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

All right. I think we're going to go ahead and get started. I'm Matt Cabral. I cover IT hardware here at Credit Suisse, and we're very pleased to have Dell here with us. We have Jeff Clarke, who is COO and Vice Chairman of Dell. So Jeff, thanks for carving out some time and joining us.

My pleasure. Glad to be here. Thanks for having me.

So 2 quick housekeeping items before we start. The first, for those of you who have been following along, I'm sure you're familiar. We're not taking live Q&A, but I am available over e-mail. So if there's anything you want me to ask Jeff, it's [email protected]. And the second, Dell asked me to read a brief safe harbor, so here we go. This discussion may refer to non-GAAP results, including earnings per share, unless otherwise indicated. For a reconciliation to the most directly comparable GAAP measure please consult the slides labeled supplemental non-GAAP measures in the performance review available on the fiscal 2021 Q3 earnings results page on investors.delltechnologies.com. Dell Technologies' statements that relate to future results and events are forward-looking 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 those forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in Dell Technologies' periodic reports with the SEC. Dell Technologies assumes no obligation to update its forward-looking statement. So I think we're compliant. I think we're good to go.

The -- to kick off the conversation, Jeff. Q3 results last week, a pretty solid quarter. Maybe just to level set the conversation, walk us through what happened this year, just how the various businesses have performed as you've gotten through 2020.

Sure. I'm happy to do that. If you think about it, I know you've probably been through this all week and all year, gee, 2020, who could have thought? Unprecedented. Who would have thought? We certainly didn't plan or predicted that we'd be in the midst of a global pandemic. But that said, through 3 quarters of navigating, I think, a pretty difficult time and certainly uncertain. We've, I think, proven to be very resilient this year. We've delivered consistent results. And I think we have delivered that over this very challenging macro environment. If you think about it relative to Q3 that we just announced, I believe, 2 weeks ago now, we delivered an incredible quarter in our Client Solutions Group. We had a record revenue. We had a record shipments. We had a record operating profits. We delivered solid profitability. I think earnings per share was $2.03, up 16%. We generated strong cash flows of $3 billion, up 64% year-over-year. And then lastly, what I think is important, particularly as we've talked about this in Dell Technologies, is paying down debt. We paid down a significant amount of debt, $4.6 billion, $3.1 billion of core debt. And the key indicator for us is we now have our core leverage ratio down to under 3 at 2.9, putting us in that 2 to 3 range we've been trying to accomplish over the past couple of years. If I step back and look at sort of what's happened in the marketplace itself with the customers, I think it's easy to say digital transformation has become a must-have to compete in this world today. I think the technology trends that we've been long tracking have been accelerated. Accelerated substantially to the degree that I think they will have meaningful impact in years to come. And it plays to our hand and the technologies we've been investing at Dell. The other thing, I think, is key to kind of back up that digital transformation comment that I made earlier. We've seen customers with what we've been tracking with our digital transformation maturity index, I know a mouthful. But more customers continue to invest in digital transformation. In fact, this year, 80% have fast-tracked those key strategic digital transformation programs. And 25% of customers since we last polled them in 2018 have made noticeable progress from the categories that they would have been in before. I think that all bodes well as we think about the next part of the decade, the next couple of years, particularly when you think about what customers are telling us their priorities are today, first and foremost, enabling work from home and learn from home. They've had to work through how to -- many customers had not digitized their experience of engaging with customers, so building an online presence; building a digital presence; simplifying their IT business; embracing multi-cloud as the world is clearly many, many clouds and how do they bring a multi-cloud environment together; and then lastly, around data management and data security. And if you think about what we've been able to do, which I'm pretty proud of our work thus far through 3 quarters is, look, our broad and diverse portfolio is helping us. Whether it's from the PC side and benefiting from the work-from-home and learn-from-home phenomena that's happening now, our work across servers, storage, HCI, CI, services, et cetera, we're in a great position to where the marketplace is going. And I think that's been a catalyst for us to deliver the consistent results. We've been able to be agile. We've been able to pivot to where the pockets of growth are. And we've been able to take advantage of where the growth opportunities in the marketplace are. Whether it's by segment, customer type or product type, our big diverse business has allowed us to do that. I hope that helped.

