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

Good morning, folks. This is Simon Leopold with Raymond James. Welcoming you to our tech conference held virtually in the clouds rather than in person in New York, maybe next year. We're going to be kicking off our session here with Matt Baker, who is the SVP of Corporate Strategy, but I've been entrusted with reading the fair disclosures. So I'm going to give this a shot, and then, we'll dive right into our fireside session. Thank you.

Good luck, Simon.

Thank you. Yes. 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 its forward-looking statements. One more. This presentation includes information about non-GAAP operating income, which is not a measure of financial performance prepared in accordance with U.S. generally accepted accounting principles. We have provided a reconciliation of non-GAAP measures to the most directly comparable GAAP measures in the slide captioned supplemental non-GAAP measures available on the company's fiscal year 2022. Third quarter results have a page at investors.delltechnologies.com. I've heard that enough times. I don't think I did a terrible job.

You did a great job.

And I didn't even practice. But Matt, I want to thank you for joining us today. So maybe let's start off with setting a little bit of context. If you could just tell people a little bit about what your role is, your responsibilities and a little bit about your background so that we make sure we keep questions inbounds.

Sure, sure. So I am Matt Baker. I'm Head of Corporate Strategy. I've been at the company for 17 years, responsible for, in essence, planning the business, looking and evaluating new business opportunities and also spend a significant amount of time around business development and partner management. So -- and before that, just by way of background, I was responsible for strategy inside of our ISG business for 10 years. And prior to joining Dell, I was at Intel for a decade, mostly in technical roles. So that's my background.

Great. Great. Yes. No, it was a little bit funny as I was preparing for this. They had not updated your bio on the Dell web page. So I flagged that and we got that updated. So if I added any value, that's probably it. I want to maybe start off, given that the VMware separation really just occurred. So we've known this has been coming for a long time, but maybe help us weave this into what are the implications on the strategy and the benefits or any changes that you see coming because of this?

Yes. Well, to be honest with you, I don't see a significant amount of changes in terms of technology and business strategy as it relates to the spin of VMware. These relationships are not built on ownership structure. They're built on processes and relationships and people. And we've worked very hard to build out those relationships over the past 5 years, and we've been incredibly successful. And that success is motivation to continue business as usual, right? The synergies we've created between the two companies will long endure any ownership structural changes and so on and so forth. But of course, there are other added financial benefits and some somewhat intangible benefits in terms of our ability to sort of consider the world a little bit more broadly for both companies. So of course, it unlocked a significant amount of value for all shareholders to benefit from, gives us some additional flexibility. And of course, with the special dividend, added some capital and allowed us to sort of rebalance the business a bit. So I don't foresee any practical changes in terms of the business that we're doing together, the innovations that we're driving together. And I spent many, many months working on the commercial agreement, and I'm responsible, as I am with Strategic Partnerships, with managing these things. So I've spent a significant amount of time with my colleagues in Palo Alto. And I can tell you, we settled in on a number of very important strategic areas for us to continue to collaborate on. We're fond of saying, first and best, and that really means that we're working together first and we're working together best. It's not first and only, however, of course, and it gives VMware and Dell the flexibility to continue to work with other partners. And it's important to note as well that we're at a very special time in the industry in terms of moving from one architectural framework that what I would call the virtualization era into this new cloud native era. And without getting into too many technical details, I'll just say, it's really important at the beginning of these new sort of waves of technology that you have a broad ecosystem because it takes some time to settle out as we are innovating and establishing a new sort of way of doing IT. And it does -- it goes by a lot of names, cloud-native, micro services, containers, et cetera. But it truly is 1 of only 3 major shifts that I have experienced from client server, first; virtualization, second. I don't really think of cloud as one because cloud was virtualization in someone else's data center. Now we have cloud-native. And so it's an exciting time, and it's an important time to be building an ecosystem and therefore, first and best, yes, of course, but not first and only, and therefore, driving innovation on behalf of our customers.

Okay. And I'm going to come back to some of these trends you've alluded to.

Please.

