Dell Technologies Inc. (NYSE:DELL) Q4 2024 Earnings Call Transcript

Dell Technologies Inc. (NYSE:DELL) Q4 2024 Earnings Call Transcript February 29, 2024

Dell Technologies Inc. beats earnings expectations. Reported EPS is $2.2, expectations were $1.73. DELL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Fiscal Year 2024 Fourth Quarter and Year-End Financial Results Conference Call for Dell Technologies Inc. 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 Inc. Any rebroadcast of this information in whole or in 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 like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Rob Williams: Thanks, everyone, for joining us. With me today are Jeff Clarke, Yvonne McGill and Tyler Johnson. Our earnings materials are available on our IR website, and I encourage you to review these materials and the presentation, which includes additional content to complement our discussion this afternoon. Guidance will be covered on today’s call. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP gross margin, operating expenses, operating income, net income, diluted earnings per share 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 our press release.

Growth percentages refer to year-over-year change unless otherwise specified. 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 and our SEC filings. We assume no obligation to update our forward-looking statements. Now I’ll turn it over to Jeff.

Jeff Clarke: Thanks Rob, and thanks, everyone, for joining us. As I reflect back on this past year, it’s increasingly clear that data and technology are essential to everything our customers do, and Dell is well-positioned to thrive in this environment. Our FY24 revenue was $88.4 billion, with operating income of $7.7 billion and EPS of $7.13. In a year where revenue declined, we maintained our focus on operational excellence, delivering solid earnings per share and outstanding cash flow. FY24 was one of those years that didn’t go as planned, but I really like how we navigated it. We showed our grit and determination by quickly adapting to a dynamic market, focusing on what we can control, and extending our model into the high-growth AI opportunity.

Our operating margin rate improved as we delivered higher gross margins with disciplined operating expense management. We focused on cash and working capital improvements, generating $8.7 billion cash flow from operations, and we improved our cash conversion cycle to negative 47 days exiting the year, a 15-day improvement. We delivered on our capital allocation commitments, and we have returned $7 billion to shareholders since the initiation of our dividend. Earlier today, we announced an increase to our dividend, which Yvonne will cover in more detail. We have positioned ourselves well in AI. We’ve already started to benefit from the momentum we’re seeing. We saw strong demand continue for our AI-optimized server portfolio, including our flagship PowerEdge XE9680, which remains the fastest-ramping solution in company history.

We have just started to touch the AI opportunities ahead of us, including broader adoption of AI by enterprise customers and the projected growth in unstructured data where we are well-positioned with industry-leading storage solutions. We believe the long-term AI action is on-prem where customers can keep their data and intellectual property safe and secure. PCs will become even more essential as most day-to-day work with AI will be done on the PC. We remain excited about the long-term opportunity in our CSG business. Look for us to make a number of new product and solution announcements at Dell Technology World in May that will help customers get started with AI and make it easy. Turning to Q4, we saw positive signs in the business as we exited the year, but enterprise and large customers remained cautious with their spend.

Our Q4 execution was solid given the environment with ISG faring better than CSG. We delivered revenue of $22.3 billion with strong profitability and cash flow. Operating income was $2.1 billion. Diluted EPS was $2.20, and cash flow from operations was $1.5 billion. In ISG, traditional server demand grew year-over-year and a third consecutive quarter of sequential growth, and storage demand grew above normal seasonality, though down year-over-year as expected. Storage recovery typically lags servers by a couple of quarters. Our strong momentum in the AI build-out continues as we believe Dell is uniquely positioned with our broad portfolio to help customers build Gen-AI solutions that meet their performance, cost, and security requirements. In Q4, we saw strength across a wider range of customers and geographies within expanding pipeline.