Yes. No, no, that's helpful. That's a great way to sort of kick off the conversation. I guess maybe to build on top of your comments about digital transformation, I feel like the second part of that discussion is often around cloud. And I think we've seen a real acceleration in customers moving to the cloud this year as part of that push towards digital transformation that you mentioned. Maybe just help us understand Dell Technologies' cloud strategy and just how Dell competes in a cloud world longer term.

Yes, happy to do that. Look, we have seen customers move to cloud. And maybe this will surprise the folks on our call today. Look, moving to the cloud is good for Dell. Customers who moved to the public cloud, which is where they generally start first, quickly find out that cloud is an essential part of their IT strategy. And then they quickly find out that cloud is an operating model, and that the cloud is actually many clouds. Very few companies in my experience have one cloud. In fact, they want more clouds. And if you think about the evolution of workloads and how this plays out, the research that we have done, the research that many firms have done, over the next handful of years, you're looking at kind of a distribution of workloads, it's 40% to 50% private clouds, 30% to 40% of the workloads in public clouds, and then the balance being in traditional data centers. And I think there's 2 things to take from that. One, not everything goes to a public cloud. It is a world of many clouds. And most importantly, there's a distribution across those that require an orchestration. So our strategy is really helping customers deal with the multi-cloud world they're going to be in. How do they resolve disparate tools, disparate SLAs? How do they drive consistent operations? How do we bring them a simplified management stack and drive consistent automation across this multi-cloud world? How do we help them prevent the lock-in? How do we allow them to access the premium services they want in whatever cloud format they want to consume it in? And then lastly, how do we give them control of their performance, their control of their data and provide the security they want across their cloud environment? That's what we believe we're uniquely doing at Dell Technologies. That's what we think we have built and are continuing to build on, which really helps us distinguish our cloud story and our cloud capabilities over any others. We recognize our customers are going to work in public clouds, private clouds. And then the fun part is the new clouds that are going to emerge on the edge, which I think is going to be an explosion of growth over the next many years as we think about whether it's smart cities, smart factories, smart hospitals. The creation of all this information on the edge of the network that ultimately will have to be dealt with at the edge to drive the analytic outcomes that customers want. We think, again, that's an opportunity for us to extend our footprint and our cloud strategy to another emerging area of cloud growth.

And maybe to build on that, I want to talk about VMware a little bit later in the conversation. But just in this concept of trying to create that consistency for customers across those multiple landing points, just how important is VMware to that strategy. And just talk about sort of that path forward as you're trying to lead to that multi-year or hybrid cloud steady state for customers longer term.

Yes. Think about it as a substrate that works across those various clouds. So if you think of it as a substrate that drives the consistent management, the consistent orchestration and the consistent automation, it's a very important component of our cloud strategy. And then if you think about it in the context of delivering cloud capability, whether that's a VxRail with VMware Cloud Foundation to build software-defined data centers for a private cloud or to build a smaller version of that for an edge cloud, you have a consistent substrate or fabric, if you will, that allows us to help our customers move data, workloads, containers across those various environments. That's what Pat and I have been working on in our joint cloud strategy. And that continues as we look into the future for a considerable amount of time. There's still a fair amount of, I'd say, problem-solving, making this easier for customers to work across this hybrid cloud environment.

Got it. I want to dig into the segments a little bit more. And I want to shift gears and talk about CSG a little bit. This year, it's been an interesting one from a PC point of view. I think demand has continued longer than I think people thought, certainly coming into this year, but even at the beginning ends of the -- the beginning phases of the pandemic. Maybe as you think about now going forward, I guess the path for PC is into 2021 or even just longer term, versus the risk of maybe some of this is a pull-forward that is going to need to kind of be brought forward or paid for in some respects in terms of slowing trajectory as we go forward.

