Dell Technologies Inc. (DELL) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining our virtual tech conference. Before we get started, I have 2 quick things. First, the safe harbor statement. Dell Technologies' statements that relate to future results and events are forward-looking statements and based on Dell Technologies' current expectations. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in Dell Technologies' periodic reports filed with the SEC. Dell Technologies assumes no obligation to update its forward-looking statements. Second , I'd like to remind everyone, all the participants dialed in, that it is II season. And to the entire BofA tech team here, we really appreciate your support in II. I'm Wamsi Mohan, IT hardware and supply chain analyst here at BofA. We're delighted to welcome Michael Dell to our tech conference, almost a year after we got his really interesting take on tech trends in Dell last year. Michael obviously needs no introduction. As you all know, he started Dell at the age of 19, in 1984 with $1,000. And today, the enterprise value of Dell is $86 billion. As Chairman and CEO, Michael oversees a unique family of businesses, which include Dell, Dell EMC, Pivotal, SecureWorks, Virtustream, VMware. And I -- it really warms my heart to see what Michael has done on the philanthropic side. He and his wife, Susan, have provided so much support to children and families around the world. So Michael, we're really privileged to have you with us over here today. Thank you for taking the time.

Wamsi, great -- do we have an echo problem here? Or are we coming through loud and clear?

We can hear you fine, Michael.

Okay. Great.

Michael, so maybe to kick it off, I saw your letter in a LinkedIn post on standing strong together this week. And given the current unrest in the country, do you want to share some thoughts on this before we get started?

Sure. I would just say it's a difficult time in the country right now. We're still dealing with the COVID-19 crisis. And now we're all grieving to see a kind of cruel and senseless murder of George Floyd. And at some point, the protests are going to stop but the issue doesn't go away. And I think companies can play a big role here. Companies have to do more. And that's what we're talking about inside our company. And we have a strong culture that embraces and thrives on diversity. And I guess I'm not holding my breath for our government to do much about this. And I think companies like ours together are going to provide opportunities that hopefully will make a difference here. So that's what we're focused on inside our company, the things that we can do better to help make a difference with this.

Yes. No, Michael. It's great to see leadership from senior company executives and CEOs, and it's so much needed in this world today. It's been a very strange year, especially the last several months with COVID-19. There's been tremendous amount of uncertainty created from a broader macro perspective. Would love to get your thought around how you're viewing the world in its current state as it pertains to Dell Technologies?

Absolutely a different year. I think one of the things that we heard very loudly from our customers was that technology has never been more important. And while we can look at the economic challenges and the decline in GDP and all of the challenges in small and medium business, it is kind of amazing how much business was able to be continued. And if there was ever a question as to the role of technology in the economy, I think that was probably answered. And people saw that the PC was essential as 4.5 billion people were effectively cocooning in their homes, whether it's working, learning or anything else, you're doing it from your PC. And we certainly saw that in our demand trends. And if anything, I think, while there's certainly disruption, certain size of companies are more affected than others. Certain industries are more affected than others. And the rate of recovery will vary by company and industry, and that sort of thing. I think we've all got a glimpse of the future here, and we're not going to go back to the way it was. And I think digital transformation, the fourth industrial revolution, 5G, AI, all the things that we've all been working on, get accelerated coming out of this. And that's a sort of consistent theme that we hear and see with our customers.

Michael, so clearly, the macro environment has been tough. How does this compare with some of the other challenges? I mean you've been in the industry for a tremendously long period of time, I mean, 35 years plus. How do you see what you would be doing here to lead the company through this pandemic? And you obviously bring so much experience through many, many different cycles. So I would love to get your view on how you're thinking about moving the company forward here.