But in every session, I inevitably have to ask a little bit about supply chain. And so I know nobody wants to talk about it, but we do. So maybe if you could talk a little bit about how the supply chain issues that are being experienced industry-wide are affecting corporate strategy and maybe talk about how you guys are thinking about your pricing dynamics of your inputs and your products? And what's sort of been the reception in the marketplace with both customers and suppliers?

Yes. I mean there's no question that there are headwinds in the supply environment. And it's being talked about everywhere. So it's not just in our industry. It's in every industry. I hate to be a card dealer at this point, right? But it really is challenging. And the thing that I would say is I commonly describe our supply chain team as sort of the Olympians of the supply chain game. And I think that's something that Dell has been known for throughout its history is just driving extreme discipline in our supply chain operations. So while there are significant constraints out there, I feel like the team has been really navigating those headwinds better than anybody, and it shows in our results. We shipped a record 6.6 million PC units in Q3. And you can see through the results that I would say we're faring better than most. But it's no doubt that there are component shortages out there, and it's kind of -- it's particularly strange in that it's not the components that you would think are constrained, right? It's some of the components that are on older fab processes, 8-inch wafer node, so on and so forth that are really the constrained areas. And therefore, it's not like we're having trouble accessing CPUs and core memory. It's more like the sort of odd things out there, right? And those are things that we can work around. And because of our unique model with sort of this direct sales force and sort of an end-to-end value chain around -- all the way from supply through to sales, we're able to work with our customers to sort of shape demand towards product that's available while still satisfying the needs that they have. So I'd say that we've spent a significant amount of time working hand in glove with our customers to help them navigate and gain access to the technology that they need to drive their business. So while, yes, it's difficult. And yes, the supply chain team has had to weather the supply issue. Before that, global trade issues. They've just been sort of fighting it out for the last 6 years. And frankly, it's something we're all really proud of. I commonly tell members of my team and throughout the company. I'm like the next time you see Kevin Brown, give him -- our supply chain leader. Next time you see Kevin Brown, give him a big hug because he's the reason why we're outperforming others, right? So while it's definitely a challenge out there, it's something that we're navigating through. And then on top of that, you've got sort of -- we've been through this period of component price inflation. We've continued to see that throughout the year, and we believe we'll see that start to ease in Q4 and, frankly, turn deflationary going into next year. So yes, we've been working hand in glove again with our customers, making sure that they have access to product. Of course, pricing appropriately, given the supply constraints, shaping demand and frankly, given the results that we're seeing and that we'll see as we get some of the industry pundit reports coming out, I feel like we're doing much better than many others.

And one of the things that sort of the logical follow-up, I think is, is how sticky will these price increases be in the sense of -- over the summer, we heard the Fed arguing that inflation was very transitory. I think we've now all recognized not so much. So for you, what's your thinking on the stickiness of these higher prices of both inputs as well as your products?

That's a good question, and we exist in a pretty competitive marketplace, right? And so I would anticipate that, that competitive market price place will sort of drive the pricing environment, right? And so we're always looking for opportunities to position Dell sort of in a proper price position. Given the competitiveness of the market, I would expect to see the pricing environment sort of behave as it has in the past. And this sort of inflationary, deflationary process is necessary new in our market. In fact, it's not. It's something I've been watching and participating in for a decade. So I don't expect the market to sort of dislocate and behave much more differently going forward than it has in the past.

And I've actually just gotten a question on this topic from the audience. So this is a new feature, I'm excited. So this is asking what's your ability to alter sources in order to make changes? In particular, I think the question is focused a little bit on CPU since you've been in Intel shop. How flexible is that ability for Dell?

Yes, yes. It's an interesting question. And I would say that, that there is flexibility, but the interesting part is that it's not -- it's -- again, it's not really the core components that you would think of. It's mostly the odd discretes on motherboards, switching power supplies, capacitors, other elements. And of course, there's infinite flexibility with those components because they tend to be more commodity components that we can switch from one to another. So there is a lot of flexibility, and it's not as if it's sort of the Intel, AMD, ARM area that we need flexibility. It's in some of the areas that you and I would never think about. It's more of the pedestrian parts that are on the motherboard or components of other elements like NICs, network interface cards, NICs, and other elements that are the ones that are more constrained. And there again, we have a lot of flexibility.

