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

[Audio Gap] statements and are 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. So with that, maybe we'll just plunge right in. Before we start, firstly, congratulations to Tom. He just informed me that he had his third grandchild recently, and we were remarking on the call that he has special Dell Technologies filters to make him look so darn young. So congrats...

Thank you, Toni. So everybody's good. So thank you for mentioning that.

Great. Well, you guys reported earnings a few weeks ago. And maybe we can just start a little bit with some of the statements that you had made on the call and some of the questions that I've been receiving from clients since that call. So first, on the call, you discussed April being a weaker month for Dell than the month of March. And I was wondering if you could characterize that statement and what you have seen in the marketplace in general in May and June.

Yes. Hey, Toni. So hey, great to be with you today, by the way, and thanks for hosting us. So as you recall on the call, Toni, we talked about the fact that we had seen our small business, the medium business, customer segment business slowed down as we went through the quarter. And then that was really a comment from Jeff Clark at the time. And then I mentioned the fact that we -- the demand in April softened as compared to March and February. And as you know, we also then talked about the fact that as we thought about Q2, that against historical sequential norms, that we thought we would be below historical sequential norms in terms of that revenue growth quarter-on-quarter. And so look, as we've -- we continue to navigate through the quarter. Obviously, if you look at IDC forecast, it is not anticipated to be a robust quarter. If you look at IDC PC demand, I think at minus 12% for the -- or minus 6%, I think, for the quarter, and then getting worse as you go through the rest of the year. You look at the GDP framework that's laid out, and just as Chairman Powell happens to be on CNBC and talking about how soft Q2 is going to be so -- from a GDP perspective. So look, our perspective is we're continuing to navigate and execute through the quarter. We're going to -- we're set up to run the business for the long term. We're optimistic about the long term. But at this point, I'm not really at liberty to talk about demand trends within the intra-quarter of Q2.

Well, do you have a perspective, Tom, in terms of economists that you talk to? Or you mentioned some third-party data that you look at. Is the belief that Q2 is probably the toughest quarter for IT spend in general? Or is the belief that there's sort of a lag effect from unemployment and corporate earnings, et cetera, and that maybe the bottom might be Q2 or Q3. I don't know calendar. I don't know if you have a perspective on that.

Toni, I'm not sure I'm that good. I will tell you, we look at -- we tend to look at IDC data, in terms of the forecast. And they would lay out, if you look at their PC, server and storage forecast, that Q2 in terms of the storage or the enterprise business, the infrastructure servers and storage, they would forecast to be the softest, and then some recovery in the market as you go back into Q3, Q4. The PC is actually a little bit opposite. They would say that Q2 -- they seem to forecast Q2 a bit better than Q3, Q4 in terms of the demand profile. Now look, I mean, the reality is, as you well know, Toni, nobody really knows with any degree of certainty what this demand environment's going to be. And so much of this is going to be dependent upon the health dynamics in the sense of, do we have effective treatments for COVID? And do we get a vaccine developed? And how confident do consumers and businesses feel as they move forward. From our perspective, we continue to have, I think, high-quality conversations with our customers. We're continuing to talk about the capabilities that they need. I think one thing we've seen, Toni, is the acceleration of this digital platform that customers are [Technical Difficulty]. You and I have talked about the fact that we -- I tend to think that digital transformation is a bit of an overused term. But I think it has highlighted for businesses -- or this environment has highlighted for businesses, the importance of the resiliency and of the technology platform that enables their extension of their business model. So from our perspective, we're going to navigate through this. We tend to look at IDC as sort of a guidepost, if you will. Which says that the rest of the year, as we've said, we'll continue to have a fair degree of uncertainty as we look at the demand environment. I don't know, Yvonne, if you'd add anything to that.

Tom, I think you covered it well. And we will get updated IDC guidance next week from a storage and server perspective. So looking forward to seeing their most recent view on the marketplace for Q2 and rest of the year.

Now I think implicit in your -- in the IDC forecast is general economic health will improve, and hence, the enterprise business sort of being weakest in Q2 and then getting better. But implicit, I think, in that forecast is PCs will not get better either in part because of some combination of a strong upgrade cycle for Windows 10, and in part, because of sort of a work-at-home sort of pull forward at the beginning of the year. Qualitatively, does that resonate with you? Because generally, IT spend sort of picks up with GDP or corporate earnings, right?