There is a real period that we can compare this to. As far as I can tell, it's basically a wartime like response from not just our government, but governments all over the world, as they're applying stimulus and liquidity into their business sector and economy to kind of keep things going during this period. The virus isn't going to go away. I mean, at the end of this, everyone will either have had the virus or have a vaccine. But we don't know how long that takes. But there's certainly lots and lots of people to go, right, that they haven't got the virus yet. So look, I mean, we are adapting and adjusting. About a decade ago, we started a flexible work environment inside Dell, where people could work from home. So when -- in early March, we -- kind of hard to believe it's almost 3 months now, we asked people to work from home. It worked very seamlessly. And look, a lot of companies found that it worked pretty well. Like all organizations, we've been looking at which jobs are more productive, which jobs are less productive, what things can we carry forward, where can we improve our efficiency as a result of all this. And there's certainly a real close look at supply chains and some kind of reconciling of supply chains to make them more resilient. But it is still a pretty uncertain and unpredictable environment. I mean the north stars for us have been taking care of our people, taking care of our customers and taking care of our business, right, and making sure we're healthy for the long term. As far as the business, we've been really focused on relative share. An industry forecast, with all due respect to the industry forecasters, is usually not very good. It's even worse in an environment like this. And so the only thing that really matters is how did you do relative to the other companies. And for the quarter that we just finished, as you know, we outgrew our competitors in all of the major areas of our business. In our client business, we were the only one in the top 5 to grow units in the calendar first quarter. We're now up to #2 in commercial PCs. Of course, we've been #1 in revenue, #1 in profits for a long time. We grew faster than our major competitors in storage, and in servers as well, by a meaningful amount. And that was even without the new product introduction that we just made in the mid-range of storage, so feeling okay on an absolute basis and feeling better on a relative basis.

Yes. No, you'll be happy to know, Michael, that BofA employees have been super productive during this time period with the help of a lot of Dell PCs and servers at the back end. So...

Well, we're greatly appreciative of that relationship. And certainly, it's an honor for us to do that. I'll tell you, our teams absolutely love hearing those kind of stories because it -- we want to be connected to the mission and purpose of our customers, and to know that the work that they're doing helps keep the economy going. For us, it's just very inspiring.

No, absolutely. So Michael, through this period, what solutions do you think have been most requested by customers? What's been most helpful to them? And what do you see in a post-COVID world? You mentioned that things are -- have really changed. The way business is being done has really changed. So do you anticipate these changes to be the new normal moving forward?

So we work from home, got a big surge. And one of the things we're seeing there is that there's kind of this focus from to do it fast to do it right. Do it fast is just take whatever is on your desk, put it on your arm and go home, right? Or take your PC home and download this software and log in here. Do it right is more of a, "Okay, if I'm going to be home for a couple of months, well, I want to have a proper setup, right?" I want to have a big screen. I want to make it secure. I want to have the right camera. And if I got a PC that's 4 years old -- there's many hundreds of millions of those 4-year-old PCs out there, I can't really -- I can't do this Webex call. I can't do a Zoom call. I can't really function either way I'd like to. So our Latitude business, our commercial notebook business was up 37% in the first quarter. VMware certainly had strong demand in VDI. We, again, had strong demand in VxRail. We had double-digit growth in our high-end storage. And look, on a relative basis, as I said, we grew share in all the major categories. And I do think things like 5G, over the medium and long term, get a boost here because we've learned how important high-quality connectivity is. And if you think about the client opportunity, specifically, you've got 900 million people working in offices with computers, roughly 3/4 of those are not remote in some way. And some of those have remote capabilities but a number of them are fixed. And not all of those are candidates to work from home, but it's still a pretty large population of machines as you go into more of a do-it-right phase of setting up this kind of capability. I do think companies will use remote work more than they have in the past. We'll be doing more meetings like this than we have in the past. And that's a good thing. And as executives reflect on how well their companies worked or didn't work during this period, technology was the glue that held it all together. And so I think that's going to get preferential investment as against other investments.

Yes. No, that makes a ton of sense. Michael, when I talk to the investment community, there is some concern around Dell's ability to navigate through strong deceleration and -- in economic. And part of that pertains to the financial leverage that's part of the portfolio. And some of it is just concerns around pushout in terms of IT spend in a weak macro environment. We actually saw the inverse of that a little bit because of technology pull-in. But how do you think people should think about how Dell is built for navigating through these sort of shocks? And how are you positioning it for the longer term?

I think there are couple of differences from kind of the Dell of 5 or 10 years ago. If you look now, we have about $6 billion in recurring revenue per quarter. It's roughly a little more than 25% of the revenues more than the profits. It was actually our recurring revenue. Our deferred revenue was up 16% in the first quarter. That's a really big change from '09. And during this last period here, we've built the essential technology company. Customers love the integration and the capabilities we have. And I was just on a call earlier today with 30 CIOs in Europe, and they love the solutions that we're bringing. And every company is probably going to have to make some adjustments in its cost structure. We are certainly doing that. Other companies will do it as well. I think we all know what those areas are. We're fully careful of executing those cost improvements as we need to. And some of them are just occurring naturally, right, as we're adjusting the way we're working. But we'll continue to navigate the environment here and do our best here. We did reiterate our commitment to the -- paying down $5.5 billion in debt during this year. So continuing to strengthen our capital structure and staying on this path to investment grade is a very high priority for us.