And presumably, those kinds of parts are -- you're competing with home appliances and autos for some of those same components, right?

Yes. And I think that, that's the reason why the Fed and others say that this is transitory is that supply chains don't like being turned off and turned on again. It's not like you can reboot the supply chain, and it's all going to just work, right? So as we've eased out of this -- well, I shouldn't say out, as the pandemic has eased and people have had more confidence, they've certainly wanted to spend more money and feel like I went into cash preservation mode and now I can loosen up the purse strings a bit and that's led people to march into car dealerships, into appliance shops, everything. And therefore, that's why I think you see the pressure on discretes on all of these oddball components. And unfortunately, it's also an area that a lot of people don't necessarily want to invest in more 8-inch wafer fabs, right? They're going to the new advanced 12-inch wafer plants, all of the smaller geometries because that's where the money and the profit is. And so it's just working through that process. And you're right, it's not just because people are buying more PCs, more servers, more storage. They're buying more of everything and the kinds of components that are in tight supply are components that are shared across many different industries. That being said, we're the biggest game out there, right? So we have an incredible set of relationships with our suppliers that have been built over decades, and doing business with Dell has been good for their business, right? And so we certainly leverage those relationships to ensure that we have the right level of supply to meet the demands of our customers. And that's why I've said the Olympians of the supply chain game. Kevin Brown and his team have really been critical in navigating this environment. And they've got a lot of sleepless nights, but we've also got a lot of happy customers because of their efforts. So that's what I would say. It's not like we're having to shift people from Intel to AMD. It's more of this NIC component to that NIC component or this storage controller in a server to that version of the storage controller. And therefore, it really gives us a little bit more flexibility than I imagine folks would think we'd have.

So I want to get to drill down a little bit on the business units, but for people who are a little bit newer to the story, getting an introduction, I'd like to sort of kind of build to it. So maybe just talk a little bit about how you segment the market and how you're sizing your markets, and we can sort of walk into the business units from there.

Yes. So let me start with sort of the core business. And I'd say those core businesses are what we call ISG or the Infrastructure Solutions Group. Think of that being anything that goes into a data center, servers, storage, networking, software that runs on all of that equipment, so on and so forth. And then CSG or our Client Solutions Group. Think of that as PCs, notebooks, desktops, workstations, et cetera. That is a very large TAM, $670 billion. And it's projected to grow in sort of single digits over the next few years. So it's a healthy, incredibly large market in which we're competing and winning. We also look at the market through -- as corporate strategy. What are the new opportunities, right? And so there are a number of attractive adjacencies that we're looking at. Some of those are like telecom. We'll talk a little bit about edge, data management and of course, the shift to as a service that we're seeing quite broadly throughout the market. These opportunities collectively represent about an additional $650 billion, right? And so it's doubling the opportunity. And these are all growing at high-single digits throughout 2024, right? So the edge market itself, and I'll explain what edge is a little bit more here in a second. But the edge market itself is a $110 billion opportunity, growing at about 17%. Let's talk a little about what edge means. It is everything that is outside of a traditional data center. And so that could be theft loss and prevention within a retail environment, right, utilizing machine vision to analyze what's going on. It also could be real-time automation inside of a factory. And therefore, you're seeing a tremendous amount of IT landing inside of these new environments. So let's turn to telecom. And we probably all heard the term 5G by now, right? So the telecom industry is going through a somewhat unprecedented G, the fifth G. And that fifth G is characterized by a sort of uncoupling and unbundling of what had prior been quite a proprietary infrastructure environment to something more open and running on what you would think of as more traditional data center technology. The telecom industry, the opportunity there is about $114 billion. It's a slower growing space, but it's also being highly disrupted by this new software-defined architecture. You'll sometimes hear people say, ORAN or Open RAN, which stands for open radio access network. And that's the part of the network that has historically been dominated by proprietary equipment from vendors like Nokia, Ericsson, et cetera, that is opening up and creating opportunities for us. So these are all large new -- net new opportunities in areas that are coming our way. And so that's the big takeaway from that series of areas that I just rattled off. These are all areas that are moving in our direction versus being far adjacencies that are out of reach. And therefore, the sort of secular dynamics within these industries are pushing them closer and closer to Dell and therefore, something we can benefit from greatly. So we're really excited about the opportunity in telecom, in edge, in data management. Data management, for example, we talk about the growth of data, sort of this relentless growth of data and sort of exabytes everywhere. We recently published a paper that the sort of headline of it was the data paradox. And a lot of our end customers and others throughout the industry reported that, look, they acknowledge that there is a huge opportunity around generating value from the data that they collect. And a lot of times, people say digital transformation. That's really just shorthand for generating business value from analytics, from data, from automation. And they -- the paradox of it is, while they recognize that it's growing, they're having trouble sort of understanding what they have and building value out of it. And that is a huge opportunity for a company like Dell, who stores more data than anybody on Earth, to turn around and sort of step into this adjacent opportunity, which is, hey, I've got all of your data. Let me help make sense of it for you and add more context around it, help you find it and help you put it to work, right? So that is core markets, large, $600-plus billion, and a set of adjacencies that more than double the opportunity. I mean, we're excited about the future. And we're excited about this sort of relentless push towards more and more technology in our lives for automation, for optimization, so on and so forth, that is driven by this term you hear people talk about of digital transformation.

