Good afternoon, and welcome to the Fiscal Year 2022 First Quarter Results Conference Call for Dell Technologies Incorporated. I’d like to inform all participants that this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies Incorproated. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I’d now like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Thanks, Jermiria, and thanks, everyone, for joining us. With me today are our Vice Chairman and COO, Jeff Clarke; our CFO, Tom Sweet; and our Treasurer, Tyler Johnson. Our press release, financial tables, web deck, prepared remarks and additional materials are available on our IR website. The guidance section will be covered on today’s call. During this call, unless we otherwise indicate, all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, earnings per share, 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. Additionally, I’d like to remind you that all statements made during this call that relate to future events and results 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 and SEC filings. We assume no obligation to update our forward-looking statements. Now, I will turn it over to Jeff.

Thanks, Rob. Hi, everyone. Thanks for joining us today. We are coming off a strong first quarter and a successful Dell Technologies World, where we connected with more than 60,000 customers, partners and stakeholders. We made important announcements on APEX, our edge strategy, and social impact and sustainability commitments, and the response was fantastic. We are energized by the positive feedback on our strategy, innovation and opportunity. One of the real silver linings of last year is that digital transformation has been accelerated. Our world is running on data highways now and we are experiencing everything technology makes possible, deeper, data-driven insights, connectivity and even a deeper human connection. Technology is no longer the IT department, it’s the entire organization. It’s how you enable everything to deliver better business outcomes. And customers are looking to Dell Technologies as their strategic partner to help run their business, deliver their outcomes, capture their opportunities in the data era. For example, a large Fortune 500 retailer made VxRail and VMware Cloud Foundation, the hybrid cloud standard for workloads in their data centers. Another example is Honeywell, who is helping its customers transform day-to-day business operations through software-as-a-service solutions for the industrial sector. Built on Dell infrastructure, Honeywell Forge Connect is the edge interface for Honeywell Forge Enterprise Performance Management. Turning to the financial results. We started the year strong, delivering record revenue in Q1 of $24.5 billion, up 12%. These results are driven by the do anything from anywhere economy, where technology enables connectivity and outcomes for all of us. Instead of going to work, school, entertainment or shopping, it all comes to us through our PCs. That need for connectivity was demonstrated in the record demand last year and has continued into this year. Our Client Solutions Group delivered record revenue for…

Thanks, Jeff. I am pleased with our performance as we started the year strong with double-digit revenue growth, operating income growing faster than revenue and strong cash flow generation given the strength in the business. Revenue for Q1 was a first quarter record at $24.5 billion, up 12%, driven by growth in all 3 business units, especially CSG and an improving ISG business. Gross margin was $8 billion, up 9% and 32.7% of revenue. Gross margin as a percent of revenue was 70 basis points lower, primarily driven by a 370 basis point revenue mix shift to CSG. Operating expense was $5.3 billion, up 3% year-over-year. We are continuing to prudently manage our expenses. But as we talked about last quarter, some costs are coming back into the P&L. Operating income was also a first quarter record at $2.7 billion, up 26% and 11.1% of revenue. We saw improved profitability in all 3 segments, led by CSG. Given the progress we’ve made on paying down debt, our interest expense was down approximately $162 million, contributing to an even stronger growth of 59% in consolidated net income to $1.8 billion. Earnings per share, was $2.13, up 59%. Our recurring revenue, which includes deferred revenue amortization, utility and as-a-Service models is approximately $6 billion a quarter, up 12% year-over-year. And our remaining performance obligation is approximately $42 billion, up 15%, which includes deferred revenue plus committed contract value not included in deferred revenue. The growth was driven by a solid performance in hardware and software maintenance and custom as-a-Service solutions. Excluding VMware, Dell’s remaining performance obligation is approximately $32 billion, up 18%. Turning to the business units, our Client Solutions Group delivered another quarter of outstanding results despite industry-wide supply chain challenges. CSG revenue was up 20% to $13.3 billion, driven by…

Thanks, Tom. Before we start the live portion of our call, I am sorry to share that Jeff will not be able to join us for the Q&A session. Regretfully, he had an emergency in his extended family this afternoon. Next, we ask that each participant ask one question to allow us to get as many of you as possible. Jermiria, can you please introduce the first question?

We’ll take our first question from Jim Suva with Citigroup.

Thank you very much. On the supply constraint side as well as higher memory costs going higher and returning back to work, can you give us some color on that as far as your orders, your books? Are corporations ordering different things post-COVID than pre-COVID? And the component cost of memory, are you able to pass those through? Or is there like a one-quarter lag? Thank you very much.

