Good afternoon, and welcome to the Fiscal Year 2021 Second Quarter 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 part without the prior written permission of Dell Technologies is prohibited. [Operator Instructions] I'd like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Thanks, Holly, 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 trials are available on our IR website. The guidance section will be covered on today's call. During this call, unless we indicate otherwise, 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, and that VMware historical segment results have been recast to include Pivotal results. Additionally, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and SEC reports. We assume no obligation to update our forward-looking statements. Finally, before I turn it over to Jeff, I want to address the amended 13D that we filed on July 15 disclosing that Dell Technologies is exploring potential alternatives with respect to its ownership interest in VMware, including a potential spin-off of its ownership interest to Dell Technologies stockholders or maintaining the status quo. We believe a spin-off could benefit both Dell Technologies and VMware stockholders by simplifying capital structure and corporate structure and enhancing strategic flexibility while still maintaining a mutual beneficial strategic and commercial partnership. With that said, we will not address the filing any further or take questions related to this topic. Now I'll turn it over to Jeff.

Thanks, Rob. We are finishing up day 171 working remotely at Dell Technologies, and the novelty of the new normal has worn off. Michael sent a note to our team members earlier this month that captures the situation quite well, and I quote, this is going to be a marathon, and it's going to be uneven and frustrating at times. What I can tell you, and what you will see in our results today, is that our team has continued to deliver in extraordinary ways in this unprecedented environment. I'd like to provide several examples of our team's resiliency, tenacity and adaptability. The grit that is inherent in our Dell Technologies culture. These examples demonstrate why I remain so optimistic about the future of the Company and our ability to consistently deliver no matter the obstacle. We are still largely working from home. We're not alone in this dimension as we will highlight in our Q2 results. We have moved beyond work as a location. COVID-19 has made one thing clear to us: work is something you do, an outcome, not a place or a time. And it takes teamwork and a culture that prioritizes outcomes and results over effort. Though we have team members juggling many challenges: parenting, caregiving, citizens and countries still grappling with surges of the pandemic, our employee engagement and productivity is at an all-time high, we are seeing a human transformation right before our eyes, emphasizing trust, empathy, patience and flexibility that will serve society and business long after these tough times are over. While working from home and navigating a turbulent market, we continue to drive innovation in new and different ways. Over the course of nine weeks in Q2, we had nine product and solution launches, all while working remotely. We now have…

Thanks, Jeff. Overall, we were pleased with our performance, especially given the current environment. Despite the pandemic and economic headwinds, we're executing on our strategy in driving long-term value creation for Dell Technologies and our stakeholders. We're delivering relative growth and winning in the consolidation. We're creating differentiated Dell Technologies solutions through innovation and integration, and we're generating strong cash flow, enabling us to delever and create value for shareholders. Revenue for the second quarter was $22.8 billion, down 3% year-over-year. FX continued to be a headwind, particularly in Brazil, India and China, impacting our growth rate by approximately 150 basis points. Revenue was up 4% sequentially, which was below our historical Q2 seasonal revenue range, but was in line with our expectations as we discussed on our Q1 earnings call. Gross margin was $7.6 billion or 33.5% of revenue. Like Jeff said, we saw demand growth in education, state and local government and consumer during Q2, which impacted gross margin given these customer verticals tend to deliver less margin dollars. The majority of cost actions taken in the first quarter remain in place and helped drive operating expenses down 4% year-over-year and down 3% sequentially to $5 billion. Some of these cost benefits are shorter-term reductions that will phase out over time. For example, we saw lower employee benefit claims during the government shelter-in-place periods, lower facilities-related costs and reduced advertising and promotional spending in certain verticals. We believe some of these cost benefits will normalize as we move through the remainder of the year as we prepare sites to bring team members back to the office and benefit utilization normalizes. Operating income was $2.6 billion or 11.5% of revenue. While down 5%, operating income was up 21% sequentially driven primarily by the strong operating expense controls and business…

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

We'll take our first question from Katy Huberty with Morgan Stanley.

