Dell Technologies Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 30, 2023

There are 15 speakers on the call.

Operator

Good afternoon, and welcome to the Fiscal Year 20 24 Third Quarter 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 I'd like to turn the call over to Rob Williams, Head of Investor Relations.

Operator

Mr. Williams, you may begin.

Speaker 1

Thanks everyone for joining us. With me today are Jeff Clark, 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 and diluted earnings per share.

Speaker 1

A reconciliation of these measures So the 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.

Speaker 1

Now I'll turn it over to Jeff.

Speaker 2

Thanks, Rob. We delivered Q3 revenue of $22,300,000,000 with solid profitability and strong cash flow. Operating income was $2,000,000,000 diluted EPS was $1.88 and cash flow from operations was $2,200,000,000 In ISG, the demand environment for traditional servers improved over the course of the quarter and demand for AI servers ISG revenue was flat quarter on quarter with sequential growth in servers and networking revenue, driven by AI For the quarter, we shipped over $500,000,000 of AI optimized servers including our XE-nine thousand six hundred and eighty, XE-nine thousand six hundred and forty, XE-eight thousand six hundred and forty and the R750 and R760XA servers. Customer demand for these AI servers nearly doubled sequentially and demand remains well ahead of supply. In CSG, the demand momentum we saw in June July continued into August, but slowed as the quarter progressed.

Speaker 2

The result was CSG revenue was down sequentially and short of our expectations. Operationally, we executed well remaining disciplined on Pricing in an increasingly competitive environment. And we controlled our expenses focusing on profit and cash flow, including outstanding working capital And lastly, we've returned another $1,000,000,000 to shareholders via share repurchase and dividends. Yvonne will go into more details on cash flow and capital returns later. AI continues to dominate the technology and business conversation.

Speaker 2

Customers across the globe are turning their operations upside down to see how they can use generative AI to advance their businesses in meaningful ways. These AI initiatives are being driven at the CEO and Board levels. And as a result, We are at the front of a significant TAM expansion. AI optimized server mix increased to 33% of Total server orders revenue in Q3, driven by strong demand from AI focused cloud service providers and growing interest from other customer verticals. We drove improved demand margins, increased services attached and incremental unstructured storage attach over the course of the quarter.

Speaker 2

The XE-nine thousand six hundred and eighty is the fastest ramping solution in Dell history. And in Q3, we continue to see strong demand and big wins, including customers like Corweave, A cloud provider that specializes in GPU accelerated workloads and mVIEW, which is using high performance computing clusters powered by the XE-nine thousand six hundred and eighty servers to train foundational models. Our AI optimized server backlog nearly doubled versus the end of Q2 With a multibillion dollar sales pipeline including increasing interest across all regions. That all said, AI hype is everywhere and we need to be measured on our expectations. We are still in the early innings with AI as customers continue to work through their AI Experience over multiple technology cycles tells us that progress won't always be linear, but we are excited about the opportunity in front of us.

Speaker 2

We believe Dell is uniquely positioned with our broad portfolio to help customers size, characterize and build GenAI solutions that meet their performance, cost and security requirements. Our AI strategy, AI in our products, AI built on our solutions, AI for our business and AI for our ecosystem partners is the foundation for our actions, Priorities, roadmaps and partnerships. And in Q3, we continue to build our capabilities. We are collaborating with Meta to make it easy for our customers to deploy Metasalama 2 models on premises with Dell AI optimized portfolio. We are also collaborating with Huggy Face to help users create and fine tune and implement their own open source Gen AI models on Dell Infrastructure.

Speaker 2

And earlier this month, we introduced the ObjectScale XF-nine sixty, an all flash Scale out appliance for Gen AI and real time analytics based on our software defined object storage solution, which can run on Linux and Red Hat OpenShift on PowerEdge Servers. Looking forward, the recovery in ramp in PC demand we were expecting in Q3 has continues to age and there are exciting changes coming to the PC next year, including advances in AI enabled architectures from Intel, AMD and Windows on ARM, which will help drive a PC refresh cycle. We are also seeing the beginning of a traditional including multi cloud, edge and AI into incremental growth. And we are positive on FY 2025 and fully to return to growth next year given the expected tailwinds to our various businesses including AI. Technology is everywhere and Dell is thriving.

Speaker 2

The amount and value of data continues to grow and as that happens the opportunity for Dell Technology grows in tandem. We have proven that over 4 decades through wave after wave of innovation. And we have proven our ability to capture the growth Customers remain disciplined in our pricing and focus on cost. Now over to Yvonne for the detailed Q3 financials.

Speaker 3

Thanks, Jeff. We're focused on driving a balance of growth, profitability and cash flow in any demand environment. We delivered revenue of $22,300,000,000 down 10% with strong gross margins, lower operating expense and improved working capital management. Gross margin was $5,300,000,000 23.7 percent of revenue, flat year over year. We continue to see increased pricing pressure in Q3, but remain focused on profitable opportunities.