Yes.

So it's a little unusual to have part of your business potentially getting better if we believe the IDC forecast, which I think is predicated on kind of an improving GDP, and part of your business getting worse. So, A, does that make sort of qualitative sense to you that the PC market could be more challenged for a longer period of time? And do you think it's more because of Windows 10? Or do you think it's more because there was sort of this pull forward in the March -- February, March, April time frame?

Yes. Toni, it's a great question. If I just step you back, right, as you and I talked late last year and as we walked into this year, we both talked about, at least I talked about with you or the fact that I thought the PC market in this year was going to be a bit more challenging as we got through the Win 10 refresh cycle, sort of that midyear time frame, right? And I think what we've seen to date would say, okay, we did see an acceleration of PC demand, as we talked about in Q1, with that work from home, distance learning dynamic that, clearly, we saw. As we look forward to the rest of the year, it's hard for me to say whether demand got pulled forward or is the demand environment in its entirety soft. I do think that we will -- businesses tend to invest when they have a bit more comp in their outlook and in their business model. And as we think about it, look, we are, in our minds, thinking our way through the fact that we're going to have to operationalize and navigate through, I think, a challenging environment over the coming months. With the idea though that, ultimately, as you look at next year, for instance, you look at the IDC forecast for next year, where it says, hey, there seems to be a resurgence of demand across all form factors, right? PC, storage, server, in the capabilities that we drive into fiscal '21 as businesses begin to feel more confident. And so look, I think from our perspective, whether we pull it forward or whether there was this big consumption due to the work from home, we do think there's a bit of a digestion period. The question is, is do -- as you think about how workforce is transformed over time, do companies come back around to begin to reinvest in PCs for remote workers in more of an outpatient footprint. There was a hurry to get product out to them so they could do their job. The question is now from a PC framework, how do you think about the next iteration of that demand? And look, Toni, I would remind you, there's still -- I think there's still -- the number still -- I believe is still out there, something like 500 million PCs that are over 4 years old. So there is still a continual refresh cycle that will happen. But at what pace, I think, is still a question mark.

Right, right. Just in terms of April, did you -- when you saw relative softness versus March and February, was that pretty consistent across the PC business and ISG? Or was it more pronounced for one? And again, the reason I ask is, is that a manifestation of just people being tighter overall, and therefore, all spending? Or was it less or more pronounced in PCs because of this potential pull forward and/or still fulfilling some of that work at home?

Yes. Toni, I think as we talked on the Q1 call and in our callbacks, we did see softness in ISG generally across the quarter, particularly from sort of that early March onward as companies pivoted spend towards work from home. So as we walked into April, what we talked about was the fact that we didn't see the typical historical ramp pattern in our ISG business that we generally see as we get into month 3 of the quarter. Now we did see some ramp, but it wasn't as pronounced as it had in past -- has been in past quarters. And so the ISG business was clearly soft in Q1, as we talked about. The PC business slowed in Q1 as in that April time frame, I should say, as we got through that surge of those large sort of BCRP, work from home, distance learning-type demand -- the demand pattern that came in.

Right. Now HPE and HPQ both spoke of backlog build in their quarter, which also ended at the end of April. Did Dell have any supply issues or backlog build in either the PC or ISG business? And maybe you can just talk about component availability more broadly.

Yes. And Yvonne should jump in here as well. I mean we saw, as we talked about, again, we did see -- there was a surge of buying, obviously, our factory and supply chain wasn't set up to handle. I think we threw out the number on our earnings call, Toni, of 37% year-over-year growth in latitude notebooks, for instance, right? I mean, and so we did see some extended lead times come out as we were managing the demand dynamic and the supply dynamic. And so we did talk about the fact that we did see a little bit more backlog than -- as we exited the quarter than what was historically normal. But in terms of component availability, the Intel processor dynamic continues to be a headwind for us. And I think it's now been, I think, about 6 quarters of trying to manage that Intel mix dynamic and supply dynamic. That continues to be a problem for us as we go forward. And we're not thinking that it gets better until we get into the back half of the year. So again, so lead times did extend out. Lead times have come generally back into a normal time line or framework at this point as we continue to work our supply chain. But I think that's the framework that we've chatted about in the past.

