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

Good afternoon, everyone. My name is Paul Coster. I cover applied and emerging technology and IT hardware at JPMorgan. I'm joined here today by Sam Burd, who is the President of the Client Solutions Group at Dell Technologies. Sam, good afternoon, and thank you so much for joining us.

Okay. Thank you for having me, Paul. Great to be able to join you today.

All right. Thanks. And we love the view out your window, which I understand is near Austin. So I'm just going to start with the safe harbor sentiment -- statement. And Hall Butler promised me I'd get paid for this. Dell Technology 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 these expressed -- 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. And that's the end of my career in IR. All right. Sam, thanks very much for joining us. This is the JPMorgan CES technology forum. I don't know how many years we've been doing it, but I think it's the first one we've done virtually. And the CSG group at Dell is coming off of -- well, it's 3/4 of the way at least, through a fabulous year. I'd just -- so that everyone's sort of -- the scene is set here. In the most recent print, you put up $12.3 billion of revenue and $1 billion of operating income. And that was 8% year-on-year growth, 10% sequential revenue growth and nearly 40% year-on-year and 40% sequential improvement in operating income. That's a pretty good deal, Sam.

So let's start with 2020. I mean it's been a dreadful year, and yet here's Dell powering through. So what is it that happened here? Why are you doing so well?

Well, like you said, it's been a year of many different challenges. But if we think, back fall, we had a -- as you hit on, we had a really good quarter. We had our best quarter in our history if you look at revenue, units shipped and profitability. And it's been an interesting path to get here. You think about a decade ago, people were out talking about the death of the PC and saying the PC might be replaced by phones and tablets. Paradoxically, they were writing all that on PCs. So you spin things forward a decade later, and what we saw with COVID and the pandemic really underscored a big opportunity out there in technology. It just showed that the PC is an old friend. It's a great productivity tool for work, school, home for things that you want to get done. And I look at the past year and I'd say technology has never been more important. You think about home, we used to go places to do things. We now had in the past year, it's like the PC was bringing the world to our home, whether it's work we were doing, kids going to school, a doctor visit that would happen through a PC, playing games as an escape valve for everything that was going on. We don't think that changes post-COVID either. We see people operating in a world and probably accelerated how we're going to go do things and being able to both be in different physical places but do a lot more from your home or wherever you want to go be. So all those trends kind of came together in the past year to be a good year for technology, a good year for PCs. Paul, IDC reported yesterday 303 million units shipped in the PC industry in 2020. It's the highest size of the industry that we've had in the past 6 years. It was 13% growth. Think about the business and the industry really stabilized in 2016, and we've seen growth since then. And even with all that growth, as we look to the future and see opportunities out there, like, there are lots of people without technology who could use and benefit from technology. In U.S. alone, there's 10 million students without PCs, 10 million students in Japan, 40 million students in Western Europe. We're seeing a home environment -- if people's home environments are like mine or many people I talk to, it's like one PC in a household is just not enough. It's like we're moving to a 1 to 1 PC to person to be connected to the world environment. And I look at all the PCs out there, 1.7 billion PCs in the installed base, 700 million of them more than 4 years old. So they're not the kind of PC that delivers the experience people want if they're doing Zoom calls, playing games. And then with all that going on, we've seen a shift to notebooks in our business, in the industry in general, which if you think about what that means for growth and just opportunities in the PC space, notebooks have a quicker replacement cycle than desktops probably on -- our research suggests in the order of 1.5 years quicker replacement cycle. They tend to be a higher ASP. They tend to pull more things with them. If I look at what I'm doing here with accessories, whether it's keyboards, big displays to go in and visualize the data that you have, docks to go connect. So there's a bigger bucket of goods and opportunity that you have in selling to customers. And we've generally seen with the whole COVID pandemic that enterprises and people have figured out technology really matters to keeping people happy, keeping employees satisfied. Like they care about the job they're taking. They want great technology so they can get things done. So if you look at 2020, it's been a crazy year in many regards, but it's been a good year for technology and really, technology helping people stay connected, technology being important to how the -- we kept the world operating. And the PC has played a big role in that, and we think that continues going forward.

