ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2020 and the unaudited Condensed Consolidated Financial Statements included in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and that are subject to numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied in any forward-looking statements.
Unless otherwise indicated, all results presented are prepared in a manner that complies, in all material respects, with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.
Unless the context indicates otherwise, references in this report to “we,” “us,” “our,” the “Company,” and “Dell Technologies” mean Dell Technologies Inc. and its consolidated subsidiaries, references to “Dell” mean Dell Inc. and Dell Inc.’s consolidated subsidiaries, and references to “EMC” mean EMC Corporation and EMC Corporation’s consolidated subsidiaries.
Our fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. We refer to our fiscal year ending January 29, 2021 and our fiscal year ended January 31, 2020 as “Fiscal 2021” and “Fiscal 2020,” respectively. Fiscal 2021 and Fiscal 2020 include 52 weeks.
INTRODUCTION
Dell Technologies is a leading global end-to-end technology provider, with a comprehensive portfolio of IT hardware, software, and services solutions spanning both traditional infrastructure and emerging multi-cloud technologies that enable our customers to build their digital future and transform how they work and live. We operate globally across key functional areas such as technology and product development, marketing, go-to-market, and global services, and are supported by Dell Financial Services. We continue to seamlessly deliver differentiated and holistic IT solutions to our customers, which has driven significant revenue growth and share gains.
Dell Technologies operates with significant scale and an unmatched breadth of complementary offerings. Digital transformation has become essential to all businesses, and we have expanded our portfolio to include holistic solutions that enable our customers to drive their ongoing digital transformation initiatives. Dell Technologies’ integrated solutions help customers modernize their IT infrastructure, address workforce transformation, and provide critical security solutions to protect againstkeep people and organizations connected in this current time of disruption caused by the ever increasingcoronavirus disease 2019 (“COVID-19”) pandemic. We are providing essential solutions to our customers during this period of accelerated digital transformation to improve and evolving security threats.strengthen business and workforce productivity. With our extensive portfolio and our commitment to innovation, we have the ability to offer secure, integrated solutions that extend from the edge to the core to the cloud, and we are at the forefront of the software-defined and cloud native infrastructure era. Our end-to-end portfolio is supported by a differentiated go-to-market engine, which includes a 43,000-person sales force, a global network of channel partners, and a world-class supply chain that together drive long-term growth and operating efficiencies.
In October 2020, Dell Technologies announced Project APEX, which will simplify how our customers can consume IT as-a-Service—across storage, servers, networking, hyper-converged infrastructure, PCs and broader solutions. As we release these solutions over time, businesses will be able to buy and implement IT with a simple, consistent cloud experience across our extensive product portfolio. Dell Technologies Cloud Console will give customers a single self-service interface to manage every aspect of their cloud and as-a-Service journey. Dell Technologies Storage as-a-Service will be deployed and managed on-premises by Dell Technologies.
Products and Services
We design, develop, manufacture, market, sell, and support a wide range of comprehensive and integrated solutions, products, and services. We are organized into the following business units, which are our reportable segments: Infrastructure Solutions Group; Client Solutions Group; and VMware.
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• | •Infrastructure Solutions Group (“ISG”) — ISG enables the digital transformation of our customers through our trusted multi-cloud and big data solutions, which are built upon a modern data center infrastructure. ISG works with customers in the area of hybrid cloud deployment with the goal of simplifying, streamlining, and automating cloud operations. ISG solutions are built for multicloud environments and are optimized to run cloud native workloads in both public and private clouds, as well as traditional on-premise workloads.
— ISG enables the digital transformation of our customers through our trusted multi-cloud and big data solutions, which are built upon a modern data center infrastructure. ISG works with customers in the area of hybrid cloud deployment with the goal of simplifying, streamlining, and automating cloud operations. ISG solutions are built for multicloud environments and are optimized to run cloud native workloads in both public and private clouds, as well as traditional on-premise workloads.
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Our comprehensive portfolio of advanced storage solutions includes traditional storage solutions as well as next-generation storage solutions (such as all-flash arrays, scale-out file, object platforms, and software-defined solutions). We have simplified our storage portfolio to ensure that we deliver the technology needed for our customers’ digital transformation. We continue to make enhancements to our storage solutions offerings and expect that these offerings, including our new PowerStore storage array released in May 2020, will drive long-term improvements in the business. Our server portfolio includes high-performance rack, blade, tower, and hyperscale servers, optimized for artificial intelligence and machine learning workloads. Our networking portfolio helps our business customers transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes. Our strengths in server, storage, and virtualization software solutions enable us to offer leading converged and hyper-converged solutions, allowing our customers to accelerate their IT transformation by acquiring scalable integrated IT solutions instead of building and assembling their own IT platforms. ISG also offers attached software, peripherals, and services, including support and deployment, configuration, and extended warranty services.
Approximately half of ISG revenue is generated by sales to customers in the Americas, with the remaining portion derived from sales to customers in the Europe, Middle East, and Africa region (“EMEA”) and the Asia-Pacific and Japan region (“APJ”).
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• | •Client Solutions Group (“CSG”) — CSG includes branded hardware (such as desktops, workstations, and notebooks) and branded peripherals (such as displays and projectors), as well as third-party software and peripherals. Our computing devices are designed with our commercial and consumer customers’ needs in mind, and we seek to optimize performance, reliability, manageability, design, and security. In addition to our traditional hardware business, we have a portfolio of thin client offerings that we believe will allow us to benefit from the growth trends in cloud computing. For our customers that are seeking to simplify client lifecycle management, Dell PC as a Service offering combines hardware, software, lifecycle services, and financing into one all-encompassing solution that provides predictable pricing per seat per month through Dell Financial Services. CSG also offers attached software, peripherals, and services, including support and deployment, configuration, and extended warranty services.
— CSG includes branded hardware (such as desktops, workstations, and notebooks) and branded peripherals (such as displays and projectors), as well as third-party software and peripherals. Our computing devices are designed with our commercial and consumer customers’ needs in mind, and we seek to optimize performance, reliability, manageability, design, and security. In addition to our traditional hardware business, we have a portfolio of thin client offerings that we believe will allow us to benefit from the growth trends in cloud computing. For our customers that are seeking to simplify client lifecycle management, Dell PC as a Service offering combines hardware, software, lifecycle services, and financing into one all-encompassing solution that provides predictable pricing per seat per month through Dell Financial Services. CSG also offers attached software, peripherals, and services, including support and deployment, configuration, and extended warranty services.
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Approximately half of CSG revenue is generated by sales to customers in the Americas, with the remaining portion derived from sales to customers in EMEA and APJ.
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• | •VMware— The VMware reportable segment (“VMware”) reflects the operations of VMware, Inc. (NYSE: VMW) within Dell Technologies. VMware works with customers in the areas of hybrid and multi-cloud, modern applications, networking, security, and digital workspaces, helping customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments. VMware’s portfolio supports and addresses the key IT priorities of customers: accelerating their cloud journey, modernizing their applications, empowering digital workspaces, transforming networking, and embracing intrinsic security. VMware enables its customers to digitally transform their operations as they ready their applications, infrastructure, and employees for constantly evolving business needs.
— The VMware reportable segment (“VMware”) reflects the operations of VMware, Inc. (NYSE: VMW) within Dell Technologies. VMware works with customers in the areas of hybrid and multi-cloud, modern applications, networking, security, and digital workspaces, helping customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments. VMware’s portfolio supports and addresses the key IT priorities of customers: accelerating their cloud journey, modernizing their applications, empowering digital workspaces, transforming networking, and embracing intrinsic security. VMware enables its customers to digitally transform their operations as they ready their applications, infrastructure, and employees for constantly evolving business needs.
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During the third quarter of Fiscal 2020, VMware, Inc. completed its acquisition of Carbon Black, Inc. (“Carbon Black”), a developer of cloud-native endpoint protection.
On December 30, 2019, VMware, Inc. completed its acquisition of Pivotal Software, Inc. (“Pivotal”). Before the transaction, Pivotal was a majority-owned subsidiary of Dell Technologies through EMC and VMware, Inc. Pivotal provides a leading cloud-native platform that makes software development and IT operations a strategic advantage for
customers. Pivotal’s cloud-native platform, Pivotal Cloud Foundry, accelerates and streamlines software development by reducing the complexity of building, deploying, and operating new cloud-native applications, and modernizing
legacy applications. With the acquisition, which aligns key software assets, VMware, Inc. will drive and build on a comprehensive development platform with Kubernetes.
Dell Technologies now reports Pivotal results within the VMware reportable segment, and the historical segment results have been recast to reflect this change. Pivotal results were previously reported within other businesses. See Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report for the recast of segment results.
Approximately half of VMware revenue is generated by sales to customers in the United States.
Our other businesses, described below, consist of product and service offerings of Secureworks, Virtustream, Boomi, and RSA Security,Boomi, each of which is majority-owned by Dell Technologies. These businesses are not classified as reportable segments, either individually or collectively, as the results of the businesses are not material to our overall results and the businesses do not meet the criteria for reportable segments.
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• | •Secureworks (NASDAQ: SCWX) is a leading global provider of intelligence-driven information security solutions singularly focused on protecting its clients from cyber attacks. The solutions offered by Secureworks enable organizations of varying size and complexity to fortify their cyber defenses to prevent security breaches, detect malicious activity in near real time, prioritize and respond rapidly to security incidents, and predict emerging threats.
•Virtustream offers cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments.
•Boomi specializes in cloud-based integration, connecting information between existing on-premise and cloud-based applications to ensure that business processes are optimized, data is accurate and workflow is reliable.
On February 18, 2020, we announced our entry into a definitive agreement with a consortium of investors to sell RSA Security. On September 1, 2020, the parties closed the transaction. At the completion of the sale, we received total cash consideration of approximately $2.082 billion, resulting in a pre-tax gain on sale of $338 million. The Company ultimately recorded a $21 million loss net of taxes. The transaction was intended to further simplify our product portfolio and corporate structure. Prior to the divestiture, RSA Security’s operating results were included within Other businesses. See Note 1 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about this transaction.
(NASDAQ: SCWX) is a leading global provider of intelligence-driven information security solutions singularly focused on protecting its clients from cyber attacks. The solutions offered by Secureworks enable organizations of varying size and complexity to fortify their cyber defenses to prevent security breaches, detect malicious activity in near real time, prioritize and respond rapidly to security incidents, and predict emerging threats.
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• | Virtustream offers cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments.
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• | Boomi specializes in cloud-based integration, connecting information between existing on-premise and cloud-based applications to ensure that business processes are optimized, data is accurate and workflow is reliable.
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• | RSA Security provides essential cybersecurity solutions engineered to enable organizations to detect, investigate, and respond to advanced attacks, confirm and manage identities, and, ultimately, help reduce IP theft, fraud, and cybercrime. In February 2020, Dell Technologies announced its entry into a definitive agreement to sell RSA Security to a consortium of investors in an all-cash transaction for approximately $2.075 billion, subject to certain closing adjustments. The transaction, expected to close in the third quarter of Fiscal 2021, is intended to further simplify our product portfolio and corporate structure.
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We believe the collaboration, innovation, and coordination of the operations and strategies across all segments of our business, as well as our differentiated go-to-market model, will continue to drive revenue synergies. Through our coordinated research and development activities, we are able to jointly engineer leading innovative solutions that incorporate the distinct set of hardware, software, and services across all segments of our business.
Our products and services offerings are continually evolving in response to industry dynamics. As a result, reclassifications of certain products and services solutions in major product categories may be required. For further discussion regarding our current reportable segments, see “Results of Operations — Business Unit Results” and Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Dell Financial Services
Dell Financial Services and its affiliates (“DFS”) support our businesses by offering and arranging various financing options and services for our customers in North America, Europe, Australia, and New Zealand. DFS originates, collects, and services customer receivables primarily related to the purchase or use of our product, software, and service solutions. We also arrange financing for some of our customers in various countries where DFS does not currently operate as a captive. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, providing them with financial flexibility to meet their changing technological requirements. The results of these operations are allocated to our segments based on the underlying product or service financed. In response to the COVID-19 pandemic, we are continuing to focus on supporting our customers and are providing up to $9 billion in financing support by offering low or zero percent interest rate programs as well as payment deferral options. The financial impact to DFS and our securitization and structured financing programs is not expected to be
material. For additional information about our financing arrangements, see Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Strategic Investments and Acquisitions
As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm, Dell Technologies Capital, with a focus on emerging technology areas that are relevant to all segments of our business and that will complement our existing portfolio of solutions. Our investment areas include storage, software-defined networking, management and orchestration, security, machine learning and artificial intelligence, Big Data and analytics, cloud, Internet of Things (“IoT”), and software development operations. In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives. As of May 1,October 30, 2020 and January 31, 2020, Dell Technologies held strategic investments of $1.0$1.5 billion and $0.9 billion, respectively.
Business Trends and Challenges
COVID-19 Pandemic and Response — In March 2020, the World Health Organization (“WHO”) declared the outbreak of the coronavirus disease 2019 (“COVID-19”)COVID-19 a global pandemic. This declaration has been followed by significant governmental measures implemented in the United States and globally, including travel bans and restrictions, shelter-in-place orders, limitations and closures of non-essential businesses, and social distancing requirements in efforts to slow down and control the spread of the virus.
The health of our employees, customers, business partners, and communities remains our primary focus. We have taken numerous actions to date in response to COVID-19, including a swift implementation of our business continuity plans. Our crisis management team is actively engaged to respond to changes in our environment quickly and effectively, and to ensure that our preparedness plans and response activities are aligned with recommendations of the WHO, the U.S. Centers for Disease Control and Prevention, and governmental regulations. We have implemented broad travel restrictions and moved to virtual-only events. Most of our employees were previously equipped with remote work capabilities over the past several years, thus we were ableenabling us to quickly establish a work from homework-from-home posture for the majority of our employees. Further, we implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with customers. CertainWith the virus surging again across many regions, and municipalities within the United States and internationally are beginning to lift stay-at-home and quarantine mandates, and we are actively developingbeing cautious with our return-to-site protocols and will continue remote work practices to ensure the health and safety of our employees, customers, and business partners.
We are working closely with our customers and business partners to support them as they expand their own remote work solutions and contingency plans, helping them access our products and services remotely. We have benefited from our agility, our breadth, and our scale. Notable actions we have taken include the following:
•Our global sales teams embraced a new selling process and are successfully supporting our customers and partners remotely.
•We are helping to address our customers’ cash flow requirements by expanding our as-a-service and financing offerings.
•Our close relationships and ability to connect directly with our customers through our e-commerce business have enabled us to quickly meet the immediate demands of the new workwork- and learn from homelearn-from-home environments.
•The strength, scale, and resiliency of our global supply chain have afforded us flexibility to manage through this challenging time. We adapted to events unfolding real-time by applying predictive analytics to model a variety of outcomes to respond quickly to the changing environment. We were ableoptimized our global supply chain footprint to keep factories openmaximize factory uptime, for both Dell Technologies and our suppliers, by working through various local governmental regulations and mandates. During this time, we established robust safety measures to protect the health and safety of our essential team members.
•We continue to drive innovation and excellence in engineering with a largely remote workforce. Engineers and product teams recently delivered several critical solutions, including cloud updates and key client product refreshes, as well as the May 2020 launch of the PowerStore midrange storage solution.
During the first quarternine months of Fiscal 2021, we also took certain precautionary measures to increase our cash position and preserve financial flexibility. For additional information regarding our cash position, liquidity and capital structure, see “Market Conditions, Liquidity and Capital Commitments.”
We saw unique demand dynamics over the course of the quarter and see an uncertain environment as we look ahead. Wealso made a series of prudent decisions to manage expenses and preserve liquidity including but not
limited to global hiring limitations, reduction in consulting and contractor costs, global travel restrictions, and, subsequent to May 1, 2020, a temporary suspension of the Dell 401(k) match program for U.S. employees.employees, and lower facilities-related costs. We will evaluate these actions as we set our annual operating plan for Fiscal 2022, taking into account current conditions, and expect that some of the benefits of these cost reduction initiatives recognized during Fiscal 2021 will phase out over time. All of these decisionsactions are aligned with our strategy, which remains unchanged, of focusing on gaining share, integrating and innovating across the Dell Technologies portfolio, and strengthening our capital structure.
