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

Hi, everybody. Thank you for joining us here. Tim Long, IT hardware analyst at Barclays. Very happy to have Sam Burd, who runs the Client Solutions Group at Dell with us today. So thanks for your time. First up, we're going to read a safe harbor here. Dell Technologies may make statements that relate to future results and events that are forward-looking statements based on the comment the company's current expectations. Actual results and events could differ materially due to a number of risks and uncertainties, including those discussed in the company's SEC filings. The company assumes no obligation to update its forward-looking statements. Here we go.

Good. Maybe -- Sam, thank you for coming again. Maybe if we could start off talking a little bit about kind of last quarter. Give us a little recap of what you saw on the PC side, customer demand and help kind of look into next quarter, and then we'll take it from there.

We're happy to do that. [ I ] lead our Client Solutions Group, essentially our PC business. So in that business, as you saw last quarter, we have [indiscernible] PCs. We have displays, peripheral services, everything around that business. It's where our company started. We're about to celebrate our 40th birthday. So that's an exciting time. The other good thing is to we have the capability inside our company [ to practice ] this really well. Keeps me, keeps all of us -- keeps me on my toes. You put that together with our infrastructure business, those two altogether equals Dell. So last quarter, we saw about 11% decline in our business. And we saw an interesting trend because in summer time frame, in June, July, we see a lot of positive momentum in the PC side that continued into August [ as per ] our guide for Q3. As we finished out the quarter, we saw less than the ramp-up that we expected in September, October. And we saw weakness in large enterprise demand. So that translated over into the Q3 that we saw. We looked ahead to Q4 as you kind of look at the dynamics going in, in the industry, we see that [ pattern ] continuing over to Q4. So if you look at industry pundits, they're kind of a forecasting quarter in the PC space to be down about 5% quarter-on-quarter in a quarter that's typically up every year sequentially. We think our business will do better than that. We expect to be down low single digits in our business. But I think if you look at the market view and our view, we're seeing continued caution among large enterprise customers. All that said, if you look at the broader view and you get out of a quarter-by-quarter mechanic, we see a lot of reasons to be optimistic in the PC space. We have new capability coming [ into release ], we have a large installed base that is [ needs ] to be [ refreshed ] and to be kind of positive indicators of demand in the future.

Okay. Just digging down on that, what are you kind of hearing from -- is this just macro? Or maybe there was more purchases and it's tougher compares. So what do you think is driving the little blip we're seeing on the demand side?

Well, Tim, we've seen a difference between large enterprises and some of our more transactional and small business customers. So [with ] large enterprises, we've seen the macro environment has caused some caution in spending. And that's where, again, this dynamic of there's an installed base of PCs that need to be refreshed. Customers I talk to, realize that. You're also trying to balance the budget that means they have to refer with what they do in that corporate environment. And that trade-off is causing a lot of angst as they realize, hey, I can be the budget bureau this quarter. And 2 quarters from now, I'm going to not be putting the right tools in the hands of my employees. I've got to think about PCs, got to think about infrastructure, the whole spectrum where more technologies [ streaming ] by companies tends to equal those companies who [ do ] matter. So we're shorting through that spend that they need to do on PCs in a macro environment with a set of PCs that need to be refreshed. In more transactional segments, we talked about more stable demand in Q3. So we've seen those businesses deciding to invest. Those businesses, interestingly, in the past have usually been bellwethers of a better kind of demand environment out there in the industry. So I think we put all those things together, what we're hearing is customers say, I know, I put PC is really important to our workers. It's a core productivity tool. I'm going to refresh it. I need to fit that in my kind of large enterprise budget envelope and the discussions we're having in the macro environment we see as a company.

Okay. We obviously, not alone. There's a lot of companies that I cover in the enterprise world as being in the same macro impacts. Let's take a higher level view here. Just curious on your view of the Dell operating margins for Client Solutions Group are very strong, and they've been well above pre-COVID levels. Your largest competitor, same dynamics. So can you talk a little bit about what's changed in the PC industry that the leading companies have been able to sustainably hold a much better operating margin than previously before it was component and COVID situation?

Yes, you have it exactly right. So if you look to the 2 years before COVID, our operating margins were 4.9%. If you look at the last 3 full fiscal years, we were at 6.8%. If you us hear today tracking ahead of that. Now we've benefited from a lot of good things in our model driving that performance year-to-date. So you look at a differentiated business model with [indiscernible] the complementary channel, it drives a different business mix for us. It's a richer set of PCs that we're selling, that's better margins that we go and target. We've had a highly deflationary cost environment. Our -- again, our unique model with low inventory is really good at capturing that cost deflation first before our competitor is putting that onto our P&L. So you see all those dynamics at play as we think about the course of this year. We've talked about we see some of those dynamics changing as we get into Q4. Our long-term framework operating income view for our business, the CSG business is 5% to 7% operating income. We think that's a good range that we expect to be over the long term. And as we get into Q4, I contrast that with Q3, we're going to see that deflationary environment kind of some of the dynamics change there. Are we going to see commodity costs become more neutral in Q4, and we think become inflationary next year. We also saw as we went through Q3 is that demand didn't materialize, we get into the typical dynamic where then we see more price aggression. We saw that build in Q3. We expect that dynamic to continue into Q4. So our guide, as we talked about Q4 was then operating margins that are lower in the PC business as we get into that Q4 time frame, more falling in that long-term range that we've laid out.