So I want to pivot a little bit to the business units now with that kind of as the foundation. And let's start with PCs because it's big, and there's a lot of debate. So investors keep telling us, at least the bearish ones, that PCs are always 1 quarter away from rolling over, and you can't sort of disprove it until you're there, and then it slides out to another quarter. So I know Dell's argued that the PC market is at a sustainably higher level than it had been 5 years ago. And maybe if you could talk a little bit about the explanations behind this shift.

Yes. It's -- and this is one of the effects of the pandemic. It was -- let's -- if we rewind let's just say, like 5 years, right? The average household would have 1 or 2 PCs per household, right? You weren't necessarily doing everything through a window of a machine. And so the pandemic really made PCs, it was 1 or 2 per household. It's now 1 or 2 per person, right? And it's become sort of an essential part of life, right? It's an essential part of school. It's an essential part of this, that. And the other thing, and I don't think that we're going to be going back to the way it was, right? So we firmly believe that a new watermark has been set in terms of the numbers of PCs per household, let alone sort of the expansion of the market as other markets open up and mature, connectivity becomes more pervasive. And we -- fundamentally, we believe that the pandemic has reinforced the PC as the prime productivity platform. Everyone was saying that the PC was dead when they saw phones and tablets. But we all know that it's no fun working on a phone or a tablet, right? Like the little teeny fingers aren't going to go fast enough to work on, right? So it's reestablished or I should say, sort of firmly planted the PC as the prime productivity platform in all cases. Yes, you can consume content from a phone or a tablet, but this do-everything-from-everywhere world that we now find ourselves living in, it puts the PC front and center. And so I'd like to say if someone says that something is going to turn over and die or the PC is dead, it's sort of like the news of my death is greatly exaggerated. And the news of the PC's demise or it's slowing away from the current watermark, no, not going to happen. And frankly, that's a firm bet we placed many, many years ago that I think was incredibly wise by Michael Dell was everyone lamenting the death of the PC and us being confident that the PC isn't going anywhere anytime soon. And unfortunately, or fortunately, but unfortunately, for the world, for all of us, is that this pandemic has taught us a lot of lessons. And at least for us, there is a little bit of a silver lining in that it's placed our business on the critical path for everybody's lives.

And Dell's PC business is skewed with about 70% more commercial versus consumer products. What are the strategic implications of that business mix? Do you manage the portfolios differently? How do you think about that within your context?

We do. I mean, we choose where we participate in the PC market quite carefully. And as you've observed, we focus more on the commercial PC space, gaming with Alienware and the high-end portion of the PC marketplace. We don't have nearly as much exposure to Chromebooks, low-end retail notebooks, so on and so forth. And so what you've started to see is some slowdown in that discount space, right, the Chromebook space. We simply don't have the level of exposure to those marketplaces that some others have. And therefore, we feel a lot more confident. I mean, these are the areas that are more durable in our mind, particularly the commercial notebook space. And if you can imagine us all in a world of a more hybrid work from anywhere world, certainly, it's bending the mix towards mobile devices, right? So notebooks, mobile workstations, so on and so forth, all of which tend to command higher prices, are more profitable and are essential. And again, that's why we say we believe there's a new watermark that has been set. And that new watermark then goes into the sort of the pace of the marketplace we've historically seen with refreshes. We've got a Windows 11 refresh coming upon us, right, which is another dynamic that historically, I'm sure most of the investors listening understand those dynamics. And so frankly, we feel really good about this notion of a new watermark being set.

