all sizes and across geographies and.
<unk>, which allows us to see the demand environment shifts faster than the rest of the industry and as the demand environment changed we reacted quickly and decisively which showed in our results.
Took actions to reduce costs decreasing our operating expense, 3% sequentially in Q2, and another 6% sequentially. In Q3, we have now reduced quarterly operating expense by over $300 million. Since Q1, we reduced server backlog consistent with our Q2 commentary and delivered strong profitability.
As our model allowed us to access component cost deflation faster than the rest of the industry and we stayed focus on relative performance in the most profitable segments of the market. Despite some expected distortions in the PC market given elevated competitor backlog, we continue to gain commercial PC unit share in Q3 and <unk>.
Now gained share in 35 of the last 39 quarters in ISG, we expect to extend our industry leading share positions in servers and storage when Q3 IDC results are announced in December .
And we executed on all of the above without compromising our innovation agenda with 30 infrastructure launches in the last 13 weeks, including six new Dell apex offerings in strategic areas like multi cloud edge and subscription and as a service. We're excited about the launch of project frontier our initiative to deliver.
And edge operation software platform focused on unifying edge operations across infrastructure and applications for a broad set of industries and earlier today, we announced the availability of power flex our flagship software defined storage solution on AWS with a cloud first design point.
It reflects on AWS is the first adult industry, leading storage offerings available in the public cloud as part of project Alpine our effort to bring our industry, leading storage software to public cloud to provide multi cloud data mobility and simplified data management it will enable customers to use Dell storage software capabilities.
And API wherever their data resides without the need for purpose built our specialized public cloud infrastructure.
Our new project Alpine related SaaS offerings will add to our growing portfolio of apex solutions, while enabling our customers to harness the power of multi cloud.
Stepping back the near term market remains challenged and uncertain on one hand, we are seeing some customers delay purchases. Other customers continue to move ahead with Dell given the criticality of technology to their long term competitiveness and a growing need to drive near term productivity through it.
The World continues to digitally transform data continues to grow exponentially and customers continue to look to technology to drive their business forward no matter the economic climate as the market leader in commercial Pcs and infrastructure, we are well positioned whether a customer is seeking to drive growth productivity and efficiencies.
Or a combination we're trusted advisors to our customers and we have a business model that allows us to adjust quickly to meet their needs. So we are very confident in our ability to adapt and deliver results. Despite the near term uncertainty Q3 was proof of our underlying advantages and ability to execute no matter the environment.
As always we will continue to focus on what we can control taking care of our customers driving differentiated relative performance delivering against our innovation agenda, managing our cost position maintaining pricing discipline and building a unique and winning culture with our team. This is the playbook that has served us well across multiple cycles.
And no matter the backdrop, we intend to accelerate our strategic position as we did in Q3 now I will turn it over to Tom for the financials.
Thanks, Chuck I am pleased with our Q3 P&L performance, despite the tougher near term demand environment. It's.
As Chuck mentioned, we highlighted the softening environment and slowing ISG demand in our Q2 earnings conversation in the third quarter generally played out as we expected, albeit with server demand velocity is slowing a bit more than we anticipated.
We continue to focus on executing our strategy to win in the consolidation and modernization of our core markets.
And we have executed well over the last few years and again in Q3.
ISG, we've grown our revenue for seven consecutive quarters and have grown our revenue at a 3% CAGR since fiscal year 'twenty.
We have been consistent structural share gainers in servers, where we are number one gaining 530 basis points over the last five years in mainstream server revenue per IDC.
In storage, we are bigger than two and three combined and with a refreshed storage portfolio. We have added to our number one position gaining share over the last two quarters and anticipate gaining share in both storage as well as servers again this quarter when IDC results come out in December .
Our CSD business has grown at a 12% CAGR since fiscal year 'twenty.
As Chuck mentioned earlier, we have gained commercial.
<unk> share in 35 of the last 39 quarters, including Q3.
Turning to our Q3 results, we delivered revenue of $24 7 billion down 6% with strong ISG performance, particularly in servers, we reduced total backlog by $1 $2 billion sequentially during the quarter with CST backlog now in a more normal range.
And ISG backlog slightly elevated year on year, but substantially reduced from the beginning of the quarter.
Profitability was strong in Q3 gross margin was $5 9 billion up 2% and 23, 7% of revenue.
Gross margin percentage was up two points, primarily due to a favorable mix shift to ISG and a decrease in our cost of goods sold during the due to certain components, turning deflationary along with declining logistics costs.
FX remained a headwind and impacted revenue by approximately 420 basis points.
Q3 operating expense was $3 5 billion down, 8% and 14, 1% of revenue as we slowed hiring and reduced discretionary costs given the current macro environment.
As a result operating income was a record $2 4 billion up 22% and nine 6% of revenue.
Our year to date tax rate decreased to 18, 2%, primarily due to geographic mix of income.