Okay. You mentioned some of the positives affecting margins. Could you talk -- look out the next 1, 2, 3 years, kind of your top 2 or 3 priorities for the business to set up deltas to [ beat ] here?

Yes. And we -- as you look at how we drive a -- those kind of operating income margins and a differentiated performance versus our competitors. We've done a good job if you look over COVID, Tim, of growing our presence in the most profitable places in the market. So that's been part of our strategy, and our intention is to continue that approach. So we updated folks on our strategy in October. If you look at that and you look at what we've talked about before, strategy has been remarkably consistent. It's also been very successful. So two key pieces that we have in that. Number one, we target the best, most attractive, most profitable segments of our industry. So that's a really good thing to go do. And then we're focused on how do we extend our lead and capture new growth in those segments. So you think about the first piece of that. The segments that we go after. We're more weighted towards commercial, workstations, premium consumer than our competitors in the industry. That's a really good space to play in. It has durable demand. When you look at our business, if we just take our client business, compare that to our competitors, our kind of total revenue per unit in that business is approaching 2x our competitors. So you see that kind of differentiated mix, the different space that we target show up in our P&L. The second piece of that strategy of go extend our lead and capture new growth, we have a really different model that we execute. So you look at our direct model and a high mix of our direct business with a complementary channel gets us a great kind of ability to engage customers and be their adviser. Also think about our breadth in not only the PC space, but the enterprise infrastructure space, we can really work with companies as they're figuring out what technology they need to put in place in their business. We have leadership offerings in every segment, we can help them figure out the strategy that they need. We got a great product lineup, driven not just by engineers who are super passionate about what they do, but insights we get from all that customer engagement. We've got a world-class supply chain. In the world today, customers want people who are going to be able to deliver. We've got a great services footprint in 170 countries. We can take care of customer technologies. So you put all that together and you go. Customers are voting with their dollars on our business. And we've been able to extend our lead. The last decade, we've gained 10 points a share, nearly 10 points a share in our commercial PC. We gained nearly 9 points a share in [indiscernible], #1 positions in client revenue, in workstations, in high-end gaming. So all that's been an ability to take that model, go prove to customers that we deliver value for them and execute. And then I look at the next year and the opportunity -- if you think about the opportunities we have in front of us with that strategic framework, it's go grow in the segments that we're going after. How do we sell broader solution to our customers. So we've done a really good job of PCs. We've done a good job of displays and services. We're tackling an opportunity we see in the peripheral space, a $40 billion TAM around the PC. Our customers want that all to work together. We're driving that solution for our customers. And then the third piece is take advantage of the big installed base that's out there and the promise of more capable PCs that are going to help people win and be productive in a hybrid world, be productive in a world where [indiscernible] comes to the PC that you're using.

Okay. Great. Great. If you listen to HP, they'll say we're focused on commercial, high-end gaming, peripheral. So it does seem like many -- most of the larger players are targeting the same areas. What do you think -- does that get more crowded in the go-to areas? Or does it become more competitive? Or is it an area where Dell has the lead and can defend much better than others trying to move up into those areas?

Yes, Tim, we aim to have a high, high Say:Do ratio and a very consistent strategy. So I would say the world is competitive, and we thrive on going and winning every single day with our customers. Like the way we go have those share gains and leadership positions, if you've got to put the best product on the table for our customers. So people can talk about the different spaces that we're going after. I would say, if you take our company and go back to 40 years, 40 years ago to today, we are focused on delivering on the right things for our customers, so great products and a real sense of understanding our customers and doing what they need. And we -- I think about my teams, we live, breathe, think about what our commercial customers need every single day. We do that in PCs. We do that in infrastructure where we have a very strong position. We do that across the company. And it's how we started this company. If you think about that kind of customer focus and passion, it's a powerful combination. It's a winning ingredient. If you look at any kind of bolt-on strategy, you go that's a really good thing to have. It's a consistent approach that Michael has infused in the company from the day we started. So to me, saying you want to go do something and then having a model that's set up consistently executing on that hugely customer-focused, hugely results-focused is a big asset. And that we've got to deliver to our customers. And we have a track record of doing that. We are investing in getting them great technology. I think that's the secret ingredient to be a differentiated model with a passion for customers that says we've won in the past, we will continue to win with a consistent focus on those customer segments. And they're higher value. They're great places to go after. That's why we put our focus there.

