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

Good afternoon, everyone, and thank you for joining us on Day 2 of the UBS Global TMT Conference. My name is David Vogt. I'm the U.S. Enterprise Hardware and Networking Analyst here at UBS. And I am pleased to have with us today Chuck Whitten, Chief Operating Officer for Dell Technologies, who's responsible for running the day-to-day business operations of the company. Before we get started and jump into the presentation, Dell asked me to read the safe harbor statement. So just quickly, 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 the 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. Non-GAAP financial measures. This presentation includes information about non-GAAP operating income, which is not a measurement of financial performance prepared in accordance with the U.S. generally accepted accounting principles. Dell has provided a reconciliation of non-GAAP measures to the most directly comparable GAAP measures in the slides captioned Supplemental non-GAAP Measures available on the company's fiscal year 2022 third quarter result event page at investors.delltechnologies.com. So with that out of the way, Chuck, thanks for joining today.

No, well done, David. That's the fastest I've heard that read. So thank you.

I don't -- I think Rob has -- his job is safe. I'm never going to take that one. So I think maybe since you're relatively new to the seat, a lot of people know you, but you're still relatively new, I thought it would make sense, maybe just spend a couple of minutes going through your background and kind of how do you see your role at Dell and kind of maybe touch on what you've kind of worked on in the past that's sort of applicable to what you're working on today at Dell in your role?

Yes, sure. And I thought maybe -- well, first, thanks for having me. I'm looking forward to being able to do these in person soon, David. And I thought maybe I can do a quick introduction on me, as you said, and then maybe share a little bit for investors that haven't taken a closer look at us recently, maybe some highlights of our strategy and vision, our recent performance and our long-term shareholder return framework. And then we can get to Q&A. Sounds okay?

Sounds perfect.

Yes. Well, so -- as you said, Chuck Whitten. I -- you should, in many ways, think of me as a Dell insider even though I'm just a little over a quarter with the company. I spent the last 22 years of being in company. But about a decade of that, I spent working exclusively with Dell Technologies and working alongside Michael and Jeff and Tom and the entire leadership team on their growth strategy and most critical strategic initiatives. So I'm very familiar with the company, spent the bulk of my time in technology. And I was excited to join this company at this critical point in its history, which is incredibly exciting, as we'll talk about today. From a strategic perspective, maybe I would start by highlighting 3 things about our strategic position. The first thing I would call out to those that haven't looked at us recently, we are very uniquely positioned in the data and multi-cloud era. We have durable competitive advantages. We have market-leading positions. We have the financial flexibility to drive sustained profitable growth. We'd like to say, in many ways, markets are coming our way as IT becomes more distributed, the edge, more multi-cloud and more data intensive. The second point I would make is that our ISG and CSG core businesses are very attractive. They sit in large markets, estimated about $670 billion in TAM. They're projected to grow in the low single-digits over the next few years, and that gives us ample headroom for growth. We have a track record as a company of gaining share in these businesses behind what we think is a differentiated strategy to consolidate and modernize those core markets, which leads me to the third point. We have attractive new growth opportunities that surround that core business, about $650 billion in additional market opportunity, growing at an 8% CAGR through 2024. And these are markets where we have the ability to use the same advantages that we've developed in our core business and where we're driving real innovation today. Those are markets like edge and telco, just to name a couple of examples. So with that, this is the sort of strategic backdrop, maybe I'd highlight a few things about our recent performance. Look, we continue to see unprecedented demand for technology. It's clear that technology is more essential today than ever before. And it's equally clear that Dell is at the center of customers' IT and digital agendas. The usage pattern for PCs has permanently changed, and it's reset that market to new levels and widespread digital transformation and the economic recovery has spurred growth in IT spending and IT infrastructure. And so against that backdrop, we delivered a fifth consecutive record quarter in Q3, delivering 21% revenue growth in that quarter. And we saw growth in all business units, all regions and broad strength across our PCs, servers and notably, an inflection point in storage as we grew that business year-over-year. I'd note, we gained share in servers, storage and PCs according to the latest reported IDC results as well. From a BU perspective, our CSG business delivered record revenue. It was up 35%. It was driven by ongoing strong demand across the board, commercial and consumer, notebooks and desktops. And on a year-to-date basis, that business, CSG is up 28%. ISG posted its third consecutive quarter of growth. That's up 5% on a year-to-date basis. ISG is up 4%. And we continue to just generate exceptional cash flow. We had $13.5 billion trailing 12 months cash flow from operations. That's up 45%. And of course, we delivered all of that performance in like an incredibly challenging supply environment, while managing through inflationary costs. And so we think that execution speaks to the strength of our position, our durable competitive advantages, and it adds another quarter to our track record of delivering consistent growth, profitability and cash flow in any environment. And maybe I'll just conclude quickly with long-term value creation framework. We're firmly committed to creating shareholder value. We've simplified our corporate structure, selling Boomi and spinning off VMware. Our focus on debt paydown and achieving the investment-grade rating has significantly simplified our capital structure. Our business generates significant cash flow, as I said. And so over the past few years, we have used about 95% of our free cash flow to pay down debt. Going forward, we're excited as we transition to a much more balanced capital allocation framework that will include return to shareholders. And our financial framework is focused on growth, 3% to 4% over the long-term with EPS growth of 6% or better. And we're very optimistic about the future. The strength of our core businesses with #1 market positions, the durable competitive advantages I mentioned, and our focus on new businesses in adjacent markets where we have a right to win. We think our strategy and financial flexibility will drive long-term shareholder value and long-term value creation. So with that, David, maybe we can go through your questions?