No, I appreciate that. I want to pivot to the infrastructure group, the ISG part of the business. And likewise, there's a narrative that says everything is going to the cloud, nobody's ever going to buy a server ever again. So when we hear from some of the companies that refer to themselves as born in the cloud, they're arguing that the networking incumbents, the players like Dell can't adapt, can't move forward. How do you respond to that assertion?

It's back to these -- I don't know why we -- not we, but why folks default into the zero-sum thinking because never in our industry has a zero-sum scenario played itself out as truly zero-sum, right? There's no doubt that the public cloud is a popular way of doing computing, and it's an important component of anybody's environment, right? And so there's truth to -- you can't deny that the public cloud is growing and in some cases, not all cases, but in some cases, the public cloud built these systems themselves. I would say, though, is it's not just -- I should step back and say that when many of the Wall Street crowd, sorry, say cloud, that's a lot of crowd, cloud, say cloud, there's a default assumption that it is public IaaS cloud and let me just say what IaaS means, Infrastructure as a Service. It's the most basic form of cloud. It actually happens to also not be the largest part of cloud. The largest part of cloud is SaaS or Software as a Service. So think Salesforce.com, NetSuite, the platform we're on right now, right, Zoom -- I can't remember, OpenExchange. These are all businesses that own and operate their own infrastructure. And they buy significant amounts of infrastructure from Dell. So when people say cloud, it's sort of shorthand for Amazon Web Services in the minds of most Wall Street analysts. But the reality is, is there's a much bigger, broader element of the market around SaaS, including IaaS, some of which purchase equipment from Dell. So we're participating in the adoption of public cloud today because we are powering the clouds that we're operating on as we speak, right? If you're on your phone, searching, going, browsing, there's an incredibly high percentage chance that you're interacting with a Dell piece of equipment. And then the other thing that I would say is we're quite fond of saying cloud is not a destination or a locality, it's an operating model. And there is a phenomena starting, I mentioned the word, edge. This phenomena is driving systems out into the world around us. And a lot of people ask, well, what is edge? What is this all about? Why is it happening? And at the end of the day, if you think about the experiences that we are desiring, that we want to see manifest in the world, a lot of them are these real-time immersive experiences on the consumer side or real-time automation within factories to drive greater productivity. And the interesting thing about this term real-time is that real-time is temporal, right? It's about doing things very quickly. And we all think of the speed of light as this incredibly fast thing. The reality is the speed of light is not terribly fast when you're considering real-time automation. And so in a factory, if you're trying to utilize machine vision for safety, someone steps in the wrong area, you want to shut the line down. Latency has to be measured in sub-10 milliseconds, and that is just a few miles away, maybe 100 miles away. And when we're talking public cloud, latencies are measured in tens or hundreds of milliseconds, right? You cannot achieve real-time operation with a remote public cloud facility. And so this desire for real-time immersive experiences is actually leading to a significant wave of decentralization. And just to quote the CEO of a second largest public cloud player said, I don't know, a year or 1.5 years ago at their major conference. They said, "We have reached peak centralization." And they were talking about this phenomena as a public cloud player acknowledging that this edge thing is real. And in order to create these outcomes that are expected or desired or imperative in terms of driving greater productivity, then the world is going to be awash in technology. And while the public cloud players are good at supporting hundreds of thousands of things in a handful of locations, Dell is incredibly good at supporting tens or hundreds or thousands of things in millions of locations, right? And this decentralization phenomenon is pushing the market back in our direction. Not to say it wasn't in our direction with public cloud because many of the public cloud players are excellent customers of Dell. But this decentralization phenomenon is really pushing computing back towards our core competency, which is the ability to deliver service and deliver product and capability, support it, manage it all throughout the globe, and be there if there's a problem within 2 hours, that's our core competency. And therefore, not only is it that our core business will benefit, but the potential to partner with some of these cloud players that are becoming increasingly more like software and operating system vendors, I think we're going to see this next phase of the industry be one of more robust ecosystems versus us talking about this zero-sum winner takes all phenomenon, which, frankly, is not reality, has not happened. So we're bullish, we're -- go ahead. Sorry, Simon.

