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Michael Dell presents at annual Bernstein Strategic Decisions Conference

Good afternoon, everyone and welcome to Bernstein Strategic Decisions Conference. I’m Toni Sacconaghi, Bernstein’s IT Hardware Analyst, and I am really excited and pleased to have Michael Dell, the Founder, Chairman and CEO of Dell Technologies join us this afternoon.

Michael really needs no introduction. He founded a computer company in his dorm at the University of Texas. And at age 27 was CEO of a Fortune 500 company. He is really the inspiration for many young entrepreneurs and we’re thrilled to have them here today.
Before we just begin the discussion, let me just mention that Dell Technologies statements that relate to future results and events are forward-looking statements and are based on Dell Technologies’ current expectations. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in Dell Technologies’ periodic reports filed with the SEC. Dell Technologies assumes no obligation to update these forward-looking statements.
So with that, welcome, Michael, and thanks again for joining us.
Michael Dell
Great to be with you, Toni.
Toni Sacconaghi
So you guys just reported last week, your fiscal Q1 ’22 results. They were really strong, better than the Street expected. Maybe you can just talk a little bit about what you’re seeing in IT spending right now and what you’re hearing from customers?
Michael Dell
So yes, very happy with the first quarter results. And looking back at the sort of last 12 months, record cash flow $14.4 billion from operations, pretty happy about the ability to drive profitability and cash flow through the business. I think the – right now, certainly there is generally more demand than supply and technology investments are highly prioritized by companies as it relates to their spending.
As you’ve heard, I’m sure from many speakers, the digital transformation is been accelerated huge priority inside companies. And we’re seeing that and well positioned in our various businesses to benefit from.
Toni Sacconaghi
Well, maybe we can talk a little bit about the demand profile of each of your major businesses. So PCs grew revenues 20% in the quarter. I think, consumer was 40% plus, commercial which includes Chromebooks was also double digits. What is driving this? And you guys have talked about an elevated backlog in PCs, that probably likely to last through year-end. How do we think about what is happening and how you think about the sustainability of what might be happening? Just on the PC side and we’ll talk about enterprise.
Michael Dell
Sure. So, you know, you’ve got this sort of work from anywhere world and, it’s sort of transitioned from what it was before to one PC per person. And in some cases, more than one PC per person and the PC has sort of cemented itself as the most important tool that people have to stay connected and do work in a hybrid world.
And along with that, this move toward more notebooks, they have a 1.5 year roughly quicker refresh cycle that creates demand. Average selling prices are going up as people want bigger displays and more capable systems. The oldest PC in your house can’t really do a zoom meeting like this. You know, gaming is up big time. We have Alienware, notebooks up 76%.
So – and then of course, you’ve got a big expansion of the TAM for us as we’ve added software, peripherals, more services and support and we’ve done a great job in particularly adding to the TAM with services and support.
So, commercial demand is quite strong right now. And as people go back to offices, is a really interesting phenomenon. This has never happened before. Let’s say you go back to your office, September 1, will everything there is year and a half old. Right. And by the way, it’s not very capable of performing in the way that we’ve been used to during this period.
So feeling very good about the overall demand trends. We’re on the supply chain side, like everybody else dealing with the challenges that are out there. I think we did anticipate some of this and have ordered ahead and forecasted reasonably well.
But there are there are challenges and having a large supply chain and being a, what I am going to call a permanent customer, for a lot of these CapEx intensive businesses is super important. If you are putting $10 billion in the ground, every time you dig a hole, you are really focused on not just what happens next quarter, but over the next 10 years. And, these CapEx intensive companies know our company. They know me. They know Jeff Clarke, as a permanent customer and a permanent home for their output.
Toni Sacconaghi
So, Michael, let me just follow up with a couple of questions on that PC demand environment. One, you and others have talked about an elevated backlog. And I think you guys said and so did HP, probably your principal competitor of PCs, that the backlog would probably be elevated through year end? How do we know that there isn’t a lot of double ordering in that backlog, and that, you know, in this rush to raise supply, if ultimately that backlog isn’t as strong as people think that we could potentially have a harder landing So let’s talk about the backlog question. And then I want to just talk about sustainability of demand after that.