Yes. No, that's a great starting point and a great overview. So maybe I think we get a ton of questions on the durability of your business, the sustainability of some of the growth. Now obviously, I don't think anyone expects a growth to continue at such an unprecedented rate, given where we're coming from, from a COVID perspective. But maybe let's just start with the CSG business for a second. Obviously, there's a range of expectations in the public domain. I think Dell is on the record chain, expecting that next fiscal year, the CSG business will grow. Maybe can you share with us kind of how you think about that business in the context of what we just went through from COVID, maybe changes in consumer behavior and/or commercial behavior and what gives you some degree of confidence that maybe the next fiscal year, we're going to see growth? Obviously, we don't think it's going to be a linear growth environment. There will be some peaks and some valleys. But there's some debate whether the absolute level of PC demand remains relatively stable as opposed to reverting back to a more normalized level that we saw pre-COVID. So just maybe start from there and take it from there.

Yes, happy to. Again, just -- I would start with the backdrop we're coming out of because I think the starting point matters as well, which is, look, CSG grew 35% in Q3. Our commercial business grew 40%. Our consumer business grew 21%. As I said, that's year-to-date, up 28%, and that healthy demand was across all geographies. So let's start with -- the backdrop is very strong. But more directly to your question, look, we believe we've seen a change in usage patterns that have fundamentally reset the market to a higher level. Why do I say that? You mentioned behavior. To do anything from anywhere economy, work from anywhere, shop from anywhere, entertain from anywhere, game from anywhere, it's created demand for a modern PC experience that's not going backwards. So pre-pandemic, the market averaged approximately 260 million units from 2016 to 2019, that jumped to 300 million units last year. It's going to come in somewhere between 340 million units and 350 million units this year. That do anything from anywhere has increased the number of places that we need technology. That's what we mean by a reset. And then I think what's important is the texture underneath that top level demand. There are more notebooks that drives a faster refresh cycle. There are approximately, call it, 700 million PCs greater than 4 years old. That means they can't deliver the modern experience that users have gotten used to in the last year, the modern experience that you and I are using right now to have this conversation. Win 11 will add to that refresh cycle and requires modern hardware. If I turn to the consumer side of the business and education, we sell millions of children and schools without PCS. We remain pretty far from one PC per person. The benchmark long used to be one PC per household. That paradigm has obviously shifted. So look, all of those factors make us bullish on demand. I think IDC's latest forecast for next year is flat overall. So again, not the torrid growth, as you said, of last year. We're more bullish than that, but the net is we expect growth next year, which brings me probably to the final point I'd make on our business, which is not all units are created equal in the PC market, and our business is positioned particularly advantageously. So our business and focus is centered on the higher value segments of the market, commercial PCs, premium consumer gaming. We participate broadly, but that's our focus. And if you trace the arc from 260 million to 270 million PCs in the TAM to the 340 million to 350 million I mentioned, those are the portions of the market that have proven to be the most stable. They're less susceptible to the fluctuations up and down that you may have seen in chrome and lower-end consumer units. So that gives us some confidence as well. And look, the other thing I would leave you with is we're a structural share gainer. And so in Q3, we gained 300 bps of share according to IDC. That was almost 400 -- approximately 400, excuse me, in commercial. The last 5 years, we've gained 140 bps overall and over 460 in commercial. So we're poised to continue to grow against this backdrop of a sort of reset demand for PCs overall.