Q3, net income was $1 7 billion up 30%, 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 a record $2 30 up 39% with diluted share count decreasing sequentially to 743 million shares as a result of share repurchases in Q3.
Our recurring revenue is approximately $5 4 billion a quarter up 11%.
Our remaining performance obligations or <unk>.
There's approximately $39 billion down year over year due to a decline in backlog, partially offset by an increase in deferred revenue.
Turning to our business units.
And ISG Q3 revenue was $9 6 billion up 12% driven by a reduction in our server backlog consistent with our Q2 call commentary.
Servers and networking revenue was $5 2 billion up 14% and storage revenue was $4 4 billion up 11% as mentioned, we did see softening unit demand in servers.
What offset by higher average selling prices given Richard configurations, driven by customers running more complex workloads.
ISG operating income came in at a record $1 4 billion or 14, 3% of revenue.
Which was up 390 basis points as we benefited from scale with lower operating expenses and pricing discipline.
Our client solutions group revenue was down 17% to $13 8 billion, primarily due to underlying softness in both commercial and consumer demand.
Commercial revenue was $10 7 billion down, 13% and consumer revenue was 3 billion down 29%.
Average selling prices trended higher in both commercial and consumer as customers bought Pcs with Richard configurations.
<unk> operating income was $1 1 billion down 7%, primarily due to scaling partially offset by stronger gross margin percentage and lower operating expenses.
Operating income was seven 7% of revenue.
Dell financial services originations were $2 3 billion up 17% with strength across geographies and TFS ended the quarter with $13 $8 billion in assets.
We have historically seen stronger originations and more recently, an increasing interest in subscription models as the macro environment slows.
Turning to our cash flow and balance sheet, our cash flow from operations was approximately $400 million in Q3 and is $3 9 billion on a trailing 12 month basis.
Q3 cash flow was helped by profitability, but offset by the sequential revenue decline in the P&L and a use in working capital.
Within working capital inventory was up sequentially as we strategically accelerated purchases of some key components.
We continue to navigate through supply chain dynamics.
Improving working capital efficiency and reducing inventory remains a priority.
Our core debt balance is $16 2 billion in our core leverage ratio leverage ratio is one six.
We ended the quarter with $6 5 billion in cash and investments down $600 million sequentially, principally due to $800 million in capital returns.
Turning to capital allocation, we repurchased 16 3 million shares of stock in Q3 for $609 million and paid $238 million in dividends.
In addition to our $1 billion annual dividend.
Since the beginning of our current share repurchase program, we have bought back $70 3 million shares for $3 three $6 billion.
Going forward, we will continue our balanced capital allocation approach.
<unk> shares programmatically to manage dilution, while maintaining flexibility to be opportunistic.
Turning to guidance considering the demand environment, we expect Q4 revenue between 23 billion and 24 billion down 16% at the midpoint with ISG roughly flat.
Similar to Q3 currency continues to be a headwind for us we are expecting a roughly 500 basis point impact to Q4 revenue.
We continue to be focused on managing cost. However, we do expect to see a roughly $150 million opex increase sequentially given the extra week in our fiscal Q4.
We expect our interest and other expense to be up $60 million sequentially, driven by interest rate volatility and the impact on our derivatives portfolio.
For our non-GAAP tax rate you should assume 22% at the midpoint, which reflects a 19% plus or minus 100 basis point rate for the full year.
We expect our diluted share count to be roughly $730 to 735 million shares.
Netting this out we expect diluted earnings per share in the range of $1 50 to $1 80 down 4% at the midpoint.
I recognize that many of you have questions about our view on fiscal year 'twenty four.
Still early in our annual planning process, However, I'll frame our current thinking.
We expect ongoing global macroeconomic factors, including slowing economic growth and inflation rising interest rates and currency pressure to weigh on our customers and as a result, their spending intentions, even as they continue to digitize their businesses.
These dynamics are creating a broader range of financial outcomes for our upcoming fiscal year, particularly as we think about the second half of the year.
With what we know today, it's likely next years revenue is below historical sequential using our Q4 guidance as the starting point.
In closing, we delivered strong third quarter financial results, we have strong conviction in the growth of our Tam over the long term, even though some customers have paused purchases in the near term.
And we are committed to delivering our value creation framework with a revenue CAGR of 3% to 4%.
Diluted earnings per share CAGR of 6% plus and a net income to adjusted free cash flow conversion of 100% or better since fiscal year 'twenty. Our revenue has grown at an 8% CAGR our diluted earnings per share has grown at nearly a 20% CAGR and we have exceeded our net income to.
Adjusted free cash flow target in each of the last three fiscal years. We are also committed to return 40% to 60% of our adjusted free cash flow to our shareholders over time and have returned $4 1 billion of capital to our shareholders over the last 12 months through share repurchase and dividends.