Right. And just on the processor availability, is that impacting your ability to fulfill? I mean if you had better -- or are you substituting, whether it be with AMD or with other Intel offerings?

Yes. Look, we're trying to substitute where it makes sense, but there are certain classes of processors, for instance, that are in tight supply, right? Some of the -- if you think about acute, Toni, it tends to be a public, an education sort of segment time line given the state budgets and state education calendars. And so we are seeing some classes of processors in short supply. And in some instances, you can substitute, in other instances, you can't. In other instances, you're effectively building some backlog as you go through Q2 as a result of that. So I mean, that's the dynamic that we're managing right now.

Right. But I guess the question is, if we have generally a weak demand environment, are you demand-constrained, or are you supply-constrained? Because it -- sometimes, you sort of feel like, well, that doesn't really make sense. It sounds like really what's driving the outlook is a demand consideration, not a supply consideration. How do we just sort of think about one relative to the other?

Yes. Look, again, I don't really want to comment on Q2 demand at this point. But what I would tell you is that like in any instance, as we go through a quarter, Toni, there are certain configurations or parts that may be in short supply that you're managing. In some instances, you're able to talk to the customer and ask them to, would they consider a different configuration. In other instances, they can't. So in any given quarter, you're balancing that supply-demand dynamic, and I don't think this quarter is any different. I don't know, Yvonne, if you would add anything to that.

No. I think, Tom, you've hit on it. And we manage that on a consistent basis and manage through our lead times and discussions with our customers and what their needs are.

Okay. Now just in terms of if we do have a sustained downturn, how do we think about Dell's sort of fixed versus variable costs? I think last quarter, the company did a nice job sort of keeping margins in both ISG and in the PC business was better than expectations. And so maybe you can help investors think about perhaps for each of the 2 major businesses, how do we think about fixed versus variable costs? And I think in the past, you've talked about sort of 70% of your product coming from ODM, 30% coming from your facilities. Is that sort of the right way also to think about it?

Yes. I think that we have what we would say is a highly variable cost structure, Toni. And I know you and I have had conversations about our maneuverability, if you will, in a demand-constrained environment and what levers do you -- can you -- as you think about operating leverage, right? And look, we have a highly variable cost structure. Yes, the vast majority of our factory footprint or our manufacturing footprint is ODM. If you look at our OpEx structure, it's highly focused on labor and other variable spend. And Yvonne has been instrumental as we have worked our way through how do we think about what operating levers to pull in the sense of OpEx actions or cost actions. So Yvonne, maybe you could highlight some of the things we've thought our way through and that we've done as we sort of navigate through the environment.

Sure. As we discussed on the call, we've put in place a number of actions around global hiring freeze, contractor consulting reductions, advertising, marketing reductions, travel restrictions. We put a hold on our merit cycle for the year as well as promotions. And then the most recent thing we did was put a -- suspended our 401(k) match. There's other levers depending on the business positions that will be evaluated if need be, but most of our costs are variable, and we feel like we have a lot of leverage there. Our goal is to protect our liquidity, the P&L and our workforce capabilities, and really be thoughtful about that demand environment with our customers.

Right. So is there a framework for thinking about -- because conceptually, one of the challenges that, Dell was -- I often talk about this with clients, and I say, look, Apple has 30% operating margin. So if they have negative leverage and OpEx goes up by 2 points, operating margins drop from 30% to 28%, so not that much. You're Dell and you have 10% operating margins, and OpEx goes up 2%, your operating margins fall from 10% to 8%, that's a 20% dip. That's a lot more, right? So it's not -- part of the challenge is your aggregate company operating margin is not that huge. And so you're particularly sensitive to that leverage. And so I don't know if there's a -- when we saw that at HPE this past quarter, where there was really significant negative operating leverage, even though revenue didn't fall that dramatically, in part because they sort of have similar kinds of operating margins. So Yvonne, I don't know if you want to think about -- I think about storage as having -- there's still a lot of facilities that make storage, legacy MC facilities that are making storage for Dell. There's got to be some fixed costs associated with that. You probably don't want to cut R&D. And so if you were to have a 15% contraction in the ISG business, how do we think about how that impacts potential operating margins in that business? Because, conversely, I think when you have growth in that business, you've got a lot of operating leverage to the upside.