We saw unique demand dynamics during the first nine months of Fiscal 2021. In ISG, the demand environment weakened as enterprise customers directed more of their investments towards remote work and business continuity solutions. In CSG, overall demand was stronger than expected as customers sought to enable work and learn from home solutions. For additional information about impacts of COVID-19 on our operations, see “Results of Operations—Consolidated Results” and “—Business Unit Results.”
We are unable to accurately predict the full impact that this unprecedented environment may have on our results fromof operations, financial condition, liquidity and cash flows due to numerous uncertainties involved, including the progression of the COVID-19 pandemic, governmental responses, and the timing of recovery. We will continue to actively monitor global events and make prudent decisions to navigate in this uncertain and ever-changing environment. We believe we are well-positioned for long-term success, and that we will continue to lead the industry with innovative solutions and the essential technology that the world needs now more than ever.
Dell Technologies Vision and Innovation — Our vision is to be the essential technology company for the data era and a leader in end-user computing, software-defined data center solutions, data management, virtualization, IoT, and cloud software. We believe that our results will benefit from an integrated go-to-market strategy, including enhanced coordination across all segments of our business, and from our differentiated products and solutions capabilities. We intend to continue to execute on our business model and seek to balance liquidity, profitability, and growth to position our company for long-term success.
We are seeing an accelerated rate of change in the IT industry. We seek to address our customers’ evolving needs and their broader digital transformation objectives as they embrace the hybrid multi-cloud environment of today. NewFor many customers right now, a top digital priority is to build stable and resilient remote operational capabilities. We are seeing demand for simpler, more agile IT across multiple clouds. The pandemic has accelerated the introduction and adoption of new technologies are being introducedto ensure productivity and adopted quickly.collaboration from anywhere. In light of this rapid pace of innovation, we continue to invest in research and development, sales, and other key areas of our business to deliver superior products and solutions capabilities and to drive execution of long-term sustainable growth.
ISG — We expect that ISG will continue to be impacted by the changing nature of the IT infrastructure market and competitive environment. The overall server demand environment was down for the quarterfirst nine months of Fiscal 2021 and remains varied among international regions. In the fourth quarter of Fiscal 2021, we expect ISG demand to be slightly lower than the prior year’s sequential growth based on the continued softness in data center spending. We will continue to be selective in determining whether to pursue certain large hyperscale and other server transactions as we drive for balanced growth and profitability. With our scale and strong solutions portfolio, we believe we are well positionedwell-positioned to respond to ongoing competitive dynamics. We continue to focus on customer base expansion and lifetime value of customer measurements.relationships.
Cloud-native applications are expected to continue as a primary growth driver in the infrastructure market as IT organizations increasingly adopt cloud native architectures. We believe the complementary cloud solutions across our business strongly position us to meet these demands for our customers, who are increasingly looking to leverage cloud native architectures, whether on-premises, private or public.
The unprecedented data growth throughout all industries is generating continued demand for our storage solutions and services. We benefit by offering solutions that address the emerging trends of enterprises deploying software-defined storage, hyper-converged infrastructure, and modular solutions based on server-centric architectures. These trends are changing the way customers are consuming our traditional storage offerings. We continue to expand our offerings in external storage arrays, which incorporate flexible, cloud-based functionality. Through our research and development efforts, we are developing new solutions in this rapidly changing industry that we believe will enable us to continue to provide superior solutions to our customers.
CSG — Our CSG offerings are an important element of our strategy, generating strong cash flow and opportunities for cross-selling of complementary solutions. Given current market trends, weDuring the first nine months of Fiscal 2021, CSG demand was strong in certain product
lines, particularly for notebooks and gaming systems, while demand for commercial desktops decreased. These demand dynamics were driven by the imperative for remote work and remote learning solutions, as business, government, and education customers sought to maintain productivity in the midst of COVID-19. We continue to deploy Dell PC as a Service offerings for customers who are seeking simplified solutions and lifecycle management with predictable pricing through DFS. We expect that the CSG demand environment will to continue to be cyclical. Although CSG demand was robust for portionsin the fourth quarter of the first quarter of Fiscal 2021, industry analysts are forecasting overall demand for our CSG solutions will deceleratefiscal year is typically stronger due to holiday purchasing patterns, and in Fiscal 2021 givenwe expect CSG demand in the current macro-economic environment, includingfourth quarter to be slightly above normal seasonality. We remain committed to our long-term strategy for CSG and will continue to innovate across the effects of COVID-19.portfolio, while benefiting from consolidation trends that are occurring in the markets in which we compete. Competitive dynamics will continue to be a factor in our CSG business as we seek to balance profitability and growth. We are committed to a long-term growth strategy, and beyond Fiscal 2021 we believe the CSG demand environment will strengthen due to continued innovation across our solutions portfolio and the ongoing need for work from home solutions, as well as the consolidation trends that are occurring in the markets in which we compete.
Recurring Revenue and Consumption Models — Our customers are interested in new and innovative models that address how they consume our solutions. We offer options including as-a-service, utility, leases, and immediate pay models, all designed to match customers’ consumption and financing preferences. Our multi-year agreements typically result in recurring revenue streams over the term of the arrangement. We expect that our flexible consumption models will further strengthen our customer relationships and provide a foundation for growth in recurring revenue.
Supply Chain — During Fiscal 2020, we recognized benefits to our ISG and CSG operating results from significant component cost declines. During the first quarternine months of Fiscal 2021, the cost environmentcomponent costs continued to be deflationarydecline in the aggregate, for both ISG and CSG, but at a lower rate than in Fiscal 2020. We currently expect theIn recent quarters ISG experienced some component cost environment to be inflationary during the second quarter of Fiscal 2021 and to continue to be inflationaryinflation, particularly for the second half of Fiscal 2021. This may result in consolidated operating results for Fiscal 2021 that trend more toward Fiscal 2019 levels.servers. The component cost trends and forecasts aretrending is dependent on the strength or weakness of actual end userend-user demand and supply dynamics, which will continue to evolve and ultimately impact the translation of the cost environment to pricing and operating results.
Dell Technologies maintains limited-source supplier relationships for processors,certain components, because the relationships are advantageous in the areas of performance, quality, support, delivery, capacity, and price considerations. In recent periods, we have been impacted by processor and othercomponent supply constraints in certain product offerings.offerings, some of which resulted from COVID-19 driven demand patterns. Delays in the supply of limited-source components, including as a result of COVID-19, are affecting the timing of shipments of certain products in desired quantities or configurations.
Macro-Economic Risks and Uncertainties — The impacts of trade protection measures, including increases in tariffs and trade barriers, and changes in government policies and international trade arrangements may affect our ability to conduct business in some non-U.S. markets. We monitor and seek to mitigate these risks with adjustments to our manufacturing, supply chain, and distribution networks.
We manage our business on a U.S. dollar basis. However, we have a large global presence, generating approximately half of our revenue by sales to customers outside of the United States during both the first quarternine months of Fiscal 2021 and Fiscal 2020. As a result, our revenue can be impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts.
Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted EBITDA, and cash flows from operations, which are discussed elsewhere in this report.
Class V Transaction
On December 28, 2018, we completed a transaction (“Class V transaction”) in which we paid $14.0 billion in cash and issued 149,387,617 shares of our Class C Common Stock to holders of our Class V Common Stock in exchange for all outstanding shares of Class V Common Stock. The non-cash consideration portion of the Class V transaction totaled $6.9 billion. As a result of the Class V transaction, the tracking stock feature of Dell Technologies’ capital structure was terminated. The Class C Common Stock is traded on the New York Stock Exchange.
VMware, Inc. Ownership
On July 15, 2020, we announced that we are exploring potential alternatives with respect to our ownership in VMware, Inc., including a potential spin-off of that ownership interest to Dell Technologies’ stockholders. Although this process is currently only at an exploratory stage, we believe a spin-off could benefit both Dell Technologies’ and VMware, Inc.’s stockholders by simplifying capital structures and enhancing strategic flexibility, while still maintaining a mutually beneficial strategic and commercial partnership. Any potential spin-off would not occur prior to September 2021. Other strategic options include maintaining the status quo with respect to our ownership interest in VMware, Inc.
NON-GAAP FINANCIAL MEASURES
In this management’s discussion and analysis, we use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include non-GAAP product net revenue; non-GAAP services net revenue; non-GAAP net revenue; non-GAAP product gross margin; non-GAAP services gross margin; non-GAAP gross margin; non-GAAP operating expenses; non-GAAP operating income; non-GAAP net income; earnings before interest and other, net, taxes, depreciation, and amortization (“EBITDA”); and adjusted EBITDA.
We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items fromManagement considers these non-GAAP measures in evaluating our GAAP results allows management to better understand our consolidated financial performance from period to periodoperating trends and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures.performance. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful and transparent information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, and non-GAAP net income, as defined by us, exclude amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, other corporate expenses and, for non-GAAP net income, fair value adjustments on equity adjustments and an aggregate adjustment for income taxes. As the excluded items have a material impact on our financial results, our management compensates for this limitation by relying primarily on our GAAP results and using non-GAAP financial measures supplementally or for projections when comparable GAAP financial measures are not available. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net revenue, gross margin, operating expenses, operating income, or net income prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.
Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. The discussion below includes information on each of the excluded items as well as our reasons for excluding them from our non-GAAP results. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.
Revenue Reclassification — During Fiscal 2020, Dell Technologies made certain reclassifications of net revenue between the products and services categories on the Consolidated Statement of Net Income (Loss), which impacted previously reported amounts for the third quarter and first quarternine months of Fiscal 2020. The reclassifications were made to provide a more meaningful representation of the nature of certain service and software-as-a-service offerings of VMware, Inc. The reclassifications resulted in an increase to services revenue and an equal and offsetting decrease to product revenue of $179$210 million and $584 million for the third quarter and first quarternine months of Fiscal 2020.2020, respectively. Total net revenue as previously reported remains unchanged. The Company did not recast cost of goods sold for the related revenue reclassifications due to immateriality.
The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:
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• | Amortization of Intangible Assets—Amortization of intangible assets primarily consists of amortization of customer relationships, developed technology, and trade names. In connection with our acquisition by merger of EMC on September 7, 2016, referred to as the EMC merger transaction, and the acquisition of Dell Inc. by Dell Technologies Inc. on October 29, 2013, referred to as the going-private transaction, all of the tangible and intangible assets and liabilities of EMC and Dell, respectively, were accounted for and recognized at fair value on the transaction dates. Accordingly, for the periods presented, amortization of intangible assets represents amortization associated with intangible assets recognized in connection with the EMC merger transaction and the going-private transaction. Amortization charges for purchased intangible assets are significantly impacted by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
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• | Impact of Purchase Accounting—The impact of purchase accounting includes purchase accounting adjustments related to the EMC merger transaction and, to a lesser extent, the going-private transaction, recorded under the acquisition method of accounting in accordance with the accounting guidance for business combinations. This guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities on the date of the transaction. Accordingly, all of the assets and liabilities acquired in the EMC merger transaction and the going-private transaction were accounted for and recognized at fair value as of the respective transaction dates, and the fair value adjustments are being amortized over the estimated useful lives in the periods following the transactions. The fair value adjustments primarily relate to deferred revenue, inventory, and property, plant, and equipment. Although the purchase accounting adjustments and related amortization of those adjustments are reflected in our GAAP results, we evaluate the operating results of the underlying businesses on a non-GAAP basis, after removing such adjustments. We believe that excluding the impact of purchase accounting provides results that are useful in understanding our current operating performance and provides more meaningful comparisons to our past operating performance.
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• | Transaction-related Expenses — Transaction-related expenses typically consist of acquisition, integration, and divestiture related costs and are expensed as incurred. These expenses primarily represent costs for legal, banking, consulting, and advisory services. During both the first quarter of Fiscal 2021 and Fiscal 2020, transaction expenses related to VMware, Inc. acquisitions. From time to time, this category also may include transaction-related gains on divestitures of businesses or asset sales. During the first quarter of Fiscal 2021, we recognized a gain of $120 million on the sale of certain intellectual property assets. We exclude these items for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
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• | Stock-based Compensation Expense— Stock-based compensation expense consists of equity awards granted based on the estimated fair value of those awards at grant date. We estimate the fair value of service-based stock options using the Black-Scholes valuation model. To estimate the fair value of performance-based awards containing a market condition, we use the Monte Carlo valuation model. For all other share-based awards, the fair value is based on the closing price of the Class C Common Stock as reported on the NYSE on the date of grant. Although stock-based compensation is an important aspect of the compensation of our employees and executives, the fair value of the stock-based awards may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. We believe that excluding stock-based compensation expense for purposes of calculating the non-GAAP financial measures presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
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• | Other Corporate Expenses— Other corporate expenses consists primarily of severance, facility action, and other costs. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives. We continue to integrate owned and leased facilities and may incur additional costs as we seek opportunities for operational efficiencies. Other corporate expenses vary from period to period and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
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•Amortization of Intangible Assets—Amortization of intangible assets primarily consists of amortization of customer relationships, developed technology, and trade names. In connection with our acquisition by merger of EMC on September 7, 2016, referred to as the EMC merger transaction, and the acquisition of Dell Inc. by Dell Technologies Inc. on October 29, 2013, referred to as the going-private transaction, all of the tangible and intangible assets and liabilities of EMC and Dell, respectively, were accounted for and recognized at fair value on the transaction dates. Accordingly, for the periods presented, amortization of intangible assets represents amortization associated with intangible assets recognized in connection with the EMC merger transaction and the going-private transaction. Amortization charges for purchased intangible assets are significantly impacted by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
•Impact of Purchase Accounting—The impact of purchase accounting includes purchase accounting adjustments related to the EMC merger transaction and, to a lesser extent, the going-private transaction, recorded under the acquisition method of accounting in accordance with the accounting guidance for business combinations. This guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities on the date of the transaction. Accordingly, all of the assets and liabilities acquired in the EMC merger transaction and the going-private transaction were accounted for and recognized at fair value as of the respective transaction dates, and the fair value adjustments are being amortized over the estimated useful lives in the periods following the transactions. The fair value adjustments primarily relate to deferred revenue, inventory, and property, plant, and equipment. Although the purchase accounting adjustments and related amortization of those adjustments are reflected in our GAAP results, we evaluate the operating results of the underlying businesses on a non-GAAP basis, after removing such adjustments. We believe that excluding the impact of purchase accounting provides results that are useful in understanding our current operating performance and provides more meaningful comparisons to our past operating performance.
•Transaction-related Expenses — Transaction-related expenses typically consist of acquisition, integration, and divestiture related costs and are expensed as incurred. These expenses primarily represent costs for legal, banking, consulting, and advisory services. From time to time, this category also may include transaction-related gains on divestitures of businesses or asset sales. During the first quarter of Fiscal 2021, we recognized a gain of $120 million on the sale of certain intellectual property assets. During the third quarter of Fiscal 2021, we recognized a pre-tax gain of $338 million on the sale of RSA Security. We exclude these items for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance. See Note 1 and Note 8 of the Notes to the Condensed Consolidated Financial Statements for additional information about the divestiture of RSA Security and acquisitions by VMware, Inc., respectively.
•Stock-based Compensation Expense— Stock-based compensation expense consists of equity awards granted based on the estimated fair value of those awards at grant date. We estimate the fair value of service-based stock options using the Black-Scholes valuation model. To estimate the fair value of performance-based awards containing a market condition, we use the Monte Carlo valuation model. For all other share-based awards, the fair value is based on the closing price of the Class C Common Stock as reported on the NYSE on the date of grant. Although stock-based compensation is an important aspect of the compensation of our employees and executives, the fair value of the stock-based awards may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. We believe that excluding stock-based compensation expense for purposes of calculating the non-GAAP financial measures presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
•Other Corporate Expenses— Other corporate expenses consists primarily of severance, facility action, and other costs. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives. We continue to integrate owned and leased facilities and may incur additional costs as we seek opportunities for operational efficiencies. Other corporate expenses vary from period to period and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures presented below facilitates a more
meaningful evaluation of our current operating performance and comparisons to our past operating performance. During the first nine months of Fiscal 2020, this category included Virtustream gross impairment charges of $619 million.