Hey, Jim. So look, I mean, as it relates to component costs, I’d give you the following thoughts, right? So, obviously, given the – what the environment is with the pace of recovery, the supply situation has not kept up with the demand environment as we think about the need for semiconductors. And that’s an industry-wide issue and clearly an issue that the technology industry is dealing with. Look, we do expect and – we do expect that component costs are inflationary in Q2 and probably are going to be inflationary in the second half as we think about it today. And that’s principally coming out of displays, DRAMs and NAND. We’re not seeing customers at this point in time adjust their configuration frameworks, if you will, in terms of the amount of memory or other types of how they are loading or configuring their systems. That has been a pattern we’ve seen in the past though with past memory cost or price increases in certain components. So it’s clearly something we’re watching. I do think as it relates to pricing, it is our intent that we will price the input cost increases as appropriate, keeping a thoughtful eye on the market and keeping – making sure we’re in a competitive position. So that’s sort of the state of play at this point.

All right. Good. Thanks, Jim. Next question?

Our next question is with Wamsi Mohan with Bank of America.

Hi. Yes. Thank you. Tom, your guide of low to mid-single-digit decline in operating income for next quarter, as we sort of look at that, that would put you roughly flattish for operating income year-on-year, but there are these inflationary pressures that you spoke about in the second half. How should we think about the balance of operating leverage that might kick in because of a recovery in ISG versus these inflationary costs? Is it correct to extrapolate what you’re talking about in 2Q further out in the year? Thank you.

Well, look – hey, Wamsi, thanks for the question. I think about it like this. One, I’m really not going to get into the back half of the year other than - let me give you a couple of thoughts around reiterating perhaps what I just mentioned. One, I do think as we think about component cost increases, we will adjust our pricing as appropriate. We are going to have to work our way through the component supply dynamic situation, and that’s going to be an area that we’re going to have to actively manage as we go through the year. So as I suggested in the – in my comments, I would tell you to take the Q1 revenue framework and move that –bring that forward through your sequential models with some thought around the comments I just gave you around Q2 sequentials. And then, look, from my perspective, I don’t want to get into the back half. So we will update you on our Q3 thinking on our Q2 call. And then we have a scheduled – or we’re anticipating scheduling an Analyst Meeting in September, where we will give you more thoughts on the back half of the year and the go forward.

All right. Hey, thanks, Wamsi. Next question?

Our next question is from Amit Daryanani with Evercore.

Yes. Thanks for taking my question. Tom, I was hoping we could just maybe talk a little bit more on the free cash flow side. It was a lot more positive in the April quarter versus at least what my model had, which is more neutral maybe. So maybe just talk about what drove that performance in the April quarter? And then I don’t expect you to give me a full fiscal 2022 outlook, but what are the two or three puts and takes we should consider for the rest of the year from a free cash flow generation basis, especially given how strong April was?

Yes. Look, I’ll answer half of that question, and I’ll ask Tyler Johnson to jump in as well, our Treasurer. So the performance in cash for Q1 was quite strong. And you’re right, our seasonal pattern is typically a use of cash in Q1, given some of the dynamics of the business from a seasonality perspective and bonus payouts and things of that sort. Given the strength in the business though quarter-on-quarter, we did see strong cash flow generation in the quarter. And I think coupled with working capital management, the discipline that we’ve shown over the last number of years around working capital, we – I was very pleased with the cash performance. Tyler, what would you add, comments, thoughts about the environment from a cash perspective?

I’d probably just add, we obviously benefit as we get this higher mix of CSG because that typically has shorter terms. So there is a benefit there. And look, our collections teams did just an outstanding job, so that was great. Just as a reminder, too, and as you compare it to a year ago, we did have a COVID impact last year. I think that was somewhere around $900 million. But look, as Tom said, it was a great cash flow quarter. We don’t guide forward on cash flow. But as I think about the rest of the year, at least as I think about next quarter, Q2 and Q4 tends to be our stronger cash flow quarters. And I am expecting Q2 to be a good cash flow quarter.

All right. Great. Hey, thanks, Darya. Thanks. Next question, please.

Our next question is from Katy Huberty with Morgan Stanley.

Yes. Thank you. Good afternoon. Tom, last quarter, you said there wasn’t yet confidence in the pace and timing of ISG recovery, which influenced your view of profit declines for the year. Can you just update us on where your visibility and confidence in ISG revenue recovery is today versus 90 days ago? And if it recovers, as it’s started to in the first quarter, does that give you a possible path to profit growth for the year if you execute through the supply dynamics you talked about?