Speaker 3

And you should expect us $3,300,000,000 or 14.9 percent of revenue, down 5% driven by lower SG and A costs and down 7% sequentially as we actively manage our spend. Operating income was $2,000,000,000 down 17% and 8.8% of revenue with the impact of a decline in revenue, partially offset by lower operating expense. Our tax rate was 19.2% year to date or 15.4 percent for the quarter. Net income was $1,400,000,000 down 19% and diluted EPS was $1.88 down 18%. Our recurring revenue in the quarter was $5,600,000,000 up 4%, And our remaining performance obligation or RPO was $39,000,000,000 flat year over year with growth in deferred revenue offset by a decrease in backlog.

Speaker 3

Deferred revenue was up primarily due to increases in software and hardware maintenance agreements and VMware Resell. ISG revenue was $8,500,000,000 down 12% and flat sequentially. Servers and networking revenue was $4,700,000,000 up 9% sequentially. We saw server ASPs continued to expand in both AI optimized and traditional servers and our AI mix of server demand accelerated again sequentially, given customer interest in GenAI. We delivered storage revenue of $3,800,000,000 down 13% with demand growth in data protection and PowerScale.

Speaker 3

ISG operating income was $1,100,000,000 or 12.6 percent of revenue, down 170 basis points, driven by a decline in revenue, partially offset by an increase in gross margin rate. Looking forward, our many number one positions are proof of our deep enterprise expertise And with a TAM of $200,000,000,000 growing at a 7% CAGR over the next few years, we are confident in our ability to grow the business as the market returns to growth. Our fiscal Q3 CSG revenue was $12,300,000,000 down 11%, primarily driven by a decline in units, while ASPs remained flat. Commercial and consumer revenue were $9,800,000,000 $2,400,000,000 respectively. CSG profitability remained strong in Q3 with operating income of $900,000,000 or 7.5 percent of revenue.

Speaker 3

OpInc was down 20 basis points driven by a decline in revenue offset by lower operating expense and an increase in gross margin rate as we maintained pricing discipline and benefited from lower input costs. With the TAM of $400,000,000,000 growing at a 2% CAGR, We will continue to focus on commercial, the high end of consumer, profitable relative performance and executing our direct attach motion for services, software, peripherals and financing. During the quarter, we saw continued strength in Apex and our data center utility and FlexFund demand offerings and added new multi cloud offerings, including Apex Cloud Platform for Azure and Red Hat OpenShift. Our Q3 Dell Financial Services originations were $1,800,000,000 DFS ending managed assets reached $13,900,000,000 up 1%, while the overall DFS portfolio quality remains strong with credit losses near historically low levels. Turning to our cash flow and balance sheet.

Speaker 3

Our cash flow from operations was $2,200,000,000 primarily driven by working capital improvement and profitability. Working capital benefited from an approximately $200,000,000 sequential decline in inventory, strong collections performance and continued improvement in receivables aging. Our cash conversion cycle improved again sequentially and is now at negative 52 days, a 20 day improvement since the end of last year. We ended the quarter with $9,900,000,000 in cash and investments, flat sequentially, driven by free cash flow generation offset by $1,000,000,000 in capital returns. Core leverage was 1.6x exiting Q3, flat sequentially.

Speaker 3

During the quarter, we repurchased 11,200,000 shares of stock at an average price of $66.55 and paid a $0.37 per share quarterly dividend. Turning to guidance. Enterprise and large corporate customers continue to be cautious in the current macro environment. Against that backdrop, we expect Q4 revenue to be in the range of $21,500,000,000 $22,500,000,000 with a midpoint of $22,000,000,000 Sequentially, we expect ISG revenue to be up mid single digits driven by sequential growth and traditional servers and seasonal growth in storage. We expect CSG revenue to be down low single digits sequentially.

Speaker 3

We're seeing pockets of stability in PC demand, but have yet to see a broader recovery in the PC market. And in our other business segment, we expect to be down in the low 20s sequentially. Operating income rate should be down marginally versus Q3 driven by a more competitive pricing environment in CSG. And for our tax rate, you should assume roughly 20%, plus or minus 100 basis points for Q4 or 19.5 percent at the midpoint for the full year. We expect our Q4 diluted share count to be between $729,000,000 733,000,000 shares and our diluted EPS should be $1.70 plus or minus 0 point We're increasing our expectations for the full year diluted earnings per share to $6.63 plus or minus $0.10 Turning to FY 2025.

Speaker 3

It's still early in our planning process. However, I recognize your thinking about next year. So let me share our current thinking. We're seeing signs of stability and inflection in parts of the portfolio, including traditional and AI optimized servers. We expect revenue to return to growth next year, above our long term financial framework.

Speaker 3

The opportunity is the broader IT spending recovery with large corporate and enterprise customers, particularly in the U. S. We'll continue to focus on profitable growth, but we'll be mindful of the competitive environment and inflationary input costs as we move through the next year. Pricing discipline and cost controls will help mitigate these headwinds. Count on us to continue to execute our unique operational model focused on cash flow and returning capital to shareholders.