We will continue to be disciplined in how we are managing the business and our financial posture in this complex macro environment.
Focusing on what we can control and helping our customers along their digital journey.
Now I'll turn it back to Rob to begin Q&A.
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.
Let's go to the first question.
Ladies and gentlemen to ask a question star one on your Touchtone telephone Please star one.
Our first question from Krish <unk>.
Sankara with Cowen <unk> Company. Please go ahead.
Yeah, Hi, Thanks for taking my question.
Chuck I'm, just kind of curious you mentioned about how the IC spending will foster.
What do you see across the ecosystem Gulf all enterprises, the largest smaller one and within that where do you think.
Yeah.
Focusing their budgets right now.
Global Eagle software, just kind of curious any thoughts you can give on <unk> spending.
Pending environmental fee.
Yes, Thanks, Chris Let me give you a little bit.
The texture that we're seeing but then maybe let me start by just highlighting look we executed very well in what was a.
Very dynamic environment as we've highlighted our principal objective in this environment is to deliver relative performance and share gain and in Q3, we did that across client server and storage and we delivered very good profitability. So while we're not going to get into specific demand numbers today, let me offer some texture on the environment that we're seeing.
First I would just say the CSC demand environment remains.
<unk> with as you saw in our results consumer weaker than commercial.
We saw slowing server growth as Tom highlighted in our prepared remarks, it was probably a little bit worse than we anticipated at the time of our Q2 earnings call.
So as we said Q3 server revenue growth of 14% was aided by server backlog reduction.
And storage fared better it's ultimately not immune to the broader dynamics youre seeing across customers.
We saw growth across multiple storage categories, including the high end HCI and power store.
Your direct question about texture underpinning that those dynamics were largely consistent across geographies, we'd say verticals as well and customer side Theres, probably a couple of exceptions, we would call out.
One would be China, which had a much more pronounced weakness last quarter and we would highlight the energy sector. The U S government sector, and then medium business generally globally as performing better relative to the rest of the business and the customer feedback is very similar to what we described in Q2.
Cautious and deliberate behavior in the face of whats a lot of economic macroeconomic dynamics out there. So we're hearing reassessment of budgets re priority.
Re prioritization excuse me of spending and customers buying effectively for just their immediate need. So net I would say Q3 was a continuation of the trends that we called out during our Q2 earnings call.
Thank you very much.
We will take our next question from David vote with UBS. Please go ahead.
Great. Thanks, guys for taking the question Tom maybe this is for you can you kind of elaborate on year on your earlier remarks about the framework for 24, just to clarify when you talk about.
Obviously, theres a lot of moving pieces, but how do you think about the historical sequential moves as we move through the year. So are you trying to communicate that we basically start with Q4, and then take sort of a normal sequential pattern over the last let's say two to three years and sort of maybe haircut the haircut that a little bit given the uncertainty just trying to maybe level set since my.
My line dropped a little bit.
Hey, David happy to happy to sort of elaborate on that obviously as we look at the environment, It's pretty early in our planning process from a fiscal year.
24 perspective.
Nearly the landscape and the dynamics are complex and there is a high degree of complexity out there, whether it's around inflation or interest rates whats going on with FX global growth in general supply chain geopolitical I could probably go on but you get the point that at this point there is as we look at if theres, a pretty wide range of <unk>.
<unk> outcomes dependent upon how some of these things move and change on us and in particular I would say the back half of next year continues to be.
<unk> is a fair amount of complexity.
Chuck mentioned that we do see customers with a bit of cautiousness in their spend right now.
I think thats pretty evident.
And so that said, we're going to focus on what we can control, meaning will focus on assuring we help our customers as well as ensuring we manage the P&L properly both.
Tight on both spending and customer satisfaction.
And as a reminder, I would highlight that.
From a spend perspective, we've been focused on spend now for a number of quarters as we have restrained hiring and put other cost control measures in place, but having said all of that what I was trying to elaborate well I don't want to get into exactly what Nick sure. It looks like because we're still working our way through a reduced ink, it's going to it's got some complexity in some channels.
<unk> to it.
And as a result of that if you took sort of the midpoint of our guide and then ran.
Historic normal historical sequential say over a couple of two year historical and maybe aircraft those a bit I think youre going to be in the ballpark of work, but our current thinking is recognizing that it's going to continue to evolve and change over the coming.
Months.
Maybe the other data point to help you triangulate on that is if you look at.
P&L revenue growth in the back half of fiscal 'twenty three so obviously the minus 6%, we just printed for Q3 the.
At the midpoint minus 16.
Our Q4 guide sort of sort of points to a minus 10 minus 11 sort of growth rate and that's probably something you ought to think about as you should do that math.
Thanks, Tom.
Thanks, David.
We'll take our next question from Tim Long with Barclays. Please go ahead.
Thank you.
Hoping to dig a little deeper into <unk>.
