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

Good morning, everyone. I'm Katy Huberty, U.S. IT hardware analyst at Morgan Stanley. And I'm really pleased to welcome Jeff Clarke, COO and Vice Chairman of Dell. Jeff is responsible for running day-to-day business operations, shaping the company's strategic agenda, and aligning priorities across the leadership team. He led the integration of EMC and is a key driver of the strong partnership with VMware. Before we begin the discussion, I want to inform you 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 these forward-looking statements. Because of a number of risks, uncertainties and other factors, including those discussed in Dell's periodic reports filed with the SEC, Dell Technologies assumes no obligation to update its forward-looking statements. Please also see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that, Jeff -- Jeff, thank you so much for joining us today.

My pleasure. Nice to be here.

I want to start out talking about the macro IT spending environment. Dell just reported a record quarter last week with strength coming from PCs and VMware, but you also started to see some recovery in your infrastructure group. Help us characterize how you see the shape of the IT spending recovery so far. And what are your expectations for how that progresses for the remainder of calendar 2021?

Sure. Yes, we had a heck of a quarter, a heck of the year last year. And certainly, if I was here a year ago, when all of us spoke nearly a year ago, I'd have told you maybe a slightly different story, that Infrastructure was going to rebound in calendar '20. We were starting out a Windows 10 completion and end of life of Windows 7 and a PC sort of down in the second half, and literally just this opposite happened all through '20 because of the pandemic. And if you think about '21, '22 and beyond, we believe that there are signs of a rebound. Our struggle is trying to understand how the ISG side of that equation comes around. If you look at the -- all the industry pundits, you got low to single mid-digit improvement in the marketplace, as I think the storage market is forecasted to grow by 3.9%. servers in the 3-range, so encouraging signs. We don't know when, when you think about servers or storage. And that's sort of our dilemma planning the year and communicating our guidance and what we're thinking about for the year. And so when does that really begin to expose itself in demand? I'm encouraged by what we saw in the end of Q3 and Q4 in our server business. You might recall, we said on Q3, our server business was performing in the month of October. That momentum carried all the way through in Q4 to the point we reported our first server growth in 9 quarters. We saw server growth in large bids, in our transactional business, we saw in our small business, in our medium business. So very encouraging signs that the server, the compute side is rebounding. We saw a tremendous performance in our business in the high-value workloads, which are very important to us in capturing the momentum there. The one outlier is our storage business. Our storage business was down or continued to be down in Q4. It did improve, which was good to see. I am encouraged. I would use the word encouraged with a big E. What we did in the midrange, the midrange, we grew 8%, I believe, for the first time in 9 quarters. We had growth in the midrange, which so important to us, and so important in the marketplace. So it's those dynamics. We see the PC business demand continuing to be strong in this do-anything-from-anywhere environment, work-from-home, learn-from-home. We believe the ISG or Infrastructure side rebounds. We're probably cautiously optimistic of what's the timing of that. But we're encouraged that there is demand out there. Compute has started and storage is later in the year. Your guess is as good as mine right now.

Right. Is there an obvious explanation for why servers would rebound quicker than storage? I mean, one that I can think of is that the sales cycles for servers are faster. Is there any other reason why we'd be seeing strength in servers relative to storage right now?

I think the one you said is certainly the case. The other one is look, all of this extra client workload on the edge of the network is driving more compute back in the infrastructure. We're clearly seeing that across the board. And clearly, our role of providing cloud infrastructure into the SaaS providers is another reason why we've seen demand, I think, improve on the server side throughout the year. Those would be the 3 that I'd point to.

Yes. And so how much of that encouraged with the capital E, would you say is baked into your low- to mid-single-digit revenue growth guidance for the year?

To the best that we could, a little bit. Again, for us, it's -- I think you asked me that question specifically last Thursday of when does storage kick in? It's not like February 1, the new fiscal year, storage orders picked up because it's a new fiscal year. And it's just not how the demand profile works in storage. There are longer cycles. Those expenditures had been put off for some time. We've seen a healthy storage environment in the first half of the year in the high end. It was good to see us able to perform and grow in the midrange. So again, encouraged. Work to do to see when it actually consistently delivers. I mean, I think the IDC forecast for Q1 for storage is still a negative [ 4% ]. So our industry pundits aren't even thinking it rebounds in the first quarter. Our the job is to outperform that.

Right. So I do want to dig into the PC business and the Infrastructure business separately. But first, if we put timing of a recovery aside and just think bigger picture. How do you view customer IT budgets and priorities changing due to COVID?

