Dell Technologies Inc. (DELL) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Fiscal Year 2020 First Quarter Financial Results Conference Call for Dell Technologies Incorporated. I'd like to inform all participants, this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies Incorporated. Any rebroadcast of this information, in whole or part, without prior written permission of Dell Technologies is prohibited. Following the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I'd like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Thanks, Ian, and thanks for joining us. With me today are our Vice Chairman, Jeff Clarke; our CFO, Tom Sweet; and our Treasurer, Tyler Johnson. During this call, we will reference non-GAAP financial measures, including non-GAAP revenues, gross margins, operating expenses, operating income, net income, EPS, EBITDA, adjusted EBITDA, and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release. Please also note that all growth percentages refer to year-over-year change, unless otherwise specified. Finally, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck. We assume no obligation to update our forward-looking statements. Now I'll turn it over to Jeff.

Thanks, Rob. Good afternoon, everyone. I would like to cover three topics before Tom goes through the financial results. First, our view on the IT spending environment; second, new solutions we have introduced; and third, the current demand backdrop. We are in the midst of a technology-led investment cycle that is accelerating digital transformation. The latest IDC forecast for IT spending through 2022, excluding telecom, supports this view with projected growth to be more than 2x world GDP. That investment is fueled by exponential increase in data and data-centric workloads that are driving better business outcomes alongside in an increasingly diverse and mobile workforce. Our investments in solutions and innovations are pointed directly at this opportunity. We have a differentiated portfolio that is delivering solutions from the edge to the core to the cloud and our customers are taking advantage of the value that Dell Technology provides. This is all clear earlier this month when we hosted 15,000 customers, partners and industry experts at Dell Technologies World. At this event, we unveiled the Dell Technologies Cloud, a new set of cloud infrastructure solutions to make hybrid cloud environments simpler to deploy and manage as customers continue to move towards hybrid cloud environments. We announced a new Data Center-as-a-Service offering. This fully manned solution brings the simplicity of public cloud service consumption to an on-premise environment. This service can be combined with Dell Technologies Cloud platforms or public cloud on Dell Technology Solutions like VMC on AWS to create a singular and seamless management experience across the edge, core and cloud environments. In addition, Michael, Satya Nadella and Pat Gelsinger announced an expanded partnership with Microsoft to enable our customers to extend their on-premise VMware Cloud environments to Azure. And earlier in the quarter, we announced the industry's first jointly engineered hybrid cloud infrastructure stack that brings together VxRail and VMware Cloud foundation to facilitate compute storage and network virtualization delivering the fastest ramp to the Dell Technologies cloud. All of these solutions represent breakthroughs in cloud innovation that enables a flexible range of IT and management options with tight integration and a single vendor experience for purchasing, deployment, services and financing. They provide customers an operational hub for their hybrid clouds on-premise with consistent cloud infrastructure across all cloud types. To advance customers workforce transformation, we announced Dell Technologies Unified Workspace that helps our customers fundamentally change the way they deployed, secure, manage and support their devices. Unified Workspace provides a full PC lifecycle experience and provisioning strategy all powered by the cloud by integrating VMware’s Workspace ONE which enables customers to access any application on any device, anytime, SecureWorks, Threat Intelligence and Detection to prevent and detect and respond to potential security issues and Dell Provisioning and Deployment Services on our award winning commercial PCs. These examples best demonstrate how Dell Technologies is innovating and collaborating across the physical and virtual infrastructure, cloud, PCs, security and services to deliver highly integrated solutions for our customers. And we are just getting started as we build on our leading positions in software-defined data center, enterprise, hardware, security and PCs. Shifting gears to the current demand environment. Our external storage business is healthy, delivering solid year-over-year orders growth. Our sales teams remain optimistic about our portfolio and positioning as we head into Q2 and beyond. In addition, software-defined data center solutions and HCI continue to grow at a healthy clip with VxRail growing triple digits again in Q1. Turning to servers. The industry saw unprecedented growth last year. We planned for slower growth this year, but – demand environment was softer than we and the industry expected. We were consciously more selective on larger server deals during the quarter, particularly in China and we focused on acquiring new customers and balancing topline and bottom line results across the entire server business. The result, a decline in revenue, but with higher profitability. We have built the business to be successful in any environment, whether the market expands or contracts, we expect to outperform the industry, and when IDC releases calendar Q1 share data later in Q2, we anticipate gaining share again in servers. You should expect us to continue to balance growth and profitability. We did that in Q1 and you should expect us to focus on balance in Q2. Switching to our client business. We are seeing continued strength in commercial PCs driven in part by increased coverage and small and medium business and the Windows 10 Refresh. In a growing market, we gained 220 basis points of share according to IDC in calendar Q1. We gained worldwide PC share for the 25 consecutive quarter according to IDC with share up 80 basis points. Longer-term, we remain optimistic about IT spending as organizations continue to invest in software-defined data center as well as IT infrastructure to support their edge and cloud strategies and no one is better positioned than Dell Technologies to help our customers with these needs. With that, I'd like to turn it over to Tom to talk about the Q1 results.