Yes, Katy. I was pleased with the progress that we made in ISG in Q1, overall, revenue of $7.9 billion, up 5%, operating income a little bit up against a year ago, but headed in the right direction. We saw server velocity improving as the demand for compute accelerated, and servers and networking were up 9%. So, pleased with that. IDC, as you would know, has a slightly positive sort of spin on server revenue growth for the year; saw improvement in storage with flat year-on-year, which is obvious from a revenue perspective, but improvement from Q4; really pleased with the progress we’re making in midrange. HCI continues to be strong. PowerStore receptivity is – from a customer base perspective, has been good. And we’re seeing net new buyers increasing in storage. So Q1 was positive. As we look out to the rest of the year, again, while I don’t want to forecast the rest of the year, we will continue to see how the trends shape. We are reasonably optimistic that the IDC forecast for servers will – and storage continues to – will continue to be positive as it is in Q2, and we will continue to see progress there. So I think as we get to the back half of the year and we get through Q2, we will give you our perspective on the back half in terms of, does ISG velocity continue. We do – we – at this point, we believe that it is a positive trend and that we expect it to improve as we go through the year, as we have said in the past. So overall, cautiously optimistic about the year for ISG.

Hey, thanks, Katy. Thanks, Tom. Next question, please.

Our next question is from Toni Sacconaghi with Bernstein.

Yes. Thank you for taking the quarter – the question. I have a question about your reselling relationship with VMware today. So I think in your last fiscal year, you resold about $4 billion worth of VMware product. A small minority of that was along with Dell product. Most of it was just distributing VMware product to resellers. What is the financial arrangement when you resell VMware products? So on that $3.5 billion that’s not affiliated with Dell product, do you receive a commission? And is there any sort of internal revenue transfer deduction? And then when Dell and VMware are separate, will Dell still be receiving commissions or what will be the financial arrangement and incentive for Dell to continue to act as VMware’s largest distributor?

Hey, Toni, without getting into a lot of detail there, you – as you would know, today, any – VMware is consolidated. So those – the revenue flowing through Dell is effectively eliminated as we consolidate VMware. I would harken the relationship on the $3.5 billion that you referenced to distributor arrangement, where it’s a distributor-margin-type framework. And that’s the intent as we move forward. Obviously, post spin, we’re not eliminating the VMware revenue and related margin. But as highlighted in the commercial agreement framework, as we chatted about in April, we do expect that through our sales incentives and our selling organizations that we’re incentivized to sell VMware. We still think about VMware as part of the – from a first investor relationship given our tightly coupled solution capabilities that we have. So we’re going to continue to move forward with VMware and push that as appropriate, but it’s effectively a distributor arrangement.

Thanks, Toni. Next question?

Our next question is from Steven Fox with Fox Advisors.

Hi, good afternoon. I was wondering if you could dig in a little bit more into the storage orders. I think you mentioned up 23%. How does that sort of play into your thinking for the rest of the year? Any other color on the mix or how it’s trending with certain customers would be helpful. Thank you.

Yes. Steven, it’s – what – if we just think about storage, storage revenue for first quarter was $3.8 billion, flat year-over-year. What I highlighted though was as we look at some of the families within the storage framework, we were very pleased with midrange storage up 23%. We’re pleased with our HCI performance. We saw slower growth but still growth in our unstructured and our Isilon PowerScale offerings. Power – the high end, which is a smaller portion of the market, was soft for us. We’ve highlighted that in the past couple of quarters. But as you recall, if you think about where from a total TAM addressable market it is, the midrange storage is the biggest area of opportunity for us. And we’re pleased with the dynamic and the velocity that we’re seeing there. I highlighted the fact that storage net new buyers was up 12%. So, pleased with that. Within PowerStore, 20% of the buyers are new storage buyers. And we’ve got about 25% more competitive displacements year-over-year with PowerStore. So we are pleased with the customer receptivity. We just recently announced a software upgrade in terms of – which is our fourth software release for the family in the last year. And that’s – it’s – again, it’s a micro-services and container-based architecture. So it’s – these are non-disruptive upgrades, but the 25% faster performance for mixed workloads, so more automation. So we’re – I think the pace of innovation within the PowerStore framework is continuing to move forward. So having said that, look, we are cautiously optimistic about storage. So we’ve got – we went from a negative growth in Q4 in storage revenue on a year-over-year basis. We now have flat. We need to get it to growth. And obviously, the point here is that it’s got to continue to grow on a more consistent basis. But the overall economic environment and the buying environment and the IT forecasting would suggest that the storage market should continue to be positive for the year, and we will – it’s our intention to take advantage of it. So cautiously optimistic but there is more work to do. We have more work to do on coverage models. We have more work to do to accelerate consistent performance across the entire portfolio. So those are areas of focus for us.