I just want to explore this a little bit more. So the PC seems to be reinvigorated. So too, coincidentally, there is a little company up in Washington state called Microsoft, which went from -- it felt like a laggard a few years ago. It doesn't feel like that anymore. And the ecosystem that they bring with them to the PC seems to have strengthened a bit, and it feels a bit more useful and more suited to creatives and team work and so on. Can you just talk about that? Is that also sort of helping out here?

Oh, I think we've figured out how to use technology in the PC to, like you said, innovate and collaborate. And I think there's more to come. Because you think about we're 9 months into a -- the pandemic has pushed new ways of figuring out how to go and get things done. Some worked really well. There are opportunities and things we're working on, other people in the industry working on to solve how can we collaborate, innovate even better. And there are things today that you have to have touch to go get done in the best way. There are things that tomorrow, I think we'll figure out how to have a real breakthrough there. But Windows is a really powerful operating system. If you look at what we've been able to do with Windows 10, it's encouraged for a long time an open approach in the industry where people can innovate and put apps together. And you look at powerful technology, an open ecosystem, there's a lot of innovation that happens, and it enables people who are creating and reinventing different industries. And you just -- you can't imagine going to work today or going to school today without a PC. It's like my home network, there were some connectivity problems in the beginning. My kids are like, geez, I can't do anything in school. And it's like I think back to my school days, like, I didn't have a PC sitting with me. Today, you can't connect, like, you're not part of the world. So I think we've done some great things on that. I think we see that, that opportunity continues.

So I mean your thesis is that the pandemic isn't a onetime pull forward of demand. It's an accelerant of certain trends. And one of the trends, which you called out there, is the students who do not have PCs at the moment. I think I added it up at about 60 million in total across Japan, Europe and North America that require PCs. I imagine that they're probably going to sort of gravitate towards the lower end of the PC range, Chromebooks as well. Is that sort of a big -- one of the bigger areas of growth at the moment?

We're certainly seeing, Paul, demand in the education space. We see it with consumers. If you think about -- we've seen government as a strong sector. I think we'll see commercial as we go forward as people refresh the PCs that they have in place. So I think there's certainly those accelerants that mean this will continue post the COVID world that we're in and when there's vaccines out there. We also see -- people are discovering there are new different ways of working of -- it's not, hey, COVID goes away, and then suddenly everyone's back commuting to the office in the morning, coming back home at night. And you're going, no, our -- I talked to many different companies. I talked to the people that are on our team at Dell. And people want to work in a -- it's kind of woken them up to -- there's a new hybrid world and approach that you can go in doing things. It equals, there are days when I'm going to want to be in a home office, and it's great to be able to spend time with the family, be very flexible in the environment that you're in. There are other days when it's right to be in the office, maybe reviewing the next product we're doing, being in person with the team. And people want to work that way. So we see -- the technology in the future is going to support that kind of environment, whether you're in the workspace or you're doing things from home. And people are going to be very fluid between those ways of operating. So we don't see this as a onetime thing. We see this as a new way people are going to operate. That it's an unfortunate event that we had, but it kind of opened up the world to probably a space we would have gotten to in some number of years. But maybe what the world was going to look like in 2025 or 2026 has suddenly got pulled into what it looks like today in 2021.

And if I understood your answers correctly, you don't even really expect a mix shift. It wasn't like there was suddenly this surge, upfront surge of business people working from home, buying high-end laptops, notebooks for remote access. It was across the board. And that moving forward, you see -- it's not going to be all Chromebooks suddenly. It's going to be a pretty decent mix of commercial as well as consumer; high, low end; everything across the board.