Speaker 3

And we look forward to updating our FY 2025 expectations in more detail on our Q4 earnings call. In closing, we have strong conviction in the growth of our TAM over the long term with technology trends like AI, multi cloud and edge in our favor. At the end of the day, our strategy is simple. Leverage our unique operating advantages and to extend our number one leadership positions and capture new growth. This strategy coupled with our P and L leverage and strong cash generation drives a resilient long term financial framework and Capital Allocation Plan.

Speaker 3

We have proven our ability to generate strong cash flow through profitability and working capital efficiency, including $9,900,000,000 of cash flow from operations over the last 12 months. And at our analyst meeting last month, We committed to increasing capital returns to our shareholders, expect us to continue to invest in innovation, Be disciplined in how we manage the business and focus on what we can control, delivering for our customers and our shareholders. We're excited about the future and confident in our ability to create meaningful long term value for all of our key stakeholders. Now I'll turn it back to Rob to begin Q and A.

Speaker 1

Thanks, Yvonne. Let's get to Q and A. We ask that each participant ask one We

Operator

We'll take our first question from Amit Daryanani with Evercore.

Speaker 4

Thanks for taking my question. I guess maybe to go to the AI server demand discussion, Jeff, that you had. I think you essentially said your orders doubled. So does that imply it's something north of $4,000,000,000 right now? And then how do you think that manifests itself into revenues into fiscal 2020 5, and if you can touch about how broad this customer base is becoming versus perhaps a hyperscaler that would be really helpful.

Speaker 2

Sure. Let me pull that up hard on it. So I mentioned our demand nearly doubled quarter over quarter. And what was I thought very interesting about that is every part of the AI optimized portfolio Grew quarter over quarter and we saw significant growth for enterprise customers. So I think that's important to note as we saw The entire portfolio grow, we saw the number of customers grow and we saw the number of enterprise customers grow quarter over quarter.

Speaker 2

When I think about the $2,000,000,000 that you mentioned, that was a backlog comment that we made in August. And what we talked In August was a $2,000,000,000 of backlog. And that included up until that point in time the August 1st month of the quarter because that was a real time update of our backlog $2,000,000,000 We shipped over $500,000,000 of AI optimized servers during the quarter. So when we think about demand nearly doubling and I mentioned Backlog doubled. We'd like you to part with $1,600,000,000 of AI optimized servers backlog at the fiscal exit of Q3.

Speaker 2

Equally important, we saw the pipeline in the quarter triple. I'll say that again. The pipeline for AI optimized servers tripled quarter over quarter during Q3. Lead times remain 39 weeks. Demand is ahead of supply.

Speaker 2

We continue to work to improve supply And we're working now to convert that pipeline into real sales into orders so we can continue to ship and benefit from this exciting time. As far as next year, Ivanda, I'm sure we'll talk about this in greater detail, but we're still in the planning process. We think it's a tailwind. We talked about it at each of our last financial engagements. It's a large market opportunity, 18% CAGR over the next 4 years growing to $120 ish billion.

Speaker 2

There's nothing that suggests that's not the case and it's not coming at the cost of our traditional servers.

Speaker 1

All right. Thanks, Jeff. Next question?

Operator

We will take our next question from Wamsi Mohan with Bank of America.

Speaker 5

Yes. Thank you so much. I appreciate the early look into fiscal 2025. Given some of the puts and takes that you called out Both on revenues and margins. Just wondering when you say it's going to be higher than your long term range, Is the comment pertinent to overall Dell Tech or is it also a comment that we can attribute both to CSG and ISG?

Speaker 5

Frankly, we're coming off Cyclical bottoms and so many of your businesses it feels as though you should be able to materially outgrow. So any kind of Maybe characterization of that would be helpful. And also on the cost side, Juan, I think you noted Pricing discipline, cost controls, but also some headwinds. So just thinking through that, would you say that there was also From a margin perspective or EPS growth rate perspective? Thank you so much.

Speaker 3

Thanks, Wamsi. I'd tell you, we're certainly at the early stages of the planning process. We usually wrap that process in the January timeframe, but I recognize everyone's interested in next year, so wanted to give you a little bit more context there. We expect to return to growth, As I mentioned on the call already, above our long term financial framework. And so we're seeing An inflection point in traditional servers, in addition to those AI optimized momentum that we've been talking about.

Speaker 3

And we expect servers and networking holistically to be a bigger portion of our ISG mix in the next year. If I move to PCs, our growth expectations will be dependent on the timing of the PC refresh cycle. We are also expecting a decline and mentioned it for Q4 also in VMware reseller revenue with no impact to profitability. We're expecting a more competitive environment overall. We started to see that in the Q3, so we'll expect that to continue especially in the PC market into the next year.