Got it. That's helpful. And maybe just from a behavior perspective, so there's a ton of discussion about work being just worked. What I mean by that is work could be work from home, to your point, work in the office. So does that change the sort of mix in terms of PCs going forward? What I mean by that, so your exposure is 70%, 75% commercial. But if I'm in the office and I want to have a better experience at home, is that machine going to skew more to the specs of a commercial PC because I needed to have the greatest camera, the greatest video card, the best experience if I can actually work at home? And so to your point about IDC expecting flat overall PCs, maybe it skews a little bit better because of the mix is more commercial.

I think there is -- yes, I think there's compelling elements to that argument. Let me tell you what we've seen. What we have seen is higher content rates in our PCs, right, in this environment, right? That -- because to deliver the modern experience you and I are talking about and that you get used to in a commercial environment, higher quality LCDs, cameras, compute, memory and certainly in the high end of our business. On the consumer side, we see that as well. And we see that overall. So again, we think there are richer PCs out there to deliver the experience. The other thing I think you touched on in that question is the peripheral experience becomes very important as well, right? And it's part of our secret sauce, if you will, to our profitability and growth, which is outside of the core PC, there's been almost equal, I think, actually equal, if not bigger, total addressable market for peripherals. We're the leader in one critical of those markets, displays, but there's so much more that can go around the box, particularly if you want to deliver a modern experience. And so that's an opportunity for us as well. And again, in a market for PCs, that has reset to a higher level, may not grow at the same rate, as you said, that we've seen over the last 12 to 18 months, but certainly plenty of opportunity.

Got it. And then maybe along those lines, without putting you on the spot, but all of these factors and the supply chain considerations which suggest to us and sort of intuitively, that pricing should remain relatively healthy for the foreseeable future. I mean, when you think about a relatively consolidated marketplace from a number of vendors perspective, I mean, is that a reasonable sort of leap going forward at this higher level where there's only a handful of companies that can really satisfy the needs of both sort of commercial and the high-end consumer market, obviously, yourself being one of them? So does that suggest that we have a relatively stable pricing environment as we go forward, given that pricing has been relatively strong, you have some tough compares, but just generically, is pricing not going to pull back to where we saw pre-COVID effectively?

Well, maybe some observations on pricing historically. Like, as you said, I'm not going to get into forecasting pricing. The only thing I know when I forecast is I'm going to be wrong. But in our segment, as you know, pricing tends to follow commodity costs. And we have certainly seen higher input costs over the recent quarters. We're not immune to the broad dynamics across the industry. And as we called out in Q3, the Q3 quarter-over-quarter cost increase in our environment was the largest the company has encountered in recent history. And in parallel with the part shortages, which I'm sure we'll get into at some point, component costs had an inflationary trend in Q3, and it was memory, it was displays, it was SSD. And by the way, logistics, as you read the papers, increasingly challenging, air and ocean freight remained at elevated levels. And so look, as we mentioned with regard to pricing, the last -- in our last 2 earnings calls, look, we've taken pricing action to abate that higher input costs, and we've done that in both CSG and ISG. And in general, customers have been receptive to pricing moves due to the component cost inflation, but also because the dialogue has been about availability. And look, we're mindful of our competitive position when it comes to pricing. We never want to dampen demand velocity. What the future of pricing holds, I'll leave that to you guys to speculate. But right now, it is a benign environment, given the overwhelming demand for PCs and supply challenges. And then as we just talked about, customers are pulling on higher content rates to deliver that modern experience. And that also is happening in our server business for running ML and AI workloads that require more CPU, GPU, memory and storage. And so again, it's been an attractive market for ASPs recently because of both of those pulls. I'll leave it to you to forecast what happens in the future. Yes.