Well, certainly, Toni, you hit on it. We don't want to impact our innovation engine, right? So our R&D. And so yes, we're being very thoughtful about those considerations. But I think we're pretty thoughtful and quick to ask. And even in our -- we do own more of our own facilities in the ISG space within that in the storage portfolio. But again, quite variable in the way we manage them. And I think we're quite efficient with our supply chain and our global operations team in making sure we turn those levers. A lot of the cost is shared across our entire Dell Technologies portfolio from a G&A standpoint and IT infrastructure, et cetera. So a lot of those costs that are in the ISG P&L, if you will, are shared across our portfolio. I don't know, Tom, if you'd add anything there.

So look, Toni, look, I mean, the reality is, if you had a sudden downturn, are you going to take some -- how fast can you react is really the question you're asking me, right? And we go to drive maneuverability. And so look, I mean, there's levers we could pull pretty rapidly in certain parts of the globe and in certain geographies that if we needed to do so, we would go do it. If you just think about the variable nature of the business, yes, I do have a factory footprint in the ISG space that is a bit more company-owned than ODM-owned. But the reality, that factory footprint in terms of the total cost pool, is just not that big. And so most of my cost pool in the ISG space is made up of sales and marketing, and it's made up of R&D. And so the question is -- and within sales and marketing, there's an element of that, that's variable as you think about variable compensation there. And the demand gen and the advertising framework that you could pull pretty rapidly. So I do feel like we have leverage that we can pull if we need to pull them. And -- but again, we're trying to think our way through how do we position this business for the long term, making sure that as we've come through an economic environment like we're in right now, that we navigate through this and position the business stronger on the back end than the front end, meaning, how do we think about our spend? How do we think about the resource allocation that we're driving towards storage, storage servers, making sure that we're driving the efficiency that we want within our labor pools and in our R&D efforts. So it's a broad-based effort right now to ensure that we are as efficient as we can be, knowing that there's obviously some level of variability in the demand environment as we've been talking about.

Right. Okay. Well, maybe just in terms of component prices, I think you talked about the potential for component prices to go up after fiscal Q1. Is that sort of your current default assumption? And how do we think about component prices? I mean last time we had increases in DRAM, that was actually really beneficial to server revenues and server ASP. It was sort of neutral to slightly down, I think, in margins. So what -- A, can you just confirm sort of how you're thinking about principally DRAM for the remainder of the year? And then, B, what are the implications on your PC and ISG business in terms of ASP's margin?

Yes. Toni, our view right now is Q1, as we talked about, was deflationary from a component cost. And then we talked about on the call and in the follow-up that we expected to see inflation in beginning in Q2, moving on through the rest of the year, principally as a result of DRAM and of NAND, right? And that is our point of view at this point in time, that we do expect the environment to be inflationary. Now the but there, if you will, is if, in fact, the demand environment softens, and it's different than what our supply base and what we -- what we're forecasting, that generally in a -- historically, when you've seen demand soften, you generally haven't seen a lot of inflation, as you would know. And so that's the dynamic that we'll have to watch, and that will be a function of what's the environment like and what's the supply of those various components within the market. So -- and as you've said, when it's inflationary, we have priced it. And to your point, it has been helpful from an ASP perspective in PCs and in servers. It's relatively neutral, slightly negative at the margin line because you can never perfectly time the price increases and the yield out of those price increases with the cost package moves. But it's -- we've got our supply team working it right now to try and give us a better view of what the rest of the year looks like in terms of component costs. So I think we'll have a better view as we get to the time of our earnings call at the end of Q2 to give a further update on that perspective.

And obviously, competitive environment and competitive pricing dynamics plays a role in that as well. I mean often when demand gets weaker, there's just less pie for everyone. And so people get more aggressive in chasing that pie. Is that a dynamic that you've seen in the marketplace, incremental price aggression? And why not?

