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

Good afternoon, everyone, and welcome to Bernstein's Strategic Decisions Conference. I'm Toni Sacconaghi, Bernstein's IT hardware analyst. And I'm really excited and pleased to have Michael Dell, the Founder, Chairman and CEO of Dell Technologies, join us this afternoon. Michael really needs no introduction. He founded a computer company in his dorm at the University of Texas. And at age 27 was CEO of a Fortune 500 company. He's really the inspiration for many young entrepreneurs. And we're thrilled to have him here today. Before we begin the discussion, let me just mention that 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 Technologies' periodic reports filed with the SEC. Dell Technologies assumes no obligation to update these forward-looking statements. So with that, welcome, Michael, and thanks again for joining us.

Great to be with you, Toni.

So you guys just reported last week your fiscal Q1 '22 results that were really strong, better than The Street expected. Maybe you can just talk a little bit about what you're seeing in IT spending right now and what you're hearing from customers?

So yes, very happy with the first quarter results. And looking back at the sort of last 12 months, record cash flow, $14.4 billion from operations. Pretty happy about the ability to drive profitability and cash flow through the business. I think that right now, certainly, there's generally more demand than supply. And technology investments are highly prioritized by companies as it relates to their spending. As you've heard, I'm sure, from many speakers, the digital transformation has been accelerated, huge priority inside companies and we're seeing that and well positioned in our various businesses to benefit from it.

Well, maybe we can talk a little bit about the demand profile of each of your major businesses. So PCs grew revenues 20% in the quarter. I think consumer was 40-plus. Commercial, which includes Chromebooks, was also double digits. What is driving this? And you guys have talked about an elevated backlog in PCs that's probably likely to last through year-end. How do we think about what is happening and how you think about the sustainability of what might be happening just on the PC side, and then we'll talk about enterprise.

Sure. So you've got this sort of work-from-anywhere world. And it's sort of transitioned from what it was before to 1 PC per person. And in some cases, more than 1 PC per person. And the PC has sort of cemented itself as the most important tool that people have to stay connected and do work in a hybrid world. And along with that, this move toward more notebooks. And they have a 1.5-year roughly quicker refresh cycle. That creates demand. Average selling prices are going up as people want bigger displays and more capable systems. The oldest PC in your house can't really do a Zoom meeting like this. Gaming is up big time. We had Alienware notebooks up 76%. So -- and then, of course, you've got a big expansion of the TAM for us as we've added software, peripherals, more services and support, and we've done a great job in particularly adding to the TAM with services and support. So commercial demand is quite strong right now. And as people go back to offices, it's a really interesting phenomenon. This has never happened before. Let's say, you go back to your office September 1. Well, everything there is 1.5 years old, right? And by the way, it's not very capable of performing in the way that we've been used to during this period. So feeling very good about the overall demand trends. We're -- on the supply chain side, like everybody else, dealing with the challenges that are out there. I think we did anticipate some of this and have ordered ahead and forecasted reasonably well, but there are challenges. And having a large supply chain and being a -- what I'm going to call a permanent customer for a lot of these CapEx-intensive businesses is super important. If you're putting $10 billion in the ground every time you dig a hole, you're really focused on not just what happens next quarter but over the next 10 years. And these CapEx-intensive companies know our company, they know me, they know Jeff Clarke as a permanent customer and a permanent home for their output.

So Michael, let me just follow up with a couple of questions on that PC demand environment. One, you and others have talked about an elevated backlog. And I think you guys said -- and so did HP, probably your principal competitor in PCs, that the backlog would probably be elevated through year-end. How do we know that there isn't a lot of double ordering in that backlog and that in this rush to raise supply if ultimately, that backlog isn't as strong as people think that we could potentially have a harder landing. So let's talk about the backlog question. And then I want to just talk about sort of sustainability of demand after that?