Yes. I think it will continue to be all those segments buying. We have -- our business is more tilted towards commercial than consumer. We're about -- if you think about pre-COVID times, we're about 70% commercial revenue and 30% consumer revenue. Consumer has clearly grown, but there are commercial buyers out there, education buyers. I think that continues. I also don't think it's all entry-space buying. When we look at it, there are certainly people who come into the market and look for price point. But then we often see, whether it's repeat buyers or people coming into the space today are going, how do I get done what I need to get done with this tool and versus go buy the cheapest PC. You can look at analogy, Paul, in the phone space. So you go buy a phone, the phones are not at a low price point. They're pushing $1,000, some of them more. And people are going, if I use this tool every day, and it helps me be successful, I'm willing to invest to get the right tool. And whether that's a business that can look at it and go -- in our workstation space, where we're a leader, they're some of the most expensive PCs. And you think, well, okay, most expensive PC. Those will be refreshed on a slow basis because the company invested a whole lot of money in it. They actually have a really quick refresh cycle because people look at it and say, I'm putting my best designers, engineers, innovators. People like that are designing the things that matter to my business and are going to make it successful. And hey, if I can add a percent of capability to them or even a fraction of a percent of capability to them with more performance, better experience, I'm going to get them a great device. And then when we talk to those end users, they also go, when I'm looking for a place to work, I don't want -- as a new employee, Gen Z, I'm not after a company that, like, dusts off something from the closet and gives me, here's the computer that you get. Take it and like it. I like -- I want a great tool so I'm going to be able to be successful. And I want to go to the places that are getting me great tools so that I'm going to be able to make a difference versus you think about the salary that you're paying to those employees and the cost of a PC and it's -- better technology has a really good return. And we're seeing that companies, not only the IT and CIO caring about this. But partnering with people like HR or line-of-business leaders and going, how do I equip my people with the best technology. Because then, we'll be more successful. They're going to want to stay here. They're going to see that we care about them. They can go make a difference, and it pays dividends in other ways. And you see the same thing in school and home. Now it's not every single buyer, but it's the same thing of, geez, if I'm going to go play games, I have great stories of friends' kids who are convincing them they need the most powerful Alienware to do their math homework. And hey, they're probably playing games on the side as well. So yes, they're going and doing that. But it's like, if you can deliver something great and that whole experience, there's a reason to buy more than just, hey, I want a PC and I just want the cheapest thing out there.

Yes. Got it. I mean one thing I'll just say, that my observation is that the PC suddenly was thrust into this key role in the context of the pandemic. I don't feel like the PC platform has quite caught up though yet with the implications of virtualization. Suddenly, millions of us are really deeply immersed in virtual environments and also our own desktop environments. And sometimes, the 2 worlds seem to put together very poorly. That's a software problem. There's also a bit of a hardware problem when it comes to the telephonic interface or the video interface. And I sense that you guys have got some work to do to bring a next generation of PCs that fully embrace this new working paradigm. Is that something that we should expect in the year ahead?

Yes. We're certainly very aware of how people are operating today. And then there are spaces and technology where, as you said, we will invest and go make that experience better. And we, as a company, we've been passionate about this space since Michael started the company 36, almost 37 years ago. We saw technology in people's hands as being really powerful. And we've gone from a world where, you think about a year ago, I had people who would put stickers over the camera in a laptop. And it's like you'd walk into meetings, and everyone was concerned about that. You look to today and you go, "Geez, we're all sitting using cameras, Zoom. We're like on camera, all the time." And all those are ripped off. If you think about CES, we just announced some commercial systems that have something we called SafeShutter. We did a lot of other great technology announcements, but then it was funny, we got a bunch of press around, hey, people love. It's like a colored shutter. It's smart enough -- I don't have to do it myself. It's smart enough to know when I'm on camera. It's open. When I'm off camera, it's closed. And I can visibly see it's closed. So I have the privacy I want when I'm go -- when something else is going on or if I need to intelligently shut that, and I'm on camera when I need to be. And you look at continuing to build that of how do we get -- we're doing things around artificial intelligence in sound and audio on our systems, Paul, that makes it a better experience. And we started that before the pandemic. We're certainly accelerating that with the environment where interruptions and other things can happen to you as you're on camera. We're looking at how we build collaboration capabilities. We're creating -- and we shared at CES a number of new monitor products that we introduced. So again, like cameras and monitors were very hard to find built in. Built-in speakers, curved monitors for a really immersive experience if someone's at their desk. Didn't work so well in TVs where you want to sit around with a lot of people and watch, and a curved TV kind of is optimized for one person. Much better in a monitor and desk experience where you're the person who's experiencing the data that you're looking at. So you're already seeing some of those enhancements, Paul. And then we're going to continue to build that into our products and into our offerings to make them really great for how people want to use them.