That's fine. So maybe just going back to the pricing that you talked about. Can you help us -- can you remind us how the pricing flows through, let's say, in CSG, right? So you've seen tremendous price increases from components over the last couple of months. Given your inventory situation and the way your model works from a working capital perspective and the supply chain issues and elevated backlogs across the industry, what does that mean for pricing going forward? Are we going to see a little bit of margin now, and we'll see some pricing over the next 3 to 6 months to be a little bit more stable? Or is it as close to real-time as we can get, given sort of the nature of your supply chain expertise?

Well, I think as we mentioned in Q3, I said that Q3 step-up was the largest we saw quarter-on-quarter. As we go to Q4, costs remain inflationary and -- but at a much less step-up than we saw in Q3. And we always endeavor to price ahead of that as best we can. We've also been transparent. We recover a portion of our pricing sort of in quarter and some in the next quarter. I think the other variable that's hard if commodities are sort of flattening a bit, if you will, David, is logistics continues to be very challenging. And so right now -- right now, the pricing environment remains benign, and we do see sort of the inflationary pressures. It's still inflationary. Let me be clear, but at a less drastic clip than we saw in Q3. And that's how we sort of proceed with pricing. As we head into next year, what's going to happen? Hard to say. We think it's going to continue to be a challenge. Some commodities will go through a period of decline. Others will offset it. I just think that's the environment we're in right now. And it's always, of course, dependent on the broader demand environment that we're in. So we'll obviously give much more clearer guidance on that as we get into Q4, but that's sort of where we stand right now. I think you're on mute David.

Sorry about that. I think -- first day with the new camera. No, I'm kidding. I think people care tremendously about CSG, but obviously, let's not forget the strength in your ISG business and maybe just picking that for a second. Obviously, we're starting to see improvements in storage demand, server demand. And you touched on it in your prepared comments. When you think about order growth that you've seen recently, specifically in storage and what we think we're seeing from our supply chain checks in enterprise server demand as we move into calendar 2022, I'd love to get your thoughts on what you see driving sort of this improvement in demand. Maybe just a little bit more detail starting maybe on the server side and then...