Thanks, Jeff. Our model is focused on long-term profitable growth with the ability to adjust as needed based on market conditions. We are focused on growing faster than the industry and our competitors, growing operating income and EPS faster than revenue and generating strong cash flow over time. We executed against these strategic focus areas in Q1 as we balanced revenue and profitability with market conditions. Revenue was $22 billion, up 2% and our deferred revenue balance increased to $24.2 billion, up 15%. FX was a headwind this quarter, impacting year-over-year growth rates by approximately 280 basis points. Gross margin was up 7% to $7.4 billion and was 33.8% revenue, up 170 basis points driven by lower component costs from balanced pricing in both servers and PCs. Operating expenses were $5.2 billion, up 7% primarily due to investments we have made in our sales coverage and were 23.8% of revenue. Operating expenses were down sequentially consistent with comments on our year-end call. As a reminder, we discussed our expectations that our investments in sales capacity and coverage would add operating expense and that we expect to begin to see the benefit of these investments ramp as we move into the second half of the year. Operating income was up 8% to $2.2 billion or 10% of revenue. Our EPS of $1.45 benefited from strong operating results, but also from the lower tax rate in the quarter. Adjusted EBITDA was $2.6 billion or 11.7% of revenue and $10.5 billion on a trailing 12-month basis. Although Q1 tends to be our lowest cash flow quarter due to revenue seasonality and timing of annual bonus payouts, we generated cash flow from operations of $682 million. Adjusted free cash flow was $116 million. We repaid approximately $400 million of gross debt in the quarter and we have now paid down $15 billion of gross debt since the EMC merger. We remain on track to repay approximately $4.8 billion of gross debt this year. Shifting to our business unit results. ISG revenue was $8.2 billion, down 5%, while storage order growth was solid. As Jeff mentioned, storage revenue was down 1% to $4 billion as we built backlog given the timing of when storage orders were received. Servers and networking revenue was $4.2 billion, down 9%. Recall that we grew 41% in Q1 of last year, we did plan for slower server growth coming into this year, but we did see some slower server growth than we anticipated. This was more pronounced in a few areas, principally China and in certain large enterprise opportunities. We have discussed in the past that we are continuing to focus on expanding the server customer base and we balanced revenue growth and profitability as we went through the quarter. ISG operating income was $843 million or 10.3% of revenue. Operating margin percentage was down 50 basis points due to investments in sales coverage which offset higher gross margins. Our VMware business unit revenue was $2.3 billion, up 13%. Operating income was $614 million or 26.9% of revenue. Based on VMware standalone results reported earlier today, the Company generated license bookings growth in all product categories with NSX up over 40% and vSAN up over 50% year-over-year. CSG revenue was $10.9 billion, up 6%. Within CSG commercial revenue was $8.3 billion, up 13% driven by double-digit growth in commercial notebooks, desktops and workstations. Consumer revenue was $2.6 billion, down 10% as we prioritized commercial mix in the higher end of consumer PCs. We saw better profitability in CSG this quarter due to component cost declines, commercial consumer mix and pricing discipline. CSG operating income was $793 million or 7.3% of revenue. Going forward, we continue to balance revenue and profitability against market dynamics. Dell Financial Services originations were $1.7 billion, up 2%. Turning to our balance sheet and capital structure. We ended the quarter with a cash and investments balance of approximately $9.8 billion. During Q1, we refinanced approximately $6 billion of debt, freeing up fiscal year 2020 cash flow to repay longer dated debt and reduce our larger maturity towers coming due in 2021 and 2023. Our core debt balance ended the quarter at $38.6 billion. Net core debt, which is core debt, less cash in investments excluding unrestricted subsidiaries ended Q1 at $33.2 billion. Please see Slide 13 in our web deck for more detail. We remain committed to maximizing free cash flow, reducing leverage and achieving investment grade ratings. As we head into Q2, we continue to monitor the macro economic environment, the IT spending environment and ongoing trade discussions between the U.S. and China. With the help of our supply chain team, we have navigated the first three China tariff list and are well positioned against the announced tariff increase from 10% to 25%. We have been planning for a potential [fourth list] which could impact notebooks and monitors. There was not a firm target date in place, but we will adjust our global supply chain is needed to minimize the impact to our customers. We do expect component costs to continue to decline through at least the next two quarters though at a lower rate than we saw in Q1. Our direct model and associated lower inventory position provides flexibility relative to our competitors. We will continue to be disciplined on pricing as we moved through the year, but we will also ensure that we adjust as appropriate given market and competitive dynamics. Moving to guidance. Based on Q1 results and our current expectations for the balance of the year, we are trending toward the midpoint of the GAAP and non-GAAP revenue ranges for the year and above the midpoint of our GAAP and non-GAAP operating income ranges. We now expect our GAAP EPS outlook to be better than the high-end of the range, primarily due to discrete tax and other items. We expect our non-GAAP EPS to be above the midpoint of the range for the full-year after taking into consideration, the EPS adjustment we announced in March for refinancing activity. In closing, we are well positioned with one of the strongest portfolios in the industry. We are focused on long-term value creation and we believe that there is no better partner than Dell Technologies to help our customers realize their digital future. With that, I'll turn it back to Rob to begin Q&A.