Sure. It's an interesting question. If we had this conference a year ago right now, we have been talking about the end of the Windows 10 refresh. We have been talking about the first half of the year of calendar '20 was looking okay, but the refresh would have been completed and a tougher second half. And here we are now, just reported Q3, at least from an industry point of view, the largest quarter in 12 years. Q3, I think, was 82.5 million units. Again, the largest quarter in 12 years. And if you think about what some of the experts are saying or forecasters are saying, Q4 is another 80 million-plus unit quarter, growing 17%, 17.5%. I think what's key is we have found new users for the PC. And the PC has become an unbelievable essential component in this staying-at-home economy that's evolved. Now could I have forecasted that a year ago with you on this stage? No. I didn't know a global pandemic was coming. And with that has really driven a different usage pattern. And again, I think this notion, at least inside our company, we talk about that the PC is an essential component in a work-from-home, learn-from-home, stay-at-home economy. And when you think about that, it brings I think a whole lot of new opportunity. We have a rather large installed base, 1.7 billion units, give or take, depending on whose data you look at, a few additions. 700 million of them are 4 years or older. They're not capable of working in today's modern experiences. They have to be upgraded. In addition to that, I think this notion of one PC in a household is out the door. You got a family of 4 with 2 children in school, there's at least 2 PCs for the children in school, plus mom and dad are likely working. We've now gone to 4 PCs in the home. If you expand that out over time and this environment sustains itself, which it appears it's going to be, and you believe like we do that this remote, hybrid work environment is going to continue, we think this bodes well for the PC industry. I think, next year, the market is forecasted to grow just under 2%. I think the 3-year CAGR is somewhere in that ballpark as well. I think that's very believable. We have found new users. It's become more essential. And if you think about it, we still haven't tapped the opportunity. There's still 10-plus million children in the United States that don't have a PC to go home and work on every day. There's 40-plus million in Western Europe. There's 10 million in Japan. We could go on. So there's still a large base of users that we haven't hit. We have an installed base to refresh. And then the work-from-home environment has really, in my mind, accelerated the evolution of the notebook. If you look at commercial PCs, they were lagging consumer PCs in terms of adoption of notebooks. That's now changed. And notebooks drive a faster replacement cycle. When you take all of that together, I think the PC business looks pretty good.

Yes. And I guess -- so maybe building on that. I mean, to your point, here we are, as much as I'd rather be in Arizona. We're talking back and forth on a PC. And it seems like it's just really become ingrained in daily life, both professionally and personally. I guess as we have some optimism on the vaccine front, if theoretically, we all start making our way back to an office at some point, I guess how much of this is a permanent behavior shift that sticks around versus more of a stopgap as we're trying to overcome just the challenges that are out there in the environment right now?

Well, I think you have a couple of dynamics. Our research with customers would suggest pre-pandemic, the professional workforce was roughly 20% working from home. I think the number I'm going to give you, I think, is understated, but it's at least 20 points higher coming out of the pandemic. I think it's going to hit the -- hit on -- knock on the door, 50% of the professional workforce were working what we call a hybrid. So think of that as, one, maybe 2 days in an office, but 3 or 4 days at home or working remotely wherever that's defined. That's sure to stay. I know if you look at our company, it was an early adopter of this, we've been a connected workplace environment for over a decade. We had nearly 30% of our workforce in a work-from-home environment pre-COVID. We're now a very high number since we flipped a bit. But our steady-state is probably 2/3. I don't think we're going to be an outlier. And I think that's what's here to come. I do think that's important. And then the other maybe element to address is when we go back to the office at whatever level we're in the office, the PCs we're going to go work on are 5 quarters older. Never in my time, I've been doing this a while, has an installed base gone 5 quarters without the natural upgrade cycle that occurs. So there's still that to deal with as we all come back to the office or workplace later in the year next year. Does that make sense?

No, no, that does. And maybe one more PC question for you. As we look about just where the demand is right now, I've always thought about Dell's mix is maybe skewing a little bit more toward corporates, towards desktops. And today's environment is a little bit more driven by consumers and education. Maybe just talk about sort of as the demand picture shifts, what that means in terms of different investment areas for you guys and maybe a different go-to-market approach as your sort of typical sources of demand have shifted a little bit.

Well, I suspect you're referring to most of our focus and our mix is generally not proportional to the industry mix. Our mix is generally much more towards commercial than consumer.