And the Guy that sounds like it's a little bit more challenged market I think you mentioned asps were up.
Q3, so can you.
Talk a little bit about kind of where we are with channel inventory.
Commercial and <unk>.
Consumer.
What you see going on in pricing and what impact that will have.
And margin and maybe if you could just throw in what's going on with your backlog Im sure its being worked down as well.
A couple part of there, but I think you got that Jeff. Thank you.
Yes, Tim there is a lot in there let me start to unpack it and we will probably double or triple team. This one so look obviously, it's a challenging PC market backdrop, so maybe I'll just start with.
Our current internal estimates for this year, which I think we shared on our last Q2 call as sort of $280 million to $290 million industry units.
That's still our estimate as we go into Q4 and that implies sort of a.
Mid <unk>.
Double digit decline in units year over year, and I think that would be the single largest percentage decline in recent history would have to go back to 2015 to see something sharper. So that's the reality of the backdrop today as I highlighted commercial is holding up better than consumer and Thats clearly consistent with long term industry trends.
Commercial Pcs, excluding chrome tend to be the <unk>.
Bearable portion of the market.
Along with premium consumer and gaming and that's where we've been focused and so thats the dynamic that we see right now.
As expected in that environment from what we've seen channel inventories remain elevated we see promotional activity.
To sort of move move units through through distribution in particular.
And as I said customers are sort of waiting for.
The purchase for their immediate needs in this environment in terms of.
Pricing you mentioned asps.
Look.
Pricing has remained relatively stable.
Across our businesses if I, if I stay on on Pcs for a moment.
A number of factors clearly in this demand environment, we have seen a more competitive pricing environment consumer was the first clearly to see that pressure a couple of quarters ago and it remains very competitive and we saw the pricing environment get even more aggressive as the quarter progressed.
I would call commercial also is very very competitive right now given the slowdown we are describing we've seen more aggressive pricing, particularly in the largest accounts as the quarter progressed.
And so that's the.
That's the backdrop as you can imagine from a <unk>.
Supply chain standpoint.
Client and are where they were out of balance last year. We're now on more standard lead times across the portfolio and we're really in a position where what we sell is what we ship in any given quarter and that's the that's the dynamic in CSD.
Okay. Thank you.
Thank you Tim.
We will take our next question from Xiaomi Chatterley Gee with Jpmorgan. Please go ahead.
Yes.
Thank you. Thanks for taking my question I guess, if I can just talk about the.
I'll talk to that you provided on fiscal 'twenty forward and understand some of the challenges and headwinds on the top line, but maybe if you can talk about.
What are you thinking in terms of the sustainability of the gross margin, particularly im assuming some of the mix impact.
ISG was this ESG and you had a couple of.
The sequential decline in Opex here, but as you sort of look forward. How are you trying to align your cost structure to that sort of demand environment that you're thinking of.
Sort of what are the puts and takes when you think about the rest of the <unk> in fiscal 'twenty four.
Yes.
Sandra.
I don't want to get into.
Talking through every line item I mean, we gave you. Some early thinking just so do you guys sort of think your way through what the P&L dynamics at a top line might look like.
Highlight a couple of things, though right. So first as it relates to.
Gross margin stability in our Opex look.
We will work our way through what margin dynamics will look like we do expect right now that component costs are deflationary in the first half of next year with what we know today, we do think that the back half potentially.
Make may change just given some of the supply demand balances that are out there as we work our way through the year, obviously in a declining demand environment.
If there is a little bit of ASP pressure, which we would expect that we might see next year.
However, I do think that if you look at our mix of products and where we're focused on end markets.
We've got whether it's due to.
Our configuration, our attach rates in the client space or the fact that our servers that were shipping have a thicker content right from a memory perspective, those should all be helpful. As well from an opex for so so margins I think we'll have to work our way through Opex look I think we've taken cost actions that.
We have demonstrated the fact that we can control opex and.
If anything that we're very much focused on how do you manage your way through a complex environment like this we will adjust our spend targets in our cost envelopes as appropriate to manage the P&L. So I feel pretty confident in our ability to do so.
<unk>, we've taken already or you can see them in the P&L and we'll continue to work our way through that so.
Look I think it's early to start talking full P&L at this point again I just wanted to make sure you guys put some context around top line as we see it right now.
Thank you thanks, Brian Thanks, Amit.
We'll take our next question from Amit <unk> with Evercore. Please go ahead.
Thanks for taking my questions.
I was really hoping you could talk a bit more about the ISP side and the performance of this quarter.
There'll be the understanding to get IV and how do we do.
Maybe even how much of this growth.
Backlog and demand and it sounds like the end demand weakness was wondering does the weighted life was two buckets up and then Tom I think you mentioned opex headwind.
The impact of the extra week in Q4.
I could have missed this but could you just tell us global revenue benefited in Q4.
Excellent. Thank you.