Michael Dell
Yes, so the thing that we watch very closely is the cancellation rate of orders in the backlog and backlog is one of these terms that has different meanings for different companies. So I’m just going to define it for our business. Dell – when we talk about backlog, we’re generally referring to orders that the customer wants now, right. So, this is not scheduled backlog.
And as lead times have increased and also pricing has firmed, we have not seen cancellations. And we have not seen cancellation rates go up. And so we are delivering record numbers of PCs and the output continues to grow. And if you were going to see double ordering, you would also see cancellations coming through the backlog. We’re just not seeing that.
Toni Sacconaghi
And can you qualify some way what the size of that backlog might be relative to history? So typically, on average you deliver in two weeks, and now your expectedly time as X weeks? Or is there a volume in terms of months of sales of backlog that you have, just so you can provide some context for how different that might be today relative to sort of historical time periods?
Michael Dell
Yes, I don’t think we’ve – I don’t think we’ve put any parameters around it. I mean, obviously, there are folks who spend a fair bit of time, you know, going through dell.com and trying to figure out what the lead times are and coming up with analytical models. And that’s probably not a bad way to assess it at one level.
Certainly, we’re also I think, reasonably good at demand shaping, which is to say, oh, you know, you wanted this model, but that’s all at three week lead time. You know, if you go to the website, we have quick ship systems. We have systems you can get right away. And a surprising percentage of people will pick a system that they can get right away.
So, yes, backlogs are certainly higher than normal, higher than we would like. And the pricing environment has been kind of what you would expect in a situation like this?
Toni Sacconaghi
Right? I’m sure that quick ship models have decent margins. So Michael, if we step back just think…
Michael Dell
Everything has pretty decent margins.
Toni Sacconaghi
Right now and certainly does. So Michael, if we kind of step back, I mean I think the big debate among the investor community, and I’m sure OEMs like yourself are thinking about this carefully. Is you had PCs that where growth industry till about 2011, they peaked at 360 million units. They then basically fell for seven years from 2011 to 2018 to about 260 million units. And this year they’re going to be backup at 360 million units. So we’ve had an abrupt sort of change and you highlighted this PC per person type phenomena. But at least from our analysis, consumer PCs have gone from like 100 million a couple of years ago to 160. Chrombox have gone from 15 million units to 60 million in two years.
So you’ve had tremendous additions invariably new users, invariably accelerated replacement cycles. And I guess that PC intensity might be higher going forward but given the strength we had over the last four quarter and probably continue to have for another two or three quarters, what is the risk that there’s a period of digestion for one or two years, and that PC units fall 5%, 10% in 2022 or 2023. And how do you as a company think about that?
Michael Dell
Well, first of all I think if you look at our business as you know Toni we are very much more commercial business than a consumer business. And as we have grown the TAM for CSE business, it’s kind of broaden out the set of opportunities that we’re going after. And there are $150 PCs, then there are $3,000 PCs. And if you look at sort of the last 6, 7 years and you overlay those unit trends with the Dell CSG revenue, you saw some pretty interesting separation in terms of our ability to grow through periods where maybe units are not really growing.
And we are growing PC as a service, and overall feel very good about our ability to gain share. Our share is not all that high and there is plenty to room to grow and to do so profitably and to increase the TAM. We joke a lot about the wonderful displays, well Dell has been in number one in displays in the world for 12, 14 years something like that, it’s growing superfast, right. As you think about the hybrid world, and multiple locations where you might be working, people love the widescreen 49-inch display, if you don’t have one of those, you should get a couple of them.
Toni Sacconaghi
Got it. But if — and Dell has a proven track record of gaining share in PCs. It’s been pretty inexorable throughout Dell’s history. But if I were to have you put your industry pundit hat on, our PC units down in 2022 and calendar 2022, and could they be down double digits in aggregate?
Michael Dell
Obviously, I don’t think anybody knows. You know, what I see is, is, you know, the PC getting more important, not less important. I see hybrid, increasing demand, as the notebooks increasing the replacement cycle. You know, gaming is certainly growing superfast. And, look, I think our ability to grow through all of that, particularly as we moved more towards as a service and expand the TAM, you know, I’m feeling good about our opportunities.