Thanks, Tom. Let's get to Q&A. We ask that each participant ask one question to allow us to get to as many of you as possible. Ian, can you please introduce the first participant.

We'll take our first question from the line of Wamsi Mohan from Bank of America Merrill Lynch.

Hi. Yes. Thank you so much. Could you just elaborate on the server weakness? Maybe just give us some color on server units versus ASPs? And I appreciate the comment on derisking the business model more broadly from any upcoming tariffs on [list four]. But could you give us some color on what specifically Dell is doing to actually circumvent that and be well prepared in the event that those do transpire? Thank you.

Well, as we go and talk about the server margin that we saw as well as sort of the tariff framework and what we're doing about it. I would remind everybody that as we went through Q1, we did see IDC dropped their mainstream revenue forecast for the market for calendar 2019, I think from 3.4% to approximately 1%. As we thought about the year, this year we also had expected a slower server market. If you think about the velocity in the business last year with I think server and network overall was up 28% last year in fiscal 2019 and Q1 last year was up 41%. So we had planned for a slower growth. I think what we saw was a softer than anticipated growth even off the lower planning assumption. And so our philosophy in this environment, and remember what we continue to talk about is that, we want to run the business for the long-term. We want to grow relative to the market and take share. But that share needs to – that growth needs to be profitable and needs to drive cash. And so that was the framework, we are working our way through as we work through the quarter. As we think of what we saw from a server perspective, there were a couple of thoughts I’d provide for you. One was, we did see softness in China and if you guys recall our Q4 conversation, we had talked about the fact that we’re going to be adjusting our China model given some of the dynamics we saw in China and that sort of played out as anticipated. And then secondly, we also saw some – particularly in the large enterprise space, a handful of deals that quite frankly as they – as we’re looking at them, the profitability profile just didn't make sense to us. So we didn’t participate in that. And so we've balanced as we made our way through the quarter both from a revenue profitability perspective and I think we're pretty disciplined in how we did it. And so, look I feel – given where the market was and given the – what we saw, I think I feel pretty good about how we navigated the quarter there. And again there is demand out there if you want to take it, but sometimes the profitability framework doesn't make sense. And so I think that was the balance that we drove there. I don't know, Jeff, if you'd add anything to that.

I’d add a couple of points, specifically Wamsi asked about ASPs. ASPs on a year-over-year basis on our server business were up. I look at our high value workloads, the portion of the high-end of the business that we have. It continues to grow. I’d remind everybody, I think we said it in our comments, we took share. We believe when IDC reports its share data later in Q2 on the Q1 calendar that we will have gained share again in the server business. And I think that backdrop that Tom painted where there was a slowing in demand is correct, and the soft spots that he mentioned around China and large enterprise are very much spot on. We still think there is a long-term outlook that is very positive for servers and we're going to focus on our relative share position, adjusting to the market conditions. We're going to continue to grow our customer base, which we did in Q1 and we'll continue to drive the business and look after cash flow as we managed that business on a quarter-by-quarter basis.

Great. Hey, we're going to skip that second question, Wamsi and then we can come back to it at the end if we have time, so let's move to the next question.

And our next question is from the line of Shannon Cross from Cross Research.

Thank you very much. Just if you could talk a bit about the strength that you saw in the client margin, how sustainable that is? And maybe if you can just talk overall sort of how you did with servers about what you're seeing in terms of client in general? Thank you.