Yes, and maybe I'll jump in on the business I'm not sure I have a ton to add our prior answers other than to say look.
The server business, we saw slowing server growth we had.
Hinted at that not even hinted at that stated that in Q2.
And had anticipated coming into the quarter I would say look at it worsened over the course of the quarter visa.
<unk>, our Q2 earnings call and therefore, our server revenue growth of 14% on the P&L was aided by server backlog reduction we would characterize server backlog is now roughly and its normal range.
Storage is a bit of a different story its share it fared better we saw growth across multiple storage categories high end ACI power store I would say storage backlog remains somewhat elevated relative to historical norms, given the larger business right.
And so a little bit of different dynamics across server and storage, but all in all a continuation of the trends that we saw in Q2.
Yes, hey, as it relates to Q4, there is an extra week there given the.
The dynamics of our fiscal year.
The any impact.
Revenue slash margin.
The results are already we've already embedded that in our guide obviously, if you think about an extra week. There is some level of incremental transactional demand that you get from some of our more transactional businesses, but.
A big majority of our business is also project and bid based which doesn't really get impacted by a.
An extra weekend a quarter so our guide.
Envelops all of those above.
Great. Thanks, Amit.
Sure.
We will take our next question from Aaron Rakers with Wells Fargo. Please go ahead.
Yes, thanks for taking the question I wanted to go back a little bit to the margin profile and maybe understand the dynamics of deflationary component costs, and how quickly youre being able to capture that in your in your server business I guess in the context of just thinking about the pressure on the model how do we think about.
And sustainability of that.
Our operating margin given very strong performance. This last quarter in terms of the ISG in that context.
Hey, Aaron.
Yeah, Let me, let me try and unpack that for you a bit right. So look.
Chuck Chuck has already highlighted what we saw from a pricing environment perspective, obviously, we talked about the fact in Q2 in our Q2 call that to the extent that we saw that were in our component cost deflationary environment, we tend to do reasonably well from a margin perspective, given that we don't move.
Pricing as much as costs come down or the pacing of that is different.
I think thats, what we saw this quarter so.
We had lower input costs from component costs as well as logistics cost.
We obviously priced for FX and some of the other dynamics that we saw in the environment.
All of that given the configuration and the the amount of memory and storage reporting on the servers in particular.
But to some better than anticipated margins I would say and so our ability to hold on to that over time.
You, obviously have to adjust pricing for some of those market commodities, but again.
That's only one element of the pricing stack.
Can you get into things like mix and configuration as other impacts I don't know if Jeff maybe to add.
Back to our model inventory, we have a lower inventory model.
One of the benefits of how we've run the company.
Beginning.
And it gave us availability to the lower cost I think earlier I think earlier than most our supply chain is executed well through this time, we had fewer mismatch set so we're able to convert that demand shipments in the backlog shipments throughout there.
And as a result of that we were able also to take advantage as Tom said lower freight rates lower expedite lower supplier premiums.
Obviously benefited throughout the quarter.
Okay, alright, thanks Darren.
We will take our next question from Sidney Ho with Deutsche Bank. Please go ahead.
Thanks for taking my question. My question is on cash flow. So I noticed the first three quarters of the year in aggregate free cash flow was negative.
Can you talk about building some strategic inventory in the last quarter. How do you think about Q4 and by definition that for the rest of the year unless we think through next year do you expect cash flow to exceed net income I guess I can asking how long do you think it will take working capital get to get back to normalized levels. Thanks.
Hey, this is Tyler I'll take that one so I think maybe just to start if you think about the last couple of years right cash has been really strong right. So we're seeing that build given that negative cash conversion cycle and we obviously benefit from that.
I think what we're seeing now is the opposite of that right and there is two things happening and you've talked about it right. So we've got the contraction in the P&L, which is impacting cash and then.
Working capital and.
Our intent obviously is to drive those working capital balances down, but we also don't want to Miss opportunities and you saw us take advantage of that this quarter.
Which impacted cash now as im thinking into Q4, and I'm thinking into next year and recognizing that you don't provide guidance.
I think you have to keep that in context that one Tom has talked about that there will be some pressure.
In the P&L and that will impact cash, but at the same time, we do have opportunities in working capital and it's quite substantial right. So we'll be focused on driving that down.
And obviously, that's something we know how to do.
And we'll be smart about it.
That's how I'm thinking about it yes, and then Tyler I would.
Look we historically do generate cash in Q4 tends to be a seasonally stronger quarter for US now we will have to work our way through this quarter.
But look I'm confident in the long term model in terms of cash generation. It's obviously wouldn't rerun the negative working capital or a negative cash conversion cycle. When you get sequential revenue decline in the P&L, you're going to use cash and thats what were seeing but teams managing its way through it we've got work to do in inventory pleased.
With what we're doing in receivables.
Or what that looks like in terms of the aging profile of collections.