Okay. Great. Michael, you've been talking about some of the synergies and collaboration between Dell and VMware. Over the past couple of years, there's been a lot of talk about integration and innovation happening sort of across these companies. Can you talk a little bit more about how that's working?

Sure. So we're on to version 7.0 of VxRail, a product that we introduced around the time of the integration. And VMware has had double-digit growth every quarter since the integration started. And so we've added a significant additional sales capacity. And if you look at the kind of big areas that we've been collaborating on in multicloud, in digital workspace, in combining Pivotal into VMware and bringing together our application development, modernization and infrastructure management platforms into one, what we're doing in security, what we're doing in software-defined networks, the continued M&A inside VMware, it's working well. And there's always more to do there. And at the same time, the independent VMware ecosystem has continued to thrive. So we've been true to our word, at what we said we were going to do and very happy with the results on a combined basis.

So Michael, this question comes up a lot just around how you think about the ownership of VMware. We analysts tend to think it's either 100%, maybe it's much lesser, maybe it stays where it is, and there's a lot of debate on this all the time. What is -- what are your thoughts on sort of the ownership levels around VMware?

So if you look back 6 years ago, when we started the go-private, we embarked on a journey. As we sit here today, we're $92-plus billion, the essential technology company, outstanding financial performance. VMware is absolutely a key element of that. And as I said at the time of the transaction, it was the crown jewel of what we were doing, and it's even more true now. And if you look at our performance together, it's quite strong. And creating solutions together is something that absolutely differentiates us.

We've heard a lot about an acceleration and a move to the public cloud, especially in this environment. What do you think are the dynamics that are at play between on-prem and public cloud? And how do you view Dell's position through sort of all the changes that are taking place here?

Yes. I think if you do a certain measure, and you ask people, "Are you going to do more public cloud?" Right? They're like, "Yes, I'm going to do more public cloud." Right? Well, okay. Well, what does that actually mean? The reality is that everybody's figured out that it's not the public cloud or the private cloud, right? It's multicloud. And what I haven't heard in hundreds and hundreds of conversations in the last month or 2 is that companies are fundamentally changing their approach to how they're thinking about this. And it still is a workload-by-workload discussion. And companies are -- there's a pretty active workload repatriation activity that is out there as organizations figure out not all workloads belong in a certain place. This is why VMware Cloud Foundation is so powerful. It allows customers to move their workloads to any public cloud and on-premise, and at the edge and in a colo, with 4,000 partners and back and forth. And that continues to resonate very well. And so, again, we see cloud as an operating model, not a place. And we continue to think that the combined capabilities of VMware and Dell Technologies are quite strong there. Yes, there's going to be consolidation in the on-prem market, and we're going to be the consolidator.

So actually, talking about -- speaking about consolidation, how are you viewing your portfolio today in light of the fact that maybe hybrid cloud is the way that the market is evolving to? You spoke about some repatriation of workloads back. And so, clearly, you have a portfolio today that supports a lot of those things. And so as you think about the portfolio, where do you see maybe opportunities to bolster the portfolio? And secondarily, you mentioned that there's only so many on-prem companies that are going to survive without having a broad piece of the portfolio. What do you think is the rate and pace of this consolidation? Is this going to be the decade where you just start to see a lot of smaller on-prem companies that don't have a broad portfolio either fold or get taken private or just get bought out? How do you see this playing out?

Well, I think this will continue. And parts of the industry are further along there. Our relative share in storage is actually higher than it is in servers and PCs. We're bigger than #2, 3, 4 combined in storage, not the case in PCs and servers, but there's definitely consolidation. I think what you also see in storage anymore is you don't see all these new venture-backed companies that you used to see, which is -- that is a sign of consolidation because, basically, the market's kind of figuring out, "Well, if there's nobody to buy them, then they can't go public." So that says you're at the later stages. And if you go take a look at what we do at our store and just kind of dissect the product compared to the competitors, again, we had double-digit growth in PowerMax, a double-digit growth in VxRail. The one weak spot for us was the mid-range. And now with the PowerStore product, which we just introduced a couple of weeks ago, very strong initial reaction from customers and very positive early signs, breakthrough capabilities. We guarantee 4:1 data reduction, although many customers see 7 or 9:1. And we have incredible scale and technical capability to go win in that market. And so, yes, I think there'll be consolidation. In terms of the core, we are very focused on debt paydown and on the path to investment grade. So you won't see us doing a lot of acquisitions of any measurable amount. VMware is an M&A engine for us, so we continue to acquire new businesses into the VMware platform. And that works well. Pat and team have done a great job integrating those and extending the reach and capability of VMware.