Speaker 3

Other things to consider, input costs are expected to be inflationary next year led by NAND and DRAM. And of course, as we always do, we'll continue to be mindful of our cost structure. But regardless of In the environment that we're operating in, right, we will continue to execute our proven operational model. You can continue to count on us to be financially disciplined, all while driving growth, profitability and cash flow. We're really optimistic about FY 2025 And really excited about returning to growth and look forward to giving you all even more context and in our Q4 earnings call in February.

Speaker 1

Thanks for the question, Wamsi. Next question, operator.

Operator

We will take our next question from Toni Sacconaghi with Bernstein.

Speaker 6

Yes, thank you. Your tone on the call around the demand environment Sounds very, very different than it was 90 days ago where you talked about growth accelerating and a rebound In spending better than you had thought. And it sounds like the complete opposite This quarter, you were wildly above normal seasonality in Q2, you were below normal seasonality in Q3 and you're guiding below normal seasonality Lee again for Q4. Did you just mis gauge demand in Q2 like was there a pull in from Q3 to Q2 And you just misgauged the characterization of demand 90 days ago or like What really happened and changed? And if I could, I just want to clarify The AI situation.

Speaker 6

So it would be helpful if you could just give an update right now on your backlog relative to 90 days ago, which was $2,000,000,000 And if I think about, what you're saying in terms of the pipeline, it sounds very credible that backlog could be Like $5,000,000,000 exiting this year, if it's a 9 month lead time, shouldn't we expect like $5,000,000,000 to $7,000,000,000 in AI server delivery. And if you're saying servers are demand is improving for traditional servers, Why shouldn't we expect a gargantuan number for servers next year?

Speaker 2

Well, Tony, that's a few questions. Let me work my way through those. So what happened? You recall in Q2, we talked about the improved demand in June July for PCs. And that certainly helped us close the quarter and we benefited from that.

Speaker 2

And when we were together in August, we had seen that continue in August. In fact, through the month of August, the 1st month of the quarter, Our PC business was up year over year and then things changed. The business started to slow. It slowed in September, it slowed more in October. We saw more cautiousness from our customers.

Speaker 2

We saw them being more selective, Particularly large commercial customers, enterprise customers and particularly in North America, we saw the public Sector slowdown, while at the same time we actually saw stabilization in SP. But the big change was the number of large deals slowed over the course of the quarter as our customers again became more cautious and selective. And as The market slowed, which you've probably seen in some of the output numbers from the ODMs. We saw increased pricing pressure. So the pricing pressure changed in PCs from August to October.

Speaker 2

Those large deals became more competitive. I think you also saw inventory that was shipped in the June July period. Now it was caught up and you saw promotional pricing throughout the quarter And it was more aggressive as we exited the quarter and we ended the quarter. So that did change the PCs. We did not see or call the We were seeing a recovery.

Speaker 2

It's clearly pushed. Things have slowed. While at the same time, we now have 2 consecutive quarters of quarter over quarter growth of our traditional for data center servers and we have the tailwind of AI continuing to grow. As I mentioned earlier, the pipeline of AI tripled in the quarter. Demand doubled nearly doubled quarter over quarter.

Speaker 2

So those are the tailwinds of the change that we see in the business. The biggest change was PCs because storage performed as expected. Backlog, the number I'm going to give you is the Q3 exit backlog was $1,600,000,000 Orders nearly doubled. Pipeline tripled. Our job is to convert that.

Speaker 2

We're working with our field our customers to convert that pipeline that grew significantly. The interest in our AI products continues to be strong. On premise deployment of AI interest continues to be strong. The fact that we now have been working with Meta and Llama 2, bringing that on prem, Huggy faced in an open source environment to bring those models and tools on prem. I think Continuing to reiterate AI is going to follow the data, the data is on prem and we believe the pipeline and opportunity continues to build for us.

Speaker 1

All right. Hey, thanks for the answer there. And thanks for the question, Tony. I'd like to think that Our tone would be transparent and honest and that's what I hope you hear from us is that we call it like we see it And we give you the best view that we can give you at that point in time. So appreciate the question, Tony.

Speaker 1

Next question, please.

Operator

We'll take our next question from Eric Woodring with Morgan Stanley.

Speaker 1

Awesome. Thank you guys for taking my question. Jeff, I just want to kind of dig into some of your comments about spending on AI, optimized infrastructure and the impact that might have on Traditional hardware spending, because obviously there's a lot of money as you're very clearly showing us being thrown at AI related infrastructure. So Can you just maybe give us a bit more detail on what gives you confidence that this spending won't Cannibalize traditional either general compute spend or overall hardware spending as we look out over the next 12 plus months. What are the signposts that you're looking at that give you that confidence?

Speaker 1

Thank you so much.

Speaker 2

Of course, Eric. Let me try. So We believe what we've seen for 2 consecutive quarters on our traditional server business is growth. It's grown sequentially from 1 to 2, now 2 to 3. What we saw for the first time this year was the pipeline actually grow in quarter for traditional servers.