Hey Shannon, it’s Tom. I think as we thought of – as we look at the clients business for the quarter, I think a couple of thoughts I’ll provide for you. We have said in Q4 as we did our Q4 call a few months ago, that the client operating – our pricing environment was relatively benign. And I would tell you that I think that continued on into Q1, principally given some of the industry chip dynamics that we continue to navigate through. Clearly as we ran the business this quarter, we mixed towards the commercial business that generally pulls a higher profitability profile if you will. And we obviously had some benefit of the component cost deflation that we saw during the quarter. And so as we think about the business, I think there are a couple of things that were still working our way through the navigation of this as we walk into the coming quarters is how do we think about the slowing component costs framework relative to what we saw in Q1 and then our pricing actions as a result of that. And there is sort of some uncertainty around mix and the dynamics of the chips – of the industry chip shortage that we're going to have to continue to work through. So we'll manage our operating margin appropriately. From a demand perspective, we’re clearly pleased with what we saw in the quarter. We're still in – I think we've benefited from the – clearly from the sales coverage expansion that we've done over the last year or year and a half. We also are obviously benefiting from the Win 10 Refresh cycle that continues. And so I think we remain optimistic about the client business for the year and we'll manage it appropriately given some of the dynamics and uncertainties. I think we'll see as we work our way through the year. I don't know Jeff if you would add anything to that.

I'd add a couple of comments. The mix I think is important. When we look at the mix of commercial and high-end consumer, we certainly benefited from that, and we saw our direct business grow at a premium to the market place, which as you know, carries the attach of S&P services and financing which are margin accretive to us. And we’re in a world of favorable dynamics in Q1. No question. I do think as we look at the remaining part of the year, and Tom touched upon this, we have what will become a more consumer second half because we have a consumer mix shift in the second half. We have the possibility of a list four in tariffs that we’ll have to navigate as we go forward. And we certainly have, as Tom mentioned, the ongoing challenges of managing demand and supply based on part availability. So that's kind of how we look at the year, reinforcing what Tom said and a couple of other points to think about.

Thanks Jeff.

And our next question is from the line of Toni Sacconaghi from Bernstein.

Yes, thank you. I just wanted to follow-up on servers. And I was wondering if you could kind of comment around linearity through the quarter. Did you actually feel like the demand environment got progressively worse over the course of the quarter? And part of the reason I asked that is you said that storage was very backend loaded, which would suggest that demand didn't really get worse for storage. So maybe you can contrast why you think enterprise demand in servers was weakening and not in storage and whether there were different linearity patterns that you saw in storage versus servers, and then what are you modeling going forward for servers? Do you actually think the demand environment comes back or do you think it continues to soften? What is sort of baked into your expectations for Q2 in your reaffirmation revenue guidance for the year?

Hey Toni, it’s Tom. So from a linearity perspective within the quarter, I would offer this as it relates to server. We saw – early in the quarter, we saw softness in the server demand velocity if you will. And that softness lasted maybe the first half of the quarter to something of that effect. We took some pricing actions along the way to ensure that we’re in the right price position across the globe. And we did see demand on server begin to pick up as we move through the latter part of the quarter. I do think that we'll have to continue to watch it in the sense of some of the weaknesses that we call it out. I think China continues to be a headwind, given the dynamics that we're seeing over there. I will tell you outside of those – couple of soft spots that we called out, in general, we saw a reasonable server demand in some of the other areas of the globe. And we're not in the business of forecasting the market growth per servers. And I'll point back to – we do think that the server, according to the IDC, the server market has softened and we're going to navigate our way through that. And part of the reaffirmation of the guidance or the mid range – midpoint of the guidance if you will and revenue was around, if you look at the broad capabilities and solutions set that we have with the business to the extent I have softness in certain areas also have strength in other areas. And so we're balancing our portfolio, managing the business, I think putting the framework that I previously articulated as we move through the year.

Toni, as far the question about relative to the storage, I do think that from a linearity standpoint, storage does tend to be more backend loaded, fairly consistently…

No it is, I mean to emphasize what Tom said. Look, we saw the business decelerate through. As Tom said, the first portion of the quarter, we saw a rebound. We took some pricing actions along the way. We saw the businesses that would respond to list price actions respond appropriately. We think there is certainly inventory that's being digested in the ecosystem as a whole. Clearly, last year, there was a very high growth for servers and I think we're seeing some of that being digested to the year. We're seeing some customers waited for Cascade Lake and now that we have Cascade Lake shipping. We're seeing a nice ramp to the new microprocessor technology. So I think that's encouraging. And then again you saw in our storage business and what Tom mentioned is a build up towards the end of the quarter, which is historically what we see in our largest accounts. And we saw a nice steady state through our commercial business of our storage demand. And VxRail continues to do well as a hyperconverged software-defined storage offer in the marketplace.