We'll start on servers. Yes, yes, I'll start on servers and then we can discuss storage. So you heard us say, our recent history, servers and networking revenue in Q3 was up for the fourth consecutive quarter. That was -- that was plus 9%. Mainstream server demand was up double digits year-over-year. And that's obviously -- we're very pleased with that growth. I think to your direct question, as a reminder, we saw robust growth in FY '19. FY '20 was a period of digestion for compute in the server market. And FY '21 or calendar '20 was supposed to be a year of, again, infrastructure refresh. And then customers were focused on instead navigating the global pandemic and making targeted investments. And those investments often tilted, as you've seen in our financials to the client side of the business and delivering for hybrid work. And so look, what we've seen as the overall economy and IT spending has recovered is a rebound in data center demand, and that's what we're feeling right now. You've seen the IDC forecast at server revenue this year of 6%. And for the calendar, I think mid-single digits moving forward. Again, probably more bullish on that, given that we see widespread digital transformation not stopping. But regardless of the underlying market forecast, we see growth as the #1 mainstream revenue leader in servers and a structural share gainer. We just feel really well positioned for this recovery phase, given our advantages in go-to-market, our advantages in supply chain scale, our portfolio innovations and in DFS. And so net-net, it's a good market environment. We're well positioned. We're optimistic. Storage. Storage is a more complicated story for us, as you know, and it's been a work in process for us for some time. But as I mentioned in my prepared remarks, look, we returned to growth in Q3, and that was an inflection point for us. And because I know it's a broad group that watches this, I always like to start with the most critical piece of context when you look at our storage business, which is we're #1 in all external storage categories. We're #1 in high-end, mid-range, entry, unstructured, object, all flash, HCI data protection, you name it, we lead in it. And that just means you have to look at our growth numbers with a little bit of a discerning eye, unlike some of our competitors, we cover the full market. And so that's some of the puts and takes that you feel in our business. And so while we don't disclose our full demand number every year, what we did -- or every quarter, what we did highlight was that we were very encouraged by our storage momentum in Q3. And as I called out, it was an inflection point. And we're particularly pleased with our performance in the largest and most strategically relevant portions of the market. So what are those midrange? That represents roughly 60% of the storage market, where we grew 18% this quarter after growing 17% in Q2, 23% in Q1, 8% in Q4 of last year. And as we've called out, PowerStore, which is our critical product in that market, along with our Unity offering, it's clearly winning. It's attracting new buyers. It's creating repeat buyers. It's the fastest-growing storage architecture we've released through 6 quarters of sales. So we're very encouraged by midrange. We always call it HCI. It's an important battleground, where we're the market leader. We grew 47% in Q3. We also highlighted our data protection business growing 26%, where, again, an important end market-leading segment for us. So with all of those data points, where are the challenges in our storage business? Again, with a broad business, the high end continues to be a cyclical market. We're the leader in high end, over 40% market share. That's a business that's typically tied to the mainframe refresh cycle. And right now, that's a down business year-over-year. And then there's 2 other primary dynamics that impact our sort of walk, if you will, from our storage demand to our P&L revenue where we posted 1% growth. And we called those out in Q3, but the 2 are first, we had a lot of back-loaded linearity, meaning storage orders came in late in the quarter. That's very typical for our storage business, but we would say Q3 was even more backloaded than normal, and we built backlog in that business. And then second, and I think this is a really important part of the story. Our storage business has high services and software content. And that typically is amortized over 4 to 5 years based on the life of the contract. That's obviously a great thing for the business. It creates happy and loyal customers, but that revenue is not realized in period. And those 2 impacts can create a separation between our orders momentum and all that optimism I just described and our P&L realization, which is what happened in Q3. So look, the net from my chair is if we continue to deliver consistent quarterly growth in storage, particularly in those most strategically critical portions of the market, you'll see a steady build in our P&L as services are amortized. And broadly speaking, long-term trends are favorable to us in the data era. Customers are going to need more external storage, and we're the leader there.

Yes. No. I mean, that's a great point. I just would mention that we've been doing a lot of survey work, and we do pretty regular checks. And it certainly, we picked up that it sounds like order momentum was late in the quarter, as you articulated, and it's been building. And so expectations for, let's say, the quarter that was just reported were strong, but the expectations on a forward-looking basis were even stronger. Would you characterize it as being directionally accurate in terms of what you're seeing?

Well, I mean, again, the challenge with linearity is, it all depends on how the old linearity shapes in Q4 as well David, right? And so if we have a similarly backloaded quarter, you're always on the treadmill. I think, again, what I would tell you is from a demand standpoint and the resonance of our products in market right now, we feel good. Obviously, we try very hard to not have the type of linearity that we saw in Q3, but it's a reality in our business, right? We'll have it in Q4 as well.

Got it. And then when you think about the competitive landscape, you mentioned high end storage down year-over-year. Mainframes are the primary drivers of that business. There's some discussion that we may see a mainframe cycle at some point in the second half of next year, maybe starting to pick up. Do you have any thoughts on maybe the compression of the cycles or the duration of the cycles from an IBM or an IBM...

Yes. That's a great question for IBM. I think I read and look at the same data you do on that, right, and say, next year is a year to look at, right? And certainly, we try to proactively plan for that refresh cycle and do forward planning with our customers as well. But in terms of the shrinking or lengthening of those cycles, that's a great question for one of my peer companies.

Yes, they're not very forthcoming, so...

We got to try.

We got to try somehow. So obviously, maybe just pivoting a little bit, I don't want to get into supply chain until later and cash flow. But I'd be remiss if I didn't talk about VMware. That -- the spin was incredibly successful. We think it created a tremendous amount of value. Obviously, it's early days. You have a commercial relationship. It's not effectively, from my words, maybe not your words, profitable yet to where you want it to be. What if anything has changed in the early days post the spin, if anything? And what are the steps that you could potentially take to work through sort of this lower revenue stream -- lower profitability revenue stream? Yes, it will take some time. We understand that, but maybe help investors understand kind of how you're thinking about it and what the relationship looks like today and what it could look like in the future?