Yes. So it's a fascinating topic and one that we spend a lot of time with our customers talking about. In my mind, there have been 6 things that have really been prioritized by all customers across the globe, small, medium, large, multinational. First and foremost, the priority has been dominated by enabling their workforces to work from a -- there's no question, learn-from-home, work-from-home, the recovery of business continuity has been job 1, continues to be job 1. We're mostly through that, if you will, of those workforces have been enabled, but that has been the priority in driving budgets all of '20. And I think it really is fuel for '21 as well. The second one, which I think you probably have experienced this, people are buying everything online. So customers are working how do they improve their digital customer experiences. I'd like to say the new modern era is online for everything. And customers are grasping with how do I modernize and digitize my customer experience, and that has certainly been a priority. The third one is, as things shut down, many reflected my infrastructure as too complicated. I have to simplify this. If I have to go through another one of these events, and I'm ill prepared because I didn't simplify, shame on me. The fourth one we continue to see a lot of activity around, there's no doubt in our mind that this has reinforced hybrid multi-cloud architectures. There is no one cloud. It's not public versus private. It is a multi-cloud world, and customers are looking for cloud agility. The fifth priority that we've seen consistently is where is my data? What am I doing with my data? And I got more coming, how do I manage it? How do I access it? Ultimately, how do I get insights from it? And then lastly with everything that's being done outside of the office, and then with what we read in the paper from many perpetrators, is security. How do I protect my information? How do I protect my assets? So those are the 6 we consistently see. What's also interesting about 2020, we were talking about it briefly before we got started this morning. We think 2020's accelerated long-standing technology trends. And it's going to shape the next decade. We think it shapes the next decade positively. We see the world becoming increasingly more connected, automated, data-intensive, distributed. We see wide-scale connectivity everywhere, data-driven insights, that data wave is coming. And customers are trying to figure out how do I really drive insight and most importantly, outcome. We see a world of more deep automation and embedded intelligence. And lastly, we see a redistribution of compute and storage assets out to the edge. We think edge computing, because of whether it's data sovereignty, whether it's local regulation and most importantly, from a technical point of view, latency drives compute and storage assets out to the edge. So we're pretty excited about that. I'd also tell you our experience would say customers have accelerated their digital transformation. You can really see across our customer base, those customers who invested early and continued their performance is consistently better in their sector than those who didn't and/or lagged. That trend continues. And I think you're seeing a lot of customers, positive, from our point of view, having to catch up, and those who are ahead are going to continue to invest. And now maybe to summarize that, I'm positive about this. I don't see any customers going backwards. No one's asking us to take this stuff away. No one's asking us to go back to the pre-2020 state. It really is a world where customers see these trends accelerated. They need to invest. They need to catch up. They're going to speed up their investments, we believe, over the decade. And really, the dialogue has changed at the highest level. Help me drive better business outcomes. Help me deploy these new technologies, whether it's artificial intelligence, machine learning, 5G, automation. Help me bring that cloud operating model to my entire IT infrastructure. It's probably more than you bargained for but...

Oh, that's great.

That's what we see with customer priorities and the changing of where their focus is. I hope that helped.

Yes. No, I couldn't agree more that this idea of technology diffusion into more sectors. And you are seeing the leaders in investment grow faster and trade at higher valuation multiples. And I think that's awakening senior leadership and boards across different industries and really accelerating technology investment as we come out of COVID, so that is very...

Yes. We characterize them as digital leaders or digital laggards, and you really just see even in their own sector, very different business performance with those who invested and those who didn't.

Right, right.

And I think those who didn't certainly are reflecting, "Oh my gosh, we have to catch up." And they're really seeing that these trends have accelerated, and they have to pay to play. Again, in our sector, that's good. We're there to help them.

Got it. So let's dig into some of these trends and start with the -- your PC business, which grew 17% in the January quarter. And as you said, you expect continued strength through this year. Talk about what your view is of the future of work, how Dell enables a more hybrid workforce? And how does that all impact your view of long-term PC market growth?