Last November, you guided to an operating margin this year that would be roughly in line with fiscal '19. But just looking at the first half of the year, you're tracking about 100 basis points above that level. So is that still a fair target? And how do you see the operating margin playing out for the next couple of quarters?

Katy, thanks for the question. This is obviously Tom. So look, I think as we think about the first half of the year, I think we generally have been pleased with the operating performance of the organization given the dynamics in the macro. And obviously, a lot of that has to do with the cost dynamics that we've been able to drive in terms of the constraints we put on spending, whether that was the reductions in T&E, the head count freeze and those other cost actions that we took. As we sit here at the midpoint of the year and look forward into the back half, there are some dynamics I highlighted in my guidance section that I just want to keep you centered on, which is around we are seeing -- if you think about our seasonal pattern, Q2, Q4 generally are bigger quarters. Q1, Q3 generally are seasonally a little bit softer than Q2, Q4. There are a couple of dynamics as we look at Q2 -- or I'm sorry, Q3, as we think about the demand environment, the mix dynamic with our client business, our CSG business, where we typically trend towards consumer in Q3 as we get ready for the holiday season. We're going to have the additional dynamic this year, I think, a bit more education and Chromebook dynamic mix in there. So that's going to -- that has some dynamics around our margin. And then I also would remind you that with the RSA divestiture, which is targeted right around the beginning of September, we'll drop some operating income and revenue out of the consolidated total. So look, I do think that we might see a bit more downward pressure on operating margin in the back half of the year right now. We'll obviously have to watch it. And part of that would be dependent upon how do the mix dynamics play out as well as the component cost environment, which we still believe is inflationary in Q3. So I think we'll continue to look at it. First half was strong. We'll see how the back -- or solid, I should say. We'll see how the back half plays out.

Tom, is it still realistic, though, that you could see a sub-10% margin for the year like in fiscal '19?

I don't think so. Not that I'm -- I don't think it gets to that level.

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

This is Victor Chiu in for Simon Leopold. Can you provide us with some color around the performance verticals maybe where you saw better demand in the quarter? I just kind of want to get a sense for the pieces, the puts and takes that surprised you relative to your expectations.

Yes. Look, maybe I'll let -- let me say a few high-level comments and maybe Jeff could jump in and talk about some of the business unit dynamics that we saw. I would remind you that as we -- in our call in Q1, we highlighted the fact that if you think about the seasonal pattern or the linearity pattern we saw in Q1, we saw February and March quite strong, and clearly, March spiked with the work-from-home dynamic as businesses and education institutions shifted to work from home, learn from home. But then, as you recall in our talking points, we also talked about the fact that we have seen April soften. That demand dynamic of April softening, that linearity, continued on into May, which we thought May, from a demand perspective, was quite soft. June began to recover. And then by the time we hit late June, in July, we saw week-over-week strength, improved demand, although still negative as we got through the end of the quarter from a demand perspective. And so there are some dynamics within that, within the context of the BUs in terms of how each of those BUs performed during -- as we went through the quarter. And maybe with that, I'll turn it over to Jeff. Maybe he can give some highlights on what we saw in the ISG space and then in the PC space.

Yes, happy to, Victor. I mean to build on what Tom said, clearly, there were a couple of trends that we saw from a vertical orientation. We saw education and government grow double digits. We saw, as Tom mentioned, the improvement over the quarter. We saw the SB and NB verticals or businesses improved week-over-week from early June through the end of the quarter. Still below normal seasonal rates, but they improved from the beginning of the quarter. We saw the largest transformational -- in the world continue to invest in digital transformation and continued to move forward digital agendas. If you look at it from a product perspective, as Tom mentioned, learn from home and work from home continue through the quarter, particularly towards the latter part of the quarter, as many countries were preparing to send their youth back to school, which, in many cases, is going to be an online work -- learn-from-home environment. And we saw many institutional customers who have historically been in the public sector, a desktop-based or a PC asset moving to a notebook-based asset, buying more notebooks throughout the quarter. And then lastly, we saw demand on the ISG side for our data protection products, our high-end storage products and our VxRail products. Data Protection and VxRail grew double digit in the quarter on an orders basis, and we had good demand for our high-end storage in the single digits. I hope that helped.