Yes. So the thing that we watch very closely is the cancellation rate of orders in the backlog. And backlog is one of these terms that has different meanings for different companies. So I'm just going to define it for our business. At Dell, when we talk about backlog, we're generally referring to orders that the customer wants now, right? So this is not scheduled backlog. And as lead times have increased and also pricing has firmed, we have not seen cancellations. And we have not seen cancellation rates go up. And so we are delivering record numbers of PCs. And the output continues to grow. And if you were going to see double ordering, you would also see cancellations coming through the backlog. We're just not seeing that.

And can you qualify some way what the size of that backlog might be relative to history? So typically, on average, you deliver in 2 weeks, and now your expected lead time is x weeks? Or is there a volume in terms of months of sales of backlog that you have. Just so you can provide some context for how different that might be today relative to sort of historical time periods?

Yes. I don't think we've put any parameters around it. I mean, obviously, there are folks who spend a fair bit of time going through Dell.com and trying to figure out what the lead times are and coming up with analytical models. And that's probably not a bad way to assess it at 1 level. Certainly, we're also, I think, reasonably good at demand shaping, which is to say, "Oh, you wanted this model, but that's on a 3-week lead time." If you go to the website, we have quick ship systems. We have systems you can get right away and a surprising percentage of people will pick a system that they can get right away. So yes, backlogs are certainly higher than normal, higher than we would like. And the pricing environment has been kind of what you would expect in a situation like this.

Right. I'm sure the quick ship models have decent margins. So Michael, if we step back and just think...

Everything has pretty decent margins.

Right now, it certainly does. So Michael, if we kind of step back, I mean, I think the big debate among the investor community, and I'm sure OEMs like yourselves are thinking about this carefully is you had PCs that were a growth industry until about 2011, they peaked at 360 million units. They then basically fell for 7 years from 2011 to 2018 to about 260 million units. And this year, they're going to be back up at 360 million units. So we've had an abrupt sort of change, and you highlighted this PC per person type phenomena. But at least from our analysis, consumer PCs have gone from like 100 million a year, a couple of years ago to 160 million. Chromebooks have gone from 50 million -- 15 million units to $60 million in 2 years. And so you've had tremendous additions, invariably new users, invariably accelerated replacement cycles. But -- and I get that PC intensity might be higher going forward. But given the strength we have had over the last 4 quarters and will probably continue to have another 2 or 3 quarters, what is the risk that there's a period of digestion for 1 or 2 years and that PC units fall 5%, 10% in '22 or '23? And how do you, as a company, think about that?

Well, first of all, I think if you look at our business, as you know, Toni, we're much more a commercial business than a consumer business. And as we have grown the TAM for the CSG business, it's kind of broadened out the set of opportunities that we're going after. And there are $150 PCs, then there are $3,000 PCs. And if you look at sort of the last 6, 7 years and you overlay those unit trends with the Dell CSG revenue, you see some pretty interesting separation in terms of our ability to grow through periods where maybe units are not really grown. And we're growing PC as a Service. And overall, I feel very good about our ability to gain share. Our share is not all that high, and there's plenty of room to grow and to do so profitably and to increase the TAM. We joke a lot about the wonderful displays. While Dell's been #1 in displays in the world for, I don't know, 12, 14 years, something like that. It's growing super fast, right? As you think about the hybrid world and multiple locations where you might be working, people love the widescreen 49-inch display. If you don't have one of those, you should get a couple of them.

Got it. But it's -- and Dell has a proven track record of gaining share in PCs. It's been pretty inexorable throughout Dell's history. But if I were to have you put your industry [indiscernible] hat on, are PC units down in 2022 and calendar 2022? And could they be down double digits in aggregate?

Obviously, I don't think anybody knows. What I see is the PC getting more important, not less important. I see hybrid increasing demand. I see notebooks increasing the replacement cycle. Gaming is certainly growing super fast. And look, I think our ability to grow through all of that, particularly as we moved more towards as a service and expand the TAM, I'm feeling good about our opportunities. And look, I think there are exciting things happening in end-user computing. And there's a lot of energy in the ecosystem around continuing to drive the refresh. And people are energized around the new things that they could do with the latest and greatest PCs.