And look, I think, I think there are exciting things happening in user computing. And there’s a lot of energy in the ecosystem around continuing to drive the refresh. And, you know, people are energized around the new things that they could do with the latest and greatest PCs.
Toni Sacconaghi
All right, I want to – I am going to come back and revisit sort of standalone Dell, because there’s an important event happening this fall, maybe we can back up half as that and just talk about the spin-out. So you confirmed in April, that Dell Technologies is going to spin-out VMware to existing Dell technology shareholders.
And I guess the question is, how did you come to this conclusion? I think you may have seen in our written notes that, and I don’t think we’ve actually talked since the event happened, that I wasn’t sure you were actually going to do it.
Michael Dell
But now you are sure.
Toni Sacconaghi
Now I am. But, and so I’d like to say why I did – why I was questioning whether you would do it and then maybe you can take us through the process of how you got there. But you know, my question was, look, one, this was an asset that you spoke a lot about synergies together and the value that it brought to Dell Technologies, when you bought it, VMware as part of EMC. It accounts for it historically has accounted for up to half of Dell’s cash flow, it’s faster growing, it has higher margins, it’s more recurring revenue. Those are all aspirations for Dell.
And, you know, you’re not cashing out, my guess is, you’re going to continue to be a majority shareholder in Dell Technologies, you’re going to continue to own the very large stake about 40% in VMware. And so, you know, this wasn’t about, enriching your pocket, because, you know, you’re a long term investor, and I suspect you will continue to be. So how do I jive those observations with the ultimate decision that you said, hey, this is best that we spin-out VMware to shareholders?
Michael Dell
Sure, well, it’s certainly a considered decision, right. So something we thought about for some time, and took a lot of input from shareholders and understood what was going on with customers. And if you go back to 2016, you know, all those things that you said absolutely true. And we did all those things. Right. You know, we drove a lot of revenue synergies, you know, drove the revenue from Dell Technologies at VMware, you know, from a single digit percentage to over 30%. And, you know, that created a ton of value.
But still, you know, shareholders didn’t really appreciate the holding inside the company. And so you know, this structure allows us to continue all the great things we’ve been doing commercially and really doesn’t change anything for customers, but is a great benefit to our shareholders. And, you know, I think that’s, that’s obviously super important. You know, I think standalone Dell, core Dell has tons of great opportunities, not only in the alliance of partnership with VMware and multi-cloud but in edge, and telco and 5G, in the business model transformation to as-a-Service through APEX, which is also a TAM expansion.
And obviously, this structure is highly favorable for our shareholders. We solve the kind of debt issue, you know, put both companies on a great track with an investment grade and simplify the structure. And as you said, Dell technology shareholders will benefit from their holdings in VMware, which has a great future as the multi cloud platform for digital transformation.
Toni Sacconaghi
Right. But if I think really long term, like, like 20 years, and you’ve been in this industry for more than 30 and you will in some way, you shape or form VM probably for another 30. So if I think about that long term lens, is Dell Technologies as powerful a marketplace player without VMware as it would be with VMware? I mean VMware is a force in the cloud and by owning it invariably, you do shape its fortunes in terms of its acquisitions and its strategic direction and its integration with Dell more tightly than if you don’t own it. And so if you think out 20 year, I get the release of value to shareholders near term. But if you think out 20 years, is Dell Technologies stronger without VMware than with VMWare?
Michael Dell
Well, Toni, we’re building value here. We’re not building pyramids. So – I think ultimately this is a great decision for our shareholders. I think 20 years from now, our shareholders will have benefited from the holdings of the two companies. Hey, it might be five companies by then who the heck knows, right.
But four years is a long time. But look, the structure that we’ve chosen the path, we’ve chosen clearly preferred by shareholders. And I think preserves all the great things we’ve been doing for customers and so feel great about the direction, both short term and long term.
Toni Sacconaghi
So, Michael if we think about the standalone Dell going forward, how do you think about its competitive positioning and sort of what might be a realistic growth profile of that? I think your last Analyst Day was in 2019. A lot has changed since then obviously with the pandemic. But you were talking about low single-digit growth for the industry and without VMware that might even be lower. Dell gaining share, having operating leverage and EPS leverage on top of that.