Okay. All right. Thanks, Jeff. Thanks, Toni. Ian, you want to go to the next question.

Certainly. And our next question is from the line of John Roy with UBS.

Great. Staying on the storage theme, can you give us some color on the mid range? Are you seeing people waiting for your new product refresh? And we were expecting you to do a little bit better on storage. Can you give us any more color on the competitive environment within storage?

Sure, I'll start. John, this is Jeff. And then I'm sure Tom will layer in as well. We tend to look at the storage market opportunity through the price band. And when I look at our price band performance across our portfolio, I'm quite pleased on an order spaces. I mentioned orders had healthy growth for the year. We grew in the high end. We grew in – or the high price bands, that mid range price bands and the entry level price bands across our variety of products, whether that's the PowerMax product, our Isilon Unstructured product, our Unity product, and we’re pleased with that velocity if you will of our core storage array business. I don't look at it as a mid range product or category because again it's price bands. We sell the PowerMax 2000 as an example and what some would call mid range price bands. Unstructured products are sold in mid range price bands. So we tend to look at our performance across all of the portfolio. And as I said, the order spaces was healthy growth for us.

I would add, John, given in the remarks that I made that, look, we did build backlog in storage given some of the hub storage path order of the…

Order of the linearity.

Because of the linearity of the storage orders that came in. So okay, I think we feel good about the solid order demand we saw in storage and we continue to press on. I think, we've talked a lot about the fact that Jeff and his team have refreshed the product line. We've got new storage capability coming out towards the end of the year. So we feel good about the positioning of the overall solution sets that we're offering.

Yes. The capacity and coverage that we've put in place is coming online. It's coming up the productivity curve. We're encouraged by that. The product line continues to get stronger where we were a year-ago versus today is literally night and day. At Dell Technologies World, we announced extensions of Unity with a Unity XT, which is a huge performance, boost and it's very competitive in those mid range price bands. I look at what we did with storage class memory, the first to market and our high-end storage arrays. And then certainly we've talked consistently about the next-generation mid range product towards the end of the year and that remains on target.

All right. Thanks John.

And our next question is from the line of David Eller with Wells Fargo.

Good afternoon. My main question was on free cash flow, when you exclude VMware and the DFS business was negative $1.1 billion, kind of one of your toughest performances in sometime. So can you talk about the drivers of that drag in the quarter? And then just looking for some additional color on some of the prior questions you've talked about servers in China and with large enterprises. Can you just talk about China more holistically, kind of the IT spending environment overall and then from the large enterprises. What are you hearing there from large enterprises a sense of more caution related to the tariff and trade war? Any color would be helpful. Thanks.

Hey David, this is Tyler. So maybe I'll jump in here and talk about the cash flow. So yes look, I mean typically Q1 is our weaker cash quarter. I would tell you that this was pretty much in line with expectations and that's partly why I felt comfortable paying down the $400 million, which quite frankly was not something I really planned on doing when we started the quarter. If you look at the comparison relative to last year, for example, I mean really one of the bigger drivers is that we had a pretty large compensation payouts this quarter, which was driven by the bonus. So as I look forward and I kind of look at where I am today and I think my expectations for the rest of the year, I mean as Tom said during the talking points that I feel good about us paying down the $4.8 billion. So we're on track. I'm happy, but if you think forward by the end of the year and you look at how our debt maturity towers are going to look, it's going to look much different than where we started before we did the refinancing. So feel good about kind of where we're going and so everything is on track.

As it relates to your second part of that question, which was around China and what we're seeing in China. Look, I would tell you that that obviously it's an important market for us. It's our second largest market. I think we in the past, said its high-single – in terms of the revenue mix, in terms of the whole, its high-single digits. We obviously have a – we think a good relationship and a good business there. But clearly the U.S., China trade tensions are a bit of an overhang on the business. We did see more competitiveness in the market and principally in the server space there this quarter given say then a year-ago, where part of that is I think the component cost framework year-over-year. And what we saw were some of the opportunities there and the pricing around those just didn't make sense from a profit framework that we’re driving or trying to execute too. We also had talked about in the past relative to the China business on servers that we wanted to diversify that buyer base and we've been working on doing that. So I think we balanced with the business with what we saw in the market and what we thought was made appropriate since. Absent servers though, I mean we're pleased with the commercial client growth there. We're pleased with the storage growth in China. And so again, this is one of the things that we'll have to continue to watch that business as we move forward through the year and adjust as appropriate given what we're seeing in the market and in the broader macro dynamics.

All right. Thanks Dave.

And our next question is from the line of Steve Milunovich from Wolfe Research.