Yes. Well, let me start at the strategic level and just say, I always like to categorize it as a capital structure change, but not an operating model change. So let me start there. The strength of our relationship with VMware has never been better. And the first and best is the word we use all the time, our first and best motions with VMware through our technical and commercial agreements that we've honed over 5 years plus longer dating back to EMC are very hard for anyone else to replicate and they run deep in our company. And so our operational efforts don't change. And to our customers, we haven't heard noise. It's just been business as usual as we continue to innovate together and pursue joint market opportunities. We made a recent relatively big announcement on our APEX Cloud Services offering on VMware Cloud. That's a perfect example of us jointly going after the multi-cloud market together and a further example of our kind of technical alignment. So look, that commercial agreement you described that formalizes our joint commitment to product innovation and go-to-market alignment means that we'll start reporting VMware revenue as reseller revenue in our other business segment. That's alongside our SecureWorks business. And as you said, that today is, call it, neutral profitability, right, for us. Over time, we will work and revisit that within the frame of the agreement. We have an annual process around which we talk about our commercial agreements. So it's our intent to certainly improve that. But strategically speaking, we continue to be in lockstep with VMware driving technical innovation and serving our customers, and that's really our focus right now.

Got it. And just to be clear, you mentioned it, but I want to make sure I understand. So you've been talking about the spin-off for 12 to 15 months before it actually happened. So customers probably were well primed in terms of how to think about the 2 businesses separate effectively. Well, they were separate before, but financially they separate. And so other companies in the past might have had some disruptions in terms of relationships, revenue conversion, it sounds like you've seen none of it, right?

No, no. And it is true because this isn't -- it was not a carve-out of a business from inside of us, where we had to separate a lot of -- there were 2 businesses, right? That had a -- it's almost like a strategic alliance, or it is a strategic alliance today, but it was like that before. That's why I think it was very, very seamless. Obviously, lots of lawyer work and baker work and all of that to get the spin-off to work correctly. But no, from our technical teams and our go-to-market, limited changes other than getting used to this new reality of a more arm's length arrangement.

Got it. I want to touch on -- you touched in your prepared remarks, financials and cash flow. But before we get there, I told Rob I'd be -- put this late in the question, but we have to ask about supply chain. And I think most investors are comfortable with the headwinds that your company and other companies face today. But the question that we get over and over again is you mentioned freight. You mentioned a lot of companies talk about it, specifically in the PC business, the lack of matched components, older components, maybe there is some shortages of PMICs or just across the board, random, ad hoc shortages. When you think about the expertise that Dell has put in place from a supply chain perspective, do you think longer-term that more companies move in your direction and that you -- your model is fine-tuned or will we come back to a normalized environment? Or do you think there's any sort of structural changes that need to be made in the supply chain to maybe mitigate these potential headwinds, right? So maybe companies carry more inventory than normal, maybe just-in-time inventory isn't really the right way to go for the longer term? I know it's a form of theoretical question. I think companies have been spoiled for the better part of the...