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• | •Fair Value Adjustments on Equity Investments — Fair value adjustments on equity investments primarily consists of the gain (loss) on strategic investments, which includes the recurring fair value adjustments of investments in publicly-traded companies, as well as those in privately-held companies, which are adjusted for observable price changes and, to a lesser extent, any potential impairments. During the third quarter and first nine months of Fiscal 2021, this category included an unrealized gain of $465 million related to one of our strategic investments. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for additional information on our strategic investment activity. Given the volatility in the ongoing adjustments to the valuation of these strategic investments, we believe that excluding these gains and losses for purposes of calculating non-GAAP net income presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
•Aggregate Adjustment for Income Taxes — The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments described above, as well as an adjustment for discrete tax items. Due to the variability in recognition of discrete tax items from period to period, we believe that excluding these benefits or charges for purposes of calculating non-GAAP net income facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance. The tax effects are determined based on the tax jurisdictions where the above items were incurred. See Note 11 of the Notes to the Condensed Consolidated Financial Statements for additional information about our income taxes, including discrete tax items.
— Fair value adjustments on equity investments primarily consists of the gain (loss) on strategic investments, which includes the recurring fair value adjustments of investments in publicly-traded companies, as well as those in privately-held companies, which are adjusted for observable price changes and, to a lesser extent, any potential impairments. Given the volatility in the ongoing adjustments to the valuation of these strategic investments, we believe that excluding these gains and losses for purposes of calculating non-GAAP net income presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
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• | Aggregate Adjustment for Income Taxes — The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments described above, as well as an adjustment for discrete tax items. Due to the variability in recognition of discrete tax items from period to period, we believe that excluding these benefits or charges for purposes of calculating non-GAAP net income facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance. The tax effects are determined based on the tax jurisdictions where the above items were incurred. This category includes discrete tax benefits of $59 million and $405 million related to intra-entity asset transfers that were completed during the first quarter of Fiscal 2021 and Fiscal 2020, respectively. See Note 11 of the Notes to the Condensed Consolidated Financial Statements for additional information on our income taxes.
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The table below presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for theperiods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, 2020 | | % Change | | November 1, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 |
| (in millions, except percentages) |
Product net revenue | $ | 17,352 | | | — | % | | $ | 17,275 | | | $ | 50,127 | | | (3) | % | | $ | 51,765 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Impact of purchase accounting | 2 | | | | | 5 | | | 8 | | | | | 15 | |
Non-GAAP product net revenue | $ | 17,354 | | | — | % | | $ | 17,280 | | | $ | 50,135 | | | (3) | % | | $ | 51,780 | |
| | | | | | | | | | | |
Services net revenue | $ | 6,130 | | | 10 | % | | $ | 5,569 | | | $ | 17,985 | | | 10 | % | | $ | 16,357 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Impact of purchase accounting | 37 | | | | | 79 | | | 121 | | | | | 235 | |
Non-GAAP services net revenue | $ | 6,167 | | | 9 | % | | $ | 5,648 | | | $ | 18,106 | | | 9 | % | | $ | 16,592 | |
| | | | | | | | | | | |
Net revenue | $ | 23,482 | | | 3 | % | | $ | 22,844 | | | $ | 68,112 | | | — | % | | $ | 68,122 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Impact of purchase accounting | 39 | | | | | 84 | | | 129 | | | | | 250 | |
Non-GAAP net revenue | $ | 23,521 | | | 3 | % | | $ | 22,928 | | | $ | 68,241 | | | — | % | | $ | 68,372 | |
| | | | | | | | | | | |
Product gross margin | $ | 3,563 | | | (4) | % | | $ | 3,717 | | | $ | 10,204 | | | (9) | % | | $ | 11,239 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Amortization of intangibles | 376 | | | | | 517 | | | 1,122 | | | | | 1,555 | |
Impact of purchase accounting | 3 | | | | | 7 | | | 13 | | | | | 20 | |
Transaction-related expenses | — | | | | | — | | | — | | | | | (5) | |
Stock-based compensation expense | 7 | | | | | 3 | | | 17 | | | | | 9 | |
Other corporate expenses | 12 | | | | | 2 | | | 15 | | | | | 11 | |
Non-GAAP product gross margin | $ | 3,961 | | | (7) | % | | $ | 4,246 | | | $ | 11,371 | | | (11) | % | | $ | 12,829 | |
| | | | | | | | | | | |
Services gross margin | $ | 3,698 | | | 8 | % | | $ | 3,409 | | | $ | 11,066 | | | 11 | % | | $ | 10,010 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Amortization of intangibles | (1) | | | | | — | | | — | | | | | — | |
Impact of purchase accounting | 37 | | | | | 79 | | | 121 | | | | | 235 | |
Transaction-related expenses | — | | | | | — | | | — | | | | | — | |
Stock-based compensation expense | 44 | | | | | 30 | | | 124 | | | | | 82 | |
Other corporate expenses | 32 | | | | | 4 | | | 40 | | | | | 32 | |
Non-GAAP services gross margin | $ | 3,810 | | | 8 | % | | $ | 3,522 | | | $ | 11,351 | | | 10 | % | | $ | 10,359 | |
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| | | | | | | | | | |
| Three Months Ended |
| May 1, 2020 | | % Change | | May 3, 2019 |
| (in millions, except percentages) |
Product net revenue | $ | 16,038 |
| | (3 | )% | | $ | 16,575 |
|
Non-GAAP adjustments: | | | | | |
Impact of purchase accounting | 4 |
| | | | 4 |
|
Non-GAAP product net revenue | $ | 16,042 |
| | (3 | )% | | $ | 16,579 |
|
| | | | | |
Services net revenue | $ | 5,859 |
| | 10 | % | | $ | 5,333 |
|
Non-GAAP adjustments: | | | | | |
Impact of purchase accounting | 44 |
| | | | 78 |
|
Non-GAAP services net revenue | $ | 5,903 |
| | 9 | % | | $ | 5,411 |
|
| | | | | |
Net revenue | $ | 21,897 |
| | — | % | | $ | 21,908 |
|
Non-GAAP adjustments: | | | | | |
Impact of purchase accounting | 48 |
| | | | 82 |
|
Non-GAAP net revenue | $ | 21,945 |
| | — | % | | $ | 21,990 |
|
| | | | | |
Product gross margin | $ | 3,234 |
| | (7 | )% | | $ | 3,496 |
|
Non-GAAP adjustments: | | | | | |
Amortization of intangibles | 372 |
| | | | 519 |
|
Impact of purchase accounting | 7 |
| | | | 6 |
|
Transaction-related expenses | — |
| | | | (2 | ) |
Stock-based compensation expense | 4 |
| | | | 2 |
|
Other corporate expenses | 2 |
| | | | 4 |
|
Non-GAAP product gross margin | $ | 3,619 |
| | (10 | )% | | $ | 4,025 |
|
| | | | | |
Services gross margin | $ | 3,619 |
| | 10 | % | | $ | 3,301 |
|
Non-GAAP adjustments: | | | | | |
Impact of purchase accounting | 44 |
| | | | 78 |
|
Transaction-related expenses | — |
| | | | (3 | ) |
Stock-based compensation expense | 36 |
| | | | 24 |
|
Other corporate expenses | 7 |
| | | | 9 |
|
Non-GAAP services gross margin | $ | 3,706 |
| | 9 | % | | $ | 3,409 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, 2020 | | % Change | | November 1, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 |
| (in millions, except percentages) |
Gross margin | $ | 7,261 | | | 2 | % | | $ | 7,126 | | | $ | 21,270 | | | — | % | | $ | 21,249 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Amortization of intangibles | 375 | | | | | 517 | | | 1,122 | | | | | 1,555 | |
Impact of purchase accounting | 40 | | | | | 86 | | | 134 | | | | | 255 | |
Transaction-related expenses | — | | | | | — | | | — | | | | | (5) | |
Stock-based compensation expense | 51 | | | | | 33 | | | 141 | | | | | 91 | |
Other corporate expenses | 44 | | | | | 6 | | | 55 | | | | | 43 | |
Non-GAAP gross margin | $ | 7,771 | | | — | % | | $ | 7,768 | | | $ | 22,722 | | | (2) | % | | $ | 23,188 | |
| | | | | | | | | | | |
Operating expenses | $ | 6,132 | | | (3) | % | | $ | 6,290 | | | $ | 18,303 | | | (5) | % | | $ | 19,344 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Amortization of intangibles | (470) | | | | | (540) | | | (1,425) | | | | | (1,779) | |
Impact of purchase accounting | (9) | | | | | (10) | | | (31) | | | | | (44) | |
Transaction-related expenses | (52) | | | | | (76) | | | (211) | | | | | (170) | |
Stock-based compensation expense | (385) | | | | | (289) | | | (1,078) | | | | | (795) | |
Other corporate expenses | (170) | | | | | (49) | | | (340) | | | | | (749) | |
Non-GAAP operating expenses | $ | 5,046 | | | (5) | % | | $ | 5,326 | | | $ | 15,218 | | | (4) | % | | $ | 15,807 | |
| | | | | | | | | | | |
Operating income | $ | 1,129 | | | 35 | % | | $ | 836 | | | $ | 2,967 | | | 56 | % | | $ | 1,905 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Amortization of intangibles | 845 | | | | | 1,057 | | | 2,547 | | | | | 3,334 | |
Impact of purchase accounting | 49 | | | | | 96 | | | 165 | | | | | 299 | |
Transaction-related expenses | 52 | | | | | 76 | | | 211 | | | | | 165 | |
Stock-based compensation expense | 436 | | | | | 322 | | | 1,219 | | | | | 886 | |
Other corporate expenses | 214 | | | | | 55 | | | 395 | | | | | 792 | |
Non-GAAP operating income | $ | 2,725 | | | 12 | % | | $ | 2,442 | | | $ | 7,504 | | | 2 | % | | $ | 7,381 | |
| | | | | | | | | | | |
Net income | $ | 881 | | | 60 | % | | $ | 552 | | | $ | 2,162 | | | (58) | % | | $ | 5,113 | |
Non-GAAP adjustments: | | | | | | | | | | | |
Amortization of intangibles | 845 | | | | | 1,057 | | | 2,547 | | | | | 3,334 | |
Impact of purchase accounting | 49 | | | | | 96 | | | 165 | | | | | 299 | |
Transaction-related (income) expenses | (286) | | | | | 76 | | | (247) | | | | | 165 | |
Stock-based compensation expense | 436 | | | | | 322 | | | 1,219 | | | | | 886 | |
Other corporate expenses | 106 | | | | | 55 | | | 287 | | | | | 792 | |
Fair value adjustments on equity investments | (489) | | | | | (18) | | | (591) | | | | | (160) | |
Aggregate adjustment for income taxes | 169 | | | | | (695) | | | (1,067) | | | | | (6,024) | |
Non-GAAP net income | $ | 1,711 | | | 18 | % | | $ | 1,445 | | | $ | 4,475 | | | 2 | % | | $ | 4,405 | |
|
| | | | | | | | | | |
| Three Months Ended |
| May 1, 2020 | | % Change | | May 3, 2019 |
| (in millions, except percentages) |
Gross margin | $ | 6,853 |
| | 1 | % | | $ | 6,797 |
|
Non-GAAP adjustments: | | | | | |
Amortization of intangibles | 372 |
| | | | 519 |
|
Impact of purchase accounting | 51 |
| | | | 84 |
|
Transaction-related expenses | — |
| | | | (5 | ) |
Stock-based compensation expense | 40 |
| | | | 26 |
|
Other corporate expenses | 9 |
| | | | 13 |
|
Non-GAAP gross margin | $ | 7,325 |
| | (1 | )% | | $ | 7,434 |
|
| | | | | |
Operating expenses | $ | 6,151 |
| | (2 | )% | | $ | 6,247 |
|
Non-GAAP adjustments: | | | | | |
Amortization of intangibles | (483 | ) | | | | (698 | ) |
Impact of purchase accounting | (12 | ) | | | | (17 | ) |
Transaction-related expenses | (76 | ) | | | | (47 | ) |
Stock-based compensation expense | (330 | ) | | | | (237 | ) |
Other corporate expenses | (86 | ) | | | | (10 | ) |
Non-GAAP operating expenses | $ | 5,164 |
| | (1 | )% | | $ | 5,238 |
|
| | | | | |
Operating income | $ | 702 |
| | 28 | % | | $ | 550 |
|
Non-GAAP adjustments: | | | | | |
Amortization of intangibles | 855 |
| | | | 1,217 |
|
Impact of purchase accounting | 63 |
| | | | 101 |
|
Transaction-related expenses | 76 |
| | | | 42 |
|
Stock-based compensation expense | 370 |
| | | | 263 |
|
Other corporate expenses | 95 |
| | | | 23 |
|
Non-GAAP operating income | $ | 2,161 |
| | (2 | )% | | $ | 2,196 |
|
| | | | | |
Net income | $ | 182 |
| | (45 | )% | | $ | 329 |
|
Non-GAAP adjustments: | | | | | |
Amortization of intangibles | 855 |
| | | | 1,217 |
|
Impact of purchase accounting | 63 |
| | | | 101 |
|
Transaction-related (income) expenses | (44 | ) | | | | 42 |
|
Stock-based compensation expense | 370 |
| | | | 263 |
|
Other corporate expenses | 95 |
| | | | 23 |
|
Fair value adjustments on equity investments | (94 | ) | | | | (62 | ) |
Aggregate adjustment for income taxes | (284 | ) | | | | (704 | ) |
Non-GAAP net income | $ | 1,143 |
| | (5 | )% | | $ | 1,209 |
|
74
In addition to the above measures, we also use EBITDA and adjusted EBITDA to provide additional information for evaluation of our operating performance. Adjusted EBITDA excludes purchase accounting adjustments related to the EMC merger transaction and the going-private transaction, acquisition, integration, and divestiture related costs, severance, facility action, and other costs, and stock-based compensation expense. We believe that, due to the non-operational nature of the purchase accounting entries, it is appropriate to exclude these adjustments.
As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance. EBITDA and adjusted EBITDA do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. In particular, EBITDA and adjusted EBITDA are not intended to be a measure of free cash flow available for management’s discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.
The table below presents a reconciliation of EBITDA and adjusted EBITDA to net income for the periods indicated:
| | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| May 1, 2020 | | % Change | | May 3, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 |
| (in millions, except percentages) | | (in millions, except percentages) |
Net income | $ | 182 |
| | (45 | )% | | $ | 329 |
| Net income | $ | 881 | | | 60 | % | | $ | 552 | | | $ | 2,162 | | | (58) | % | | $ | 5,113 | |
Adjustments: | | | | | | Adjustments: | |
Interest and other, net (a) | 566 |
| | | | 693 |
| Interest and other, net (a) | (273) | | | 677 | | | 929 | | | 2,000 | |
Income tax benefit (b) | (46 | ) | | | | (472 | ) | |
Income tax expense (benefit) (b) | | Income tax expense (benefit) (b) | 521 | | | (393) | | | (124) | | | (5,208) | |
Depreciation and amortization | 1,316 |
| | | | 1,616 |
| Depreciation and amortization | 1,361 | | | 1,494 | | | 4,017 | | | 4,608 | |
EBITDA | $ | 2,018 |
| | (7 | )% | | $ | 2,166 |
| EBITDA | $ | 2,490 | | | 7 | % | | $ | 2,330 | | | $ | 6,984 | | | 7 | % | | $ | 6,513 | |
| | | | | | | | | | | | | |
EBITDA | $ | 2,018 |
| | (7 | )% | | $ | 2,166 |
| EBITDA | $ | 2,490 | | | 7 | % | | $ | 2,330 | | | $ | 6,984 | | | 7 | % | | $ | 6,513 | |
Adjustments: | | | | | | Adjustments: | |
Stock-based compensation expense | 370 |
| | | | 263 |
| Stock-based compensation expense | 436 | | | 322 | | | 1,219 | | | 886 | |
Impact of purchase accounting (c) | 48 |
| | | | 83 |
| Impact of purchase accounting (c) | 39 | | | 84 | | | 129 | | | 251 | |
Transaction-related expenses (d) | 76 |
| | | | 42 |
| Transaction-related expenses (d) | 52 | | | 76 | | | 211 | | | 165 | |
Other corporate expenses (e) | 95 |
| | | | 19 |
| Other corporate expenses (e) | 214 | | | 45 | | | 395 | | | 771 | |
Adjusted EBITDA | $ | 2,607 |
| | 1 | % | | $ | 2,573 |
| Adjusted EBITDA | $ | 3,231 | | | 13 | % | | $ | 2,857 | | | $ | 8,938 | | | 4 | % | | $ | 8,586 | |
____________________
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(a) | See “Results of Operations — Interest and Other, Net” for more information on the components of interest and other, net. |
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(b) | See Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on discrete tax items recorded during the first quarter of Fiscal 2021 and Fiscal 2020. |
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(c) | This amount includes the non-cash purchase accounting adjustments related to the EMC merger transaction and the going-private transaction. |
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(d) | Transaction-related expenses consist of acquisition, integration, and divestiture related costs. |
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(e) | Other corporate expenses includes severance, facility action, and other costs. |
(a)See “Results of Operations — Interest and Other, Net” for more information on the components of interest and other, net.