Thank you. Could you explain your cloud strategy and the impact that you expect on the Company? You've got to VxRail integrated with VCS, you've got the Dell cloud platform, you've now got the Azure relationship, but Pat’s kind of gone out his way to say, hey, our number one partnership is with AWS. Could you kind of talk about what the strategy is? And then are we going to see most of the benefit of that in a VMware or on the Dell side as well?

Sure. I'll be happy to talk about the strategy, Steve. Look, we made a big series of announcements that Dell Technologies World, a handful of weeks ago and we talked about the Dell Technologies Cloud, and we specifically talked about where you could build your own cloud platforms based on our HCI and CI stacks with VMware's Cloud Foundation. So for those organizations that want to deploy their own on-prem cloud, hybrid cloud, and have the consistency of management and automation, we provide the tools for high levels of integration to do that with our VxRail and our VCF product – or I should say VMware's VCF product. And I think that is very much a differentiated offer. You'll see us continue to build around that. We will add more capability. We talked about extensions of that platform into our primary storage arrays and you'll continue to see us be able to enable our customers to build edge deployment and core data center deployments around that. Then the other offer that we announced was our data centers a service. So basically the ability to have a public cloud experience on-prem. So your own private cloud delivered as a service in your own private data center or on the edge of your network, fully managed by us, offered as a subscription by us. It's built on VxRail and VMware Cloud Foundation. We install it. We manage it, and cut – and just like any other cloud service that a customer is consuming today. And then we also extended our cloud strategy with the announcement that we made with Microsoft that essentially we allow customers who want to use public cloud and public cloud services. VMware software-defined data center running in the cloud, including the AWS, which is already in the marketplace today. And then what we announced at Dell Technologies World, VMware services for Azure. We're pretty excited about that. We believe that gives customers a wide range of capabilities in this multi-cloud world. We see customers today deploying on average five different cloud architectures today. They want consistency and management and automation and how to deploy and how to provision? What we announced and what our strategy is to allow VMs and applications and containers to move from the edge to the core data center to the public cloud. All orchestrated by us, specifically the VMware capability and then building highly integrated infrastructure products in that to help our customers. That's the strategy that we spent the vast part of Monday and Tuesday on at Dell Technologies World talking about. Does that help?

Well, as VMware?

I didn't hear that last part of the question.

It sounds like Dell hardware should benefit from this as well as VMware?

The answer is it isn't highly integrated solution to us. Certainly when you look at the managed service, it's actually a Dell Technologies managed service, which has VMware components and Dell EMC infrastructure components. And if you think about the build your own or build it as a platform, clearly we will benefit from VxRail and that appliance and the IP that we put in that with a highly integrated offer with our colleagues VMware’s Cloud Foundation product.

So you would expect to see the benefits showing up, both at Dell level, Dell EMC level as well as at a VMware level. Now obviously some of that will depend upon the mix of what the solutions set is that's being purchased, but in the extension of services that we couple around that that we'll be able to have a broad and rich set of capabilities around both the on-prem or the managed – built on-prem or managed on-prem versions.

All right. Good. Well, thanks, Steve.

And our next question is from the line of Katy Huberty with Morgan Stanley.

Yes, thank you. A gross margin was up sequentially despite the mix shift towards low margin PCs away from some of the higher margin businesses, which is speaks to your ability to capture the volatility in commodity prices better than your competitors. So I guess the question is how much longer would you expect to benefit from particularly lower memory prices and as some of your high margin segments come back seasonally? Could we see gross margins above the level you posted in the first quarter in 2Q and 3Q? Thank you.

Hey, Katy, it's Tom. So, one – I thank you for recognizing that. We do have a broad portfolio, you're right. And we pivoted and managed the business appropriately given the dynamics we saw in the market at least in our opinion we did. As it relates to margin, we do think that component costs are – we do see deflation happening in the component cost environment over the next couple of quarters as we highlighted in our talking points. We also think about the fact that the commercial client business will continue to – in our opinion to benefit from the Win 10 Refresh cycle that's going on. And given the chip shortage, we'll have to navigate through that. So in terms of [indiscernible] do we get a margin expansion out of that? I would point you back to, as I provided in some guidance comments and part of my talking points that we do expect now to be trending towards the above the mid range on operating income in non-GAAP EPS. So I think that's how I would anchor you on that. We'll continue to manage it. The unknown is here, Katy, around the impact of trade and tariffs if that worked or come to fruition. And how would that potentially have an impact on demand. I think we feel good about the work that the supply chain team has done in terms of mitigating or mitigating – potentially mitigating the impacts of lists four, but that is a bit of an unknown. And then we'll have to see how the pricing environment behaves as we move through the year. And so again, we tried to give you some perspective, but I would again point you towards look at the operating income framework that we laid out for you as part of the part of the call.