No. Yes. And I think you're asking sort of, like, let's get at the secret sauce of Dell supply chain a little bit, why are we performing the way we are? And we're getting that question a lot, right, from -- and certainly, I'm sure the world is studying us because I think we're navigating well. Look, I'll start with the environment, and then let me go to what I think we're doing and how that might apply to other companies. I would say, it's a difficult environment, but we're no different than anyone else in the industry. We see the same challenges, and you hit on a few of them. They're well documented and they fall under the broad header of integrated circuits, right? Overall industry just remains constrained, given global demand for electronic goods and components. And like the rest of the industry, we're therefore experiencing shortage of ICs, which are impacting PCs, displays, docking stations and servers. As my co-Chief Operating Officer Jeff Clarke has called out, older process nodes are the most challenged with multiple industries competing for that scarce capacity in supply. That's 8 inch being the most constrained, 12-inch, not much better. That's the 40, 55, 60 nanometer components. And it's truly day-to-day. And then add in logistics, as you said, which has proven very challenging as air and ocean freight remain at elevated levels. It's hard out there and day-to-day. So why are we performing well? What I would argue is it's not just one thing. It's our business model. And so our supply chain is, of course, an advantage. And we called it out as a durable competitive advantage. It's the largest in the industry. But importantly, it's a multi-decade operational heritage of building direct relationships with the supply base. So these are intimate conversations with the supply chain on how to navigate this type of disruption. It allows us to flash demand forecast to them well in advance, so that then we can work our way through and navigate lead times on components. But there's other elements besides our supply chain. And that this is what I think is tough for everyone to replicate. One is our product design flexibility. We have built in less complexity into our product line, more modularity and the ability to qualify the parts that are available. Our direct sales engine is an enormous advantage in this environment because we get a very high-quality demand signal that's helpful to the supply base for sure. But we're also able to shape demand based on that component availability. All of us at Dell are in regular conversations with customers that go something like here is your spec and it's on extended lead time, can I show you 2 or 3 other specs that are on shorter lead time. That's a huge advantage for us right now. And so that's why I think despite the shortages in the challenging environment, we shipped a record number of products globally in Q3. What can others learn from that? I would argue that's a really hard thing to replicate, right? If you don't have the ability to shape demand, if you don't have deep supply relationships that reach all the way down deep into not just the primary component but the subcomponent, you can't build that -- you can't build that on a dime. And so you're only -- well, what -- you have other solutions, but one of your solutions may be to hold more inventory. For us, I think this is just sort of part and parcel with what we do every quarter. It just happens to be in a sort of unprecedented time of complexity and supply chains.

Maybe can I ask you a devil's advocate question. So normal -- demand normalizes and supply chain is normalized. Does your ability to shape demand and steer demand sort of lose some of its relevancy, right, where maybe that's not that -- maybe a useless demand signal, maybe not useless, that's too strong of a word, but less of a share gaining opportunity for you, right?

Well, we're always able to -- it's certainly a huge advantage now, but there are so many benefits to having a clean and advantaged demand signal, right, whether that's -- whether that's our cost or continuity of supply, whether that's our access to technologies and transitions, right, whether that's the ability to shape a customer to a richer config for their workload or to say, hey, based on what you're trying to do in your environment, here's the right tool for the job. So there's so many advantage to us. Right now, one of them happens to be I can shape the demand to the availability. But in times of normal supply, it's also an advantage for all those other reasons. And look, at the end of the day, it's customer trust, right? We're trusted with our -- we're a trusted partner in our customers' IT agendas. And that has huge benefits, margin growth and otherwise to our book.

Yes. I mean, I would suggest, right -- I would submit that it leads to better margins, which you've been able to generate relative to your peers. And I think a better ASPM relevant than your peers released.

I would agree with both of those. Yes.

Got it. So just maybe in the interest of time, cash flow, balance sheet seems to be a topic of debate. And you've done a great job as the company deleveraging, as you mentioned in your prepared remarks. And I think Tom's talked about a little bit more incremental debt reduction to get that final upgrade from, I think it's Moody's had you on positive watch. When you think about the cash flow, and Tom's talked about this, but we'd love to get your perspective, cash flow has been running almost $6 billion on average for the last couple of years. Net income -- excuse me, cash flow is going to be better than net income. Can you give us a little bit more color on how we should think about the trajectory now that we're standalone and maybe, if possible, a little bit more color around sort of maybe the delta between cash flow and net income, if possible, just to help investor...