We'll take our next question from Matt Cabral with Crédit Suisse.

On ISG, I was wondering if you can talk a little bit more about what pricing dynamics looked like across both storage and servers in the quarter. And just if you can comment on if you've any changes in the wider competitive environment as the demand environment has gotten a little more difficult.

Well, I think, Matt, if we were to look at servers, we remain disciplined throughout the quarter, as we mentioned in Q1 as well, very disciplined to what we see in the marketplace. There are some aggressive pricing for server deals without question. But we're not out chasing share. We don't think that's good for our business. We want to be disciplined and return profitable gains in the business. Clearly, the pressure we're seeing in ISG is more of a macro one. The macro demand of the ISG sector, both storage and server, is certainly different than we thought when we planned the year and started the calendar year back in January. We have continued to see customers slow down their investments, in some cases, sweat their current infrastructure through the first half of the year to navigate through the pandemic. As I mentioned in the previous question, we've seen those largest customers continue to invest in infrastructure. We would categorize them as the digital leaders. Those digital leaders continue to invest in infrastructure, their digital transformation programs and projects. And we saw healthy demand in the largest companies around the world continuing to buy servers and continuing to buy storage class products. As we look downfield, if you will, and we think about what happens towards the second half of the year, you've probably seen the same forecast that we have. IDC has shown the external storage market and the mainstream server market under pressure in the second half of the year, specifically changing their forecast by roughly 600 basis points more negative. And we think we can weather the storm throughout the rest of the year. And as we look into next year, we see growth in the server market and the external storage market. I believe the server forecasts are roughly 7% growth next year. We believe we have the right portfolio to be able to take advantage of the growth environment that will be around -- or rebound, if you prefer. I think about the opportunities that we have in cross-selling in our buyer base, our storage customers buying servers, our server customers buying storage. The opportunity that we have in high-value workloads in the server marketplace, I think, is still an untapped opportunity for us. While we've made progress and saw growth in that area this quarter, there remains to be a good opportunity for us. And then we believe there's emerging opportunity as the telco industry standardizes on an open platform what's going to happen in edge and the data of intensive workloads that will evolve on the edge. And then clearly, the continued migration of the hybrid and private cloud world that we've seen throughout the last six quarters, we think that continues as hybrid cloud is the norm going forward. I hope that helped.

We'll take our next question from Toni Sacconaghi with Bernstein.

I was just wondering if you can comment on just demand in your guidance. You talked about weeks sequentially improving in terms of growth rate. And yet, you're guiding for below-normal sequential growth for fiscal Q3. Most companies are not. Most are guiding for inline or better-than-normal sequential growth unless they had a unique backlog relief or higher revenues in Q2 from backlog, which I don't think was the case with Dell. And I also recall, last quarter, you seemed relatively optimistic about the ISG business. You sound a bit more cautious about it now. I think server growth, even Q1 and Q2, was below seasonal despite the fact that it sounds like you're being quite aggressive with financing. So maybe you can just comment on -- are you incrementally negative around ISG relative to 90 days ago? Why are you not guiding for at least sequential growth if weekly order patterns are ultimately getting better? And why do you think you were below-normal sequential server growth from Q1 to Q2 despite aggressive financial promotion as evidenced by how much financing went up in the quarter, and your commentary around sequential improvement?