(b)See Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information on discrete tax items recorded during the third quarter and first nine months of Fiscal 2021 and Fiscal 2020.
(c)This amount includes the non-cash purchase accounting adjustments related to the EMC merger transaction and the going-private transaction.
(d)Transaction-related expenses consist of acquisition, integration, and divestiture related costs.
(e)Other corporate expenses includes impairment charges, severance, facility action, and other costs.
RESULTS OF OPERATIONS
Consolidated Results
The following table summarizes our consolidated results for each of the periods presented. Unless otherwise indicated, all changes identified for the current period results represent comparisons to results for the prior corresponding fiscal period.
| | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| May 1, 2020 | | | | May 3, 2019 | | October 30, 2020 | | November 1, 2019 | | October 30, 2020 | | November 1, 2019 |
| Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue | | Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue | | Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue |
| (in millions, except percentages) | | (in millions, except percentages) |
Net revenue: | | | | | | | | | | Net revenue: | |
Products (a) | $ | 16,038 |
| | 73.2 | % | | (3 | )% | | $ | 16,575 |
| | 75.7 | % | Products (a) | $ | 17,352 | | | 73.9 | % | | — | % | | $ | 17,275 | | | 75.6 | % | | $ | 50,127 | | | 73.6 | % | | (3) | % | | $ | 51,765 | | | 76.0 | % |
Services (a) | 5,859 |
| | 26.8 | % | | 10 | % | | 5,333 |
| | 24.3 | % | Services (a) | 6,130 | | | 26.1 | % | | 10 | % | | 5,569 | | | 24.4 | % | | 17,985 | | | 26.4 | % | | 10 | % | | 16,357 | | | 24.0 | % |
Total net revenue | $ | 21,897 |
| | 100.0 | % | | — | % | | $ | 21,908 |
| | 100.0 | % | Total net revenue | $ | 23,482 | | | 100.0 | % | | 3 | % | | $ | 22,844 | | | 100.0 | % | | $ | 68,112 | | | 100.0 | % | | — | % | | $ | 68,122 | | | 100.0 | % |
Gross margin: | | | | | | | | | | Gross margin: | |
Products (b) | $ | 3,234 |
| | 20.2 | % | | (7 | )% | | $ | 3,496 |
| | 21.1 | % | Products (b) | $ | 3,563 | | | 20.5 | % | | (4) | % | | $ | 3,717 | | | 21.5 | % | | $ | 10,204 | | | 20.4 | % | | (9) | % | | $ | 11,239 | | | 21.7 | % |
Services (c) | 3,619 |
| | 61.8 | % | | 10 | % | | 3,301 |
| | 61.9 | % | Services (c) | 3,698 | | | 60.3 | % | | 8 | % | | 3,409 | | | 61.2 | % | | 11,066 | | | 61.5 | % | | 11 | % | | 10,010 | | | 61.2 | % |
Total gross margin | $ | 6,853 |
| | 31.3 | % | | 1 | % | | $ | 6,797 |
| | 31.0 | % | Total gross margin | $ | 7,261 | | | 30.9 | % | | 2 | % | | $ | 7,126 | | | 31.2 | % | | $ | 21,270 | | | 31.2 | % | | — | % | | $ | 21,249 | | | 31.2 | % |
Operating expenses | $ | 6,151 |
| | 28.1 | % | | (2 | )% | | $ | 6,247 |
| | 28.5 | % | Operating expenses | $ | 6,132 | | | 26.1 | % | | (3) | % | | $ | 6,290 | | | 27.5 | % | | $ | 18,303 | | | 26.9 | % | | (5) | % | | $ | 19,344 | | | 28.4 | % |
Operating income | $ | 702 |
| | 3.2 | % | | 28 | % | | $ | 550 |
| | 2.5 | % | Operating income | $ | 1,129 | | | 4.8 | % | | 35 | % | | $ | 836 | | | 3.7 | % | | $ | 2,967 | | | 4.4 | % | | 56 | % | | $ | 1,905 | | | 2.8 | % |
Net income | $ | 182 |
| | 0.8 | % | | (45 | )% | | $ | 329 |
| | 1.5 | % | Net income | $ | 881 | | | 3.8 | % | | 60 | % | | $ | 552 | | | 2.4 | % | | $ | 2,162 | | | 3.2 | % | | (58) | % | | $ | 5,113 | | | 7.5 | % |
Net income attributable to Dell Technologies Inc. | $ | 143 |
| | 0.7 | % | | (51 | )% | | $ | 293 |
| | 1.3 | % | Net income attributable to Dell Technologies Inc. | $ | 832 | | | 3.5 | % | | 67 | % | | $ | 499 | | | 2.2 | % | | $ | 2,023 | | | 3.0 | % | | (52) | % | | $ | 4,208 | | | 6.2 | % |
| | | | | | | | | | |
Non-GAAP Financial Information | Non-GAAP Financial Information | | | | | | | | | Non-GAAP Financial Information | |
Non-GAAP net revenue: | | | | | | | | | | Non-GAAP net revenue: | |
Product | $ | 16,042 |
| | 73.1 | % | | (3 | )% | | $ | 16,579 |
| | 75.4 | % | |
Services | 5,903 |
| | 26.9 | % | | 9 | % | | 5,411 |
| | 24.6 | % | |
Products (a) | | Products (a) | $ | 17,354 | | | 73.8 | % | | — | % | | $ | 17,280 | | | 75.4 | % | | $ | 50,135 | | | 73.5 | % | | (3) | % | | $ | 51,780 | | | 75.7 | % |
Services (a) | | Services (a) | 6,167 | | | 26.2 | % | | 9 | % | | 5,648 | | | 24.6 | % | | 18,106 | | | 26.5 | % | | 9 | % | | 16,592 | | | 24.3 | % |
Total non-GAAP net revenue | $ | 21,945 |
| | 100.0 | % | | — | % | | $ | 21,990 |
| | 100.0 | % | Total non-GAAP net revenue | $ | 23,521 | | | 100.0 | % | | 3 | % | | $ | 22,928 | | | 100.0 | % | | $ | 68,241 | | | 100.0 | % | | — | % | | $ | 68,372 | | | 100.0 | % |
Non-GAAP gross margin: | | | | | | | | | | Non-GAAP gross margin: | |
Product (a) | $ | 3,619 |
| | 22.6 | % | | (10 | )% | | $ | 4,025 |
| | 24.3 | % | |
Services (b) | 3,706 |
| | 62.8 | % | | 9 | % | | 3,409 |
| | 63.0 | % | |
Products (b) | | Products (b) | $ | 3,961 | | | 22.8 | % | | (7) | % | | $ | 4,246 | | | 24.6 | % | | $ | 11,371 | | | 22.7 | % | | (11) | % | | $ | 12,829 | | | 24.8 | % |
Services (c) | | Services (c) | 3,810 | | | 61.8 | % | | 8 | % | | 3,522 | | | 62.4 | % | | 11,351 | | | 62.7 | % | | 10 | % | | 10,359 | | | 62.4 | % |
Total non-GAAP gross margin | $ | 7,325 |
| | 33.4 | % | | (1 | )% | | $ | 7,434 |
| | 33.8 | % | Total non-GAAP gross margin | $ | 7,771 | | | 33.0 | % | | — | % | | $ | 7,768 | | | 33.9 | % | | $ | 22,722 | | | 33.3 | % | | (2) | % | | $ | 23,188 | | | 33.9 | % |
Non-GAAP operating expenses | $ | 5,164 |
| | 23.6 | % | | (1 | )% | | $ | 5,238 |
| | 23.8 | % | Non-GAAP operating expenses | $ | 5,046 | | | 21.5 | % | | (5) | % | | $ | 5,326 | | | 23.2 | % | | $ | 15,218 | | | 22.3 | % | | (4) | % | | $ | 15,807 | | | 23.1 | % |
Non-GAAP operating income | $ | 2,161 |
| | 9.8 | % | | (2 | )% | | $ | 2,196 |
| | 10.0 | % | Non-GAAP operating income | $ | 2,725 | | | 11.6 | % | | 12 | % | | $ | 2,442 | | | 10.7 | % | | $ | 7,504 | | | 11.0 | % | | 2 | % | | $ | 7,381 | | | 10.8 | % |
Non-GAAP net income | $ | 1,143 |
| | 5.2 | % | | (5 | )% | | $ | 1,209 |
| | 5.5 | % | Non-GAAP net income | $ | 1,711 | | | 7.3 | % | | 18 | % | | $ | 1,445 | | | 6.3 | % | | $ | 4,475 | | | 6.6 | % | | 2 | % | | $ | 4,405 | | | 6.4 | % |
EBITDA | $ | 2,018 |
| | 9.2 | % | | (7 | )% | | $ | 2,166 |
| | 9.8 | % | EBITDA | $ | 2,490 | | | 10.6 | % | | 7 | % | | $ | 2,330 | | | 10.2 | % | | $ | 6,984 | | | 10.2 | % | | 7 | % | | $ | 6,513 | | | 9.5 | % |
Adjusted EBITDA | $ | 2,607 |
| | 11.9 | % | | 1 | % | | $ | 2,573 |
| | 11.7 | % | Adjusted EBITDA | $ | 3,231 | | | 13.7 | % | | 13 | % | | $ | 2,857 | | | 12.5 | % | | $ | 8,938 | | | 13.1 | % | | 4 | % | | $ | 8,586 | | | 12.6 | % |
____________________
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(a) | During Fiscal 2020, Dell Technologies made certain reclassifications of net revenue between the products and services categories on the Consolidated Statement of Net Income (Loss), which impacted previously reported amounts for the first quarter of Fiscal 2020. The Company did not recast cost of goods sold for the related revenue reclassifications due to immateriality. The reclassifications resulted in an increase to services revenue and an equal and offsetting decrease to product revenue of $179 million for the first(a) During Fiscal 2020, Dell Technologies made certain reclassifications of net revenue between the products and services categories on the Consolidated Statement of Net Income (Loss), which impacted previously reported amounts for the third quarter and first nine months of Fiscal 2020. The Company did not recast cost of goods sold for the related revenue reclassifications due to immateriality. The reclassifications resulted in an increase to services revenue and an equal and offsetting decrease to product revenue of $210 million and $584 million for the third quarter and first nine months of Fiscal 2020, respectively. Total net revenue as previously reported remains unchanged. |
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(b) | Product gross margin percentages represent product gross margin as a percentage of product net revenue, and non-GAAP product gross margin percentages represent non-GAAP product gross margin as a percentage of non-GAAP product net revenue. |
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(c) | Services gross margin percentages represent services gross margin as a percentage of services net revenue, and non-GAAP services gross margin percentages represent non-GAAP services gross margin as a percentage of non-GAAP services net revenue. |
(b) Product gross margin percentages represent product gross margin as a percentage of product net revenue, and non-GAAP product gross margin percentages represent non-GAAP product gross margin as a percentage of non-GAAP product net revenue.
(c) Services gross margin percentages represent services gross margin as a percentage of services net revenue, and non-GAAP services gross margin percentages represent non-GAAP services gross margin as a percentage of non-GAAP services net revenue.
Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, EBITDA, and adjusted EBITDA are not measurements of financial performance prepared in accordance with GAAP. Non-GAAP financial measures as a percentage of net revenue are calculated based on non-GAAP net revenue. See “Non‑GAAPNon-GAAP Financial Measures” for additional information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Overview
During the third quarter and first quarternine months of Fiscal 2021, both our net revenue increased 3% and non-GAAP net revenue remained flat, respectively, as we benefited from the strength of our broad technology solutions portfolio, which helped us navigate market volatility and competitive pressures, particularly due to the COVID-19 environment. During the third quarter and first nine months of Fiscal 2021, our non-GAAP net revenue also increased 3% and remained flat, respectively. Increases in CSG and VMware net revenue increased,were offset by a decline in ISG net revenue.revenue for both the third quarter and first nine months of Fiscal 2021. The increase in CSG net revenue was primarily driven by increasedgrowth in consumer solutions and continued strong demand for work and learn from home solutions, particularly commercial notebooks.notebooks, partially offset by lower demand for commercial desktops. VMware net revenue increased due to broad-based strength across the portfolio, including growth in sales of subscriptions and software-as-a-service offerings and software license revenue, new contracts and renewals of VMware enterprise agreements, maintenance contracts sold in previous periods, and additional maintenance contracts sold in conjunction with new software license sales.maintenance. ISG net revenue decreased primarily due to a weaker demand environment as customers shiftedcontinued to direct their investments intowards remote work solutions as part ofand business continuity plans.solutions. Although we are in the midst of unprecedented uncertainty as a result of the ongoing COVID-19 pandemic, we believe we are well-positioned for long-term profitable growth while also maintaining the ability to adjust as needed to changing market conditions with complementary solutions across all segments of our business, an agile workforce, and the strength of our global supply chain.
During the third quarter and first quarternine months of Fiscal 2021, our operating income increased 28% to $702 million due to an increase35% and 56%, respectively, primarily driven by lower selling, general, and administrative expenses as we realized the benefit of cost reduction initiatives. During the third quarter of Fiscal 2021, operating income benefited from increases in operating income for CSG and VMware, and a decrease in amortization of intangible assets. These benefits were partially offset by a decrease in operating income for ISG and increases in stock-based compensation expense and severance costs. During the first nine months of Fiscal 2021, the increase in operating income was primarily attributable to the absence of Virtustream impairment charges of $619 million recognized in the first nine months of Fiscal 2020. Operating income for the first nine months of Fiscal 2021 also benefited from increases in operating income for VMware and other businesses and a decrease in amortization of intangible assets. These benefits were partially offset by decreases in operating income for CSG and ISG and an increaseincreases in stock-based compensation expense.expense and severance costs.
Amortization of intangible assets, and stock-based compensation expense, and other corporate expenses that impacted our operating income totaled $1.2$1.5 billion and $1.5$1.4 billion for the third quarter of Fiscal 2021 and Fiscal 2020, respectively, and $4.2 billion and $5.0 billion for the first quarternine months of Fiscal 2021 and Fiscal 2020, respectively. Excluding these costs, and the impact of purchase accounting transaction-related expenses, and other corporatetransaction-related expenses, our non-GAAP operating income was $2.2 billionincreased 12% and 2% during both the third quarter and first nine months of Fiscal 2021, respectively. The 12% increase in non-GAAP operating income during the third quarter of Fiscal 2021 and Fiscal 2020. Our non-GAAP operating income decreased 2 percent for the first quarter of Fiscal 2021was due to decreasesincreases in operating income for ISGCSG and CSG,VMware, which were partially offset by a decrease in operating income for ISG. The 2% increase in non-GAAP operating income during the first nine months of Fiscal 2020 was due to increases in operating income for VMware and other businesses.businesses, which were partially offset by decreases in operating income for CSG and ISG.
Cash used inprovided by operating activities was $0.8$5.5 billion and $5.8 billion for the first quarternine months of Fiscal 2021 compared toand Fiscal 2020, respectively. Operating cash provided by operating activities of $0.7 billion for the first quarter of Fiscal 2020. The decrease in operating cash flows declined slightly during the first quarternine months of Fiscal 2021 as the strong profitability during the period was attributable tooffset by unfavorable working capital impacts related to the COVID-19 pandemic onof an increase in inventory, decline in growth rate of deferred revenue, and timing of collectionspurchases and higher inventory, mostpayments to vendors. COVID-19 impacts to working capital continued to
normalize by fiscal year-end.during the third quarter of Fiscal 2021. See “Market Conditions, Liquidity, and Capital Commitments” for further information on our cash flow metrics.