Great. So you have been gaining market share, I think, for pretty much 5 years nearly, pretty much every quarter. You're #1 in the client PC space in terms of revenues, and that probably reflects your tilt towards commercial, right? But you're definitely in the top 3 in terms of units. Most of the market share has come from the [ auto RAN ]. But what I really am interested in is, how do you feel you are differentiated from the 2 obvious competitors?

Yes. And as you said, we do operate pretty differently from our competitors. So I think you covered it well, Paul. Like, we're #3 in units. We're #1 in revenue and profitability when you think about the PC and the ecosystem around that. We do that by being different in a number of ways. One is you just think about our company and the capabilities we can bring to bear for our customers. We have leadership positions in the PC space at the edge. We have leadership positions in infrastructure. Think about storage, servers, software. So as companies are just looking to modernize their environment to drive better outcomes and results, they can engage with one company, Dell, who has really great positions across that broad spectrum. So we don't talk about it a lot, but that's a great advantage of, hey, I can tap into a company who can really help me figure out things end to end. If you look at the -- what we do in the PC space, you hit on some of it. We focus on customers who really value technology. So that's commercial customers, and we talked a little bit about the return on investment. It can be a very logical purchase experience to invest in technology there. Same thing in the consumer space where we play. And the consumer space tends to be more in the high end when you think about XPS, think about Alienware and gaming. And that's better revenue, better profitability segments. Our -- versus our competitors, we sell direct to our customers. And we have strong partnerships with the channel, but we have a really vibrant direct business. And we do that because when we do that, we're far better at selling the right customer -- or the right product to our customers. We understand their needs. We figure out the right solution. We sell the whole ecosystem around the solution. So you think about a higher ASP sale, a customer that's happier because they get the better end experience, a customer that's more loyal. So it creates a whole virtual cycle in selling direct. And then I just look at what we're doing in my space and across the board and, Paul, we're passionate about the products that we're putting together. And products have to be the lifeblood of any company who is doing a great job. And our XPS product's considered best in the industry for the past 6 years versus anyone out there, any competitors. We've got -- we drove and really brought to the industry zero-bezel design. So they're just gorgeous displays, gorgeous front-of-screen performance, everything from really mobile systems to workstation class systems. We've got a really strong brand in Alienware and performance products that gamers around the world covet. We've built intelligence and great design into our high-end commercial notebooks. So we're really committed to putting strong products out there. So you look at all those things of -- we're unique. We go to market in a different way and a real commitment to this space. It shows up in people recognizing that and seeing us as different from our competitors out there.

Is there any way in which the VMware relationship contributes to the CSG business in your pitch to corporates?

Yes. And it's how we think about some of the future opportunities in this space, Paul. And where we see an opportunity to really reinvent the life cycle experience around technologies and do that in an as-a-service way. So if you look at PCs today, companies that kind of -- not much talked about fact, companies spend like 3 to 4x more than the cost of the PCs on the life cycle around the PCs. And in doing that, it's a heavy-touch environment. It doesn't deliver a user experience that's good enough. So we've been looking at the capabilities we have plus VMware and going, how do we reinvent what that experience looks like? And we have done some as-a-service things in the past of putting some of our offerings together, but we're going -- to me, the opportunity is kind of reinvent this with software, with intelligence, AI, machine learning and start to automate some of these things that are really manual today. So you think about as simple as going, hey, if Sam is getting his next PC, how do I figure out the right PC for him versus IT going, hey, Sam's in this category, so he gets this PC. How often is he mobile? How does he use that device? How do I get the right, perfect PC for him? How does it show up to his house delivered from our factory so that he can turn it on and it works? And IT doesn't have to intervene, make sure the right apps are loaded, make sure it works on the network. And when Sam has a problem, how are we being intelligent in that? And I don't have to call into a help desk, who maybe has to go to a level 3 support at Dell and solve the problem. But before Sam even knows he has a problem, we're figuring out what's happening, and how we'd get that fixed for him and resolve that problem. And then how do I migrate data to my next PC? So all of those things were going to software, the capability that we have at VMware, the ability to work together with them to change that life cycle. We've done some offerings in that space, Paul. But we're looking to the future and going -- to me, there's a opportunity to take a PC that's been a hardware experience with stuff bolted on, turn that into an as-a-service experience, power that with software and intelligence that does things that used to be mundane, manual, not well-done tasks and make that a much better experience for people to get technology in their hands. Whether you're at a huge company or you're sitting at home and a home user, and you don't want to be IT support for the rest of the users in your household. So...