Toni, it's Tom. So look, let me set the stage, right? If you look at our normal seasonal pattern, Q1 to Q2 is generally a growth pattern, right, where Q2 has always been, for us, a strong education, state and local government buying season. Q3 -- Q2 to Q3 has traditionally been a negative sequential growth pattern for us. As we come out of that strong Q2, we start to see mix dynamics within the CSG business, with consumer starting to ramp which generally has a lower ASP, and then we step back up in Q4 generally from a sequential pattern. Our perspective this year, with what we know to date, and I'll comment on the fact -- yes, we did comment about the fact that as we got -- as we went through Q2, we saw improved demand coming into July. But the dynamics tend to change as you go into the next quarter when buying season patterns change. And so we are, I think, thoughtfully cautious around how do we think about demand in Q3 given the dynamics within the macro and our normal historical patterns here that we think are going be slightly softer. As you look at the ISG space, in particular, we would normally see a sequential falloff Q2 to Q3. The 3-year average is around negative 2%, negative 3% sequentially, Toni, for ISG. And don't forget RSA comes out of there. So I just think we're -- and you look at the IDC forecast for Q3, which has mainstream server revenue ex China at minus 12 and external storage at minus 10, essentially. I think we just -- given that pattern and given what we're seeing in the environment, we want to make sure that we're thoughtful about how we frame the quarter. And obviously, we're going to push on this appropriately. But that's -- I think from our perspective, the frame that we're providing makes sense relative to what we're seeing. And Jeff, I don't know if you have anything.

Well, the only thing I would add to it is the comment I made with Matt as well is the market has more headwinds in the second half than ISG from 90 days ago. The most recent forecasts have changed. They've become more negative in both external storage and server. Clearly, we're going to continue to operate and execute a premium to however the market -- whatever the market outcomes are. But they are certainly more negative as we look at the second half of the uncertainty that Tom talked about. We're going to focus on the growth programs of where our marketing is, our Power Up program that I talked about, I believe, in our last earnings call. Continuing to work and grow our customer base, continue to focus on the opportunities we have in cross-selling across the portfolio. We're going to continue to focus on ramping our PowerStore product as it's now in the marketplace and off to a good start. But we're facing market conditions that are very different from 90 days ago.

Jeff, I guess if I could just follow up. I appreciate the fact that, look, IT budgets have probably been slashed. A lot of CIO surveys suggest that. I appreciate the fact that you're always down sequentially, but you said you'd be down more than normal sequential. And that just feels somewhat at odds with the fact that your order rate was kind of improving in the back half of the quarter. So is there anything you saw -- you've seen in August that makes you incrementally more worried? Or put RSA aside, is there anything else fundamentally that you're worried about either competitive-wise that would suggest you shouldn't extrapolate some of that order improvement you were seeing throughout the quarter? I just want to be sure we're not missing anything.

Let's make sure, I think what Tom referenced, it was an overall number. And the one that we haven't talked about that has some headwind is the PC business. And we see a fundamental mix. While we're seeing an incremental increase in unit demand based on the learn from home and the continued work-from-home phenomena that's been underway, that is largely education-driven, that is largely lower-end ASPs that are associated with it. And I believe that's some of what Tom is referring to when we look at normal seasonal patterns. This is different. So if you look at the opportunity in the PC marketplace and where the growth is, it is heading towards the lower-end ASPs on that side of the marketplace. Does that help?

Yes

So a combination of increasingly more negative outlook of the ISG sector; we're going to continue to drive our performance, and you saw some good performance in our data protection business, as I mentioned, high-end storage, VxRail; and then the PC dynamic is another one that is -- it's very different than what we've seen in any other seasonal pattern between Q2 and Q3. Tom, anything to add?

No, I think you've articulated it, Jeff.

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

Just a follow-up on those PC comments. Your PC competitor just called out CPU and panel constraints. Is there an element on the below seasonal from a commodity procurement and supply chain perspective, too? Or is that not an issue for you guys? And I have a follow-up, if I could.