Well, I think to date, what we've seen is, look, it's always price competitive. So we should start with that, right? I mean it's a competitive environment with a number of different suppliers and participants in the market. Having said that, I haven't seen a lot of what I would say is irrational pricing. There's -- but it is something that's on my mind, because to your point, we have seen behaviors in the past where we're -- if demand were to soften, you do see some participants in the market try to get more aggressive from a pricing perspective just to capture velocity or volume. And that's -- quite frankly, that's -- I don't think that's overall healthy for the market or for the environment. We'll try -- our job is to remain disciplined, and we'll try and balance -- we'll balance revenue and profitability within the dynamics that we can control. And remember that from our perspective, Toni, it's about the long term, right? So we're thinking about how do we position and continue to grow at a premium to the market over the next number of years. And so we're going to be thoughtful about how do we position in the short term, even as we navigate the environment.

Right. Are there any regions of the world or any competitors where -- that you're seeing where pricing is more of a factor, either products, regions or competitors?

I don't think it'd be any secret if I said -- and we talked about this, that China continues to be an extraordinarily competitive server market. And there's a number of local makers there or suppliers that have tended to be very focused on revenue growth and share versus profitability. And so that's a market, as we've talked about, with your investor base and with the investor base at large, where we've tried to be pretty disciplined and selective on what we want to do there. We continue that dynamic. Yvonne, are there other areas of the globe that jump to mind in terms of other sort of dynamics out there at this point from your perspective?

No. I think China is the biggest one. And as we talked about in Q1, we saw a lot more of these large deals and public deals, right? And so that mix dynamic too is playing in it. And so the larger tenders and such are something that we keep an eye on and are very disciplined in our approach and decision-making around that.

Yes. You've talked about sort of retreating from China and retreating from the hyperscale market that's not refusing to participate in unprofitable deals there. I think in '09, you had said that China was a high single-digit percentage of revenues for Dell. And I think you've commented on hyperscale being sort of a single-digit percentage. Have those numbers changed materially from them? Like have those numbers gone down as a result of some of your actions? And how should investors think about your hyperscale and China exposure to that?

They should think about it as very small. And our focus on China, in terms of the server market within China, is how do we grow the larger commercial base, right, in terms of the medium-sized companies and the large commercial companies ex-hyperscale. And in terms of where China is, I think in terms of overall growth, our overall revenue contribution to the company as a whole, it's mid-single digits at this point. So it's come down from that high single-digit number that we've quoted a few years ago as we've resized that business.

Okay. And if we just sort of step back from the pandemic, and I know there are a lot of dynamics around supply and demand. How do you think about growth for -- maybe we can just talk about each of your 3 major markets for servers, for storage and PCs. So what do you think normalized growth for servers is? And importantly, do you -- are you excluding self-built servers in that market? So I'm thinking of traditional non-hyperscale servers, same thing for storage. How big do you think the market grows on a normalized basis for each of those markets?

Yes. Look, Toni, it's hard to predict the market growth. I mean we tend to look at benchmarks like an IDC or Gartner, in some instances, to give us their point of view because they're out surveying and doing the analytics around that. From our perspective, we got the company to grow at a premium to the market. It's our -- that's how we think about it. From a strategic perspective, we think about there's -- we play in different pockets of the market. There's a pocket of the market that clearly is more commodity-based in certain instances. And therefore, it's all about scale, share, efficiency. You can think about perhaps elements of the PC space there and some elements of the storage space. Our goal is to always grow at a premium to the market or premium to our competitive set. And that market's going to move around a little bit depending upon the economic and investment cycles we're in. As you think about storage, for instance, that has been a market that's been bouncing between minus 3, minus 5 to plus 2, plus 3 depending upon what form factors you're in, it's in that range, except for HCI. We're going to continue to grow at a premium in the storage space as we look at the opportunity there. You might know and I think you might have seen, we just released the new PowerScale unstructured storage solution this morning. So that "completes" the revamp that Jeff Clark and his product group team have done over the last 2 years to refresh the entire storage portfolio. Power Store came out last month, off to a good start there. Customer receptivity is quite high. And so we do think that our product lineup and our capabilities with HCI, with the VMware footprint and capabilities is a differentiator. And then in PC, look, that market is going to move around a bit as well depending upon investment cycle. So again, while I won't name an absolute growth number, I will tell you that our goal is to always grow at a premium. And to consolidate the market over time, and we think we have the breadth and depth and scale to do so.