Speaker 2

That's a very encouraging sign. We saw the adoption of our brand new 16 gs server double quarter over quarter. We saw the activity with our sales force in our accounts increase. We saw the opportunities in large deals Increased towards the end of the quarter. Our conversion improved over the course of the quarter.

Speaker 2

And I think those signals Tell us that this 8 quarter digestion of what was built or bought I should say through the course of COVID It's now worked its way through the system that data centers need to be updated, upgraded additional capacity. Those workloads Continue need to be said more data is being created. While at the same time, there's a whole new category Of Computing, accelerated computing, AI optimized computing fed by all of the Market momentum around generative AI that says that there's a big opportunity in both that we think Early signs, I'm not going to I won't use that word that you probably want me to use this recovery, but we have early positive signs that there's a changing in the demand profile of Traditional servers. And we're seeing a lot of excitement across our broad portfolio of AI optimized servers that I was feeling pretty good as Yvonne just mentioned about next year.

Speaker 1

Does that get out of your question, Eric? I just want to make sure that's Yes, absolutely. Very clear. Okay. Thanks, Eric.

Speaker 1

Appreciate it. Next question.

Operator

We'll take our next question from Ben Reitzes with Melius Research.

Speaker 6

Hey guys, thanks. I appreciate it. I wanted to ask about PCs with regard to your comments around 2025. What is are you expecting that growth to be above model? And what do you think the impact will be of The Windows 10 expiration and some of the new chips coming out that harness AI, If you don't mind touching on that, that'd be great.

Speaker 2

Thanks. Sure. Let me take a run-in at Ben. It probably is important to set context as we're heading into calendar 2024 or fiscal 2025 in PCs. We expect the market to close in Q4 being down.

Speaker 2

It will be 8 quarters of negative growth in the PC industry, the longest I can recollect. And it's ripe for a refresh. Another data point for you to think about, There'll be 300,000,000 PCs turning 4 years old next year. That's typically a tipping point for grading in commercial. And most of those are notebooks as everybody was working remote.

Speaker 2

The notebook mix went up 300,000,000 PCs that year, they're aging and time to refresh. And we have the opportunity With new architectures from Intel, AMD and Windows on ARM to really begin to see AI make its way out to the edge And it's a pretty exciting time. I've used the moniker, the notion of this is the next great use case of the greatest productivity device on the planet and it's coming real next year. So I think 8 quarters of decline and aging installed base and installed base of greater than 1,500,000,000 units, $750,000,000 of them over 4 years old, dollars 300,000,000 more coming next year that will age, Become 4 years old, the time to upgrade, none of those are capable of running the new AI workloads coming out to the edge in the PC, new architectures Coming that are exciting and interesting and we have what you said around windows. There's another forcing function of an upgrade.

Speaker 2

So historically, when a new version of Windows is available or one is retired, That drives a replacement cycle and that's an opportunity for us. So we're excited about that particularly given our bias towards commercial 80% of our revenue That comes from the commercial DCs. I think the opportunity is good for us. And then the other question was around the Silicon Alternatives, was that it, if I remember correctly?

Speaker 6

I think you hit on everything. I just Steve, the clarification is just PCs above PCs also above model, as well as server and ISG. That was that's probably the final part.

Speaker 2

Specifically, our internal model would have the PC market growing somewhere in the low single digits, I think 3% to 4%, you would

Speaker 1

Next question.

Operator

We'll take our next question from Asiya Merchant with Citi.

Speaker 7

Great. Thank you very much. A couple of questions on my end. Just on the AI opportunity that you talked about in the enterprise, Maybe if you could share with us the workloads and the use cases that you're now seeing. Is this gone beyond the The cloud service providers that you talked about that you're interacting with, I think you mentioned, Corvive and Indio on the call.

Speaker 7

But if I recall, there was some commentary as well on enterprises. So are you seeing an opportunity for your AI pipeline growing with the enterprise use cases? If you can share on that if you can share any anecdotes on that. And then on share buybacks, obviously, you tick that up this quarter. Should we expect this level of Share buybacks to continue into fiscal 2025 or given improving cash conversion cycles, improving top line, We should see a further step up in that run rate.

Speaker 7

Thank you.

Speaker 2

Sure. I'll lead with the AI question. A couple of maybe specific data points to help understanding characterize what we're seeing. Number of buyers up, Number of enterprise buyers up significantly. All of the portfolio saw quarter over quarter growth.

Speaker 2

And the reason that's important Because not everybody needs a 9,680. Smaller models, smaller data sets, perfect setup for our other products, which line itself Up with where we're seeing the opportunities in enterprise. So institutions of higher education, financial services, Healthcare and Life Services and Manufacturing is where we're seeing pull for our products. That's data on prem, That's models that's doing AI and ML work across the board. That's what we're seeing and we're pretty excited about that.