Sure. The first thing, I think we've said this publicly, perhaps my generation will have difficulty with this. Work is not a place anymore. No specific time frame. Work is really an outcome. And if 2020 and the pandemic hasn't reinforced that, I think we've missed it. It really is about an outcome and enabling that outcome, and not a physical place. Our view is work is hybrid. Organizations across all sectors have learned how to run their business, how to collaborate, how to innovate, how to serve with customers and be more productive in a virtual world. At Dell, we certainly have had to do this first year. We're in week 51 since we sent everybody home on March 16. We've pulled our -- 90% of our team, we pulled. They don't want to come back. And I think we're seeing the same thing from our customers. It is clear the workforce prefers the flexibility they get in this do-anything-from-anywhere environment. And we believe the future is a hybrid world where we likely will go back to the office, but we will only go back to the office, say, 1 out of the 5 days a week. You won't go back to a specific dedicated place. It will be more collaborative space. It will be space where great interactions will occur, but they will be very different than today, and the workplace will fundamentally change. Our forecast for our own organization, and it's very similar to other customers, we'll have 2/3 of our workforce be in this remote hybrid environment when we come out of the pandemic. And I think the flexibility is really the driver here. We see productivity up in our organization. We've heard the same from many of our customers. There's some secondary and tertiary benefits from this. One, from a staffing point view or the ability to recruit talent. No longer do you have to be tethered to a physical site. We can attract people where they want to be and where they want to live, which is a huge bonus. And then there's certainly the benefit to the environment that we've all seen where less commute, less lost productivity in the car or the public transportation systems. And I think all of those have been the greater good of this. We're pretty excited about the outcome. Similar to my previous -- or your previous question and statement I made, we don't see anybody going back. The old ways aren't going to come back. Are there certain jobs you have to be physically there? Sure. Our factories people will be in the factories. We haven't figured out how run a virtual factory yet. People have to physically build things. So those roles will continue to be a physical role in a facility. Longer term, when we think about this, I think the longer-term effects on the education system and the health care systems, and again, we've been talking about work just really changed. We're talking about the ability to bring a health care system that is very different, technology-driven to drive outcomes again and to be more preventative and proactive than our way we do it today. Education, I think, is going through a massive transformation. You're going to have to have a PC to keep up. It's that simple. And we have tens of millions of children around the world that don't have PCs today. 10 million in the U.S. 10 million in Japan. I think it's 40 million in Western Europe and so on. Wasn't too long ago, if you and I would have talked about just 10 years ago, 15 years ago, we were hoping for 1 PC per household. That was success. And now we're looking at a world where there are multiple PCs in a household. It's a multi-device home, and that continues. I think, if anything, we've opened the door on the possibilities there. I think when you look at the long-term demand characteristics of the device of choice is the notebook. And as a result of more notebooks, the replacement cycle accelerates. So all of those bode well, I think, for long-term PC demand. Mean we had a 300 million unit number last year. IDC's forecasting 357 million units this year. Wow. We have an installed base of 2 billion, almost 1 billion of those are 4 years or older. How do those run Zoom today? So I think there's a huge opportunity there, and that's fuel for the demand that we think is on the table for our industry. And it ultimately sets us up for increased demand, stability in our business and the consistent returns that we drive out of our PC business.

Right. And the strength this year or over the last year came more from consumer and education. But everything you're talking about would call for companies reengineering their floor space and the technology they provide to that hybrid workforce as they return to the office. So there's arguably a commercial spending cycle that's on the come?

I believe that. And again, last year, we'd have been talking about the what happens after the Windows 10 transition is completed. We were all thinking the second half was going to be down. And I don't know if a commercial rebound is, at least in my way of thinking about it, is the right way to think about calendar '21. The commercial PC segment grew 6.6% last year. Now that was hugely pushed by education, so I accept that. But we think the interesting question is what happens when people go back to the workplace? They go back to a computer in a desk or a cube that they haven't been between 6, 7, 8 quarters. And in the world we live in today, how many of those have a big monitor? How many of those have a camera? How many of those have a speaker? How many of them are equipped to work in the world of Zoom? Many businesses have policies, no cameras, no speakers, no microphones. What's going to happen to those PCs when people go back? We think they have to be upgraded. We think companies will be posed with the question, do they have a PC for the employee at home and one in the office? Or is that PC going to move? I think those are all interesting questions that we will see answered in the future. And they all bode well for increased demand in commercial PCs. So we're optimistic. We think that demand will materialize. If you break down the IDC forecast for '21, they still have the commercial PC market growing at 16.5%, which is pretty exciting.

And what's your view on the market adopting more diverse OS and processor options? Do you expect Wintel's share to shrink over time in the PC market? And how would that impact Dell's ASPs and profitability?