Our ability to manage our way through it so.
Just wanted to we're in a cycle, where we're just going to have to work our way through it but long term I believe the model is intact.
Thank you thanks Sidney.
Okay.
We will take our next question from Erik Woodring with Morgan Stanley . Please go ahead.
Hey, guys. Thank you for taking my question, maybe just if we unpack the.
Fiscal fourth quarter. The January quarter Guide for me would just love to know maybe if you could double click on on or elaborate on your comments on kind of pricing versus volume, whether we should think of both of those as a headwind or whether some of the Richard config.
It helps to offset some of the discounting that you mentioned to allow pricing to still grow over years. So just really pricing versus volume comments for the January quarter.
Yes, okay.
Think about the guide right so 23% to 24 23, revive obviously at the midpoint of minus 16.
We are essentially say that we expect ISG it would be roughly flat that sort of implies that the client business or <unk> is serving the negative minus mid twenty's sort of year over year growth.
Look as we work our way through whether units versus Asps I'm not going to get into a lot of detail, but I want you to think a little thing about if you think about margin dynamics in Q4 for a second so you've got some seasonal dynamics that typically happen in our Q4, one tends to be a stronger <unk>.
Storage quarter for us given the.
Corporate budget cycle of the calendar year corporate budget cycle that tends to be positive in terms of margin dynamics.
Yes.
Flip side of that as you get into the holiday season, traditionally that has been a bit stronger from a consumer PC perspective.
Which has put as you might imagine.
Shifting the mix a little bit on puts put some.
Little bit of downward pressure on margin coupled with.
We highlighted the fact that we did see some incremental commercial PC discounting in Q3, particularly in the third month of the quarter and obviously, we have elevated through our elevated inventory levels in the channel.
So we put it all together and quite frankly, we sort of think about margins in Q from Q3 to Q4.
Aggregate level as being roughly flat.
And then.
Couple that with the Opex side day dynamic that Im talking we highlighted that sort of gets quite.
Quite frankly, the P&L walk as you think about it.
Thank you.
We will take our next question from Steven Fox.
<unk> advisors. Please go ahead.
Okay. Thanks, Good afternoon I had a margin question also I was just curious when we look at.
So there's a big beat in margins gross margins this quarter.
You mentioned a lot of different dynamics, including things that are under your control a little bit like configuration and content attach rate. So how much will you able to manage the margins up versus just circumstance and how much can we sort of think about Dell going forward in the tough environment being able to manage gross margins a little bit better.
Yes, let me start I think look Q3 highlights I think it's about the advantages of our model and very good execution in quarter. So let's foundational if you unpack Q3.
We saw higher ISG mix and as we've said a relatively stable pricing dynamic in that pricing dynamic is a combination of on the P&C side, Richard configurations, and a more favorable mix of product along with higher attach rate is helping offset PC unit declines and then on the server side of the.
This higher content rates, so think memory Ssds, Richard Gpus offsetting the unit pressure.
Thats just foundational you, but I think the real margin story is what we were talking about a couple of questions ago, with Q3, being deflationary and our lower inventory model. It allows us to access component deflation faster than the industry and then when you coupled out with our ability to see the demand signal quickly and react.
We were able to lower opex as we put it in a prudent cost controls that Tom described so those are the puts and takes across Q3, a lot of that is in our control some of that as the advantages of our model in this environment.
Maybe just maybe to add another.
Inventory is we don't have.
Excess channels.
We're not in a position that having to discount that.
Not in a position.
We're not in a position.
<unk>, where you have to go to chase volume, we have a conscious strategy and the high priced.
Sumer.
And the focus on commercial that gives us historically and I think we're seeing it today and advantage in the market. So we're not having to respond to that discounting and promotional activity to burn down excess inventory.
Just by the fact that we have lower inventory just as Chuck said, we were able to take advantage of lower input cost component costs throughout the quarter, coupled with that Chuck maybe I wasn't clear earlier, but I think it's worth emphasizing again the logistics cost are coming down as supply now is ahead as demand we're able to put things.
On the Ocean.
Don't have to expedite its much we're not using as much expedited airfreight.
All of that along to our input cost equation, which.
Obviously helped us in the bottom line in the performance this quarter.
Great. That's very helpful. Thank you.
Okay.
We will take our next question from Lindsay.
<unk> with Bank of America. Please go ahead.
Hi, Thanks for taking my question, it's actually filling in for <unk>. Today can you talk about the component shortage environment that is too.
Maybe ISG and if anything on the CSD side did you have any revenue that you left on the table because you werent able to get all the parts and then just on ISG, you talked about backlog, reducing this quarter.
Or would you say that we are owed from backlog normalizing and do you think youll get any support on that on the server side or is it. The backlog is all on the stores I know thank you sure let me try to break that down.
Questions until at least as I think about supply and where some of the shortages are.