And maybe just digging a little bit into the servers. So clearly, that's a part of the market where you've got a scale advantage, but to the outside of this, it looks like a very commoditized platform. How do you compete in -- with that kind of platform, that product?

Well, I think it's a little bit of a hyperbole to say it's completely commoditized. It's not, right? And in many cases, these new software technologies, these new environments require that we build sort of we innovate around the new constraints that we're experiencing. So recently, we launched a new raft of servers for telco environments. These servers were -- have to have different dimensions because the telco environment is different. They have to comply to things like NEBS, which is an environmental set of standards that -- these are not commodity components. They're -- it's all about packing the most punch into what is in the telco space, a pretty constrained environment, right? So it enables us to innovate and win for -- along many, many different dimensions. Also, some of the more popular computing approaches, things like HCI built on servers is a combination and a tuning of that environment for operations for that HCI-like experience, which means it's not just the hardware. It's the combination of the hardware and software. And interestingly, it's usually around the life cycle management of how these two -- how software and hardware meet that I mentioned HCI, that we have this fabulous product that's leading in the market that in partnership with VMware called VxRail, it's been growing like gangbusters for not a decade, but approaching that. And it's become one of the most popular ways to compute and store because it's HCI, does everything, right? And so the art of that is actually managing the life cycle of that in a more automated way, so it's simpler and easier to use. And that's what most of our end customers are looking for. So while you may think of the server as a commodity component, I don't think it ever was. But when you consider the combination of, okay, we've got to fit these things and do these new environments. We've got to pack as much computing power into these constrained environments or we want to build a new way of computing around HCI, so on and so forth. It opens up a lot of opportunity for innovation and differentiation. And based on the growth that you've seen, I won't quote a bunch of numbers, but we've gained over 500 basis points of share in the last few years. And we've put a huge amount of distance between ourselves and the #2 player in that we've gained actually -- when you start talking in thousands of basis points, it starts to get a bit ridiculous. But 1,530 basis points against our next nearest competitor. We clearly are doing something right, right? So I would push back against this notion of commodity. And then what I would say is that you can't think of these components in isolation. They are really -- it's all about the combinatorial value that you bring to customers. And therefore, it's more about the broad base of the business.

So Matt, we've run out of time, which is fine. A lot of interesting insights that you shared. We've got a couple of follow-up questions. I'll catch up with you on e-mail. But I'd like to close with just one last one. If you could a little bit brief on this, but what do you think is the least appreciated aspect of Dell's story?

Well, I kind of just touched on it, right, which is people look at us as sort of this collection of component parts and want to sort of break down the component parts and analyze them more and more. The reality is, is that this is all about bringing solutions together to solve problems for our customers. It's not about an isolated market like a server or storage or a network or a PC. It's about the full end-to-end value chain that we bring to bear for our customers. And I think the underappreciated element of it is just how awesome we are at it. And the results show, we've been winning. We are winning. And then the other thing that I would say is that I think the market over appreciates this notion of zero-sum combinations. We are participating in the cloud market today. And we love cloud. It's a rising tide that floats all boats, right? And we've benefited. So I would say, underappreciated is the extent to which we're solving real business problems through technology for our end customers and winning. It's not just about the component parts. And two, you all are over appreciating the zero-sum nature of the public cloud. And we're confident that the world will be awash in technology and we're core to satisfying the needs of our customers. And I hope that was brief enough.

No, that was great. I appreciate it. The nice thing about being virtual is it's just to click away to the next meeting or so. But Matt, I want to thank you for joining us, folks. Thanks for joining us. This was a session with Dell at the Raymond James Virtual Technology Conference. Thanks a lot. Bye, guys.

Thanks, Simon. Appreciate it.