And Tom, you -- at times in the past, you've given sort of explicit metrics for growth premium to the market or market share aspirations or whatnot. But conceptually, let's just assume that all these markets are kind of flattish growth markets from a revenue perspective, storage servers and PCs. And you have, call it, maybe 18% share in PCs, 30% plus share in storage, 23% probably in server. So somewhere in the 20-ish range market share for each of these. How do -- if the markets are growing at 0, how do we think about your aspirational premium? Is it 3 to 5 points? Is a point of share every x years? Like how do you -- how should investors look at that? And how should investors gauge whether Dell is sort of doing what it says in terms of taking share?

Yes. I think they've got to watch their time, Toni, and say, are we consistently taking share over time? There may be some variation quarter-to-quarter, depending upon behaviors in the market or dynamics in the market. As you -- if you think about the size of company we are, I mean, I do think that you ought to be thinking about us in sort of that low single digits, right? And if you think about a GDP of 2 to 3, we ought to be there or slightly above it, I would guess. I mean that would be how we're thinking about it given our size and scale.

Right. And that includes the contribution from VMware?

VMware should maybe help a little bit. I mean VMware, as you know, is growing double digits. And so -- but I'm thinking about core Dell, Toni, is how I've been thinking about it.

Right. So that would jive with the notion that maybe these markets are kind of flattish, and you want to gain share. And you think sort of a low to -- low single digit, maybe mid-single-digit growth number is sort of aspirationally where you want core Dell to be?

I think that's realistic, right? I mean will there be variation? Absolutely, as you and I both know, right? But look, I mean, we want to grow at a premium. And if the markets are flat, then you're going to -- you've got to take share from somebody, right? The markets aren't expanding that much. So we're going to have to take share, which is, by the way, our strategic intent. So it all fits together.

Okay. And then just from the margin improvement opportunity, storage is historically a high-margin business. We estimate pushback, if we're wrong. Your server margins operating maybe 7 to 8, your storage is maybe 14 to 16. Obviously, it varies a bit, but storage is quite a bit more profitable than servers. PCs, you report that, obviously, in the 5%, plus or minus a couple of percent range. Where is the biggest opportunity for margin improvement among those businesses and why?

Yvonne, you want to take that?

Sure. I mean I'd start with the ISG portfolio. So server and storage. So certainly getting to storage, we just launched the -- we feel like we haven't been as competitive in the midrange as we should with them. So really rounding off with PowerScale today with that launch. But with Power Store, PowerScale, really feel that we'll be more competitive there. So I think regaining share in that space certainly will be a help. And we're looking at server as more about getting that velocity back going with the business and being very disciplined in our pricing. And then I think through also the supporting structure and how we're leveraging innovation of portfolio from an ISG perspective. In client, I really feel it's about -- it's really focusing on that consolidation in the marketplace and taking advantage and focusing on, say, consumer direct, if we're going to be in the consumer space and leveraging the opportunity we have with Dell.com now when everyone's online buying, online purchasing, it's a great advantage we have. And then our great -- our attach motions, if you will, services, our software and peripherals, really continuing to focus on that as we grow. Tom, what would you add to that?

And particularly, from a margin perspective, where do you think the biggest opportunity is? Or should we think about these as sort of being the right margins and the effort is really on taking share and preserving these margins?

Look, I think there's room for us to continue to work to improve margins, Toni. I don't think there's -- we've been pretty direct about that we'd like to migrate the margins up, but it's going to depend upon actually the mix dynamics within the business. The secret sauce there is to -- Yvonne hit upon the various piece parts of this thing, which is the profitability, the direct in a PC and attach. But the biggest lever we're going to have is going to be the storage portfolio, given the margin profile there. So the more you can drive mix and velocity and storage, the better the contribution pool -- margin pool is out of that lob. And so we'll have to make sure that we continue to drive that. Obviously, with VMware as a software company, there's clear operating margins there. So as you know, Toni, we've been on this journey for the last 3 years to turbocharge VMware and work together to drive more holistic solutions out to the marketplace. I think that's working quite well. But that there -- I'd be the -- as a CFO, I would be less than truthful if I didn't tell you I like the 28% to 32% sort of operating margins of VMware. So we've got to continue to work on, push on that as well.