If I look at this ESG business again largely.
A handful of minor exceptions supply is ahead of demand across consumer Pcs commercial.
<unk> displays docs to the point that we're now able to readjust our freight networks to take advantage of that we're in a good position.
Servers, we had.
As the team mentioned, we talked about backlog and backlog reduction.
And to think of it since you asked about supply where are the hotspots in supply they tend to be in power supplies. They tend to be in the power Ics and high performance Nicks those are still constraints in the marketplace today.
I think we weathered the storm quite well throughout this period of time, and particularly in Q3 and allowed us to maximize server shipments and storage the shortages would be in these custom ASIC parts. So think of it as FPGA <unk>.
Those types of devices the best way, we translate this to our customers just in the form of lead time.
I don't think I cant remember the last time I was in front of the onset the PC product line is essentially on standard lead time.
It's been a long path through this COVID-19 supply chain challenge time to be able to say RPC product line is on standard lead time are.
Our server product line and a large percentage of that is on standard lead time, and it will improve throughout the quarter as well storage.
So if I think about it in terms of specific backlog, we're at normal backlog in Pcs.
I think we are at normal to near normal backlogs in servers and the slightly elevated backlog storage.
I think that answered all your questions.
Yes, thanks for all the details appreciate it.
Slowly.
We'll take our next question from Simon Leopold with Raymond James. Please go ahead.
Thanks for taking the question I wanted to see if you could maybe talk to the general idea why storage.
Would or would not be correlated to servers in the sense that you're seeing slowing demand in your server business should that signal coming more threats to the storage business or should we think of them that's trending differently and if so why.
Yes.
Yes look Simon I would say look we would never argue that storage is immune to the broader it spending dynamics that are out there, but we would say is from where we sit right now it has held up better.
In our Q3.
I think youre right historically theres been a correlation but it tends to have less amplitude than say, our commercial PC market or the server market.
Clearly.
Right now data is exploding the world needs more storage and so when we flash forward to what's implicit in our guidance.
We're anticipating a seasonally strong.
Storage quarter in Q4, and so I think while you are right. Historically, there has been a core a correlation between our server and storage business at least from where we sit right now we're still seeing strength in the storage market.
Maybe one quick.
It is and we participate in the entire storage market.
Primary storage.
Protection.
And we had a cyber cyber resilience si as well as the.
HCI side that broad portfolio, I think helps us weather cyclical changes more than others.
Thank you.
We'll take our next question from Toni <unk> with Bernstein. Please go ahead.
Yes. Thank you I'm just trying to square.
How much.
Worse incrementally and sequentially you think demand may get in fiscal Q4, so when I look at your numbers typically you're up.
Q3 to Q4 by 5%, so, let's say $1 billion.
An extra week, we're probably at a minimum of 5% I get I know you have contractual business, but you have an extra week to deliver those on those contracts. So that's up another 5%. That's two plus billion. So normal seasonality you'd be up two plus billion dollars and youre guiding basically to be down 1 billion sits at three.
Billion dollar delta versus normal seasonality.
So I guess a couple of questions does that imply that you see demand getting incrementally worse.
And are you anticipating any backlog drawdown again, it was $1 2 billion in the quarter, but that doesn't explain the $3 billion delta versus normal adjusting for the extra week. So are you.
Are you expecting any backlog drawdown in Q4, and how elevated in dollar terms is the storage backlog relative.
Relative to where <unk> was.
Entering Q3, thank you.
Hey, Tony let me.
Try and answer some of those questions in your way so as it relates to Q4 look I think.
As we think about clearly we're projecting that the business continues to soften.
I think that's pretty apparent given the fact that I'm, telling you now that we expect.
PC revenue to be sort of in the mid negative growth mid twenty's year over year negative growth I'm expecting client or I'm, sorry, ISG to be roughly flat versus where they were this quarter. So the business is softening.
I think we'll manage our way through that like we always do.
As it relates to the 14th week, there is a little bit of extra transactional demand in there it's not that significant.
So I haven't done the math on your $3 billion.
That 5% comment, but look what we're trying to give you a point of view on is that we think demand does soften Bryan and if you think about our guide for next year that Sir.
Sort of follows from there.
As it relates to backlog look we don't we don't forecast what.
Happens with backlog in terms of how we're going to.
Talk to the street about it but we've just talked about the fact that in general backlogs back in normal ranges.
Yes storage is slightly elevated so if there is if there's any opportunity it would be there, but thats very much going to be dependent upon the linearity of the quarter and hydro storage orders come in.
Which has always been an interesting dynamic with the storage business for us so.
What we've told you is our best point of view at this point in time.
We'll continue to manage the business tightly as a result, I don't know, Jeff or Chuck you'd add anything to that.
I think it lies in the PC side I just did a quick look in our web deck last Q3, we did $16 $6 billion of CST revenue. This Q3 13.