All right. Thanks, Katy. Go to the next question, Ian.

And our next question is from the line of Rod Hall with Goldman Sachs.

Yes. Hey, guys. Thanks for the question. I guess I wanted to just clarify the timing of the change in demand that you've seen because the tariffs stuff, the trade stuff kind of, let's say blew up in late April and yet it sounds like what you're saying in response to some of the prior questions on linearity is that you saw demand weakness earlier in the quarter? And then you made pricing changes and then that seemed to cause demand to perk up late in the quarter, which it almost sounds like demand was weak prior to some of the trade news that went the wrong way. So I just wonder if you'd comment on what you think with going on there early in the quarter when demand was weakening. Do you think macro is, I guess a little bit impaired – before this all came up or do you think more anticipating and again trade outcome?

Hey, Rod. It's Tom. Let me frame this a little differently for you. We're talking about a couple of trends here that we saw in the year. I would tell you that our commercial client business was strong throughout the quarter. So that didn't – that was relatively strong through the quarter. And so the trade conversation if you will – it wasn't an influencer in that from what we can tell. The server conversation we had, which is what we said was soft in the first half of the quarter and picked up in the second half, I think you need to separate that a little bit from the trade and tariff conversation, right. What we saw there was a relatively soft February and first half of March in servers. We made a series of lists price moves to try and ensure that we were in the appropriate price position in early to mid March and we began to see better velocity in the – what I would call the transactional run rates server businesses as we worked our way through the quarter. I do think we saw – we did see as we said in China and in some large enterprise, some very competitive pricing or some pricing on some of these large deals that didn't make sense to us. Again, I think you've got to separate that from the trade and tariff conversation. So what we're trying to articulate, maybe not doing a great job on is to say as the server market clearly was softer than what we expected it to be. And so we spent a quarter on server sort of managing the balance of where do you push on revenue, where do you not push on revenue because the margin framework just didn't make sense. And at the end of the day, we opted towards a little less revenue and the profitability framework that we delivered. So that's how the quarter set up. And then storage velocity, which is typically has a more back-ended linearity, sort of follow that same linearity through the quarter. So the overhang here are the – the macro dynamic around trade and tariffs is one we're watching just because of you think about the impact on business confidence, consumer confidence, you think about the impact on our domestic China business. Those are the dynamics that we're also keeping our eye on. Our domestic China business, the server impact there, we were soft in servers in the China business. Some of that by design as we stepped away from these large deals that didn't make sense to us from a profitability perspective. However, on the other hand, we saw a reasonable demand growth and revenue growth in client and in storage in China. So the domestic business in China was a little bit of a mixed bag. So hopefully, I helped you to frame this a little bit better as we think about – as we thought about the dynamics that we managed our way through during the quarter.

Yes, Tom, I would add, and again in our mind, the trade, tariff conversation is very different and separated from the server velocity that we've been talking about. We started and I think we both mentioned it in our Q4 call about China servers and the slowing of our China server business. So we saw that coming into the quarter. And again it's very separated from the tariff conversation that we've been having in and out of the conversation today. That velocity I think we saw – or that lack of velocity we saw continues through the quarter in Q1 in China.

Great. All right. Moving to the next question.

And our next question is from the line of Jim Suva from Citigroup.

Thanks very much. Keeping on the server commentary, you mentioned China a lot. Was the softness exclusive to China? And if so, would you expect it to percolate to other regions? And if not, why would it not or what so unique about that market? Thank you.

Hey, Jim. This is Jeff. I'll take a swing first then Tom can come in over the top. I think we've been trying to consistently deliver a message – the China velocity or lack thereof was primarily China as it picked up. But secondly and equally important, isn’t large enterprise a handful of deals that are our opportunities if you prefer, is where we saw the significant slowdown in our business. I think Tom mentioned earlier and the other parts of our server business, we had growth. But it was isolated to our China business and those handful of large enterprise opportunities, where Tom mentioned about the economics of those and the aggressive pricing in the marketplace for those opportunities was below our profit threshold.

Yes. And Jim, it’s Tom. I would just add to that. Look, again we're going to manage this business in a way that makes sense. We obviously want to grow. We want to grow relative to the market. We believe we've taken – we'll take share again when the results get posted next week in terms of the server overall marketplace and we'll balance the revenue and profitability profile as we work our way through the market dynamics. And so we had – we saw a reasonable growth in other parts of the globe and we'll continue to manage the business appropriately.

I'd come back to relative share position, gain share. We grew our customer base and we balance given the softer market revenue and profit, I think in a very solid way.