Well, Wamsi, I think there are a couple of things. I'm going to separate on this. If you think about -- what's just happened is even IDC, within the calendar quarter, Q3 has changed the forecast outlook for the calendar quarter we're in by 20 points. I've been at this a while. I've never seen that much change in a 6-week period with seven weeks to go, which, to me, suggests that there is unanticipated demand driven from learn from home, a one-to-one education initiative. If I recall the comments I made just moments ago about the public sector, more of those workers that are at home need notebooks. That demand wasn't planned. So if you think about where the industry has been and where the demand is today, we would have had to call that many months ago given the lead time for silicon and the lead time for LCDs. That's the backdrop of where that demand is. If I look at our portfolio, it's a very broad portfolio, as you know, we have products on standard lead time across the board. But in these areas where the growth is, think Chromebook of 11.6-inch screens, education notebooks of 14-inch and 15-inch TN screens, if you look at the supply constraints there, there's supply constraints with LCD, typically on glass itself and the drivers themselves, and there aren't enough low core count CPUs for the industry to respond to this demand profile. Do I think we will solve it in time? Without question, is our supply chain responding accordingly? Yes. We're solving this each and every day. The lead times in our products service are getting better by the day. But that's the challenge in front of us. It's a good challenge. It's one that I know we will respond to. But it's this unanticipated spike in demand in this particular sub-segment that has driven industry shortages, which I'm sure you heard from everybody, we're responding to.

Okay. That's helpful. And I was wondering if you might be able to share some color on how investors should think about the timing to investment grade? I mean we have sort of -- prior to your announcement on the alternatives you're exploring with VMware, there was an expectation around this timing. And now with this in the mix, can you help us think through whether that changes the timing on the path to investment grade or how investors should think about that?

Wamsi, it's Tyler. Look, I think we've talked a little bit about -- obviously, we're in kind of a different environment, right? I think the one thing that I'm really happy about, and I think we're doing a great job of, is the continued debt paydown. Obviously, we've reiterated the $5.5 billion that we're going to pay down this year. And if you look at our payout profile, right, I've got nothing else to do this year. And probably, a piece of that $5.5 billion will be focused on the debt that's coming due next year. So I feel really good how I'm positioned from a capital structure position and then also how the debt is coming down. My conversations with the rating agencies remain good. I think, obviously, they're working through a lot as they're thinking about the overall macro environment. And I think it's fair to say that that's going to influence any type of decision. But we're making the right progress, and I'm happy to see the direction we're going. So we'll continue to see how the rest of the year plays out. But I think, like I said, we're doing what we need to do.

Tyler, we're at $34 billion of core -- $34.1 billion of core right now, I think we've done a nice job. We do -- and from a capital allocation policy, Wamsi, nothing's changed, right, in the sense that we're going to -- predominant use of our capital right now is debt paydown. And I think that continues until we get the capital structure back into that investment-grade range. And the timing of that will be somewhat dependent upon the rating agencies who consider not only our stand-alone results but also the overall macro and their perspective around that. So I think we'll continue to be very focused on it.

We'll take our next question from Shannon Cross with Cross Research.

Jeff, I'm curious how -- from a strategic standpoint, thinking about like the post-pandemic work environment, both for Dell but also, obviously, for your customers, I'm just curious how that's changing where you're focusing your investments. I know some out there have said up to 50%, which seems pretty aggressive if people won't come back to the office. But I'm curious as you look sort of a couple of years down the line how this is changing things.