Net Revenue
During the firstthird quarter of Fiscal 2021, our net revenue and non-GAAP net revenue remained flat,both increased 3%. The increases in net revenue and non-GAAP net revenue during the third quarter of Fiscal 2021 were primarily dueattributable to increases in net revenue infor CSG and VMware, which were partially offset by a declinedecrease in ISG net revenue. See “Business Unit Results” for further information. During the first nine months of Fiscal 2021, our revenue and non-GAAP net revenue both remained flat as increases in net revenue for CSG and VMware were offset by a decrease in ISG net revenue.
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• | Product Net Revenue — Product net revenue includes revenue from the sale of hardware products and software licenses. During the first quarter of Fiscal 2021, product net revenue and non-GAAP product net revenue both decreased 3% primarily due to a decrease in product net revenue for ISG.
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• | Services Net Revenue— Services net revenue includes revenue from our services offerings and support services related to hardware products and software licenses. During the first quarter of Fiscal 2021, services net revenue and non-GAAP services net revenue increased 10% and 9%, respectively. These increases were primarily attributable to an increase in services revenue for hardware support and deployment and software maintenance due to growth in CSG and VMware. A substantial portion of services net revenue is derived from offerings that have been deferred over a period of time, and, as a result, reported services net revenue growth rates will be different than reported product net revenue growth rates.
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•Product Net Revenue — Product net revenue includes revenue from the sale of hardware products and software licenses. During the third quarter of Fiscal 2021, product net revenue and non-GAAP product net revenue both remained flat as an increase in product net revenue for CSG was offset by a decrease in product net revenue for ISG. During the first nine months of Fiscal 2021, product net revenue and non-GAAP product net revenue both decreased 3% primarily due to a decrease in product net revenue for ISG.
70•Services Net Revenue— Services net revenue includes revenue from our services offerings and support services related to hardware products and software licenses. During the third quarter of Fiscal 2021, services net revenue and non-GAAP services net revenue increased 10% and 9%, respectively. During the first nine months of Fiscal 2021, services net revenue and non-GAAP services net revenue increased 10% and 9%, respectively. These increases were primarily attributable to increases in services net revenue for CSG third-party software and maintenance and VMware software, and in particular, increases in subscription-based licenses. A substantial portion of services net revenue is derived from offerings that have been deferred over a period of time, and, as a result, reported services net revenue growth rates will be different than reported product net revenue growth rates.
From a geographical perspective, during the third quarter and first nine months of Fiscal 2021, net revenue increased in the Americas due to strong CSG performance. These increases were offset by declines in net revenue generated by sales to customers in the Americas increased during the first quarter of Fiscal 2021 due to strong performance in CSG and VMware. In EMEA, net revenue from sales to customers increased during the first quarter of Fiscal 2021 due to demand for CSG solutions. Net revenue from sales to customers in APJ decreased during the first quarter of Fiscal 2021, primarily as thea result of a weaker demand environment for CSG and ISG servers and networking, particularly in China.environment.
Gross Margin
During the third quarter and first quarternine months of Fiscal 2021, our gross margin increased 1%2% to $6.9$7.3 billion and our gross margin percentage increased 30 basis points to 31.3%.remained flat at $21.3 billion, respectively. The increasesincrease in our gross margin and gross margin percentage during the firstthird quarter of Fiscal 2021 were primarilywas driven by a favorable impactimpacts of gross margin increases forin CSG and VMware and our other businesses, and a decrease in amortization of intangible assets, partially offset by gross margin decreases for ISG and purchase accounting adjustments. Theseother businesses. During the first nine months of Fiscal 2021, our gross margin remained relatively flat as favorable impacts of gross margin increases for VMware and a decrease in amortization of intangible assets were largelyoffset by gross margin decreases for CSG and ISG.
During the third quarter and first nine months of Fiscal 2021, our gross margin percentage decreased 30 basis points to 30.9% and remained flat at 31.2% basis points, respectively. The decrease in our gross margin percentage during the third quarter of Fiscal 2021 was primarily driven by decreases in gross margin percentage for ISG due to higher product costs and a shift in mix due to strong CSG sales, which was partially offset by a decrease in amortization of intangible assets. During the first nine months of Fiscal 2021, gross margin percentage remained flat as the beneficial impact of a decrease in amortization of intangible assets was offset by decreases in gross marginsmargin percentage for ISG and CSG.CSG, as well as by a decrease due to a shift in product mix due to strong CSG sales.
Our gross margin for the first quarter of Fiscal 2021 and Fiscal 2020 included the impact of amortization of intangibles and purchase accounting adjustments of $0.4 billion and $0.6 billion for the third quarter of Fiscal 2021 and Fiscal 2020, respectively, and $1.3 billion and $1.8 billion during the first nine months of Fiscal 2021 and Fiscal 2020, respectively. Excluding these costs, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP gross margin decreased 1% to $7.3during the third quarter and first nine months of Fiscal 2021 remained flat at $7.8 billion and non-GAAPdecreased 2% to $22.7 billion, respectively.
Non-GAAP gross margin percentage decreased 4090 basis points to 33.4%.33.0% and 60 basis points to 33.3% during the third quarter and first nine months of Fiscal 2021, respectively. The decreasesdecrease in our non-GAAP gross margin percentage during the third quarter of Fiscal 2021 was due to decreases in gross margin percentage for ISG due to higher product costs and a shift in mix due to strong CSG sales. During the first nine months of Fiscal 2021 the decrease in our non-GAAP gross margin percentage were
was attributable to component costs that were deflationarydecreases in the aggregategross margin percentage for ISG and CSG, (althoughas well as a decrease due to a lesser extent thanshift in product mix due to strong CSG sales.
•Products — During the firstthird quarter of Fiscal 2020), increased supply chain2021, product gross margin decreased 4% to $3.6 billion, and product gross margin percentage decreased 100 basis points to 20.5%. The decrease in product gross margin was primarily driven by higher product costs to expedite product deliveryfor ISG partially offset by an increase in gross margin for CSG salesand a decrease in amortization of intangible assets. Product gross margin percentage decreased during the COVID-19 environment,third quarter of Fiscal 2021 due to a shift in product mix due to strong CSG sales. During the third quarter of Fiscal 2021, non-GAAP product gross margin decreased 7% to $4.0 billion, and non-GAAP product gross margin percentage decreased 180 basis points to 22.8% due to the same CSG and ISG dynamics discussed above.
During the first nine months of Fiscal 2021, product gross margin decreased 9% to $10.2 billion, and product gross margin percentage decreased 130 basis points to 20.4%. The decreases in product gross margin and product gross margin percentage were primarily driven by higher product costs for ISG and a shift in product mix due to strong CSG performance.sales. These negativeunfavorable impacts were partially offset by a decrease in amortization of intangibles. During the first nine months of Fiscal 2021, non-GAAP product gross margin decreased 11% to $11.4 billion, and non-GAAP product gross margin percentage decreased 210 basis points to 22.7% due to the same CSG and ISG dynamics discussed above.
•Services — During the third quarter of Fiscal 2021, services gross margin increased 8% to $3.7 billion, and services gross margin percentage decreased 90 basis points to 60.3%. Services gross margin increased due to growth in VMware software maintenance and CSG third-party software and maintenance, particularly subscription-based licenses, as well as a decrease in purchase accounting adjustments. Excluding purchase accounting adjustments, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP services gross margin increased 8% to $3.8 billion during the third quarter of Fiscal 2021 primarily due to growth in VMware software maintenance and CSG third-party software and maintenance, and in particular, increases in subscription-based licenses.
During the third quarter of Fiscal 2021, services gross margin percentage decreased 90 basis points to 60.3% and non-GAAP services gross margin percentage decreased 60 basis points to 61.8%. These decreases were driven by decreases in services gross margin percentage for CSG, partially offset by increases in services gross margin percentages for VMware and ISG.
During the first nine months of Fiscal 2021, services gross margin increased 11% to $11.1 billion due to growth in VMware software maintenance and CSG third-party software and maintenance, and in particular, increases in subscription-based licenses, as well as a decrease in purchase accounting adjustments. Excluding purchase accounting adjustments, transaction-related expenses, stock-based compensation expense, and other businesses.corporate expenses, non-GAAP services gross margin increased 10% to $11.4 billion during the first nine months of Fiscal 2021 primarily due to growth in VMware software maintenance and CSG third-party software and maintenance, particularly subscription-based licenses.
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• | ProductsDuring the first nine months of Fiscal 2021, services gross margin percentage increased 30 basis points to 61.5% and non-GAAP services gross margin percentage increased 30 basis points to 62.7% primarily due to an increase in VMware services gross margin percentage.
— During the first quarter of Fiscal 2021, product gross margin decreased 7% to $3.2 billion, and product gross margin percentage decreased 90 basis points to 20.2%. The decreases in product gross margin and product gross margin percentage were primarily driven by component costs that were deflationary in the aggregate for ISG and CSG (although to a lesser extent than in the first quarter of Fiscal 2020) and increased supply chain costs to expedite product delivery for CSG sales. These unfavorable impacts were partially offset by a decrease in amortization of intangibles. During the first quarter of Fiscal 2021, non-GAAP product gross margin decreased 10% to $3.6 billion, and non-GAAP product gross margin percentage decreased 170 basis points to 22.6% due to the same ISG and CSG dynamics discussed above.
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• | Services — During the first quarter of Fiscal 2021, services gross margin increased 10% to $3.6 billion, and services gross margin percentage decreased 10 basis points to 61.8%. Services gross margin increased due to growth in VMware software maintenance and a decrease in purchase accounting adjustments. Excluding purchase accounting adjustments, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP services gross margin increased 9% to $3.7 billion primarily due to growth in VMware software maintenance. Non-GAAP services gross margin percentage decreased 20 basis points to 62.8% due to a decline in ISG services gross margin percentage, which was partially offset by an increase in VMware services gross margin percentage.
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Vendor Programs and Settlements
Our gross margin is affected by our ability to achieve competitive pricing with our vendors and contract manufacturers, including through our negotiation of a variety of vendor rebate programs to achieve lower net costs for the various components we include in our products. Under these programs, vendors provide us with rebates or other discounts from the list prices for the components, which are generally elements of their pricing strategy. We account for vendor rebates and other discounts as a reduction in cost of net revenue. We manage our costs on a total net cost basis, which includes supplier list prices reduced by vendor rebates and other discounts.
The terms and conditions of our vendor rebate programs are largely based on product volumes and are generally negotiated either at the beginning of the annual or quarterly period, depending on the program. The timing and amount of vendor rebates and other discounts we receive under the programs may vary from period to period, reflecting changes in the competitive environment. We monitor our component costs and seek to address the effects of any changes to terms that might arise under our vendor rebate programs. Our gross margins for the third quarter and first quarternine months of Fiscal 2021 and Fiscal 2020 were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost. We are not aware of any significant changes to vendor pricing or rebate programs that may impact our results in the near term.
In addition, we have pursued legal action against certain vendors and are currently involved in negotiations with other vendors regarding their past pricing practices. We have negotiated settlements with some of these vendors and may have additional settlements in future periods. These settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment.
Operating Expenses
The following table presents information regarding our operating expenses for the periods indicated:
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| Three Months Ended | | Nine Months Ended |
| October 30, 2020 | | | | November 1, 2019 | | October 30, 2020 | | | | November 1, 2019 |
| Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue | | Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue |
| (in millions, except percentages) |
Operating expenses: | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative | $ | 4,772 | | | 20.3 | % | | (5) | % | | $ | 5,028 | | | 22.0 | % | | $ | 14,419 | | | 21.1 | % | | (8) | % | | $ | 15,677 | | | 23.0 | % |
Research and development | 1,360 | | | 5.8 | % | | 8 | % | | 1,262 | | | 5.5 | % | | 3,884 | | | 5.7 | % | | 6 | % | | 3,667 | | | 5.4 | % |
Total operating expenses | $ | 6,132 | | | 26.1 | % | | (3) | % | | $ | 6,290 | | | 27.5 | % | | $ | 18,303 | | | 26.8 | % | | (5) | % | | $ | 19,344 | | | 28.4 | % |
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Other Financial Information | | | | | | | | | | | | | | | | | | |
Non-GAAP operating expenses | $ | 5,046 | | | 21.4 | % | | (5) | % | | $ | 5,326 | | | 23.2 | % | | $ | 15,218 | | | 22.3 | % | | (4) | % | | $ | 15,807 | | | 23.1 | % |
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| | | | | | | | | | | | | | | | |
| Three Months Ended |
| May 1, 2020 | | | | May 3, 2019 |
| Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue |
| (in millions, except percentages) |
Operating expenses: | | | | | | | | | |
Selling, general, and administrative | $ | 4,886 |
| | 22.3 | % | | (4 | )% | | $ | 5,071 |
| | 23.1 | % |
Research and development | 1,265 |
| | 5.8 | % | | 8 | % | | 1,176 |
| | 5.4 | % |
Total operating expenses | $ | 6,151 |
| | 28.1 | % | | (2 | )% | | $ | 6,247 |
| | 28.5 | % |
| | | | | | | | | |
Other Financial Information | | | | | | | | |
Non-GAAP operating expenses | $ | 5,164 |
| | 23.6 | % | | (1 | )% | | $ | 5,238 |
| | 23.8 | % |
During the third quarter and first quarternine months of Fiscal 2021, total operating expenses decreased 2%3% and 5%, respectively, primarily due to a decrease in selling, general, and administrative expenses, offset partially by an increase in research and development expenses. Our operating expenses include amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, and other corporate expenses. In aggregate, these items totaled $1.1 billion and $1.0 billion for both the firstthird quarter of Fiscal 2021 and Fiscal 2020.2020, respectively, and $3.1 billion and $3.5 billion for the first nine months of Fiscal 2021 and Fiscal 2020, respectively. Excluding these costs, total non-GAAP operating expenses decreased 1%5% and 4% for the third quarter and first nine months of Fiscal 2021, respectively.
•Selling, General, and Administrative — Selling, general, and administrative (“SG&A”) expenses decreased 5% and 8%, respectively, during the third quarter and first nine months of Fiscal 2021. The decreases in SG&A expenses were primarily due to measures taken as a result of the COVID-19 pandemic, which included global hiring limitations, reduction in consulting and contractor costs, global travel restrictions, suspension of the Dell 401(k) match program for U.S. employees, and lower facilities-related costs, as well as to a decrease in amortization of intangible assets. With respect to our cost reduction initiatives, we expect that some of the benefits which we recognized during the third quarter and first nine months of Fiscal 2021 will phase out over time. These favorable impacts to SG&A expenses were partially offset by increases in stock-based compensation expense and severance costs during the third quarter and first nine months of Fiscal 2021. Additionally, during the first nine months of Fiscal 2021, the decrease in SG&A expenses reflected the absence of Virtustream impairment charges of $619 million recognized in the first nine months of Fiscal 2020.
•Research and Development — Research and development (“R&D”) expenses are primarily composed of personnel-related expenses related to product development. R&D expenses as a percentage of net revenue were approximately 5.8% and 5.5% for the third quarter of Fiscal 2021 and Fiscal 2020, respectively, and 5.7% and 5.4% for the first quarternine months of Fiscal 2021.2021 and Fiscal 2020, respectively. R&D expenses as a percentage of net revenue increased during the third quarter and first nine months of Fiscal 2021 primarily due to an increase in compensation-related expense, including stock-based compensation expense, driven by VMware. As our industry continues to change and as the needs of our customers evolve, we intend to support R&D initiatives to innovate and introduce new and enhanced solutions into the market.
| |
• | Selling, General, and Administrative80
— Selling, general, and administrative (“SG&A”) expenses decreased 4% during the first quarter of Fiscal 2021 primarily due to measures taken in March 2020 as a result of the COVID-19 pandemic which included a global hiring freeze, reduction in consulting and contractor costs, and global travel restrictions, as well as a decrease in amortization of intangibles.
|
| |
•
| Research and Development — Research and development (“R&D”) expenses are primarily composed of personnel-related expenses related to product development. R&D expenses as a percentage of net revenue were approximately 5.8% and 5.4% for the first quarter of Fiscal 2021 and Fiscal 2020, respectively. R&D expenses as a percentage of net revenue increased during the first quarter of Fiscal 2021 primarily due to an increase in compensation-related expense, including stock-based compensation expense, driven by VMware. As our industry continues to change and as the needs of our customers evolve, we intend to support R&D initiatives to innovate and introduce new and enhanced solutions into the market.
|
We continue to make selective investments designed to enable growth, marketing, and R&D, while balancing our efforts to drive cost efficiencies in the business. We also expect to continue to make investments in support of our own digital transformation to modernize and streamline our IT operations.