AI-optimized server orders increased by nearly 40% sequentially. We shipped $800 million of AI-optimized servers, and our backlog nearly doubled sequentially, exiting the fiscal year at $2.9 billion. Demand continues to outpace GPU supply, though we are seeing H100 lead times improving. We are also seeing strong interest in orders for AI-optimized servers equipped with the next generation of AI GPUs, including the H200 and the MI300X. Most customers are still in the early stages of their AI journey, and they are very interested in what we are doing at Dell. We are helping them get started and work through their use cases, data preparation, training, and infrastructure requirements. They appreciate our perspective, our collaborative approach, and the capabilities we can provide to help them create holistic AI solutions, including our end-to-end portfolio, engagement with our engineering teams, consulting services, and financing options.

Progress in this space won’t always be linear, but we are excited about the opportunity ahead. In CSG, we remain optimistic about the coming PC refresh cycle as the PC install base continues to age, Windows 10 reaches end of life later next year, and the industry makes advances in AI-enabled architectures and software applications. In Q4, we maintained pricing discipline and managed our costs well in an increasingly competitive environment, delivering solid operating margins. In the near term, the PC market is still soft and we expect the recovery to push into the second half as enterprise and large customers remain cautious with their spin. We will continue to execute our CSG strategy, which has served us well across various economic cycles, focusing on commercial and high-end consumer with a strong attached motion.

As we enter FY25, our strategy remains simple. We are leveraging our strengths to extend our leadership positions and turning new opportunities into incremental growth. We are well-positioned with our unique operating model and a number of tailwinds. We are driving a disproportionate level of AI server growth, fueled by our technology leadership, engineering expertise, service capabilities, and our traditional server business is gaining momentum. Our storage business will benefit from the exponential growth expected in unstructured data and we are bullish on the coming PC refresh cycle where we are well-positioned. We are optimistic about FY25 and expect a return to growth above our long-term framework. Now over to Yvonne for more details about Q4.

Yvonne McGill: Thanks, Jeff. In Q4, we delivered revenue of $22.3 billion, down 11%, with strong gross margins and lower operating expense. Gross margin was $5.5 billion and 24.5% of revenue, up 70 basis points, with a mixed shift to ISG. We saw increased pricing pressure in Q4 in PCs and servers, but remained focused on profitable opportunities and we will continue to maintain that discipline and focus going forward. Operating expense was almost $0.5 billion lower than this time last year at $3.3 billion, or 14.9% of revenue, down 12% as we actively manage our overall spend. Operating income was 9.6% of revenue and $2.1 billion, down 1%, with lower operating expense and an increase in our gross margin rate, largely offsetting the revenue decline.

Q4 net income was $1.6 billion, up 22%, driven by a lower tax rate and lower I&O. Diluted EPS was $2.20, up 22%. ISG revenue was $9.3 billion, down 6% and up 10% sequentially. Servers and networking revenue was $4.9 billion, down 2% year-over-year and up 4% sequentially. Server order growth was strong, with the majority of our AI-optimized server orders going into backlog. Our AI mix of server demand increased again sequentially, given strong customer interest in GenAI. We delivered storage revenue of $4.5 billion, down 10% year-over-year and up 16% sequentially, with better profitability as we increased our mix of proprietary storage software. Demand improved sequentially across the storage portfolio, above our normal seasonality. ISG operating income was 15.3% of revenue and $1.4 billion, down 7%, driven by a decline in revenue and a lower gross margin rate, given the higher AI-optimized server mix, partially offset by lower operating expense.

Our Q4 CSG revenue was $11.7 billion, down 12%, largely driven by a decline in units. Commercial and consumer revenue were $9.6 billion and $2.2 billion, respectively. CSG operating income was $0.7 billion, or 6.2% of revenue. Op Inc was up 8%, driven by lower operating expense and higher gross margin rates, partially offset by a decline in revenue. Earlier this week, we announced that Dell will have the broadest portfolio of commercial AI PCs in the industry and new XPS systems, which feature built-in AI acceleration, with an addition of the neural processing unit, or NPU, helping to improve performance, productivity, and collaboration. While PC demand recovery has pushed out, we remain bullish on the coming PC refresh cycle and the longer-term impact of AI on the PC market.