Yes.

Legacy, the company always has been. That's also driven by the fact that it's more -- generally a more profitable space. And we've continued to have great progress there, where we've taken over the past 3, 4, 5 years, we've consolidated our position in both the PC -- general PC space as well as the commercial portion, in particular, taking a fair amount of share. Our business has grown over the last 5 years. I think 3% CAGR over the last 5 years in revenue and our profits -- or I should say the CAGR of our operating income is roughly 3x that. So I think we have a track record of consistently delivering in the marketplace. Q3, our revenues were up 8%. And the reason I think that's important is we participated broadly across the marketplace. Now some of our lack of participation or perceived lack of participation has been the ongoing supply constraints that have existed in our marketplace for a fair amount of time. We made choices. We've communicated those choices on our earnings call. But now that we have clear line of sight to supply, you're seeing us participate in a full set of price bands in both commercial and in consumer PCs. Our notebooks orders revenues were up 24%, I believe, in Q4 -- or excuse me, Q3. I think I said on our earnings call, our Chromebooks doubled year-over-year in terms of its growth rate. We're participating in the education market with our Latitude Education series. And again, I'd go back to that mark that I made earlier in our discussion. We have pivoted to where the sources of growth are in this work-from-home, learn-from-home environment. It's a great opportunity. We've pivoted there, and we're going to continue to operate there. And then there's ultimately the -- sorry about that. That was my lab walking.

It's okay. You got a guest running. No problem.

And then the other opportunity we have in the stay-at-home environment is the opportunity in gaming and other consumer category that we are the leader in and seeing tremendous success. So you take that, we're participating in the full stack. Certainly, we're very, I think, very disciplined there. We're not into the share for share's sake. It's about driving the right revenue growth, the profit growth and the right exposure to each of those market segments. Does that make sense?

Yes. Yes. And so let's shift the discussion a little bit. I want to talk about ISG a little bit because it feels like a little bit of a different story there. Demand has been tougher this year on the enterprise side. I guess, as we start thinking about rolling forward to 2021, I guess, do you think kind of that difficult demand environment is with us for a little while? Or is there maybe some pent-up demand that's sitting there that's going to kind of snap back in a way as we start moving forward to next year.

To answer your question, I'm optimistic about growth next year. Probably you want some context on why I think that. So let's see if I can work my way through that in a logical manner. If we go back to calendar '18, our fiscal '19, we had a great run in our server business. Revenues up 30%. A big buy for on-prem gear. Naturally, calendar '19, fiscal '20, there was a digestion period. And again, if we were a year ago, sitting on this call talking about our belief of the opportunity in servers, we thought it was going to be a modest growth year in calendar '20 -- fiscal '21. Yes, throw in a pandemic, business continuity, work from home being priorities, those budgets are suppressed, dollars have shifted to making sure workforces are enabled with all of the right technology. Key digital transformation programs funded, and at the expense of infrastructure buying. We think that's what's happened. Our touch points with our customers would suggest that's happened, but we're optimistic about next year. If you look at some of the market pundits, they would have the market pegged somewhere around a plus 4 growth for servers next year. We think that's realistic. Realistic because there is some pent-up demand, that budgets will equalize and shift towards infrastructure next year. You have the added benefit of technology coming out. So there's new platforms coming out, based on Intel's 10-nanometer server parts, early next year and then an upgrade of the AMD platform to their next-generation architecture. So those have historically provided a catalyst for growth in our industry. Again, you have a suppressed, I think, buying over this year. And then there's some encouraging signs that we communicated around Q3. Small and medium business improved. It actually grew in the server side, showed month-over-month improvement, which I think bodes well as we look into next year. So that was a long-winded way of describing I'm optimistic about next year on the server. I think there's certainly room to grow. And then I didn't even talk about what I think are real new growth opportunities for the server, which is the edge and the early build-out of the 5G telco network, which will be on x86 platforms. Those are very large adjacent marketplaces.

Yes.

Edge, $50 billion, $100 billion, I've heard all sorts of numbers. All I know is that's a lot, and it's a lot next to what we do. Telco infrastructure is a $100 billion opportunity. Doesn't all convert, but it's a lot next to what we do, all built on industry standard-based things, which is what we're good at.