I know that you love your IT VAR channel. But what you've just described to me suggests you're also really well positioned to start developing closer relationships with your end customers and direct relationships with them, whether it's through AI or through just simply the as-a-service contract itself.

Yes. We're -- I mean, we talked a little bit, Paul, about direct and us being unique and selling direct, while also having channel partnerships. And we can deliver this through the channel. We can deliver this in a great way, direct. And I think a real power of engaging with our customers is we understand what challenges they have. And that's where we have our team -- our team's focused on going and doing that. And I have as many -- if I look at my organization today, we have as many people working on software as we have working on hardware, which equals -- that whole experience around the device really matters a lot. And that's what we're trying to deliver to customers versus just a set of hardware things that they have to figure out on their own. That's a really incomplete offering. And that's where -- we're doing what we're doing with VMware. I think there's opportunity to make this space a lot different in the future and better for our customers.

As you transition to this as-a-service business model or -- I don't know if it's transition, but mixed in. What does it do to your revenues and profitability? Does it slow you down in some ways, and then you catch up later on after you've annualized the transition?

Yes. I think we talked about -- we have a -- something called Project APEX across our company. So we're looking at how we take the offerings across our company and really offer them as a service. That holds true for my space in the PC space. I think it's a journey to go and get there, Paul. So it's not a, hey, suddenly tomorrow, everything is switched. What we have certainly seen is as-a-service done right can be a more profitable experience and offering for our company, and we've seen that in other industries. And then like you said, the piece we have to navigate, I think there will be a transition where you go -- as-a-service is clearly sold on a per time period basis versus a one upfront purchase. So you have a -- as you go through that on any offering, you've got to navigate the piece of the revenue comes over time rather than all upfront. But it's a more profitable, more "how customers want to buy" kind of experience, that when you get through that transition period, is a pretty good outcome. So we'll have to go navigate that. But you'll see, as you do in any as-a-service business, there's some transition period that you have to go through. And we think that takes -- that's a process of years in my business.

Let's wrap with my last question. We've run out of time. I beg your pardon, Sam. But any comments on the supply chain? Any constraints on CPUs, commodity price inflation, deflation?

Well, we have a really good supply chain team, and that's been important in the past year. Because one thing I have customers looking for is also -- it's -- they want to make sure they can get a product when they need a product and whether it's navigating demand spikes out there. Not so long ago, I was celebrating the end of 2020, but it's like we're going through multiple tariff scenarios and lots of things to figure out. So that team has been super, super busy going and making sure we have the supply that we need, and we can get things done for our customers. We've seen not big changes in the environment, Paul. We see things -- Q3, last quarter, we talked about was slightly inflationary. We see Q4 as a slightly deflationary quarter. Probably the bigger thing we're working through is just some of the supply things going on as we've seen the demand we talked about materialize. And I would -- CPUs today are in better shape than they have been in past quarters. The piece that we're working on is just silicon and IC shortages as the demand for electronics across a number of industries has been pretty big. So whether it's ICs or LCDs and really, the components going into LCDs like TCONs and driver ICs that we're sorting out how we get those parts. But we have good partnerships. We're going to have to go navigate that. I think demand will -- demand for electronics and technology are probably going to stay pretty good. Some forecasts have that growing for next year. So I think some of these supply things will be with us for a little bit as we navigate making sure we have all the parts that we need.

Sam, thank you so much for participating today. Thanks, everyone, for dialing in to the JPMorgan CES Tech Conference. And I'll make it a wrap at this point. Thank you, Sam. Thank you all as well in the background for arranging this. Appreciate it.

Thanks a lot for having me, Paul. Take care.

All right. Okay. Bye-bye.