Yes. Maybe from a macro point of view, looking at servers, storage and PCs. Look, from my seat, having been an ex-designer for many years and watch this closely, the role of the x86 is changing. We're living in a world now with more specialty processors and accelerators. We're seeing more specialization towards workloads. I think there are a lot of reasons that shifting, whether it's scale, the lower barriers of entry, some of the performance scaling concerns and breaking down what used to be a single processor to do everything into specialty units going forward. So that backdrop sits on the PC as well. I think it's more pressing on the server side and the storage side than the enterprise side. But certainly, it's something that we look at on the PC side. We've offered both Intel and AMD for years. We'll continue to do so. But I'll tell you, ARM gets interesting, particularly more so as it moves from its traditional low-power value proposition to one of greater performance. The higher performance it becomes, the more interesting it becomes. I think the other thing probably to note is 2 years of microprocessor shortages has changed customer perceptions. They're more open-minded. They're more, I think, willing to accept different CPU choices simply because they care about the outcome and they care about the asset, that's what important. So a long-winded way of saying, I think x86 remains the dominant architecture in the PC in the near term, but I think there's some pretty interesting opportunities as we look down the road to other architectures.

So shifting to your Infrastructure business, which, as you mentioned earlier, recovered to slight growth in the January quarter led by servers and clearly, benefits from some of the trends you talked about, digital transformation, focus on data growth at the edge. But one of the big debates around Dell is the midrange product cycle, which has been a little bit slower to take off, just given people haven't been in the office and able to test and qualify that as quickly as maybe they have in the past. But you saw a really nice rebound this past quarter with PowerStore orders up for 4x over the third quarter. Talk about where you're seeing increased adoption of PowerStore and put some context around what you think share gains could be? You've gained over 3 years, 1,300 basis points of share. In the high end, could you see share gains that are that significant in the midrange as this product cycle really bears fruit?

Sure. Let me break those down into maybe 2 answers. One, PowerStore, we've been very pleased with our exit of the fiscal year. The numbers that you just mentioned, the ability to grow midrange for the first time in 9 quarters at 8%. The number of new customers coming in, the number of wins against our competitors tripled. To answer your question, where are we winning, all verticals, all customer segments, all geographies. There isn't a -- it's a winner here. It's been a winner everywhere that we've been pushing it. And our sales force is obviously ramping in moving it broadly across our customer base, we're very encouraged. It's going to be key for us building our storage customer base. One of the reasons we think it's winning in wide hunts today, it's the first modern midrange architecture for the data era. Most of our competitive set in the midrange is legacy architectures. They're decades old, many were built for a very different data structure, hard drives, first-generation flash. They're very dated. We've built PowerStore purposely. It's our first grounds-up, midrange product in 5 years. It is built for this data era. It's simply a better solution, we believe, for where customers are going. And we think it boils down to the architecture. We're winning the architecture discussion. Architecture matters. We have a symmetric active, active controller. We can scale up and we can scale out. We don't have to turn off features in our products to make them perform better. Always on in line data services. We don't throttle our product to make things perform and in particular way. All of those attributes of the architecture, we believe, are very important, particularly as we talk about the world we spoke about earlier. More data coming, more latency-driven applications are going to require faster and faster performance. We think we've hit that here. We've implemented storage class memory, not as a cache, but as a primary storage. We have the ability to put applications on the box. It becomes a very flexible solution in the modern era. We think that's the backdrop of why this product is a winner today. The other thing that I would point to is it's only going to get better. We built this as they can containerize microservices architecture. You probably heard me say that in the past. The reason that's important is historically, we would have launched a product and it taken us 5, 6 years to build a new one. This thing, we've launched the product, we put the first updates in the end of Q4, on time. There's 3 more revs coming this year. There'll be 3 revs coming the following year. We have a path to be able to bring fresh, new competitive features to the product on a much more consistent fast basis than we've ever done so before. We think that's why it's ramping faster than the best products we've had in our portfolio before, which would have been VxRail and XtremIO and probably interesting from your audience today. We haven't had to discount this thing to win. Margins have stayed nice. We've won when competitors are 20% less. We've won when competitors try to give away a second one for the price of one. We think it's about technology architecture, and we've only gotten started. I'm optimistic. I'd only to tell you, as a trained engineer, we have 1 data point. I need 2 data points to make a line. I need 3 to make a trend. So we have work to do here. And that leads me into your next question about where we could go. Look, we have -- our total external market share is 28.8% or 3x the size of NetApp or 7x the size of pure -- or larger than HP, NetApp and Pure combined with room to spare. So we often talk about our businesses. Geez, it's close. It's not close. We're the clear leader. And now we've modernized the portfolio from top to bottom. In the high end, you talked about our performance, we've won. Our share is over 50%, 1,300 basis points of share gain over the last 3 years. We're the leader in unstructured. We're the leader in midrange, by the way, larger than #2 and 3 combined. We're the largest in HCI, and we now have a product to go hunt and to go take share in the midrange and that's what we plan to do. It's the biggest sector. It's the fastest growing sector. We now have a competitive solution to win with. And I won't talk about what our share prospects are, but I'm pretty optimistic that we can move it from with the [ 26% ] where it is today and up the ladder. So I guess, I would summarize, our job is to go win and disrupt the market. That's what we plan to do with PowerStore, and we believe we can.