Okay. Great. Great. You briefly mentioned AI PCs in there. So let's start out with kind of your definition and your view of what that's going to mean for Dell and for the industry, and then we'll maybe dig a little deeper into it after that.

And we see customers already doing AI on PC. So we have a workstation business. We're the leader in the workstation space. We have systems with very powerful GPUs, can run up to 4 GPUs. So think about engineers, designers running AI workloads today, models with billions of parameters where they're able to do inferencing on the edge. And we've seen 2 quarters of growth, year-on-year growth in that business. So clearly, an area of opportunity to how people are thinking about putting PCs to use with [ AI ]. Now to me, the question you also asked around AI PCs, and more broadly the opportunity in the PC space, how I bring that capability to mainframe PCs all of us using every day versus just the workstation, kind of creator segment. And we're going to see hardware coming and architectures on the PCs where we'll add neural processing units, so NPUs that will be more power efficient and work on a laptop device and allow us to run AI [ capabilities ] natively on the hardware on a PC. And that creates the opportunity for ISV software to be even driving productivity and capability of those devices for our mainstream users. So that's where we're excited when we think about a large installed base, you think about more commercial PCs in the installed base being used today than we've ever had in history, I think about the COVID era and 305 million PCs sold in that kind of first year of COVID that will be celebrating a 4-year birthday next year, which is typically a cycle when you think about refresh. You think about Windows 11 coming. You think about a PC world where the systems that we're all using today don't have NPUs in them. The systems of the future will have NPUs on them and be able to run AI models on those devices, and there's a great opportunity for us and elements that will lead to a, what we see as a more positive demand environment in the future in the PC space.

Okay. How do you -- you said you have some of these devices currently being sold, but what do you think of kind of time frame and slope of the curve for a little bit more mainstream commercial adoption for AI PCs?

Yes. So we think it gets out of that or spans beyond the workstation space that we're in today to mainstream users. If you think about next-generation CPUs that we're going to get, we will have neural processors built into the silicon. So think about MediaLink, AMD, Intel products that come in the end next year, we're going to have AI multiples running on PCs with that silicon. We're going to see a one-and-done -- we're going to see continuing advancements in that capability. So if you go forward the next 12 months, go forward 12 months after that. We'll continue to see increases in those NPUs and the amount of tops that we have on the system ability to run multiple models and do more things on the PCs. So that's what we have to look forward to in the next 12 months of capability shows up on PC. So PC is not enabled today. New PCs will have that capability. The software vendors and ISV companies that I talk to, all think it's very interesting, going, how do I tap into that hardware? To me, that's the most exciting part because that equals -- that combination of hardware plus software equals innovation, ways to enhance productivity, [indiscernible] logical decision around I want to invest in the PC [ where my ] users can go do more. And we're going to see that start in the next year, and it will build in each year after that, we're going to see more capability.

Okay. I think you guys talked on the last call, this should be pretty accretive to ASPs. So how do you think about kind of you're already kind of 2x above your nearest competitor. What does that do to pricing and margins as the products start coming out and evolving?

We think it helps keep at least stability in the ASP space and margins. We've talked, Tim, there's a big difference if you look at infrastructure space, there's a bigger difference between AI and traditional kind of servers. That is a lot closer if you look at a PC environment. So PCs with AI capability, they're going to have more advanced silicon in them. As you run more models on the PC, you're going to want more memory so that you can run those multiple models on the PC. All those things will help our ASPs be stable/better in the PC space. Companies want to future-proof, buy PCs that are going to be capable. They learned that more technology equals -- more technology equals more capability in COVID. In the hybrid world, suddenly the PC that you have really mattered on how everyone [indiscernible]. We're seeing that same thing in an AI world, if I would [indiscernible] today, and [indiscernible] so core memory, better CPUs. We also have a history in the industry of we tend to take better performance and offer better value for people in the next life cycle. So we've got to put that all together. We've got commodity -- different commodity environments coming together. We've got different levels of competitive intensity depending on what the environment looks like on demand. So it's not easy to just go, hey, this is the only variable that sits and impacts ASP and margin, but it will help that, and it will help drive what we've seen a more stable ASPs in the PC space and people think about AI over their devices.

Okay. And maybe last one on AI. Could you talk a little bit about -- do you think this changes the competitive landscape you talked about 10 points a share in 10 years, pretty consistent growth there. Is there anything about the transition to AI that Dell is in a better position? You obviously have an infrastructure business where companies selling AI servers, and obviously, a lot of software capabilities across the company. So maybe just touch on what you think happens with the competitive landscape as we get into this next phase of PCs?