And Tom, I think also -- I'm sorry, Toni, I have say, increasing our -- as a service mix and such over time, right, we've got about a $6 billion reporting revenue stream right now, and we're certainly focused on building that to help with the overall P&L performance.

That's good by the way.

But it sounds like the biggest drivers of margin improvement are mix-related, more so than one of our businesses is kind of structurally a lower profitability than we think it ought to be. Is that fair?

Look, I think we can get more scale out of our storage business, Toni, right? I think that we have built that business to be -- to grow, and we need to make sure we continue to drive the velocity there and get the growth trajectory to where we want it. Being thoughtful about that. I don't want to imply anything there in the sense of it's not growth at all cost. But it's -- we have what we think are advantage products now with the refresh of the product line. Toni, you know that we've invested pretty heavily in go-to-market coverage over the last 2, 2.5 years. That coverage has ramped. We've invested in our channel program. So we -- from my perspective, I feel like now is the time for us to push on the storage business in the sense of it should be set to move. Now obviously, there's economic dynamics and macro dynamics that we'll have to navigate through. But I'm optimistic about our ability to push on and pull the storage forward. And I do think when you -- when that happens, get a scale dynamic there, and that will be helpful from a storage P&L perspective. In terms of where we're running the other businesses, we've been pretty transparent over the years that we think the PC business is roughly a 5 to 6 sort of -- 4.5% to 6% sort of operating margin, depending upon the quarter. There's been times when it's been higher. There's been times when it's been a bit lower. And servers continues to be an area that we want to continue to be thoughtful about pricing and the opportunities, and I'm not sure if there is a significant opportunity to expand that operating margin over time. We're clearly looking at that as well.

Okay. Let's shift a little bit for the last 5 or 7 minutes or so to sort of some balance sheet items. So you've talked about targeting, paying down your core debt balance by $5.5 billion this year. How confident are you in doing that?

Look, I think with everything we know right now, we should be able to do that, right? I mean as we've talked about, we started the year with a bit of excess cash on the balance sheet deliberately, by the way, with the idea that we wanted to lean into the debt paydown this year. So we had some excess cash coming into the year. We've got the RSA sale coming up in Q3, which is targeted to close in Q3, which the purchase price of that asset or the sale price of that asset was roughly a little over $2 billion. And so yes, we'll need to generate some cash flow, obviously. But -- and we'll have to see how the macro shapes, but we feel confident about our ability to pay the $5.5 billion down of core debt. In addition, obviously, we did borrow, as you know, Toni, in Q1, the $2.25 billion. So that will be used to pay down debt proceeds as well, so -- or pay down debt as well. So look, that's our plan, and we're focused on that. And I feel like we've got the framework to get that done. Obviously, we're focused on getting back to investment-grade as we chatted about, and we have to see what that timing looks like. That will be the rating agency call. That won't be ours. But it's our job to position the business so that we are being thoughtfully considered for that at the appropriate time.

So just a couple of clarifications on that. So you're going to pay down the $2.25 billion in debt and the $5.5 billion, just to be clear. And I think Matthew articulated was it started with $7 billion in cash at the beginning of the year. I'm getting $2 billion from RSA. That's $9 billion. I generate a bit of cash. And I think you guys have said you need, what, about $5 billion to run the company? So it seems you could generate a little bit of glass, you can enter next year with $5 billion and feel comfortable, and so that's sort of the implied delta that you need to feel confident on the -- to pay down the debt. Is that correct?

Yes, that's the basic math, Toni. Yes, as we've chatted about. That's right.

And how do we think about debt payment beyond 2021? What's the right pace of debt paydown, assuming sort of the macro forecast you're looking for next year and beyond are base case, correct?

Yes. Look, I think where we want to -- where we want to end up is a structure that's balanced, right? In the sense of, typically, investment grade, depending upon the rating agency definition, is somewhere between 2 and 3x core debt. And I'll set aside, Toni, and I know we have a complicated capital structure, but I'll set aside the DFS debt for a second, which is a different -- which is secured by the financing receivables. I would like us to be somewhere in that sort of 2-ish, maybe slightly less than 2 over time. I just think that's the right structure as an investment-grade company. I think it makes sense to have some debt on the balance sheet as an efficient capital structure. And that may vary a little bit, but that's where we're headed, and we'll continue to focus on ensuring our capital structure is aligned to those longer-term targets.