Yes. Well, let me channel my inter CFO and friend, Tom Sweet and start by reminding you, we're 35 days since the spin-off and investment-grade ratings, so I think there -- a little patience is in order. But look, as you said, our business generates very strong cash flow. That's somewhat been overlooked, I think, given that much of our capital allocation for years is focused on debt paydown, as you said. And it's an advantage you called out our negative working capital conversion cycle. It's just different. And when we grow with that negative working capital conversion cycle, we generate significant cash flow. As of our Q3 earnings, we paid down $15.9 billion in debt, as I said, and that brings us to a 1.9 times core leverage ratio. And now that we're investment grade, you'll continue to see a bit more debt reduction as we manage our way to 1.5 times core leverage target. And I think more excitingly, it allows for that balanced capital allocation framework that I described, which includes 40% to 60% adjusted free cash flow returned to shareholders. We'll do this via dividend, subject to Board approval starting in Q1 and through share buybacks, which will be more programmatic, managing dilution. And so I'd continue to just point you back to our long-term value creation framework and how we've articulated that. It's a long-term framework. It's the starting point. Right now, we recognize that we do have considerable cash right now on the balance sheet. We've articulated many times, it takes $4 billion to $5 billion to sort of run the business. We don't think we will adhere exactly to that $4 billion to $5 billion every minute or every quarter, but that's the sort of framework I would point you to is the 40% to 60% adjusted free cash flow.

Got it. And in that context, when you put your COO hat back on, when you look at the portfolio, you've divested Boomi, you've obviously spun out VMware. You've done some other smaller deals. Right now, the portfolio seems to be sort of hitting on all cylinders. Where do you look at the portfolio today and say in 3 years to 5 years, we need to add some capability and if that's through internal R&D efforts or M&A, how do we get there? So besides that 40% to 60%, but what else is the cash flow going to be used for?

Yes. Well, look, I think that flexible financial framework I gave you gives us the ability to invest in growth in the business and pursue M&A. And so maybe a few observations. M&A is going to certainly be part of our future. We think it's core to any good growth strategy. And without giving shopping lists out, I'd sort of say 4 things about our M&A strategy. We're strategic, is the first thing I would say. M&A is clearly going to fit into our communicated strategic framework. And so don't expect a bunch of surprises from us. We're proactive on this. And the spaces that I've talked about as being interesting to us, edge, multi-cloud, telco, data management. They are those spaces I said that are in that big adjacent total addressable market that sits next to our core business. So first, strategic. Second targeted. I think Michael has been very clear. We've all been very clear. Don't expect large-scale M&A transactions. The circumstances that led to our combination with EMC were unique. And we're focused right now on what I would call scope acquisitions versus those sort of large-scale acquisitions. We're always looking, but don't expect large scale M&A. I would say, third, look, we're disciplined. Ultimately, we're laser-focused on value accretion to long-term shareholders. In many of the spaces I just described are how would I say it very fairly valued right now. And so I -- yes, lofty. So look, strategic, targeted, discipline, don't expect large transactions, but know that we have the financial firepower to invest in those growth markets, and that's what we tend to do, all in the context of a balanced capital allocation framework for investors.

Got it. Helpful. So in the interest of time, I think we're running a little bit short. I always like to give the executive an opportunity to kind of give the elevator pitch at the end, maybe something that we didn't touch on at the very beginning and just maybe either with you if we didn't touch on anything other than what you said in your prepared remarks, anything you want to leave investors with as the key takeaway?

Well, no, I just -- look, I think in my prepared remarks, I tried to paint a vision of a business that has a lot of attractive characteristics right now, right? Our core businesses are in and of themselves attractive. And as we said, markets are coming our way. The PC has never been more critical to the world, whether it's in hybrid work or all of our lives. Infrastructure is rebounding, and we have leading positions everywhere, #1 in external storage, #1 in data protection, #1 in x86, #1 in HCI, #1 in client revenue and profit, #1 in displays. We're sort of perfectly positioned for this moment in technology. When you couple that with adjacent growth opportunities, where I think we have a right to win, building off of the capabilities and customer access that we've built in our core business and a disciplined capital allocation process with the financial flexibility we've built through years of hard work and debt paydown, we think we're really well positioned right now to create long-term value. And I think you wrap all of that in what hopefully comes across every quarter as an incredibly high say/do ratio and a culture of execution, we think we're perfectly positioned.

Perfect. Well, Chuck, I think we'll just stop it there and end it. We appreciate you dedicating a lot of your time, very generous. We appreciate it. And Rob, thanks for helping as well. And if anyone has any questions, please feel to reach out to me directly or I'm sure many of you know Rob Williams, you can reach out to him. And Chuck, thanks again, and everyone have a great evening.

It's my pleasure. Thanks, David.