Yes. And maybe the other piece of the ISG portfolio being storage. And I want to leave power storage to the side for a second. I want to come back and dig into that. But maybe just bigger picture, if we're sort of -- you're optimistic about growth returning as we get into 2021, I guess, where does storage fall in that picture? And is it sort of customers want to refresh the entire stack? Is it sort of one leads lags? How do I think about storage versus servers as we go into next year?

Well, in fact, the industry forecasters had the external storage market growing just ahead of the x86 server marketplace, the mainstream market that we participate in. I believe it's forecasted to be plus 5. So that bodes well. So the same trends that drive a server in my mind in storage, while they're different buying cycles, you're seeing that, I think, recover in calendar '21 or fiscal '22, and we're optimistic about that. End of the day, all the data that's going to be created, and the fact that we're in a data decade, and we've coined the data era and the data decade and the number of devices creating information. It's reasonable to believe that we're going to see that acceleration, particularly in those technology areas that I just mentioned, driving demand for new storage.

And if I look at Q3, across ISG, storage was a little bit more difficult. And I mean, to be fair, it was a pretty tough compare. You guys had a really good year prior. But if I think about underneath there, I think mid-range is one of the areas you guys have talked about, it's a little bit more challenging. Maybe this leads into power storage. So you're a couple of quarters in. Maybe just talk a little bit about what you've seen so far in how PowerStore changes that dynamic and should ramp for you guys going forward.

Sure. Maybe to ground us and why we talk about midrange so often for the group. It's half the market. So when you look at the external storage marketplace, it's half of the market opportunity, which we have the privilege of having the leading position of 24% share, twice our nearest competitor. That said, we used to have more than 24% share. So the challenge for us -- and you probably recall some of our earlier conversations over the past 3 years of changing the dynamic that has been happening in the share loss in the mid-range prior to the Dell acquisition and subsequent to the acquisition. And we certainly -- part of that strategy was to simplify the portfolio. We had too many competing products. And the answer to that was the PowerStore, this new revolutionary architecture that we've built over the past 3 years and just put into the marketplace. That's been our -- the answer on our planned answer to change the share trajectory. It's why you probably sensed the little impatience from me on the call a couple of weeks ago. I'm looking for results now. But if I step back and I look at what we've done, okay, 15% of the customers are new storage buyers. We doubled the revenue quarter-over-quarter. We substantially put more product in the hands of our channel partners, our customers, our sales force. The number of proof of concepts are going up. The number of touches on the product are going up. I'm encouraged. If I look at it against 2 revolutionary architecture changes we made inside the company over the past 5 or 6 years with XtremIO and VxRail, it's ahead of both of those curves through the first 2 quarters of their respective lives. That's a good sign. I'm inpatient, that's not good enough. I want it more. But it's a good sign. And we're encouraged by what we see. I'm encouraged, the fact that my competitors go out of the way to talk about why they don't see it. I find that fascinating. The fact that they say they don't see it tells me something differently than they communicate. I mean this is a -- for us, 3 years of work that really addresses what we think has been a challenging mid-range architecture. The architectures are old. They're dated. They're decades old. They're duct-taping new technologies against these old architectures and keeping those going. This is a revolutionary architecture. It's very, very different. If you think about what we've done here is we really designed a modern architecture for the cloud era and for the data era. It's a symmetric active, active system. It's both scale up, scale out. It's designed for storage-class memory and the memory architectures that are beyond, not today's memory architectures for the next decade. We put the ability to again, I can't remember if I said it, scale up, scale out. When we talk about data reduction in our platform. Data reduction's always on. We don't turn it off or throttle it like others do. It's always on. There's no performance penalty for that. Architecturally, that's a huge advancement over where everything else is today. And then if you combine that with what we've been able to do is to run applications on the array, giving the array great extensibility to extend it to be able to do the things that a cloud environment wants to do in the future, and then the fact that we've built the architecture around a micro service containerized building blocks, if you will, we're able to respond more quickly and to be able to drive to the market needs much more quickly than we think legacy architectures are. So new features will come that will become faster than ever from us before. And they will be the features that a cloud data world will need, and we feel very good about the architecture we've built. I hope that helps. Matt? [Technical Difficulties]

All right. Well, I guess some technical difficulties. But Jeff, hopefully, I still have you. Hopefully, we're back.