So Michael, you mentioned sort of the new PowerStore product clearly having great reviews. When you think about taking market share, who do you think that market share comes from? And what do you think -- how disruptive of an upgrade do you see this to be? Is it -- because there are competitors out there who claim that this is going to open up a little bit of an opportunity for them, given this is going to be somewhat more of a disruptive upgrade, so would love your thoughts on that.

Yes. I mean everyone seems to claim that they're going to benefit when anything happens. But I think if you study the mid-range pretty carefully, I mean, first of all, we had #1 share. We have #1 share. We're #1 in mid-range, okay? Now we weren't growing. In fact, we were shrinking. But we're still #1 by actually a fair bit, right? Now -- but what was the problem? Well, the problem is we had many, many different products, right? And it was kind of confusing. They were overlapping. And some of them were getting a bit old. And so we needed -- and if you have the size of the sales force we have, having multiple products, you get kind of a dispersion of activity. It's not super-efficient. So we created this one product. By the way, all the customers from the old products can migrate to the new one very, very easily. And they can migrate from the competitors, too. So look, we're -- I think we have an aggressive sales force. We know how to win. And we've been winning, but we didn't have the product in the mid-range. Now we do. And so we'll see how the other folks do. They -- the traditional competitors have been losing share to us, and that's before PowerStore. Yes. And we're going to be super aggressive. And I'm feeling very optimistic about our capability there.

No, that's great. Michael, if you sort of look out several years here, like how do you think the portfolio could change? How are you thinking about how Dell makes itself even more indispensable to its customers in the next several years? What are some of the thoughts that you have as to where you want to take this company over the next several years?

The focus for us is going to be continue to innovate and build the infrastructure that's required for the future. And I would just say 3 major focuses. It's things we've talked about here. It's winning in the consolidation in our core markets. It's strengthening our capital structure with our steady free cash flow, paying down debt, path to investment grade. And then the continued innovation and integration of the technology infrastructure in the future. The stats just came out for 2019. We were ranked, I think, #18 in the top 300 patent issuance for all companies in the world. Our patents were up 18% year-over-year. So our innovation engine is strong, and we're going to continue to evolve our capabilities here to help customers solve the unsolved problems.

No, that's great. We're almost out of time, Michael, but I wanted to ask you, does COVID change the way the channel provides value? And I mean, clearly, you've had -- I mean you started off from an online presence. And I mean that clearly showed in your results how strong sort of the switch across from negative retail to online happened in your business. How do you think about the channel and the value it provides sort of during this time and on a longer-term basis?

Retail still provides a real value for us in gaining access to customers and integrating and selling certain kinds of solutions. And let's not forget that a lot of those channel partners can be self-service, and we create online portals for them. And it's a very efficient way for us to gain additional sales capacity for certain markets that we work to serve. And we use things like deal registration to avoid conflicts and that sort of thing. But last year, we generated $52 billion in orders through the channel. And it's a strong part of what we do. Certainly, on the online, like you said, the online dell.com and delltechnologies.com grew very strong in the first quarter, and we love to see that as well.

Okay. Well, one last question for you, Michael, because I know we're basically out of time over here. And thank you so much again for doing this. It feels as though when you look at Dell ex VMware, the valuation is just so, so inexpensive that it's always been a head scratcher for people that, as you delever, there's going to be this double sort of leverage you got on EPS growth, both from debt paydown as well as margin improvement. And so what is it that you feel investors don't maybe understand about the company? What's the missing piece of the story over here? Because it clearly looks like it can be a huge value creator.

Well, as you said, spending $5.5 billion in debt paydown is a $0.25 increase in EPS. And I think as people get more and more comfortable with that path to investment grade and the consistency of cash flows, the consistent share gain in a consolidating sector, the #1 position in hardware and software, technology infrastructure. We've got a very durable business. I think people will figure it out over time. Our job is to keep building a great company. That's what we're doing.

Well, Michael, thank you so much for your time. We really appreciate it. It's great seeing you, and please stay safe. And we look forward to hearing from you sometime soon again.

Thank you. Same to you, Wamsi. Be well. Thanks, everyone.

Thanks, Michael. Bye.