Speaker 2

And the tripling of the pipeline Included enterprise customers and enterprise demand.

Speaker 8

And I'll take the share buyback. Look, I think as you mentioned, we tripled share repurchase this quarter versus last quarter. As a reminder, last year, Cash was really kind of running more on the weaker side and we had pulled back and focused more on dilution management. And then as we've seen cash accelerate this year, it's We don't typically guide around share repurchase, But I guess the way I would frame it is, we're obviously very focused on the 80% plus capital return. If you go back to When we first started our dividend, which would have been FY2023, the beginning of FY2023, we're running at 96 percent return of capital.

Speaker 8

So I feel really good about that. And I do think recognizing we don't guide, I think it's fair to say, as we look forward, we'll definitely be repurchasing more than just dilution management. All right.

Speaker 7

Great. Thank you.

Speaker 1

Thanks, Ozzie. Appreciate it.

Operator

We'll take our next question from Mike Ng with Goldman Sachs.

Speaker 9

Hi, good afternoon. Thank you For the questions, just have two quick ones on AI. First on the AI margin profile, you obviously had very strong ISG margins in quarter despite rising contributions from AI server mix.

Speaker 10

So could you just talk

Speaker 9

a little bit about how much of a headwind to that ISG margin rate came from the rising mix of AI servers, if that's the right way to think about it. And then second, I was just wondering if you could talk about the relationship between AI servers and networking and storage for you guys. Should we expect some of that AI sales pipeline that you talked about To eventually include selling Ethernet for AI or InfiniBand or more storage in the near term? Thank you.

Speaker 3

So let me start with the impact of margin rates. We did see a little bit of dilution, If you will from the impact of the shipments as we called out, but really not a material impact right now. We saw Nice performance really across the holistic server portfolio. And so that increase that Jeff I've already talked about in the traditional servers, was helpful in that mix. So it does have an impact, but We've talked about it being margin dollar accretive, but margin rate dilutive.

Speaker 3

And so we saw a little bit of that, but not to a significant extent in our Q3. We'd expect as that grows, we will see more of an impact. Again, margin dollar accretive. And so and as we have more services attached, as we expand that into the enterprise space, we'll see more and more margin accretion coming from Those AI offerings.

Speaker 2

No, I think that's a great point, Yvonne, is the team did a great job improving margins of our AI optimized servers quarter over quarter, Selling the value of the design, the performance attributes, its thermal attributes, its connectivity attributes and then attaching storage and Services around it allowed us to see improved margins quarter over quarter. And Mike to your question, is there a Relationship between storage and excuse me, networking with AI? Absolutely. These are typically clustered, Small clusters, large clusters, high bandwidth needed. We see it ultimately deployed out where the data is being created.

Speaker 2

Much of the data That will be created in the future is outside of the data center. Much of that data is unstructured. Much of that opportunity is really a nice Again, a really nice tie to what we do with our unstructured and object assets. And then networking is the high speed interconnect, the fabric. They matter, they matter more, whether it's InfiniBand or Ultra Ethernet, those are all exciting new technologies for us.

Speaker 9

Excellent. Thanks, Jeff. Thanks, Yvonne.

Speaker 2

Of course.

Operator

We will take our next question from Simon Leopold with Raymond James.

Speaker 11

Great. Thanks for taking the question. I wanted to see if you could unpack what you see going on trend wise in storage, particularly given that I know you said it came in as expected, but the revenue was a bit light versus Street expectations and Looks like it's still down year over year in the next quarter. And where my question is going is to think about the longer term trend Because I'm wondering is AI pulling money away from storage and do you see essentially margins Trending better or worse given shifts in input costs and the better margins that some of your peers have called out recently. Just wondering how you're seeing That trend as well.

Speaker 11

Thank you.

Speaker 2

Sure. Maybe a couple of data points and Yvonne can chime in as Well, from us when you think about margins, that was the last comment, we saw our storage margins improve quarter over quarter and year over year on a demand. That's exciting. We continue to sell the value of our products and the broad portfolio we have. We do see customers cautious.

Speaker 2

Large concentration of the storage businesses and very large customers and they're Absolutely being cautious and selective. And that clearly impacts our high end product portfolio. But what was exciting during the quarter is we saw our data protection in our unstructured categories actually growing on orders basis year over year. So when I think about the opportunities around protecting valuable data, when I think about the opportunities of what data is going to be Workloads and the opportunity for us to be where the data is created out at the edge with our vast array of unstructured assets. So I don't think AI pulls away storage dollars.

Speaker 2

I think what we see is The effect of 8 quarters of server decline has impacted storage. Customers are cautious. Historically, as the server business rebounds and recovers, we think our experience tells us That storage lags it by about a couple of quarters. That's what we're expecting. We see nothing that suggests that's different.

Speaker 2

And in the meantime, the opportunity around Unstructured is immense and we'll continue to focus on that.