Yes. And so look, the industry forecast are for kind of mid-4% growth for the year, for the overall storage industry. So we feel pretty good about that opportunity going forward, for sure. Thanks, Steve. I appreciate that question. Next question, please.

Our next question is from Shannon Cross with Cross Research.

Thank you very much. Tom, can you talk a bit about how APEX will impact the P&L and maybe working capital or CapEx over time? I realize it’s still early, but as you look at how the subscription revenue and that will flow through, can you just give us some of your high-level thoughts? Thank you.

Hi, Shannon, yes, look, I mean we’re very excited about APEX. And you are right, it is very early in the journey with APEX. We just announced the first set of offerings at Dell Tech World a few weeks ago. But having said that, customer interest has been quite strong, and we’re encouraged by that. But – so – but from a financial perspective, as it relates to the year, I mean it’s clearly – it’s just not going to have a material impact on the year as we think about it this year just given the size of the company that we are. What we are going to watch and monitor is number of new customers coming into APEX to make sure that that’s ramping as appropriate and within our plans. And then as it becomes more relevant to the financial situation, we will begin to give you some framework to think about around that. But you are right, on a subscription and revenue – with a subscription-based offering, clearly, revenue and cash flows are impacted as those – as that business ramps. But I’m confident given our size, our scale, our ability and our strong balance sheet that we will navigate through that as appropriate. But again, we will give you more information on that as the ramp – at the appropriate time as we see the ramp.

Yes. Good. Thanks, Shannon. Next question?

Our next question is from Sidney Ho with Deutsche Bank.

Thanks for taking my question. My question is on the CSG side, clearly very strong results in the first quarter. How are you thinking about the revenue growth for that business for the remainder of the year? And if you can comment on your expectations for commercial versus consumer separately, that would be great. And how do you discount the potential impact from component shortage, which seems to be impacting CSG more? Thanks.

Yes. Look, we’re very pleased with the CSG performance, if I can get those words out. It’s a pretty robust demand environment, and we saw that – we saw strong demand in Q4. We saw it again in Q1, very – overall revenue up 20% to $13.3 billion; 42% growth in consumer revenue, up to $3.5 billion; and $9.8 billion of commercial revenue, up 14% for Q1. So as we think about the future, there is no indication at this point in time that the demand environment remains strong. Now what we’re carefully watching is as we get into Q2 and the remainder of the year is that, as you highlighted, there are component supply and component cost dynamics that we will have to manage and work our way through. I highlighted in my prepared remarks that component costs in Q2 are going to be inflationary. We will price that inflation – that input cost to increase as appropriate, and we will have to watch to make sure that the – we will watch to see of any impact on demand. And that’s really the framework we’re going to have to work our way through as we go through the year. If you look at IDC forecast, they are forecasting a very robust demand environment for calendar ‘21. I think something appropriately like 355 million, 357 million units, 18% growth, if I recall properly. And so we’re optimistic about the business, but I do think that the supply dynamic in terms of availability is going to be – have to be something we’re going to have to navigate. And that’s going to be with us. Our best point of view is that supply constraint continues on into next year. And our supply chain team is working that daily to ensure…

Hey, thanks, Tom. Thanks, Sidney. Next question?

Our next question is from Rod Hall with Goldman Sachs.

Hi, guys. Thanks for taking me in. I wanted to come back to this net debt-to-EBITDA target you mentioned, Tom, of 1.5x. If we look at this cash flow glide path and all the other pieces of cash coming to you guys in the deal and Boomi and so on, I mean that seems like a lot of cash that frees up for Dell Technologies shareholders to be distributed or maybe it’s M&A. But I wonder if you could just comment a little bit on the timing on that. And then also, what are your priorities? Is it – do you have any thoughts on – is it dividend? Is it buyback? How do you prioritize the return of that cash? Thanks.