So I think your core debt-to-EBITDA under your kind of new definition, which includes your share of EBITDA from VMware was 3.2 at the end of fiscal '20.

That's right. Yes.

Where is that at the end of fiscal '21? And is that definition of core debt over how you're defining EBITDA, including the contribution from VMware, what number does that have to be? So where are you at the end of '21, assuming you pay a $5.5 billion? And then what number does that specific ratio have to be when you start discussions with the rating agencies?

Yes. Look, we haven't given a specific leverage target for the end of the year. So that's not a place where I want to go. I think what you should assume is that we're going to pay down the $5.5 billion this year. That's our target. The first rating agency conversation that we probably would have, given the fact that S&P gives you credit for cash on the balance sheet, would start with Standard & Poor's with S&P. I would suspect that's probably sometime early to mid next year, would be my guess. We'll have to see how that goes from -- in terms of the dynamics within the macro. But that's our focus. We -- and those conversations will progress from there.

Right. I mean just the simple math would say, if you're paying down $5.5 billion and your core debt was $33 billion, you're looking at a debt-to-EBITDA ratio that's probably like 2.125 at the end of the year, assuming your EBITDA hasn't really changed, which is obviously an assumption as well. So you think middle of calendar '21 is maybe when you can start with S&P.

Look, we'll have to see, Toni. I mean this is -- we'll have to see how the business performs. But that's sort of what's in my mind right now, to be honest, right? I think that sounds about right, given what I know today.

Right. So one of the questions I get frequently is, hey, why doesn't VMware pay a dividend, and then Dell take that cash and more aggressively or accelerate its debt repayment? Why is that not happening? Or why -- or why shouldn't that happen?

Great question, and we get that question a lot, Toni. So look, we've thought about VMware like this, which is they have the capital structure. They're a public company. They have been our primary M&A vehicle over the last number of years as they have built out their ecosystem. So we have been very hands off, if you will, in terms of their capital allocation decisions. And we've let them make their capital allocations along with their board. And so we feel like that's in the best long-term interest of the company. We're using essentially parent company debt cash generation to fund the debt that comes due. And I think in the short term and as we run the business, that's the way we've run the capital allocation framework, and I don't see that changing as we work our way through this. So we feel like it's working for us. We're able to -- it makes sense from our perspective as we think about long-term value creation, and we're going to continue on that pathway.

So 2 final questions sort of related to this. One is, the other question is, why not sell some modest stake in VMware, you own 80%, use those proceeds to more quickly accelerate that, question one. And question two is that my observation is among a lot of institutional investors, Dell's stock is a bit of an orphan, in part, because the float's not that big, but also in part, it's a super voting structure, and accordingly, will never be part of the S&P, which is really important for investors as a benchmark. So the second question would be, why is the super voting structure necessary? Michael still has full economic control. So even if it was the normal voting structure, he would still have voting majority. And is there any consideration of Dell changing that so it could be included in the S&P. So the first question is, would you sell any stake in VMware? Second one is your super voting structure. And do you think it's a hindrance? And would you consider changing it?

First on, VMware, we don't have any plans to sell a stake in VMware. We like the fact that we own roughly 81% of the company. It gives me tax consolidation. So if I were to sell a piece of that, I would blow the tax consolidation, which has some pretty severe impacts from a tax liability perspective. As it relates to the second question, Toni, in terms of Dell and super -- the micro supermajority stock. We've chatted about that from time to time that at Board level, there is no plans at this point to change that. Just given the -- we are a controlled company, we -- as you know, and I don't see that changing or -- but having said that, I think what we have tried to do with the super majority is from an economic interest, every share is treated the same. So therefore, the shareholder participation, if you will, from an economic perspective is clearly aligned, and that's been our focus and trying to make sure we have an aligned shareholder base.

Great. Well, we've gone a little over. I appreciate your time, both Tom and Yvonne. Thanks very much for joining us on this fireside chat. Our best wishes.

Thanks, Toni. Take care.

Yes. You too.

Appreciate it.