Speaker 3

And I'd add Jeff on that. The margin accretion that you on storage is real and it's great because it's going to be recognized over time in the P and L, right, with the high

Speaker 2

Thank you

Speaker 1

very much. Next question.

Operator

We'll take our next question from Sidney Ho with Deutsche Bank.

Speaker 2

Great, thanks. I have a question on AI as well. It's great to see very good momentum in that business. Are there any concerns that some of these orders could be just double booking just because supply is tight everywhere That could ease over the course of next year. I assume you have great visibility into the backlog, the $1,600,000,000 you talked about in terms of timing, but How about the multi $1,000,000,000 pipeline?

Speaker 2

How comfortable are you with that? And also, I would Ask about is that can you clarify what products and maybe services are included in that order number? Is that just AI optimized service like the 69,680? Or do you include like CPU only service in there, any professional services or even APAC as a Last one first. When we talk about our AI backlog and demand, It's not high performance computing.

Speaker 2

It's not CPU based. It's simply the portfolio that is optimized for artificial intelligence The $9,680,000 the $9,640,000 the $8,640,000 the $7.60 and the $7.50 that's it. So it's clear it is that portfolio that we built to be optimized for AI. The double booking. It's a very unusual way that the marketplace Working with the role that NVIDIA plays and helping the obviously, the supplier or the Carr, they're out helping generate demand.

Speaker 2

I think there's reasonable fidelity in the demand signal that we see today. Is it possible there's double booking? I can't sit here and tell you that there's not. I don't from my seat, I don't see it. When we see the opportunity of we are competing with others for the same opportunity, the opportunity is qualified.

Speaker 2

It's got to be qualified for NVIDIA to give the supply or to suggest the supply will be available. So I think there's a lot of control points in place That suggests there's great fidelity in the demand signal that we're seeing. But I can't sit here and tell you without 100% certainty that Isn't 1 or 2, but I think it's a really good demand signal. And given where our team is and what we see across the globe

Speaker 1

Thanks for the next question.

Operator

We'll take our next question from Krish Sankar with TD Cowen.

Speaker 12

Yes. Hi, thanks for taking my question. Jeff, I had one for you. I'm kind of curious, you spoke about AI PC. What is your definition of an AI PC?

Speaker 12

And also how much do you expect the ASP uplift to be for an AI PC? And how much incremental Growth could it drive from the current $250,000,000 unit run rate we're going through? Thank you.

Speaker 2

Our definition of an AI PC is going to be a PC that has the performance capability to run the Workload on the PC, not a cloud service. The capability of running an AI workload and An app that has been AI optimized and to be able to run it locally. The architectures that are coming All meet that criteria. There's variations in performance, but they're all meeting the threshold that we believe is required To call them PCs that will be AI enabled and AI PCs if that's a name. And I think we're Quite comfortable with that definition.

Speaker 2

Whether it drives tremendous growth to the TAM Just to be seen, what I believe it does is you don't want to be a PC user that doesn't have an AI enabled chip in it. You're going to be next to people that have 1 and yours doesn't and it will perform differently. It won't Be able to take advantage of some of the new exciting workloads, whether that's new forms of search, new forms of security, new forms of interacting With your PC itself, the ability to put some form of assistance around you. Those are going to be huge productivity uplifts and I think it's going to drive a refresh cycle. And again, The scale of this business is so large with 1,500,000,000 plus units in the installed base, 950,000,000 units Sold over the last 3 years, this is a catalyst to increase the or reduce the refresh Cycle or increase the refresh rate whatever you prefer.

Speaker 2

And I think that's an exciting time, but I can't call what that number is. Our estimate for the marketplace is Low single digit growth, I think I mentioned 3% to 4%, that would take the market from roughly 2.50% to 2.60% next year. Let's get there. Let's get it growing again after 8 quarters of decline.

Speaker 1

Well said. Next question.

Operator

We'll take our next question from Aaron Rakers with Wells Fargo.

Speaker 13

Yes. Thanks for taking the question. There's been a lot of questions already answered. But Jeff, I just want to ask you simplistically on the AI narrative. You mentioned 39 weeks of delivery time or lead times.

Speaker 13

Are you at all surprised that that's not starting to change? Have you seen any indications that lead times have pulled back with some of the China restrictions put in place? And I guess with that context also, would you expect diversity, I. E. Another large GPU supplier To be a factor in unlocking and converting some of that pipeline as we move into next year?

Speaker 2

A couple of things. The pipeline is NVIDIA pipeline today. It's not alternative pipeline, it's NVIDIA pipeline. And I wish I could tell you, Aaron, that the backlog was less than or excuse me, the lead time was less than 39 weeks. I can't today.

Speaker 2

We are on the phone working every available channel opportunity as you might imagine with our supply chain capabilities To improve supply availability, we've offered our services. We'll help where we can. I'm hopeful for the day to tell you that supplies improved greatly, lead times have reduced and we can work the backlog down faster. That's our job. I don't have those answers today.