Operating Income
During the third quarter and first quarternine months of Fiscal 2021, our operating income increased 28% to $702 million. The increase in our operating income for35% and 56%, respectively, primarily driven by lower selling, general, and administrative expenses as we realized the firstbenefit of cost reduction initiatives. During the third quarter of Fiscal 2021, was primarily attributable to an increaseoperating income benefited from increases in operating income for CSG and VMware, and from a decrease in amortization of intangible assets. These benefits were partially offset by a decrease in operating income for ISG and increases in stock-based compensation expense and severance costs. During the first nine months of Fiscal 2021, the increase in operating income was primarily attributable to the absence of Virtustream impairment charges of $619 million recognized in the first nine months of Fiscal 2020. Operating income during the first nine months of Fiscal 2021 also benefited from increases in operating income for VMware and other businesses and a decrease in amortization of intangible assets. These benefits were partially offset by decreases in operating income for CSG and ISG and an increaseincreases in stock-based compensation expense.expense and severance costs.
Amortization of intangible assets, and stock-based compensation expense, and other corporate expenses that impacted our operating income totaled $1.2$1.5 billion and $1.5$1.4 billion for the third quarter of Fiscal 2021 and Fiscal 2020, respectively, and $4.2 billion and $5.0 billion for the first quarternine months of Fiscal 2021 and Fiscal 2020, respectively. Excluding these costs, and the impact of
purchase accounting transaction-related expenses, and other corporatetransaction-related expenses, our non-GAAP operating income decreasedincreased 12% to $2.7 billion and 2% to $2.2$7.5 billion during the third quarter and first quarternine months of Fiscal 2021. The decrease in our non-GAAP2021, respectively. Non-GAAP operating income increased 12% for the firstthird quarter of Fiscal 2021 was primarily due to decreasesincreases in operating income for ISGCSG and CSG,VMware, which were partially offset by a decrease in operating income for ISG. Non-GAAP operating income increased 2% during the first nine months of Fiscal 2021 due to increases in operating income for VMware and other businesses.businesses, which were partially offset by decreases in operating income for CSG and ISG.
Interest and Other, Net
The following table providesinformation regarding information regarding interest and other, net for the periods indicated: | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| May 1, 2020 | | May 3, 2019 | | October 30, 2020 | | November 1, 2019 | | October 30, 2020 | | November 1, 2019 |
| (in millions) | | (in millions) |
Interest and other, net: | |
| | |
| Interest and other, net: | | | | | | | |
Investment income, primarily interest | $ | 24 |
| | $ | 44 |
| Investment income, primarily interest | $ | 11 | | | $ | 41 | | | $ | 47 | | | $ | 127 | |
Gain on investments, net | 94 |
| | 62 |
| Gain on investments, net | 489 | | | 18 | | | 591 | | | 160 | |
Interest expense | (672 | ) | | (699 | ) | Interest expense | (566) | | | (654) | | | (1,855) | | | (2,045) | |
Foreign exchange | (99 | ) | | (45 | ) | Foreign exchange | (31) | | | (43) | | | (130) | | | (123) | |
Other | 87 |
| | (55 | ) | Other | 370 | | | (39) | | | 418 | | | (119) | |
Total interest and other, net | $ | (566 | ) | | $ | (693 | ) | Total interest and other, net | $ | 273 | | | $ | (677) | | | $ | (929) | | | $ | (2,000) | |
During the third quarter and first quarternine months of Fiscal 2021, the change in interest and other, net was favorable by $127$950 million and $1,071 million, respectively, primarily driven by a $465 million gain on the fair value adjustment of one of our strategic investments, a pre-tax gain of $338 million on the sale of RSA Security reflected in Other in the table above, and a decrease in interest expense due to debt paydown over the periods. During the first nine months of Fiscal 2021, interest and other, net also benefited from a gain of $120 million recognized from the sale of certain intellectual property assets.assets during the first quarter of Fiscal 2021.
Income and Other Taxes
For the third quarter of Fiscal 2021 and Fiscal 2020, our effective income tax rates were 37.2% on pre-tax income of $1.4 billion and -247.2% on pre-tax income of $159 million, respectively. For the first nine months of Fiscal 2021 and Fiscal 2020, our effective income tax rates were -6.1% on pre-tax income of $2.0 billion and 5482.1% on pre-tax losses of $95 million, respectively. The changes in our effective income tax rates were primarily driven by discrete tax items and changes in our jurisdictional mix of income.
For the third quarter and first nine months of Fiscal 2021, our effective income tax rates include a discrete tax expense of $359 million related to the divestiture of RSA Security during the period. Our effective income tax rate for the first nine months of Fiscal 2021 also includes discrete tax benefits of $746 million related to an audit settlement and $59 million from an intra-entity asset transfer of certain of Pivotal’s intellectual property to an Irish subsidiary that was -33.8% on pre-tax income of $136 million.completed by VMware, Inc. For the first quarternine months of Fiscal 2020, our effective income tax rate was 330.1% on pre-tax losses of $143 million. The change in our effective tax rate was primarily driven by discrete tax items and a change in our jurisdictional mix of income. Our effective tax rates includeincludes discrete tax benefits of $59 million and $405 million resulting from$4.9 billion related to similar intra-entity asset transfers of certain of our intellectual property to Irish subsidiaries for the first quarter of Fiscal 2021 and Fiscal 2020, respectively.transfers. The tax benefit for each intra-entity asset transfer was recorded as a deferred tax asset in the period of the transaction and represents the book and tax basis difference on the transferred assets measured based on the applicable Irish statutory tax rate. We applied significant judgment when determining the fair value of the intellectual property, which serves as the tax basis of the deferred tax asset, and in evaluating the associated tax laws in the applicable jurisdictions. The tax deductions for amortization of the assets will be recognized in the future, and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax laws. We expect to be able to realize the deferred tax assets resulting from these intra-entity asset transfers. Our effective income tax rates for the third quarter and first nine months of Fiscal 2020 also include discrete tax benefits of $305 million related to an audit settlement.
Our effective income tax rate can fluctuate depending on the geographic distribution of our worldwide earnings, as our foreign earnings are generally taxed at lower rates than in the United States. The differences between our effective income tax rate and the U.S. federal statutory rate of 21% principally result from the geographical distribution of income, differences between the book and tax treatment of certain items, and the discrete tax items discussed above. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and lower tax rates is attributable to Singapore, China, and Malaysia. A significant portion of these income tax benefits relates to a tax holiday that will be effective until January 31, 2029. Our other tax holidays will expire in whole or in part during Fiscal 2022 through Fiscal 2030. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. As of May 1,October 30, 2020, we were not aware of any matters of non-compliance related to these tax holidays. The effective income tax rate for future quarters of Fiscal 2021 may be impacted by the actual mix of jurisdictions in which income is generated.
For further discussion regarding tax matters, including the status of income tax audits, see Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income
During the third quarter and first quarternine months of Fiscal 2021, net income increased 60% to $0.9 billion and decreased 45%58% to $182 million.$2.2 billion, respectively. The increase in net income during the third quarter of Fiscal 2021 was primarily due to net gains recognized in interest and other, net, and an increase in income taxes. The decrease in net income during the first quarternine months of Fiscal 2021 was primarily due to lower discrete tax benefits, which were partially offset by an increase in operating income and a decrease in interest and other, net.income.
Net income for the first quarter of Fiscal 2021 and Fiscal 2020 includedincludes amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, other corporate expenses, fair value adjustments on equity investments, and discrete tax items. Excluding these costs and the related tax impacts, non-GAAP net income decreased 5%increased 18% to $1.1 billion.$1.7 billion and 2% to $4.5 billion during the third quarter and first nine months of Fiscal 2021, respectively. The decreaseincreases in non-GAAP net income during the third quarter and first quarternine months of Fiscal 2021 waswere primarily attributable to a decreaseincreases in non-GAAP operating income and an increaseincreases in non-GAAP interest and other, net.income taxes.
Non-controlling Interests
During the third quarter and first quarternine months of Fiscal 2021, net income or loss attributable to non-controlling interests was $49 million and $139 million, respectively, and consisted of net income or loss attributable to our non-controlling interests in VMware, Inc. and Secureworks. During the third quarter and first quarternine months of Fiscal 2020, net income or loss attributable to non-controlling interests was $53 million and $905 million, respectively, and consisted of net income or loss attributable to our non-controlling interests in VMware, Inc., Secureworks, and Pivotal. Pivotal was acquired by VMware, Inc. on December 30, 2019 and, as a result, we no longer have a separate non-controlling interest in Pivotal.
During the first quarter of Fiscal 2021 and Fiscal 2020, net income attributable to non-controlling interests was $39 million and $36 million, respectively. The increasedecreases in net income attributable to non-controlling interests during the third quarter and first quarternine months of Fiscal 2021 waswere attributable to an increasedecreases in net income attributable to our non-controlling interest in VMware, Inc. For more information about our non-controlling interests, see Note 13 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income Attributable to Dell Technologies Inc.
Net income attributable to Dell Technologies Inc. represents net income and an adjustment for non-controlling interests. During the third quarter and first quarternine months of Fiscal 2021, net income attributable to Dell Technologies Inc. was $0.8 billion and $2.0 billion, respectively. During the third quarter and first nine months of Fiscal 2020, net income attributable to Dell Technologies Inc. was $143 million$0.5 billion and $293 million,$4.2 billion, respectively. The decreaseincrease in net income attributable to Dell Technologies Inc. during the firstthird quarter of Fiscal 2021 was primarily attributable to an increase in net income for the period. During the first nine months of Fiscal 2021, the decrease in net income attributable to Dell Technologies Inc. was primarily attributable to a decrease in net income for the period.
Business Unit Results
Our reportable segments are based on the following business units: ISG, CSG, and VMware. A description of our three business units is provided under “Introduction.” See Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income, respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, 2020 | | % Change | | November 1, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 |
| (in millions, except percentages) |
Net revenue: | | | | | | | | | | | |
Servers and networking | $ | 4,164 | | | (2) | % | | $ | 4,241 | | $ | 12,118 | | (6) | % | | $ | 12,858 |
Storage | 3,860 | | | (7) | % | | 4,149 | | 11,682 | | (5) | % | | 12,355 |
Total ISG net revenue | $ | 8,024 | | | (4) | % | | $ | 8,390 | | $ | 23,800 | | (6) | % | | $ | 25,213 |
| | | | | | | | | | | |
Operating income: | | | | | | | | | | | |
ISG operating income | $ | 882 | | | (11) | % | | $ | 996 | | $ | 2,587 | | (10) | % | | $ | 2,889 |
% of segment net revenue | 11.0 | % | | | | 11.9 | % | | 10.9 | % | | | | 11.5 | % |
|
| | | | | | | | | | |
| Three Months Ended |
| May 1, 2020 | | % Change | | May 3, 2019 |
| (in millions, except percentages) |
Net revenue: | | | | | |
Servers and networking | $ | 3,758 |
| | (10 | )% | | $ | 4,180 |
|
Storage | 3,811 |
| | (5 | )% | | 4,022 |
|
Total ISG net revenue | $ | 7,569 |
| | (8 | )% | | $ | 8,202 |
|
| | | | | |
Operating income: | | | | | |
ISG operating income | $ | 732 |
| | (13 | )% | | $ | 843 |
|
% of segment net revenue | 9.7 | % | | | | 10.3 | % |
Net Revenue — During the third quarter and first quarternine months of Fiscal 2021, ISG net revenue decreased 8%4% and 6%, respectively, due to decreases in sales of servers and networking and storage. ISG net revenue decreased primarily due to a weaker demand environment, as customers shifted torestricted technology spending and directed their investments intoward remote work solutions as part ofand business continuity plans. solutions.
Revenue from the sales of servers and networking decreased 10%2% and 6% during the third quarter and first quarternine months of Fiscal 2021, respectively, primarily driven by a declinedeclines in units sold of our PowerEdge servers due to a weaker demandthe broader macro-economic environment, particularlyincluding the effects of COVID-19. During the third quarter of Fiscal 2021, the decline in China,volume was largely offset by improvement in average selling prices for servers. During the first nine months of Fiscal 2021, servers and anetworking revenue was impacted by an overall decrease in average selling prices for servers resulting from competitive pressures in certain geographies.geographies in the first half of Fiscal 2021. Storage revenue decreased 7% and 5% during the third quarter and first quarternine months of Fiscal 2021, respectively, primarily due to a declinedeclines in demand.demand for our core storage solutions offerings, partially offset by increased demand for hyperconverged infrastructure solutions. We continue to make enhancements to our storage solutions offerings and expect that these offerings, including the release of our new PowerStore storage array released in May 2020, will drive long-term improvements in the business.
ISG customers are interested in new and innovative models that address how they consume our solutions. We offer options including as-a-service, utility, leases, and immediate pay models, all designed to match customers’ consumption and financing preferences. Our multi-year agreements typically result in recurring revenue streams over the term of the arrangement. We expect our flexible consumption models will further strengthen our customer relationships and provide a foundation for growth in recurring revenue.
From a geographical perspective, net revenue attributable to ISG decreased in all regions during both the third quarter and first quarternine months of Fiscal 2021, with the largest decline in EMEA, driven by a weaker demand environment as a result of pervasive global COVID-19 disruptions, which persisted for the majority of the quarter.disruptions.
Operating Income — During the third quarter of Fiscal 2021, ISG operating income as a percentage of net revenue decreased 90 basis points to 11.0%. During the first quarternine months of Fiscal 2021, ISG operating income as a percentage of net revenue decreased 60 basis points to 9.7% primarily10.9%. The declines in operating income percentages during the third quarter and first nine months of Fiscal 2021 were driven by weaknessdeclines in gross margin percentages for servers and networking, duewhich were attributable to commodity inflation and competitive pricing dynamics. The declinedeclines in ISG gross margin percentage during the firstthird quarter
and first quarter of Fiscal 2020. For the remaining nine months of Fiscal 2021 were partially offset by decreases in operating expenses as a percentage of net revenue, as we currently expect an inflationary componentrealized the benefit of cost environment, which may put pressure on ISG operating results, particularly from sales of servers and networking. We will continue to monitor our pricing in response to the changing competitive and cost environment.reduction initiatives.
Client Solutions Group
The following table presents net revenue and operating income attributable to CSG for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, 2020 | | % Change | | November 1, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 |
| (in millions, except percentages) |
Net revenue: | | | | | | | | | | | |
Commercial | $ | 8,783 | | | 5 | % | | $ | 8,330 | | | $ | 25,456 | | | (1) | % | | $ | 25,714 | |
Consumer | 3,503 | | | 14 | % | | 3,080 | | | 9,137 | | | 9 | % | | 8,354 | |
Total CSG net revenue | $ | 12,286 | | | 8 | % | | $ | 11,410 | | | $ | 34,593 | | | 2 | % | | $ | 34,068 | |
| | | | | | | | | | | |
Operating income: | | | | | | | | | | | |
CSG operating income | $ | 1,002 | | | 36 | % | | $ | 739 | | | $ | 2,309 | | | (8) | % | | $ | 2,514 | |
% of segment net revenue | 8.2 | % | | | | 6.5 | % | | 6.7 | % | | | | 7.4 | % |
|
| | | | | | | | | | |
| Three Months Ended |
| May 1, 2020 | | % Change | | May 3, 2019 |
| (in millions, except percentages) |
Net revenue: | | | | | |
Commercial | $ | 8,634 |
| | 4 | % | | $ | 8,307 |
|
Consumer | 2,470 |
| | (5 | )% | | 2,603 |
|
Total CSG net revenue | $ | 11,104 |
| | 2 | % | | $ | 10,910 |
|
| | | | | |
Operating income: | | | | | |
CSG operating income | $ | 592 |
| | (25 | )% | | $ | 793 |
|
% of segment net revenue | 5.3 | % | | | | 7.3 | % |
Net Revenue — During the third quarter and first quarternine months of Fiscal 2021, CSG net revenue increased 8% and 2%, respectively, primarily due to an increaseincreases in commercial and consumer notebook sales, partially offset by a decreasedecreases in consumercommercial desktop sales. Much of this demand was driven by the imperative for remote work and remote learning solutions, as business, government, and education customers sought to maintain productivity in the midst of COVID-19.