Yes. Hi, Rod, you are right, if things play out as we presume they will, given the VMware spin and the business performance that we’re seeing, we – there is a substantial amount of cash coming to Dell Technologies. And we’ve highlighted that as – vis-à-vis our adjusted upward target around debt repayment to $16 billion-plus of debt repayment. If those play out as we think about it and we’re investment-grade post the anticipated VMware spin transaction, it does open up the opportunity to broaden out our capital allocation framework. And we’ve talked about this a bit, as you know. I think over the last 5 years, roughly about 90% to 95% of our free cash flow has been devoted to debt repayment. That pivots obviously given the situation or the opportunity we will have later in the year. So we are going to broaden out our capital allocation strategy. Part of that will be a program around shareholder capital return. And that’s a balance between – as we think our way through dividend or share buyback or some combination thereof as well as investment in the business and potentially targeted inorganic M&A activity. I’d offer up that we will provide some more thoughts on this whole area as we get closer to the VMware spin transaction date and give you some frameworks to think about at that point in time.

Hey, Rod, and just to make sure that I heard you correctly, because I thought you might have said net debt. I just want to be clear it’s gross debt at 1.5x.

Perfect. Thanks for that clarification, Tyler. Alright. Nest question, please.

Our next question will come from Matt Cabral with Credit Suisse.

Yes. Thank you. It sounded from the prepared remarks like you guys had a really strong quarter in China. I was wondering if you could just remind us how big China is within the portfolio and maybe speak to the areas of strength that you saw during the quarter there and then just broadly how we should think about sustainability within China going forward?

Yes. Hi, Matt. So, China is roughly, from a revenue basis, about 6%, 7% of consolidated revenue at this point. It’s our second largest business unit. Having said that, it’s – from a percent of operating income generation, it’s much less than that, okay? It tends to be a lower ASP business. And the mix dynamic over there is a bit more skewed towards the client. The sustainability of it – look, I mean we’ve come through a couple of tough years with China in terms of having to reset that business and refocus the business from customer base – refocusing on specific segments of customer base, principally focused on the smaller corporates, medium business, building out the direct selling motion, building out the medium business frameworks over there. Sustainability continues to be an area that we’re thinking our way through. There is obviously geopolitical dynamics we – that you have to work your way through. But the China market is a big market. We’re – we’ve been in China a long time. We’re there to make sure that we can serve the China market appropriately. But we will continue to watch the cost structure over there and adjust appropriately given the business velocity that we’re seeing but reasonably optimistic in the long-term, but it’s an area of continued focus as we – to make sure that we set the business model over there appropriately.

Alright. Thanks, appreciate the question. Alright. Next question, please.

Our next question is from Simon Leopold with Raymond James.

Thanks for taking the question. I wanted to see if maybe you could give us a little bit more help on what’s your thinking is happening currently in your gross margins. And what I’m getting at is really trying to understand what kind of pressure you’re experiencing from supply chain for Dell from things like expedite fees for components or increased prices. So just trying to get a better sense of how to quantify the gross margin headwind you would relate to your supply chain issues. Thank you.

Yes. Hey, Simon, I’m not really going to parse that a lot for you. But I will tell you that, as I highlighted, that we are seeing component cost inflation in Q2 and remind you that Q1 was a component cost deflationary period for us. So we’re moving from deflation to inflation. We have seen increased logistics costs just given the availability of containers. The overall transport costs are up. We have air transports up. Shipping containers are at a premium. So those have all been headwinds into the logistics cost. Now this is what we do every day. So we’re managing our way through it. But to the extent that we’re seeing increased costs there, we are passing those through as appropriate. And there is no signs that these are going to subside anytime soon. I’ll say it like that just given the strong economic environment that we see from a demand perspective.

Alright. Thanks, Simon. I think we have got time for one more question, so…

We will now take our final question from Aaron Rakers with Wells Fargo.

Yes. Thanks for letting me in at the end here. I wanted to kind of build on Simon’s question there. As we think about the ISG segment, a lot of the component costs or a lot of component constraints have been kind of centered, it seems like, on the PC segment. Have you seen constraints in your ability to meet demand in the ISG segment, particularly servers? And if so, how would you characterize kind of the lead times on products or for that matter, kind of backlog building if you are seeing constraints?

Hey, Aaron, I would say it like this for ISG from a server perspective. We really haven’t seen significant supply constraint in the server space at this point. Obviously, some of the input costs are going up around DRAM and NAND. But in terms of our ability to meet demand, we’ve been able to navigate through that. And our lead times in servers are generally on standard lead times. So that environment – the ISG environment to date has been reasonably unaffected by some of the supply chain constraints as we look at it today.

Okay. Thanks. Hey, that’s going to wrap Q&A. I appreciate everyone joining us today. We will be participating virtually in a number of investor conferences and events throughout June and July. So please check the IR website, look for press releases from us for announcements of the upcoming events. Thanks for joining us today.

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