What's your view on NAND and DRAM prices? Does that become a headwind as you move through this year? And you mentioned the pricing environment, which seems incredibly favorable. If commodity prices do go up, can you just pass that through to customers and investors shouldn't really be worrying about the margin headwinds?

In an environment -- and I mentioned this in our call last week, in an environment where key components are short and demand is in excess of the supply, pricing firms up nicely. And what you really have is then customers are buying because they really need it. And if customers really need it to deploy a new workload, to run more remote clients, whatever's driving the demand, they will pay the market price for the technology because it's valuable to them. Whether it's the PC side, the server side of the storage side, we've seen prices relatively benign, they're firm. And that has to do with the demand/supply dynamics of the components. NAND, we think, will be soft again in Q1 and then start going inflationary Q2 and for the second half of the year. And we think the same is true with DRAM. Historically, we can push that through to our end users, and that's what we'll see.

And on the expense side, last week, you talked about expenses coming back in the model, some compensation spend and ramping investment. Talk about where there are opportunities in the business to invest more this year?

Sure. Tom covered where the OpEx went back in, in terms of compensation and the vast majority of the dollars there. But the 3 areas that we've invested in are for future growth. We're planting seeds. I won't surprise you with the answer, I don't believe. Apex is a significant investment in the corporation as we modernize our consumption engine, we modernize our delivery of continuous features and the cloud service model with Apex. Edge, we think that is the next strategic battleground. We think that rapidly grows to be a very large opportunity. And then the third investment we've made is into our telco and 5G product teams. So edge product team, telco and 5G product team and the broad edge -- or excuse me, the broad Apex program across the company are the 3 largest investments we're making, and they're all for future growth.

So if we tie that to the discussion around a recovery in a fairly prudent revenue outlook, it feels like you fully embedded the cost and expenses in the guide, and then taken a prudent approach on revenue. So should we think about any revenue upside largely flowing through to the bottom line? Or would you look to more so reinvest that upside in the business as we move through the year?

We have -- we believe we've invested in what we need across our employee base, the 3 areas that I've just mentioned. As the market as -- I guess, as and if the market improves like we all believe it does, we'll update you, and you'll see us change our guidance going forward. There's no more to invest in. We have the sales capacity. We have the broadest product engine in the industry, 3 new areas that I just mentioned. So it's really about understanding the timing of the recovery, primarily in storage, broadly in the enterprise or ISG business for us. And then we'll communicate positively when we see that.

Okay. That's great. We're bumping up on time, but I want to ask one last question. I'd be remiss if I didn't bring up the strategic review that Dell and VMware is in the midst of. And I know you're not going to provide an update today, but just give your high-level thoughts of what needs to be accomplished to move forward with a potential transaction? And given you're so close to the integration of Dell and VMware, what gives you the confidence that the 2 companies can execute as well independently as you have together over the last several years?

Maybe I'll start with the latter part of the question first. I think we have, over the past 4-plus years, demonstrated an unmatched better-together, first-and-best benefit to both companies. And the revenue synergies that have gone along with that, the product innovation that's gone along with that. In my mind, we've built a sustainable structure that endures -- a sustainable model that endures any sort of structure that may or may not happen. And I think that's first and foremost, most important. That our customers can be assured the great integrated solutions and the alignment of our field organizations does not change. We really firmly believe this ability to be first and best and better together is key to both companies' successes. If I go back to the progress we've made, we've made comments in both of our earnings that we are making progress. Still don't have anything resolved yet or to communicate yet. The things that have to be worked through are what you would expect, a detailed level commercial agreement, what the economics look like for this or the things continuing to be worked. But whatever the outcome, our teams today are continuing work on next generation, data center architectures. We're working together on the edge. We're working together on 5G. We are working together on Unified Workspace on the PC side to bring a modern experience there. None of that work changes regardless of what spend or no spend happens here. So that's what I like our customers and the audience today to take away. There's work to be done on, if an agreement can be reached. That's where the 2 sides are working through.

Okay. Great. Sounds like there's a lot to look forward to this year. I really appreciate you joining us today. And if anybody has any follow-up questions, please feel free to reach out to me. Have a great day, everyone.

Thanks for having me, Katy. Thank you.