Our Dell Financial Services originations were $8.4 billion for the year and $2.5 billion in Q4, down 19% driven by the sale of our consumer revolving portfolio and lower VMware resale. DFS managed assets ended the year at $14.4 billion while the overall DFS portfolio quality remained strong with credit losses near historically low levels. Turning to cash flow and balance sheet, our Q4 cash flow from operations was $1.5 billion, primarily driven by profitability. We ended the quarter with $9 billion in cash and investments, down $0.9 billion sequentially, driven by capital returns of $1.1 billion and debt paydown partially offset by free cash flow generation. And we reached our core leverage target of 1.5x exiting the year. During the quarter, we repurchased 11.2 million shares of stock at an average price of $74.67 and paid a $0.37 per share quarterly dividend.

And earlier today, we announced a 20% increase in our annual dividend to $1.78 per share, well above our long-term financial framework and a testament to our confidence in the business and our ability to generate strong cash flow. Turning to guidance, there are several trends that give us confidence in our view of FY25. First, the momentum around AI. Second, the improvement we’re seeing in traditional servers. And third, the aging PC install base that is due for a refresh. The macro environment, however, is leading customers to be more thoughtful about their infrastructure budgets, particularly in the first half. Against that backdrop, we expect Dell Technologies FY25 revenue to be in the range of $91 billion and $95 billion, with a midpoint of $93 billion and 5% growth above our long-term value creation framework.

We expect ISG to grow in the mid-teens, fueled by AI, with a return to growth in traditional servers and storage, and our CSG business to grow in the low single digits for the year. We expect the combination of ISG and CSG to grow 8% at the midpoint, offset by a decline in other businesses. Given the higher mix of AI-optimized servers, inflationary input costs, and the current competitive environment, we do expect our gross margin rate to decline roughly 100 basis points. We’ll maintain our cost discipline and expect OpEx to be roughly flat. We expect I&O of roughly $1.4 billion. Diluted non-GAAP EPS is expected to be $7.50 plus or minus $0.25, up 5% at the midpoint, assuming an annual non-GAAP tax rate of 18%. For Q1 of fiscal 2025, we expect Dell Technologies revenue to be in the range of $21billion and $22 billion, with a midpoint of $21.5 billion, up 3%.

We expect the combination of ISG and CSG to grow 5% at the midpoint, with ISG up in the mid-to-high teens. Gross margin rate will be lower sequentially, given seasonally lower storage mix and a higher AI-optimized server mix. OpEx will be up slightly with typical seasonality. Q1 diluted share count should be between 723 million and 727 million shares. Diluted non-GAAP EPS is expected to be $1.15 plus or minus $0.10. In closing, we are optimistic and expect a return to growth in FY 2025 and beyond, with a number of tailwinds. We have strong conviction in the growth of our TAM over the long-term, and we are committed to delivering against our long-term financial framework, with average annual revenue growth of 3% to 4%, diluted EPS growth of at least 8%, and a net income to adjusted free cash flow conversion of 100% or better over time.

We are also committed to returning 80% or more of our adjusted free cash flow to shareholders over the long-term. We’re excited about the future and confident in our ability to create meaningful long-term value for all our key stakeholders. Now, I’ll turn it back to Rob to begin Q&A.

Rob Williams: Thanks Yvonne. 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. Let’s go to the first question.

Operator: Thank you. We will take our first question from David Vogt with UBS.

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Q&A Session

David Vogt: Great, thanks guys for taking my question. I just wanted to go back to a comment that Jeff made in the prepared remarks about the unstructured data opportunity going forward. Just would love to kind of get a sense for how you’re thinking about the storage opportunity as AI broadens out in your server portfolio and how should we be thinking about the timing? I know you generally speaking storage kind of follow the servers by one to two quarters, but with the AI opportunity, did that change in any way and how are you thinking about leveraging your existing portfolio to take advantage of all this data that’s being created? Thanks.