All right. I want to -- I'm going to come back and revisit sort of stand-alone Dell because there's an important event happening this fall. Maybe we can back up half [indiscernible] and just talk about the spinout. So you confirmed in April that Dell Technologies is going to spin out VMware to existing Dell Technologies shareholders. And I guess the question is, how did you come to this conclusion? I think you may have seen in our written notes that -- and I don't think we've actually talked since the event happened that I wasn't sure you were actually going to do it. And...

Well, now you are, sir.

And now I am. But -- and so I'd like to say why I didn't -- why I was questioning whether you would do it and then maybe you can take us through the process of how you got there. But my question was, look, one, this was an asset that you spoke a lot about synergies together and the value that it brought to Dell Technologies when you bought it, VMware as part of VMC. It accounts for -- historically, it's accounted for up to half of Dell's cash flow. It's faster growing. It has higher margins. It's more recurring revenue. Those are all aspirations for Dell. And you're not cashing out. My guess is you're going to continue to be a majority shareholder in Dell Technologies, and you're going to continue to own the very large stake, about 40% in VMware. And so this wasn't about enriching your pocket because you're a long-term investor, and I suspect you will continue to be. So how do I jive those observations with the ultimate decision that you said, "Hey, this is best that we spin out VMware to shareholders."?

Sure. Well, it's certainly a considered decision, right? So it's something we thought about for some time. And it took a lot of input from shareholders and understood what was going on with customers. And if you go back to 2016, all those things that you said, absolutely true. And we did all those things, right? We drove a lot of revenue synergies, drove the revenue from Dell Technologies at VMware from a single-digit percentage to over 30%, and that created a ton of value. But still, shareholders didn't really appreciate the holding inside the company. And so this structure allows us to continue all the great things we've been doing commercially and really doesn't change anything for customers, but is a great benefit to our shareholders. And I think that's obviously super important. I think stand-alone, Dell, core Dell has tons of great opportunities, not only in the alliance or partnership with VMware in multi-cloud, but in edge and telco and 5G, in the business model transformation to as-a-service through APEX, which is also a TAM expansion. And obviously, this structure is highly favorable for our shareholders. We solve the kind of debt issue, put both companies on a great track with investment grade and simplify the structure. And as you said, Dell Technology shareholders will benefit from their holdings in VMware, which has a great future as the multi-cloud platform for digital transformation.

Right. But if I think really long term, Michael, like 20 years, and you've been in this industry for more than 30 and you will, in some way, shape or form be in probably for another 30. So if I think about that long-term lens, is Dell Technologies as powerful a marketplace player without VMware as it would be with VMware? I mean VMware is a force in the cloud. And by owning it invariably, you do shape its fortunes in terms of its acquisitions and its strategic direction and its integration with Dell more tightly than if you don't own it. And so if you think out 20 year, I get the release of value to shareholders near term. But if you think out 20 years, is Dell Technologies stronger without VMware than with VMware?

Well, Toni, we're building value here. We're not building pyramids. So I think, ultimately, this is a great decision for our shareholders. I think 20 years from now, our shareholders will have benefited from the holdings of the 2 companies. Hey, it might be 5 companies by then, who the heck knows, right? But 20 years is a long time. But look, the structure that we've chosen, the path we've chosen, clearly preferred by shareholders and I think preserves all the great things we've been doing for customers, and so feel great about the direction both short term and long term.

So Michael, if we think about the stand-alone Dell going forward, how do you think about its competitive positioning and sort of what might be a realistic growth profile of that? I think your last Analyst Day was in 2019, a lot has changed since then, obviously, with the pandemic. But you were talking about low single-digit growth for the industry and without VMware, that might even be lower, Dell gaining share, having operating leverage and EPS leverage on top of that. How do we think about realistically with end markets? Historically, that haven't grown much PCs and servers and storage. What do you think of sort of the kind of what is a realistic kind of growth rate for stand-alone Dell going forward? And how do you sort of get there between end market growth versus share gains?