All right. Great. Thanks, Jim.

And our next question is from the line of Matt Cabral from Credit Suisse.

Thank you. Tom, you touched on this in response to an earlier question, but just wondering if you talk specifically about the impact that tariffs had on margins in the quarter and just help us think about what you factored into the full-year for the new 25% rate and just any potential actions on the outstanding goods not currently covered?

Thanks, Matt. So from what we saw, we don't believe tariffs had a substantial impact or significant impact on what margins that we saw in the quarter.

No, we successfully mitigated the first three lists.

We mitigated the first three lists. If we in fact get a raise in tariffs from 10% to 25%, we think the mitigation strategies that we put in place continue to sustain the offset or the – mitigate the impact of the tariffs. If we think about list four, we have strategies in place given our global supply chain and in our flexible supply chain. We have over 25 manufacturing facilities around the globe that we believe we'll be able to mitigate the substantial majority of that impact. So if we couple that with the guidance framework and ranges that we provided, we feel comfortable that we'll be able to navigate our way through these – through any – through the tariff conversation absent the one comment I made earlier, which is I do think if you were to see these tariffs enacted, we'll have to see what the overall effect is on consumer and business confidence relative to the demand environment. That's the one thing that's a little hard to model right now. But in terms of our cost base and what we should be able to do, I think we will be able to mitigate the vast majority of the impact.

Great. All right. Thanks, Matt. Ian, I think we've got time for one more question.

Our final question comes from the line of Simon Leopold from Raymond James.

Thank you. I wanted to maybe see if we could step back on macro apart from what's going on, on tariffs. And I think what I'm struggling with is a number of your peers and competitors selling into the IT space have cited various companies, specific reasons for a weaker sales and execution. But it seems if we net it all out that that – and I'm trying to stay apart from the tariff issues, we are seeing some softening in enterprise demand in Europe and the U.S. I'm wondering if you could maybe give your perspective from how you maybe seeing this differently or what you're seeing in terms of these macro changes. Thank you.

Yes. Look, I mean if you just step back and think about what we see macro, there's clearly dynamics in the macro environment, right. So besides the trade and tariff conversation we've been having, you've got Brexit overhang, you've got political dynamics going on, but step back and think about the underlying IT technology investment trends, right. There is an investment cycle happening and in fact you believe the sort of the IDC framework is 2x GDP over the next number of years. And if you looked at the IDC forecast, you would see that the IDC technology investment cycle as a calendarized it by year actually the technology spend IDC forecasted to dip slightly this year, which is essentially, I think what we're seeing is a little bit of softening in the environment. I think that's undeniable. What we're trying to convey is as we manage the business in the broad set of capabilities and solutions that we have, we’re pulling various levers as we go through the quarter around managing for both growth, where we think growth is there to get that makes sense that generates profitable growth, that generates cash versus – push on growth and go by revenue with no margin or negative margin, which you can do in these business – in some of the areas. So what you're hearing us articulate is, we grew on a non-GAAP basis, revenue 2%, we built deferred revenue balances. We had a very strong client quarter. Storage demand was good. Yes, there was softness in the server environment. That's just something we'll have to continue to navigate through, principally contained in China and in some of those large enterprise, handful of large enterprise opportunities. And so I think our job is the leadership team and the management team is to execute our way through those dynamics. And that's what we'll continue to do as we were in the Q2. So look, we'll have to see how the year unfolds. You obviously heard that we still like the year the framework that we laid out at the beginning of the year. We pointed you toward the midpoint of revenue of that revenue range from a revenue framework perspective to think about and we pointed you above the midpoint of the operating income and EPS. So obviously we'll keep our eye on this and adjust as appropriate as we go through the year, but we remain optimistic about the opportunities that we have and our positioning in the market.

Yes. I appreciate it. Thanks, Tom, and thanks, Simon. We'll have an opportunity to revisit this as we get to the second quarter, the end of the second quarter when we announce the results at the end of August. And then it's our current plan to have a short meeting up in New York in the September timeframe to talk more about the strategy. So we'll continue to update the Street on kind of our view, not only on the Company, but also on the overall environment and the macro and what we're seeing. So with that, we'll wrap it up. I want to let you know that we'll be at the Bank of America Merrill Lynch Global Technology Conference in San Francisco on June 5. We'll be at Barclays High Yield Loan and Bond Conference on June 6 in Colorado Springs. And we'll also be up in Toronto, the following week on June 11 and this would be members of the Investor Relations and Treasury team. So look forward to continuing the dialogue with everyone. Thanks for joining us.

This concludes today's conference call. We appreciate your participation. You may now disconnect at this time.