Probably like the code.
Right.
Right.
Explicitly as he commented about servers weakening during the quarter you didn't really comment that Pcs were weakening throughout the quarter and I am one.
Wondering whether that was indeed the case.
Because if it wasn't it's not really clear why the guidance is where the guidance is unless you're expecting real changes in asps.
Yes look I think.
We saw.
As you think back to our Q2 commentary what we've talked about the fact that we saw Pcs.
Consumer Pcs have been soft and we saw commercial Pcs weekly.
I think thats pretty.
That's pretty self explanatory.
Hey, Thanks, Tony.
Thank you.
We will take our next question from Shannon Cross with Credit Suisse. Please go ahead.
Thank you very much.
Okay. I can answer you mentioned it I wanted to go back to one of the comments that was made which is that you are seeing increasing interest in subscription models I don't know if you can talk a bit about.
What customer bases are interested in them.
How we should think about I know they'll have a little bit of a dampening impact to revenue, but obviously locking in recurring revenue. So maybe if you can just discuss a bit of what youre hearing from customers.
Yeah. Thanks, Shannon, it's Chuck I'll start.
That's been our apex business, which in Q2, we highlighted that.
We sort of hit the $1 billion milestone and side growing at a continued healthy rate and adding new customers.
We've been consistent that were going to be thoughtful about how we discuss progress there.
We're not certainly not going to provide sort of quarter to quarter updates and so we can share metrics that can be traced clearly back to the P&L, but what I would tell you is interest remains very high and our subscription offers we saw again triple digit customer growth and healthy growth in the quarter and we continue to invest in the portfolio in our web deck as a whole.
Series of.
New apex offers that we've released since we last spoke in August we tend to see.
Broad based interest right now it does tend to be concentrated at some of the larger companies in the medium sized businesses the world, but we're getting a lot of interest in conversations from customers as they try to navigate.
This macro environment as you as you would imagine.
It is not sizable enough relative to our.
<unk> $100 billion trailing 12 month business too.
To sort of go go much more beyond that but we are getting lots of customer interest.
Got it.
Alright.
Sorry, Shannon I was going to add the new backup target service that we just announced is a pretty exciting offer.
Don around expanding our geographic capability, our channel capability now customer managed option capability around <unk> I think is another extension that we can continue to grow on and then the two as a service offers that we've extended.
The Red hat offer that we announced back in September then secondly, the new one which is the apex high performance computing service I think is another opportunity for us to grow.
And I can tell you the pipeline is full of continued to apex offers.
Okay, great. Thanks Shannon.
We will take one last question and then I'll turn it back over to Chuck for a closing comment.
Thank you we.
We will take our final question from Jim Suva.
With Citigroup. Please go ahead.
Thank you and I actually only have one question and that's on your inventories while they were up and you talked about a deflationary environment.
Need to secure some pretty key components, which is understandable can you talk to us about when do you think youll actually kind of re normalize inventory and working capital or are you just better simply to hold more because what the deflationary environment. You just kind of have to wonder here, but I understand theres shortages. Thank you.
Okay.
Yes, Hey, Jim.
Look I mean, it is my goal and I think the goal of all of US here that we need to manage inventories down we build it over the last couple of years, given the supply chain dynamics.
Going through the pandemic in a deflationary environment, you clearly want to hold less inventory and so.
I am not going to give you an exact timeline on where how those things sort of unfolds, but.
I think apps.
Absent the strategic buys we did this quarter the inventory actually came down quite nicely.
The strategic buys you did made economic sense and so.
That was the whole point behind that so I do think it's going to be a few more quarters as we continue to normalize inventory.
And then we will have to evaluate this as we go in terms of what's the right level given the supply chain dynamics.
And so more to come on that but in the meantime over the next few number of quarters, we're pretty focused on pushing inventory down from a working capital perspective.
Thanks for that Jim Hey, before we end the call I'm going to leave you with a few final thoughts on behalf of the team and then we'll wrap look we delivered strong performance over the last few years and we delivered again in Q3 as we discussed today Q3 highlights the advantages of our model, we see changes in the market first and we react and positioning the business.
Outperform so in Q3, we took appropriate cost actions, we drove share gains we delivered very good profitability, we drove our innovation agenda forward and we delivered against our capital return commitments and that's what we mean when we say that we can deliver differentiated results in any market environment. We do expect the demand environment to be challenging in the.
Near term, but the long term trends remain very much in our favor and importantly, we have a seasoned leadership team led by Michael Jeff and Tom who have a strong track record of delivering across these challenging economic cycles. So we're going to stay focused on what we can control and we remain committed to delivering differentiated results for our stakeholders as we did in Q.
Three so with that we appreciate everybody joining us today and look forward to seeing you soon.
Ladies and gentlemen. This concludes today's conference call. We appreciate your participation you may now disconnect at this time.