Commercial revenue increased 4%5% during the firstthird quarter of Fiscal 2021, primarily due to increased demand from largefor commercial notebooks, and governmentalparticularly for entry-level commercial notebooks, driven by customers in education and state and local government. The increase in demand for workcommercial notebooks was partially offset by lower demand for commercial desktops during the third quarter of Fiscal 2021. Commercial revenue decreased 1% during the first nine months of Fiscal 2020 primarily due to lower demand for commercial desktops, the effects of which were largely offset by an increase in demand for entry-level commercial notebooks, driven by customers in education and learn from home solutions, particularly drivingstate and local government.
Consumer revenue increased 14% and 9% during the third quarter and first nine months of Fiscal 2021, respectively, due to continued strong demand for commercialconsumer notebooks and high-end and gaming systems, coupled with an increase in average selling prices for our higher-priced consumer notebooks. Consumer revenue decreased 5% during the first quarter of Fiscal 2021 due to lower consumer demand, particularly in retail, as a result of the COVID-19 market disruption.
From a geographical perspective, net revenue attributable to CSG increased in the Americas and EMEA during both the third quarter and first quarternine months of Fiscal 2021. In APJ, particularlyThese increases were partially offset by declines in China, net revenue decreasedattributable to CSG in APJ during the first quarter of Fiscal 2021.periods.
Operating Income — During the firstthird quarter of Fiscal 2021, CSG operating income as a percentage of net revenue decreased 200increased 170 basis points to 5.3%8.2% primarily due to a decrease in operating expenses as a percentage of revenue, as we realized the benefit of cost reduction initiatives, and to a lesser extent, an increase in CSG gross margin percentage driven by consumer pricing favorability. During the first nine months of Fiscal 2021, CSG operating income as a percentage of net revenue decreased 70 basis points to 6.7%. TheThis decrease was primarily dueattributable to a decrease in CSG gross margin percentage which was principally driven by increased supply chain costsa shift in product mix to expedite delivery of certain productsentry-level commercial notebooks and lower component cost deflation relative to meet strong demandpricing. The decrease in this environment, as well as by competitive pricing dynamics. Also impacting the decrease inCSG gross margin percentage was partially offset by a decrease in operating expenses as a percentage of revenue, as we realized the aggregate CSG componentbenefit of cost environment was deflationary in the first quarter of Fiscal 2021, although to a lesser extent than in the first quarter of Fiscal 2020. We expect an inflationary component cost environment in the remaining nine months of Fiscal 2021, which will put pressure on CSG operating results. We will continue to monitor our pricing in response to the changing competitive and component cost environment.reduction initiatives.
VMware
The following table presents net revenue and operating income attributable to VMware for the periods indicated.During Fiscal 2020, the Company reclassified Pivotal operating results from other businesses to the VMware reportable segment. Prior period results have been recast to conform with the current period presentation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, 2020 | | % Change | | November 1, 2019 | | October 30, 2020 | | % Change | | November 1, 2019 |
| (in millions, except percentages) |
Net revenue: | | | | | | | | | | | |
VMware net revenue | $ | 2,893 | | | 8 | % | | $ | 2,671 | | | $ | 8,556 | | | 10 | % | | $ | 7,779 | |
| | | | | | | | | | | |
Operating income: | | | | | | | | | | | |
VMware operating income | $ | 837 | | | 18 | % | | $ | 709 | | | $ | 2,504 | | | 22 | % | | $ | 2,055 | |
% of segment net revenue | 28.9 | % | | | | 26.5 | % | | 29.3 | % | | | | 26.4 | % |
|
| | | | | | | | | | |
| Three Months Ended |
| May 1, 2020 | | % Change | | May 3, 2019 |
| (in millions, except percentages) |
Net revenue: | | | | | |
VMware net revenue | $ | 2,755 |
| | 12 | % | | $ | 2,457 |
|
| | | | | |
Operating income: | | | | | |
VMware operating income | $ | 773 |
| | 30 | % | | $ | 595 |
|
% of segment net revenue | 28.1 | % | | | | 24.2 | % |
Net Revenue — VMware net revenue, inclusive of Pivotal, primarily consists of revenue from the sale of software licenses under perpetual licenses and subscription and software-as-a-service (“SaaS”) offerings, as well as related software maintenance services, support, training, consulting services, and hosted services. VMware net revenue for the third quarter and first quarternine months of Fiscal 2021 increased 12%8% and 10%, respectively, primarily due to growth in sales of subscriptions and SaaS offerings, as well as an increase in sales of software maintenance services. Growth in sales of subscriptions and SaaS offerings was primarily driven by increased demand for hybrid cloud offerings and digital workspaces. Software maintenance revenue benefited from new contracts and renewals of VMware enterprise agreements, revenue recognized from maintenance contracts sold in prior periods, and additional maintenance contracts sold in conjunction with new software license sales.previous periods.
From a geographical perspective, approximately half of VMware net revenue during the third quarter and first quarternine months of Fiscal 2021 was generated by sales to customers in the United States. VMware net revenue for the third quarter and first quarternine months of Fiscal 2021 increased in both the United States and internationally.
Operating Income — During the third quarter and first quarternine months of Fiscal 2021, VMware operating income as a percentage of net revenue increased 390240 basis points to 28.1%.28.9% and 290 basis points to 29.3%, respectively. The increase wasincreases were primarily driven by an increasedecreases in gross marginselling, general, and administrative expenses as a percentage of net revenue. During the first quarter of Fiscal 2021, VMware net revenue growth outpaced increased operating expenses, particularly R&D compensation-related expensesas we benefited from decreased travel-related costs resulting from acquisitions and additional investments.travel restrictions imposed in response to the COVID-19 pandemic. While the COVID-19 pandemic has not had a significant adverse financial impact on VMware operations to date, in future periods we expectthere continues to be significant uncertainty regarding the economic effects of the COVID-19 pandemic and the extent to which it may have a negative impact on VMwareVMware’s sales and results of operations for the sizeremainder of Fiscal 2021 and duration of which we are currently unable to predict.into Fiscal 2022.
OTHER BALANCE SHEET ITEMS
Accounts Receivable
We sell products and services directly to customers and through a variety of sales channels, including retail distribution. Our accounts receivable, net, was $10.8$11.4 billion and $12.5 billion as of May 1,October 30, 2020 and January 31, 2020, respectively. We maintain an allowance for expected credit losses to cover receivables that may be deemed uncollectible. The allowance for expected credit losses is an estimate based on an analysis of historical loss experience, current receivables aging, and management’s assessment of current conditions and reasonable and supportable expectation of future conditions, as well as specific identifiable customer accounts that are deemed at risk. Our analysis includes assumptions regarding the impact of COVID-19 and continued market volatility, which is highly uncertain and subject to significant judgment. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. As of May 1,October 30, 2020 and January 31, 2020, the allowance for expected credit losses was $144$115 million and $94 million, respectively. Allowance for expected credit losses of trade receivables as of May 1,October 30, 2020 includes the impact of adoption of the new current expected credit losses (“CECL”) standard, which was adopted as of February 1, 2020 using the modified retrospective method. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We will continue to monitor the aging of our accounts receivable and take actions, where necessary, to reduce our exposure to credit losses.
Dell Financial Services
Dell Financial Services and its affiliates (“DFS”) support Dell Technologies by offering and arranging various financing options and services for our customers globally, including through captive financing operations in North America, Europe, Australia, and New Zealand. DFS originates, collects, and services customer receivables primarily related to the purchase of our product, software, and service solutions. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. New financing originations were $1.8$2.1 billion and $1.7$2.0 billion for the firstthird quarter of Fiscal 2021 and Fiscal 2020, respectively. In response torespectively, and $6.5 billion and $5.7 billion for the COVID-19 pandemic, we are focused on supporting our customersfirst nine months of Fiscal 2021 and intend to provide up to $9 billion in financing support by offering low or zero percent interest rate programs as well as payment deferral options. The financial impact to DFS and our securitization and structured financing programs is not expected to be material.Fiscal 2020, respectively.
Pursuant to the current lease accounting standard effective February 2, 2019, new DFS leases are classified as sales-type leases, direct financing leases, or operating leases. Amounts due from lessees under sales-type leases or direct financing leases are recorded as part of financing receivables, with interest income recognized over the contract term. On commencement of sales-type leases, we typically qualify for up-front revenue recognition. On originations of operating leases, we record equipment under operating leases, classified as property, plant, and equipment, and recognize rental revenue and depreciation expense, classified as cost of net revenue, over the contract term. Direct financing leases are immaterial. Leases that commenced prior to the effective date of the current lease accounting standard continue to be accounted for under previous lease accounting guidance.
As of May 1,October 30, 2020 and January 31, 2020, our financing receivables, net were $9.5$10.2 billion and $9.7 billion, respectively.We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. Allowance for expected credit losses of financing receivables as of May 1,October 30, 2020 includes the impact of adoption of the CECL standard referred to above. Our analysis includes assumptions regarding the impact of COVID-19 and continued market volatility, which is highly uncertain and subject to significant judgment. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. For both the firstthird quarter of Fiscal 2021 and Fiscal 2020, the principal charge-off rate for our totalfinancing receivables portfolio was 0.7% and 0.9%, respectively. For the first nine months of Fiscal 2021 and Fiscal 2020, the principal charge-off rate for our financing receivables portfolio was 0.9% and 1.0%., respectively. The credit quality of our financing receivables has improved in recent years due to an overall improvement in the credit environment and as the mix of high-quality commercial accounts in our portfolio has continued to increase. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables without recourse to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved.
We retain a residual interest in equipment leased under our lease programs. As of May 1,October 30, 2020 and January 31, 2020, the residual interest recorded as part of financing receivables was $551$472 million and $582 million, respectively. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, we assess the carrying amount of our recorded residual values for impairment. Generally, residual value risk on equipment under lease is not considered to be significant, because of the existence of a secondary market with respect to the equipment. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. Our remarketing sales staff works closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure. No impairment losses were recorded related to residual assets during the third quarter and first quarternine months of Fiscal 2021.2021 and Fiscal 2020.
As of May 1,October 30, 2020 and January 31, 2020, equipment under operating leases, net was $975 million$1.3 billion and $840 million,$0.8 billion, respectively. Based on triggering events, we assess the carrying amount of the equipment under operating leases recorded for impairment. No material impairment losses were recorded related to such equipment during the third quarter and first quarternine months of Fiscal 2021.2021 and Fiscal 2020.
DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing. For DFS operating leases, which have increased under the current lease standard, the initial funding is classified as a capital expenditure and reflected as an impact to cash flows used in investing activities.
See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our financing receivables and the associated allowances, and the equipment under operating leases.
Off-Balance Sheet Arrangements
As of May 1,October 30, 2020, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations.
MARKET CONDITIONS, LIQUIDITY, AND CAPITAL COMMITMENTS
Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties.
We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized credit rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments.
We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than the U.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See Note 7 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our use of derivative instruments.
We are exposed to interest rate risk related to our variable-rate debt portfolio. In the normal course of business, we follow established policies and procedures to manage this risk, including monitoring of our asset and liability mix. As a result, we do not anticipate any material losses from interest rate risk.
The impact of any credit adjustments related to our use of counterparties on our Condensed Consolidated Financial Statements included in this report has been immaterial.
Liquidity and Capital Resources
To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our strategic initiatives. In addition to internally generated cash, we have access to other capital sources to finance our strategic initiatives and fund growth in our financing operations.Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost-effective manner.
In this unprecedented environment resulting from the COVID-19 pandemic, we are taking actions to increasestrengthen our cash position and preserve financial flexibility. In March 2020, as previously reported, we drew $3.0 billion underflexibility, while continuing to prioritize our debt paydown target for the Revolving Credit Facility as a precautionary measure given the uncertainty in the global markets, which we repaid during the quarter. Additionally, we accessed the debt markets in the first quarter of Fiscal 2021, in which we issued $2.25 billion aggregate principal amount of First Lien Notes and VMware, Inc. issued $2.0 billion aggregate principal amount of senior notes. The proceeds from the issuance of these notes are expected to be used for general corporate purposes, including planned repayment of upcoming debt maturities. Subsequent to the first quarter of Fiscal 2021, VMware, Inc. repaid $1.25 billion principal amount of its 2.30% Notes due August 2020.fiscal year.
The following table presents our cash and cash equivalents as well as our available borrowings as of the dates indicated:
| | | May 1, 2020 | | January 31, 2020 | | October 30, 2020 | | January 31, 2020 |
| (in millions) | | (in millions) |
Cash and cash equivalents, and available borrowings: | | | | Cash and cash equivalents, and available borrowings: | |
Cash and cash equivalents (a) | $ | 12,229 |
| | $ | 9,302 |
| Cash and cash equivalents (a) | $ | 11,304 | | | $ | 9,302 | |
Remaining available borrowings under revolving credit facilities | 5,472 |
| | 5,972 |
| |
Remaining available borrowings under revolving credit facilities (b) | | Remaining available borrowings under revolving credit facilities (b) | 5,466 | | | 5,972 | |
Total cash, cash equivalents, and available borrowings | $ | 17,701 |
| | $ | 15,274 |
| Total cash, cash equivalents, and available borrowings | $ | 16,770 | | | $ | 15,274 | |
____________________
| |
(a) | Of the $12.2 billion of cash and cash equivalents as of May 1, 2020, $5.9 billion was held by VMware, Inc. |
(a) Of the $11.3 billion of cash and cash equivalents as of October 30, 2020, $3.9 billion was held by VMware, Inc.
(b) Of the $5.5 billion of remaining available borrowings under revolving credit facilities, $1.0 billion was attributable to the VMware Revolving Credit Facility.
Our revolving credit facilities as of May 1,October 30, 2020 include the Revolving Credit Facility.Facility, which we entered into on May 25, 2020. The Revolving Credit Facility has a maximum aggregate borrowing capacity of $4.5 billion. Availablebillion, and available borrowings under this facility are reduced by draws on the facility and outstanding letters of credit.As of May 1,October 30, 2020, there were no
borrowings outstanding under the facility and remaining available borrowings totaled approximately $4.5 billion. Subsequent to the first quarter of Fiscal 2021 on May 25, 2020, we entered into a new revolving credit facility for China (the “China Revolving Credit Facility”). The new terms provide for collateralized and non-collateralized principal amounts not to exceed $1.0 billion Chinese renminbi and $1.8 billion Chinese renminbi, respectively, or equivalent amounts in U.S. dollars. We may regularly use our available borrowings from both our Revolving Credit Facility and our China Revolving Credit Facility on a short-term basis for general corporate purposes. See Note 19 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about the new China Revolving Credit Facility.
The VMware Revolving Credit Facility has a maximum capacity of $1.0 billion. As of May 1,October 30, 2020, $1.0 billion was available under the VMware Revolving Credit Facility. The VMware Term Loan Facility had a borrowing capacity of up to $2.0 billion through February 7, 2020. As of May 1, 2020, the outstanding borrowings under the VMware Term Loan Facility were $1.5 billion, with no remaining amount available for additional borrowings. None of the net proceeds of borrowings under the VMware Revolving Credit Facility or the VMware Term Loan Facility will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc. and VMware, Inc.’s subsidiaries.
See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about each of the foregoing revolving credit facilities.
We believe that our current cash and cash equivalents, together with cash that will be provided by future operations and borrowings expected to be available under our revolving credit facilities, will be sufficient over at least the next twelve months to fund our operations, debt service requirements and maturities, capital expenditures, share repurchases, and other corporate needs.