Thanks for the question, Shannon. It's an interesting dynamic that we see underway right now. If I look at Dell, I think I mentioned this in our prepared remarks, we see us being a connected workplace now for almost 12 years, a future where 60-plus percent of our professional workforce will work in a remote or hybrid environment, where they come to the office one or two days is the definition of a hybrid workplace. And that workplace itself will transform. Rather than having pre-described or predetermined workspace, the workspace is going to be much more highly collaborative, much more open to drive that sort of collaborative nature that we think happens in the future of work. Our belief is that we think, and I think it's understated, that we'll have a 20- to 30-point increase in remote workers and remote -- or hybrid type of work environments across all company types, all sectors, all geographies. And I think what's interesting is how the PC industry will navigate how to, what we've coined as the three phases, do it light, do it right and then the new innovation that leads to a modern PC experience. Given where things are today, we're still much more on the do it light where we're taking sectors that have historically been behind on the mobile phenomena. Public is one of them or, quite frankly, education that's been behind. And we're just getting compute assets in their hands to enable them to work remotely to work online. We will move to a phase where doing it right is going to take over, and we're going to see, I think, a lot of innovation and play to our broad end-to-end portfolio. Things such as unified workspace are going to matter where we can actually take on life cycle management. We can do provisioning of the PC via our cloud capability. We can do app and patch updates remotely. We can do proactive and predictive service calls. So we can change the dynamic of the asset that's in our customers' hands and then how do we make that asset more productive in time because we still see, and I think it's proven time and time again here, over the first six months of this calendar year, the PC remains the primary productivity device. And it's increasingly the essential learning device in an online future way to educate the world, too. I think that bodes very well for us as an industry. I think we have to navigate some of the changes and what types of products are in each of those types of end users' hands. And then we're really excited about the innovation that it will drive long term as we modernize that PC experience and thinking of this even perhaps as more of an as-a-service experience long term on the PC side. Does that help?

Yes.

We'll now take our final question from Rod Hall with Goldman Sachs.

I wanted to come back to the mid-range weakness comment you made, Jeff, and try to tie that back together with PowerStore and understand -- well, first of all, is that mainly related to SMEs being weak, which I think a lot of companies have seen? And then secondly, on PowerStore, are you seeing it taking people longer to test the product? And is there anything you're doing short term with regards to pricing of other products or offering of other products to try to help people out while they evaluate PowerStore in this difficult environment?

Sure. Let me start with a couple of thoughts because I love the question. One is, I think, it's important to note we've completed the journey that I've spoken to you all over the past handful of years now of modernizing our ISG portfolio. The entire ISG portfolio now is powered up in our definition. If you think about the last three products of those nine products that we launched over the quarter, PowerStore, PowerScale, PowerFlex are all on the marketplace around the rest of the portfolio. Next week is an interesting time for us because the world's largest sales force is going through their annual technical training and will be clearly amped up on our new portfolio and its competitiveness across each and every sector that we participate in. Specifically with PowerStore, what we have done is we're doing more demos, more virtual demos. Clearly, this virtual world has made it a little more difficult, but it's a long selling cycle to begin with. We always thought about our PowerStore ramp in the second half of the year converting the pipeline that I talked about last time. If I was to reflect on what's happened in Q2, I would tell you, we're very happy with the early traction we've had with PowerStore. At less than a quarter of shipping, we have already acquired hundreds of new customers, 20% of them are new to Dell. 20% of our PowerStore customers are new to Dell. What's probably the more compelling from my point of view is we're seeing a strong correlation with our competitive swaps that are up 32% quarter-over-quarter. And we've seen 2x the level of competitive displacement revenue than the previous quarter since the launch of PowerStore. I think about the largest storage sales force on the planet, their expectations are high. They're enthusiastic about the product. Our expectations haven't changed at all about PowerStore. That sales force is out generating hundreds of new opportunities a week. We're doing many virtual demos every week on top of the pipeline that we referenced last time. So we absolutely believe we have a winner here. Our expectations haven't changed. Yes, we're dealing with a COVID environment that takes a little longer to do some of the evals, some of the certifications. But our team is being creative, helping customers do that. And then your last question about pricing, we didn't change our pricing on PowerStore. We went into the marketplace, and we priced PowerStore against the competition at the same level on an effective gigabyte. So in my mind, we've put a better product potentially in the hands of the market at the same price as our competitors on an effective gigabyte. I think that's a win in our hand.

Thanks, Rob. And thanks, Jeff. All right. That's a wrap on Q&A. We'll see many of you virtually at the Citi Global Technology Conference on Tuesday, September 8. So thanks for joining.

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