Yes. We see -- even without AI, Tim, we see companies wanting to work with a company that can really be an adviser and partner to them across technology. And I would say that's heightened with AI. So the successful companies are investing in technology. If you look at the leaders in industries and companies see that and realize they need to figure out where those investments are going to have good return, how they drive that in their enterprise and something that we have that's a really valuable asset. When I look at my business and our client business, combine that with the infrastructure space, we have leadership positions across every one of those businesses. So our team with our unique model and a [indiscernible] outreach direct engages with customers and help them plot out that strategy that they need to think about around technology. And we've got a great portfolio behind that. So they're not -- they're getting great offerings in all those spaces that can really work with our team. They don't have to go, hey, what is the company trying to sell me. We've got great stuff in every space, we can help them work through the tradeoffs. In a world where companies want less people to engage, they want to and have to plot a strategy in a complex world, throw AI on top of already technology, we have a really capable go-to-market team that can change with customers and help them work that strategy. So I think that plays very well to our advantage. We've got to deliver great products. We've got to deliver for our customers, but we have a portfolio and a team that can sell and advise customers on that portfolio that's really unique in the industry.

Okay. you mentioned commodities kind of favorable now, maybe not to go next year. Where are you with supply chain and logistics costs? And are we back to normal lead times? How is all that looking for your business? I know the lower inventory model has really helped you navigate this much better. So where are we at in the dynamic?

We see great lead times on the client business. So I see some people in the room today who need a holiday for themselves and family members. So I can help you -- if you give me your credit card after this, I will set you up. It's a no-hassle payment system. We see lead times. Our great products are available to customers, more of the dynamic we see is on the cost environment where we have some of the suppliers, you think about memory, [ main ] suppliers, DRAM, have lost a lot of money over the last couple of years. And as they change their supply dynamics that kind of cost environment is going to [ change ] as we get into next year, but supply continues to be great. We're able to deliver to our customers. We have a really capable supply [indiscernible] for going and doing that. So that's another advantage. When you think about customers I talk to going in a world with macro uncertainties, global environment uncertainties, I also want a technology company that is going to be able to deliver for me. And we proved we could do that during COVID. We have a lot of capability in that space that's a valuable asset for the companies that are working with us.

Okay. Maybe if you think out multiple years, I think the latest expectation is 2% or 3% growth for CSG, your PC business. What are the dynamics behind that? Obviously, we've had a roller coaster of the kind of flattish, slightly up market to big up and then big down back to where we started. So how are you thinking about kind of longer-term dynamics and growth?

So longer term we see the TAM in our space, so think about PCs, displays, peripherals are running those PCs growing to about 2%. And that's driven off -- the discussion we had, Tim, it's driven off an installed base, a capability and innovation that we think will drive refresh of those PCs that those devices are running the PC. And then -- so that's a growth environment. We see that, that can -- mileage can vary across cycles. We set our long-term revenue growth in the [ CSG ] business at 2% to 3%. So we see ourselves gaining share in that environment and capturing more revenue as we deliver for our customers. That's across -- we average that across a lot of cycles. So we also started to talk about next year, we'll have more to share as we get to the end of our Q4, but we said we expect next year to be above our long-term framework revenue growth for the businesses. We talked about in the PC space. If we look at our internal model and how we look at the PC space, we see more like 3% to 4% unit growth in the PC world next year, which led us to say, hey, we think revenue will be above our long-term framework view for the next year. And it's a combination of that kind of installed base dynamic we talked about. It's going to play out. The customers you and I talked about together of balancing enterprise budgets with demands of those end users that we see that opportunity. It's going to materialize. We're going to have those units show up, and we like the portfolio we have. You got to be passionate about putting together great products and we're going to deliver that for our customers.

Okay. I guess a minute or 2. So maybe just the last one here. Can you talk a little bit about kind of where you're investing, whether it's organically or inorganically? It sounds like it will be around those value segments of the business. But any color you can provide like where you really want to put some capital behind it to really maximize the opportunity?

Yes. We always look externally at capabilities we could add. But if we did capital, and we're talking about acquisitions, anything we did in the space would be at the tuck-in kind of variety, have to fit well with our strategy. When I look at our CSG business, though, as I see the opportunities on great products, AI capability, the ecosystem around the PC, we really believe we can capture that kind of growth and extend our leadership, capture new growth opportunities organically. So you've seen us do that, Tim, with the peripherals business. We've expanded our offering there. We've hired people with great industry expertise. We've built a road map and are building a road map that's very competitive in that space. It's a $40 billion TAM that we're going after. We did the same thing in the displays space, a leadership position today. A $30 billion TAM opportunity. So we always look at other acquisitions that makes sense that [indiscernible] difficulty to us. But in the CSG space, we've been able to do a lot of that in organic, and we anticipate that being the case in the future.

Okay. Great. Well thank you very much for your time. I really appreciate it. Thank you everybody for joining.

Thank you, Tim. Thank you.

Thank you.