Yes, sir, I'm back. I can hear you in the world of Zoom.

The world of Zoom, indeed. Well, I appreciate you bearing with me. And we only have a few minutes left, but I do want to try to hit another couple of questions while I have you. The first one, I want to talk about VMware a little bit. And I know you guys haven't announced anything definitive on the potential spin-off. But I guess help me understand a little bit what Dell, without owning VMware, would look like going forward. And this goes back to what we were talking about earlier in the conversation about how Dell's -- or VMware's important to that sort of control plane almost in a hybrid or multi-cloud world. I guess how important is that partnership on the technology road map going forward?

Well, it's an important partnership. And I appreciate you not asking me to expand on what I can't expand on what we've put out in the public formally and then we'll leave it at that. But I think what's important maybe for the viewers today to hear is, look, regardless of the outcome, Pat and I have put in a -- had built a partnership that can, I think, adapt to any structure that's in place. We have a better together first and best mindset with tremendous synergies in the field in front of our collective customers and deep integration on the engineering side. It doesn't change. From my -- customers are asking what changes. Nothing changes regardless of a spin or no spin. We have built a collaboration that transcends any structure. Our ability to work together on cloud technology and cloud architecture, our ability to work on the next-generation data center architecture, where we're thinking about how modern applications are built and what role accelerators will play in handling those modern applications in a modern data center architecture. Our teams are collectively working on that today. We're working on them tomorrow and into the future. The work that we're doing in telco, where industry standard platforms with the virtualization technology and layer from VMware, moving our way into the ORAN is all work that we're doing today and will transcend any structure going forward. So our ability to build differentiated solutions and put those in front of our customers of the 2 companies working together doesn't change. And if you look across the 6 categories of technology that we think are so important and that are accelerated, our 2 companies are so aligned, whether that's a cloud operating model, 5G, edge, AI, ML, data management and security. The companies across our product teams and Pat's product teams, in fact, we just spent all day yesterday reviewing the latest work, the 2 of us, I think, is in great shape. And I'm so excited. Again, structure aside, we've put together a collaboration, both on the go-to-market side and the technical side that customers can count on that will deliver a differentiated experience.

Got it. And one last one for you, and I probably should have left you more time for this one. But we've gone through a bunch of different areas with the conversation. But as we think about now, the landscape going forward and the opportunities to drive growth for Dell Technologies, just wondering if you can leave us with any sense of what gets you most optimistic, most excited about the path forward from here for you guys.

Well, the path forward for me is -- and as I think about this and then for our company is this notion that we're a bunch of technology optimists. And if you're a technology optimist, and you think the world is going to become more connected, more automated, data-intensive and a distributed computing environment, and that's going to be accelerated, what's not to like? That's what we do. If I think about 5G being the next digital fabric, again, I think about enabling data-driven insights for our customers so they can drive better business outcomes. I think about automation and embedded intelligence in every operation that companies do in their IT systems and tools. The explosion of data that's coming, the fact that, that's got to be dealt with in real-time to drive smart cities, smart cars, smart hospitals, smart schools, what's not to like? I get real excited about those prospects of where the technology is going, the portfolio that we have, the investments that we've made in a differentiated manner across those areas that I just mentioned that we're collaborating with VMware, coincidence, huh? Hybrid cloud, edge, 5G, AI, ML, data management and security, that's aligned to customers' priorities. That's aligned to where we're investing. That's aligned to where we're collaborating with VMware. What's not to like? And those are big adjacent markets to where we've historically participated in. So that's why I get excited. I'm a technology optimist. I've been at our company for a very long time, as you know. I like our hand and I like the future.

Perfect. Well, I think that's a good spot to end. Thank you so much, Jeff, for spending some time with us, and I appreciate the discussion.

My pleasure. Thanks for having me. Take care.

Yes.