So I think we have an attractive long-term financial model in the core business. And as I think about growth, I would characterize the longer-term picture as GDP or perhaps a little bit north of GDP growth over time with strong cash flow and compounding EPS. We have large and growing long-term available markets, and we're well positioned across multiple sectors. We have, as you said, a history of gaining share in x86, in hyperconverged, in PCs. I think you'll see us grow [indiscernible] fast in revenue. I think we'll have EPS accretion through debt reduction and I think there's tons of value to continue to be created inside the core when you lay all that out over 3- to 5-year time frame. And we're certainly looking forward to our Analyst Day to kind of elaborate some of that.

Right. And we talked a little bit about PCs. We didn't touch as much on enterprise, Michael. And so again, I think if you look at the market research data, it would paint a picture of limited market growth in both servers and storage from a revenue perspective. Do you have a different view? Or is it really your confidence that Dell can take share in both of those markets that drives you to something that's more GDP-type growth?

Well, I think we can take share. And I also think that there are emerging growth vectors, for example, in edge that are very significant. I mean we're starting to see hundreds of edge projects that are meaningful by customers, which obviously we're more indexed to those, multi-cloud continues to proliferate. And look, we are providing a lot of infrastructure to a lot of the CSPs out there. I mean if you look at our top 1,000 ISG customers, the demand from Software as a Service from cloud-hosting companies, from telco, consumer web tech, fintech, it's grown double digits in the last 12 months. And it's roughly 30% of our orders from our top 1,000 customers are in those categories. And yes, I mean, the growth trends in ISG have been improving. And I think in the second half of the year, feeling optimistic about what we'll continue to see there. And I think we can gain share.

Right. So Michael, just -- I know you've alluded to this number on earnings calls before. So the -- you're suggesting or you're stating that 30% of orders that's 30% of the revenues from the 1,000 largest customers are coming from CSPs. Is that correct?

Yes.

Okay. And if I were to sort of say, look, one question that I get a lot is, how does Dell participate in the cloud? And how do you measure your cloud revenues? Would that be the statistic that you would cite? Or how would you discuss Dell's both cloud strategy, participation and revenue profile today?

No. I would say it's quite a bit broader than that. I mean first of all, I think about the cloud in terms of hybrid cloud and solutions that span across both public and private. And if you look at private cloud, it's significant, right? There's a lot of private cloud and it's continuing to grow. It's not going away. And we're #1 in that. And VMware is #1 in hybrid cloud management and 600,000 VMware customers. It's sort of migrating from the virtualization company to the software-defined data center to the multi-cloud company, and Dell Technologies is a leading way to deploy that. And what we're doing with APEX is sort of moving the whole business to an as-a-service and consumption model. And so it's much broader than just selling equipment to the CSPs. You take our VxRail system, and we just announced some new enhancements to that. It is by far and away kind of the leading platform for hybrid cloud and super easy for customers to deploy that kind of solution. And if you think about moving that into an as-a-service consumption model, the TAM grows quite nicely for us. And all that is to say, I think we have a very attractive opportunity in ISG as well.

Right. And just on APEX because we've heard more OEMs move towards as-a-service models. Obviously, Dell had Dell Financial Services for a long time. And so consumers have been able to consume in various kinds of pay-as-you-go manners before. Maybe you can just succinctly suggest why APEX is different? And why is it necessarily lead you into bigger TAMs? I get the fact that if you have someone on the subscription and a solution, you can probably have higher support attach rates, and you can work with them on a larger part of the solution. But specifically, what is -- what do you believe is distinctively different relative to the various consumption models that you've offered over the last several years, particularly with your DFS capability?