Debt
The following table summarizes our outstanding debt as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| October 30, 2020 | | Increase (decrease) | | January 31, 2020 |
| (in millions) |
Core debt | | | | | |
Senior Secured Credit Facilities and First Lien Notes | $ | 27,186 | | | $ | (2,478) | | | $ | 29,664 | |
Unsecured Notes and Debentures | 1,352 | | | — | | | 1,352 | |
Senior Notes | 2,700 | | | — | | | 2,700 | |
EMC Notes | 1,000 | | | (600) | | | 1,600 | |
DFS allocated debt | (870) | | | 625 | | | (1,495) | |
Total core debt | 31,368 | | | (2,453) | | | 33,821 | |
DFS related debt | | | | | |
DFS debt | 9,201 | | | 1,436 | | | 7,765 | |
DFS allocated debt | 870 | | | (625) | | | 1,495 | |
Total DFS related debt | 10,071 | | | 811 | | | 9,260 | |
Margin Loan Facility and other | 4,167 | | | 143 | | | 4,024 | |
Debt of public subsidiary | | | | | |
VMware Notes | 4,750 | | | 750 | | | 4,000 | |
VMware Term Loan Facility | — | | | (1,500) | | | 1,500 | |
Other | 55 | | | (5) | | | 60 | |
Total public subsidiary debt | 4,805 | | | (755) | | | 5,560 | |
Total debt, principal amount | 50,411 | | | (2,254) | | | 52,665 | |
Carrying value adjustments | (550) | | | 59 | | | (609) | |
Total debt, carrying value | $ | 49,861 | | | $ | (2,195) | | | $ | 52,056 | |
|
| | | | | | | | | | | |
| May 1, 2020 | | Increase (decrease) | | January 31, 2020 |
| (in millions) |
Core debt | | | | | |
Senior Secured Credit Facilities and First Lien Notes | $ | 31,857 |
| | $ | 2,193 |
| | $ | 29,664 |
|
Unsecured Notes and Debentures | 1,352 |
| | — |
| | 1,352 |
|
Senior Notes | 2,700 |
| | — |
| | 2,700 |
|
EMC Notes | 1,600 |
| | — |
| | 1,600 |
|
DFS allocated debt | (863 | ) | | 632 |
| | (1,495 | ) |
Total core debt | 36,646 |
| | 2,825 |
| | 33,821 |
|
DFS related debt | | | | | |
DFS debt | 8,269 |
| | 504 |
| | 7,765 |
|
DFS allocated debt | 863 |
| | (632 | ) | | 1,495 |
|
Total DFS related debt | 9,132 |
| | (128 | ) | | 9,260 |
|
Margin Loan Facility and other | 4,014 |
| | (10 | ) | | 4,024 |
|
Debt of public subsidiary | | | | | |
VMware Notes | 6,000 |
| | 2,000 |
| | 4,000 |
|
VMware Term Loan Facility | 1,500 |
| | — |
| | 1,500 |
|
Other | 55 |
| | (5 | ) | | 60 |
|
Total public subsidiary debt | 7,555 |
| | 1,995 |
| | 5,560 |
|
Total debt, principal amount | 57,347 |
| | 4,682 |
| | 52,665 |
|
Carrying value adjustments | (619 | ) | | (10 | ) | | (609 | ) |
Total debt, carrying value | $ | 56,728 |
| | $ | 4,672 |
| | $ | 52,056 |
|
During the first quarternine months of Fiscal 2021, the outstanding principal amount of our debt increaseddecreased by $4.7$2.3 billion to $57.3$50.4 billion as of May 1, 2020.
During the first quarterOctober 30, 2020, primarily driven by net repayments of Fiscal 2021, our core debt increasedand VMware, Inc. debt, partially offset by $2.8 billion to $36.6 billion as of May 1, 2020. a net increase in DFS debt.
We define core debt as the total principal amount of our debt, less DFS related debt, our Margin Loan Facility and other debt, and public subsidiary debt. The increase inOur core debt was primarily$31.4 billion as of October 30, 2020. During the first nine months of Fiscal 2021, the decrease in our core debt was driven by principal repayments. Proceeds of $2.082 billion from the sale of RSA Security were used to pay down core debt. Principal repayments included the retirement in full of $4.5 billion principal amount
of 4.42% First Lien Notes due toJune 2021, repayment of $600 million principal amount of 2.650% EMC Notes due June 2020 upon maturity, and repayment of approximately $229 million of term loan facilities. These repayments were partially offset by the issuance of multiple series of First Lien Notes in an aggregate principal amount of $2.25 billion on April 9, 2020. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our debt. The change in DFS allocated
There are no scheduled maturities of core debt also contributedfor the remainder Fiscal 2021, although we intend to the increase, and is discussed further below.continue making core debt principal payments as part of our overall capital allocation strategy.
During the first quarternine months of Fiscal 2021, we issued an additional $0.5$1.4 billion, net, in DFS debt to support the expansion of our financing receivables portfolio.portfolio, which includes the issuance of 500 million Euro of senior unsecured eurobonds on June 24, 2020. DFS related debt primarily represents debt from our securitization and structured financing programs. The majority of DFS debt is non-recourse to Dell Technologies and represents borrowings under securitization programs and structured financing programs, for which our risk of loss is limited to transferred lease and loan payments and associated equipment, and under which the credit holders have no recourse to Dell Technologies.
To fund expansion of the DFS business, we balance the use of the securitization and structured financing programs with other sources of liquidity. We approximate the amount of our debt used to fund the DFS business by applying a 7:1 debt to equity ratio to the sum of our financing receivables balance and equipment under our DFS operating leases, net. The debt to equity ratio used is based on the underlying credit quality of the assets. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our DFS debt.
As of May 1,October 30, 2020, margin loan and other debt primarily consisted of the $4.0 billion Margin Loan Facility.
Debt of public subsidiary represents VMware, Inc. indebtedness. The increasedecrease in debt of public subsidiary during the first quarternine months of Fiscal 2021 was due to principal repayments by VMware, Inc. of $1.25 billion principal amount of its 2.30% Notes due August 2020 and $1.5 billion principal amount of the VMware Term Loan Facility. These repayments were partially offset by the issuance of VMware Notes in an aggregate principal amount of $2.0 billion on April 7, 2020. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about VMware, Inc. debt.
VMware, Inc. and its respective subsidiaries are unrestricted subsidiaries for purposes of the core debt of Dell Technologies. Neither Dell Technologies nor any of its subsidiaries, other than VMware, Inc., is obligated to make payment on the VMware Notes or the VMware Term Loan Facility. None of the net proceeds of the VMware Notes or, as discussed above, the VMware Term Loan Facility will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc. and its subsidiaries.
Our requirements for cash to pay principal and interest on our core debt increased significantly due to the borrowings we incurred to finance the EMC merger transaction and, to a lesser extent, the Class V transaction. We have made good progress in paying down core debt since the EMC merger transaction. We believe we will continue to be able to make our debt principal and interest payments, including the short-term maturities, from existing and expected sources of cash, primarily from operating cash flows. Cash used for debt principal and interest payments may also include short-term borrowings under our revolving credit facilities. We will continue to focus on paying down core debt. Under our variable-rate debt, we could have variations in our future interest expense from potential fluctuations in LIBOR, or from possible fluctuations in the level of DFS debt required to meet future demand for customer financing.
We or our affiliates or their related persons, at our or their sole discretion, may purchase, redeem, prepay, refinance, or otherwise retire any amount of our outstanding indebtedness under the terms of such indebtedness at any time and from time to time, in open market or negotiated transactions with the holders of such indebtedness or otherwise, as appropriate market conditions exist.
Cash Flows
The following table presents a summary of our Condensed Consolidated Statements of Cash Flows for the periods indicated:
| | | | | | | | | | | |
| Nine Months Ended |
| October 30, 2020 | | November 1, 2019 |
| (in millions) |
Net change in cash from: | | | |
Operating activities | $ | 5,530 | | | $ | 5,783 | |
Investing activities | 26 | | | (3,982) | |
Financing activities | (3,483) | | | (2,600) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (67) | | | (100) | |
Change in cash, cash equivalents, and restricted cash | $ | 2,006 | | | $ | (899) | |
|
| | | | | | | |
| Three Months Ended |
| May 1, 2020 | | May 3, 2019 |
| (in millions) |
Net change in cash from: | | | |
Operating activities | $ | (796 | ) | | $ | 682 |
|
Investing activities | (485 | ) | | (458 | ) |
Financing activities | 4,264 |
| | (719 | ) |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (136 | ) | | (36 | ) |
Change in cash, cash equivalents, and restricted cash | $ | 2,847 |
| | $ | (531 | ) |
Operating Activities — Cash used inprovided by operating activities was $0.8$5.5 billion for the first quarternine months of Fiscal 2021 compared to cash provided by operating activities of $0.7$5.8 billion for the first quarternine months of Fiscal 2020. The decrease in operatingOperating cash flows declined slightly during the first quarternine months of Fiscal 2021 as the strong profitability during the period was attributable tooffset by unfavorable working capital impacts related to the COVID-19 pandemic onof an increase in inventory, decline in growth rate of deferred revenue, and timing of collectionspurchases and maintenance of higher inventory levels for continuity of supply, most of which we expectpayments to vendors. COVID-19 impacts to working capital continued to normalize by fiscal year-end.
Cash flow from operating activities during the firstthird quarter of the fiscal year is typically lower due to parts of Dell Technologies’ business being subject to seasonal sales trends as well as timing of annual personnel-related payments.Fiscal 2021.
DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing. For DFS operating leases, which have increased under the current leasing standard, the initial funding is classified as a capital expenditure and reflected as cash flows used in investing activities. DFS new financing originations were $1.8$6.5 billion and $1.7$5.7 billion during the first quarternine months of Fiscal 2021 and Fiscal 2020, respectively. As of May 1,October 30, 2020, DFS had $9.5$10.2 billion of total net financing receivables and $1.0$1.3 billion of equipment under DFS operating leases, net.
Investing Activities — Investing activities primarily consist of cash used to fund capital expenditures for property, plant, and equipment, which includes equipment under DFS operating leases, capitalized software development costs, strategic investments, and the maturities, sales, and purchases of investments. During the first nine months of Fiscal 2021, cash provided by investing activities was $26 million and was primarily driven by net cash proceeds from the divestiture of RSA Security during the the third quarter of Fiscal 2021, largely offset by capital expenditures and acquisitions of businesses. In comparison, cash used in investing activities was $485 million and was primarily driven by capital expenditures, which were partially offset by net cash proceeds from the sale of certain intellectual property assets. In comparison, cash used by investing activities was $458 million$4.0 billion during the first quarternine months of Fiscal 2020 and was primarily driven by capital expenditures and acquisition of businesses, which were partially offset by net cash proceeds from the net sales of strategic investments.
Financing Activities — Financing activities primarily consist of the proceeds and repayments of debt, cash used to repurchase common stock, and proceeds from the issuance of common stock. Cash provided byused in financing activities of $4.3$3.5 billion during the first quarternine months of Fiscal 2021 primarily consisted of debt repayments and repurchases of common stock by our public subsidiaries, partially offset by cash proceeds from the issuances of multiple series of First Lien Notes in an aggregate principal amount of $2.25 billion and VMware Notes in an aggregate principal amount of $2.0 billion, as discussed above.Notes. In comparison, cash used byin financing activities of $719 million$2.6 billion during the first quarternine months of Fiscal 2020 primarily consisted of repayments of debt and repurchases of common stock ofby our public subsidiaries.
Capital Commitments
Capital Expenditures — During the first quarternine months of Fiscal 2021 and Fiscal 2020, we spent $0.5$1.4 billion and $0.6$1.6 billion, respectively, on property, plant, and equipment. These expenditures were incurred in connection with our global expansion efforts and infrastructure investments made to support future growth, and the funding of equipment under DFS operating leases. During the first quarternine months of Fiscal 2021 and Fiscal 2020, funding of gross equipment under DFS operating leases was $0.2$0.6 billion and $0.3$0.7 billion, respectively. Product demand, product mix, and the use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2021 are currently expected to total between $2.3 billion and $2.5be approximately $1.9 billion, of which approximately $1.0$0.8 billion is expected for equipment under DFS operating leases.
Purchase Obligations — Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be canceled without penalty.
We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for our production.
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting us, see “Part II — Item 7A — Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020. Our exposure to market risks has not changed materially from that set forth in our Annual Report.
ITEM 4 — CONTROLS AND PROCEDURES
This report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 under the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2 filed with this report. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of May 1,October 30, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 1,October 30, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended May 1,October 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controlscontrol over financial reporting despite the fact that mostreporting. Most of our employees are working remotely for their health and safety during the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
The information required by this item is incorporated herein by reference to the information set forth under the caption “Legal Matters” in Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this report.
ITEM 1A — RISK FACTORS
In addition to the other information set forth in this report, the risks discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 could materially affect our business, operating results, financial condition, or prospects. The risks described in our Annual Report on Form 10-K and our subsequent SEC reports are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that also may materially adversely affect our business, operating results, financial condition, or prospects.
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities
During the first quarter of Fiscal 2021, we issued to employees an aggregate of 4,245 shares of the Class C Common Stock for an aggregate purchase price of approximately $0.1 million pursuant to exercises of stock options granted under the Dell Inc. Amended and Restated 2002 Long-Term Incentive Plan. The foregoing transactions were effected without registration in reliance on the exemption from registration under the Securities Act of 1933 afforded by Rule 701 thereunder as transactions pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule.
Purchases of Equity Securities
The following table presents information regarding repurchases of Class C Common Stock by us and our affiliated purchasers during the first quarter of Fiscal 2021, and the remaining authorized amount of future repurchases under our stock repurchase program.
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Weighted Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (b) |
| | (in millions, except average price paid per share) |
Repurchases from February 1, 2020 through February 28, 2020 | | — |
| | $ | — |
| | — |
| | $ | 1,000 |
|
Repurchases from February 29, 2020 through March 27, 2020 (a) | | 7 |
| | $ | 35.98 |
| | 6 |
| | $ | 760 |
|
Repurchases from March 28, 2020 through May 1, 2020 | | — |
| | $ | — |
| | — |
| | $ | 760 |
|
Total | | 7 |
| | $ | 35.98 |
| | 6 |
| | |
_____________
| |
(a) | Includes approximately 828 thousand shares purchased by Michael Dell for his own account in the open market. |
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(b) | On February 24, 2020, our board of directors approved a stock repurchase program under which we are authorized to repurchase up to $1.0 billion of shares of the Class C Common Stock over a 24-month period expiring on February 28, 2022. During the first quarter of Fiscal 2021, we suspended activity under our stock repurchase program. |
ITEM 6 — INDEX TO EXHIBITS
The Company hereby files or furnishes the exhibits listed below:
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Exhibit Number | | Description |
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| | Registration Rights Agreement, dated as of April 9, 2020, among Dell International L.L.C., EMC Corporation, the guarantors party thereto and BofA Securities, Inc., Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC, as the representatives for the initial purchasers. |
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| | Amendment No. 23 to the Second Amended and Restated Registration Rights Agreement, dated as of AprilSeptember 15, 2020, among Dell Technologies Inc., Michael S. Dell and Susan Lieberman Dell Separate Property Trust, SL SPV-2 L.P., Silver Lake Partners IV, L.P., Silver Lake Technology Investors IV, L.P., Silver Lake Partners V DE (AIV), L.P., Silver Lake Technology Investors V, L.P. and Venezio Investments Pte. Ltd. |
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101 .INS†† | | |
Exhibit
Number
| | Description |
101 .INS†† | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101 .SCH†† | | Inline XBRL Taxonomy Extension Schema Document. |
101 .CAL†† | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101 .DEF†† | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101 .LAB†† | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101 .PRE†† | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104†† | | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
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†† | | Filed with this report. |
††† | | Furnished with this report. |
* | | Management contractscontract or compensation plansplan or arrangementsarrangement in which directors or executive officers participate. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| DELL TECHNOLOGIES INC. |
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| DELL TECHNOLOGIES INC. |
By: | | |
| By: | /s/ BRUNILDA RIOS |
| | Brunilda Rios |
| | Senior Vice President, Corporate Finance and |
| | Chief Accounting Officer |
| | (On behalf of registrant and as principal accounting officer) |
Date: June 8,December 7, 2020