Speaker 2

It's 39 weeks. We're trying to continue to get more supply. That's where we are. As we look forward into calendar year 2024, there's clearly alternatives coming. There's work to be done in those alternatives.

Speaker 2

Software stacks have to be taken care of, resolved the opportunities around them. But there's more Options coming. Their adoption rate we'll see. But right now that Multi $1,000,000,000 pipeline that I referenced the backlog that we've talked about is NVIDIA based, 39 week lead time. We're working our behinds up every day to get more supply.

Speaker 1

Yes. Thanks, Jeff.

Speaker 2

You bet you.

Speaker 1

Next question.

Operator

We'll take our next question from Samik Chatterjee with JPMorgan.

Speaker 14

Hi. Thanks for taking my question. I guess, sticking on the AI Subject, you shipped over $500,000,000 of AI optimized servers in the quarter. Just curious with lead times holding where they are, How should we think about the trajectory of sort of what to expect for shipments in the coming quarter? Is it fairly stable in that sort of $500,000,000 range?

Speaker 14

Or Should we expect some level of sort of ramp up if it's supply easing? And then just a quick clarification, Jeff, you've mentioned a few times now the Improvement you're seeing in traditional servos even as you sort of called out that customers are pulling back spending in most recent months, you've seen some signs of that. Just curious what's the driver there? Like why what's your insight in terms of as customers are pulling back? Why is there sort of this green shoot in traditional servers that runs a bit counter to that overall theme?

Speaker 14

Thank you.

Speaker 2

Well, we don't forecast shipments in terms of Specific dollars by product line for the next quarter, our shipments for AI are implied in the guidance that Yvonne gave. I really don't want to break it down into a specific of how many that will ship of AI service, but 39 week lead time, 9 months, You kind of look at the math and go, maybe that's probably the right sort of zip code to be in, but For hand and mouth for parts? Traditional servers and why we think there's The green chute. I think it's the comments around it's been an 8 quarter digestion period, the longest that I can recollect In the server business, data centers have aged product and they've worked through what they have bought in the early The first half of the COVID era. They now need to add capacity and we're seeing that in different areas.

Speaker 2

And to the point now again to be a slightly repetitive 2 quarters in a row of sequential growth, A building pipeline which hasn't happened this year, improved activity increased activity, improved conversion makes us feel Comfortable that something's changed. Again, I'm not using that word recovery, but something's changed. It's an inflection point that Ivan mentioned earlier. And we're going to continue to obviously feed that inflection and continue to look at the opportunity.

Speaker 1

Thank you. All right. Let's see if we can get one last question in.

Operator

We'll now take our final question from David Vogt with UBS.

Speaker 10

Great. Thanks guys for squeezing me in at the end. Can you Jeff, can you talk to sort of the thought process if AI lead times come in a little bit more next year? What that means for your networking, fabric or And then ultimately the pull forward, maybe the pull through of storage. I might have missed it earlier, but just want to get a sense for How that would sort of impact the rest of the ISG business?

Speaker 10

And then just quickly on CSG, can you kind of share with us your thoughts, maybe Yvonne, on Sort of the margin impact from higher component costs, whether it's DRAM, NAND or however you're thinking about it? Thanks.

Speaker 2

Well, clearly as GPU supply improves, The fabric that is associated with those units will be shipped and aligned to that. So the ability for us in our Our networking business will benefit from an uplift or an increase in supply. And I think that's encouraging. And as I talked about, storage attach is important. We are certainly Working with our sales teams, working with the to find the opportunities as this data is being created at increasingly greater rates outside of the data center to make sure that we're there and it's landing on Dell Storage.

Speaker 2

And as it lands on Dell Storage making sure that as AI follows the data that our AI optimized portfolio is next to it, I I mean that's the sales motion. A set of professional services around that, a set of services that attach around that. So think of every opportunity of a Model training fine tuning ultimately as we get to inference is an opportunity for compute assets which drags set of storage assets around that and it's got to be connected. We kind of look at that as the AI estate if you will and that's the opportunity. It's real and our teams are focused on it.

Speaker 3

And then on your question around component Costs and the potential pressure we put on margin rates, we do run a low inventory model. And so When we have component cost increases, we try to recover them as quickly as we can by raising prices and passing those through into the market. So you'll see us continue with that. It's certainly not the first time that we've had this happen. And so it's an engine that's Well tuned within Dell, but you will have to navigate through that with the competitive environment and we will.

Speaker 3

But it usually takes a period of time to recapture that impact as they

Speaker 2

the question.

Speaker 1

All right.

Speaker 8

Thanks, Glenn. Thanks, guys.

Speaker 1

Thanks, everyone, for joining us. Yes. Thanks, David. Hey, we'll see many of you next week at Raymond James and Barclays and Also the 1st week in January at the Consumer Electronics Show. Thank you.

Speaker 1

Have a good evening.

Operator

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

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Earnings Conference Call
Dell Technologies Q3 2024
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