Jeff Clarke: Sure, thanks for the question, David. I look at it and maybe in the simplest terms to feed these GPUs with the data they need to train models, fine tune models, then ultimately drive them into production via inference is data, data intensive. And we look at that sort of architecture that these things need to be fed and fed an incredibly high bandwidth to make sure the GPU engines aren’t idle. And when we reflect on what’s happening in the marketplace with training, a lot of training initially has been done in text and as we get to richer data sets and we move into enterprise, which we would think the big opportunity is as AI tracks to where the data is created, which is on-prem or out at the edge of the network, it lends itself to a growing storage opportunity for us.

And I really like our portfolio. I think about what we’ve done with PowerScale, recently launched the F710 and 210 where we’ve increased the write performance, we’ve increased the read performance, we’ve increased the performance around some of these high concurrency, latency sensitive workloads. It’s aligned with what is going to be the growing need as this gets deployed inside the enterprise. And I think the same is true around our object scale product, the XF960. These are the types of assets and capabilities that our customers are going to need as they really move from training to inference out into what we call the real production world. And we like our portfolio. You may have seen an announcement from us early in the quarter around a SuperPOD certified with Ethernet.

We think that is an absolutely critical capability of bringing storage into the enterprise. Many and most enterprises are Ethernet based. That’s a huge opportunity being in the marketplace with that and the new storage products that I referenced, I think sets up quite well to be able to feed these new workloads with high performance storage, which we tend to be the leader in.

David Vogt: All right, thanks Jeff for the color. That helps.

Operator: And we will take our next question from Eric Woodring with Morgan Stanley.

Erik Woodring: Super guys, thanks so much for taking my question. Jeff, I was wondering if you could expand maybe a bit on some of the qualitative characteristics around your AI optimized server backlog order and pipeline, meaning the mix of tier two cloud customers that you’ve talked about in the past versus enterprises, how that looks like from a dollar or a client count perspective, if or what you are hearing from any sovereigns, linearity in the quarter and any kind of qualitative details that you could share with us. Thanks so much.

Jeff Clarke: Sure, there’s a lot to answer there. Let me start with maybe the demand. And you heard us talk about the demand up sequentially 40%. And that demand was across a rich customer set. The number of CSPs grew, the number of enterprise buyers grew. So for us, two important indicators is less concentrated this quarter than the previous quarter with more customers in both the CSP category and the enterprise category buying from us. That demand was spread across the H100, H800, the H200 and the MI300X. So we sold a broad portfolio or a broad portfolio of silicon diversity into the marketplace for our customers. That’s reflected in our backlog. And the backlog is hard to parse in the sense of a single lead time because it’s now a complex backlog with multiple variants before that I mentioned across deployments needed today, deployments needed through the balance of the quarter and balance of the first half and balance of the second half.

So we had delivery dates planned on new data center capabilities or new data center build out. So we’re excited about that. Probably another important characterization about the demand and how the backlog looks is the pipeline grew. We talked about our five-quarter pipeline at the last call. The five-quarter pipeline grew this quarter as well. So who we sold to grew. The potential of who we’re going to sell to grew. The number of shipments that we had during the quarter grew and the backlog grew. And we expect to ship more in Q1 than we shipped in Q4. I hope that was the color that you’re looking for. And maybe the last part of your question is there’s certainly a lot of energy and opportunity around these emerging nation state opportunities, building out AI and rebuilding their economies around these modern technologies.

We believe we’re in those discussions. We believe that’s a very untapped opportunity in the marketplace and we’re certainly with our geographic coverage and our go-to-market coverage believe we’re in the game.

Erik Woodring: Beautiful. Thank you.

Jeff Clarke: Thanks, Eric.

Operator: We’ll take our next question from Aaron Rakers with Well Fargo.

Aaron Rakers: Yes, thanks for taking the question and congrats on the good results. I guess getting away from maybe the AI because I’m sure a lot of people are focused there, but I’m curious in your comments on the traditional server market. I know some of the Gartner data suggests we’re still seeing overall units down quite a bit on a year-over-year basis and servers offset by AI. But what’s giving you the confidence or the visibility that you’re starting to see the traditional server market recover? And just, any thoughts on the pace of that as we look through the calendar year?