How do we think about realistically with end markets historically that haven’t grown much PCs and servers and storage? What do you think of, sort of, kind of what is a realistic kind of growth rate for stand-alone Dell going forward, and how do you sort of get there between end market growth versus share gains?
Michael Dell
So, I think we have an attractive long-term financial model in the core business. And as I think about growth, I would characterize the longer-term picture as GDP or perhaps a little bit north of GDP growth overtime with strong cash flow and compounding EPS. We have large and growing long term available markets, and we’re well positioned across multiple sectors.
We have as you said, a history of gaining share in x86, in hyper converse, in PCs. I think you’ll see us grow operating fast in revenue. I think we’ll have EPS accretion through debt reduction. And I think there is tons of value to continue to be created inside the core, when you lay all that out over three to five year timeframe. And we’re certainly looking forward to our Analyst Day to elaborate some of that.
Toni Sacconaghi
Right. And we talk a little bit about PCs. We didn’t touch as much on enterprise, Michael. And so again, I think if you look at the market research data, it would paint a picture of limited market growth in both servers and storage from a revenue perspective. Do you have a different view or is it really your confidence that Dell can take share in both of those markets that drives you to something that’s more GDP type growth?
Michael Dell
Well, I think we can take share, and I also think that there are emerging growth vectors. For example in edge, there are very significant. We’re starting to see hundreds of edge projects that are meaningful by customers, which obviously – were more indexed to those multi-cloud continues to proliferate. And look, we are providing a lot of infrastructure to a lot of the CSPs out there.
I mean if you look at our top 1,000 ISG customers, the demand from software as a service from cloud hosting companies, from telco, consumer web tech, FinTech, it’s grown double digits in the last 12 months. And it’s roughly 30% of our orders from our top 1000 customers are in those categories. And yes, I mean the growth trends in ISG have been improving. And I think in the second half of the year, feeling optimistic about what we’ll continue to see there and I think we will gain share.
Toni Sacconaghi
Right. So, Michael, just, I know you’ve alluded to this number on earnings calls before. So the – you’re suggesting or you’re stating that 30% of orders, that’s 30% of revenues from the 1,000 largest customers are coming from CSPs. Is that correct?
Michael Dell
Yes.
Toni Sacconaghi
Okay. And if I were to sort of say, look, one question that I get a lot is, how does Dell participate in the cloud? And how do you measure your cloud revenues? Would that be the statistic that you would site or how would you discuss Dell’s both cloud strategy, participation and revenue profile today?
Michael Dell
No, I would say it’s quite a bit broader than that. I mean first of all, I think about – think about the cloud in terms of hybrid cloud and solutions that span across both public and private. And if you look at private cloud, it’s significant, right. There’s a lot of private cloud and it’s continuing to grow. It’s not going away and we’re number one in that.
And VMware is number one in hybrid cloud management and you know 600,000 VMware customers, is sort of migrating from the virtualization company to the software defined data center to the multi-cloud company and Dell Technologies is a leading way to deploy that.
And what we’re doing with APEX is sort of moving the whole business to as-a-Service and consumption model. And so it’s much broader than just selling equipment to the CSPs. You take our VxRail system and we just announced some new enhancements to that. It is by far and away kind of the leading platform for hybrid cloud and super easy for customers to deploy that kind of solution.
And if you think about moving that into an as-a-Service consumption model, the TAM grows quite nicely for us. And all of that is to say I think we have a very attractive opportunity in ISG as well.
Toni Sacconaghi
Right and just on APEX because we’ve heard more OEMs move towards as-a-Service models. Obviously Delta had Dell Financial Services for a long time and so consumers have been able to consume in various kinds of pay-as-you-go manners before. Maybe you can just succinctly suggest why APEX is different and why is it necessarily lead you into bigger TAM?
So I get the fact that if you have someone on a subscription and a solution. You can probably have higher support attach rates and you can work with them on a larger part of the solution. But specifically what is – what do you believe is distinctively different relative to the various consumption models that you’ve offered over the last several years particularly with your DFS capability?
Michael Dell
Sure. So what I’m seeing in our business is, we’re increasingly winning data centers service projects and managed services is growing. And if you think about the sort of evolution of this business, right, you kind of starts as a product business, then you add services, then you add managed services and sort of the next destination, not going to call it the ultimate destination because it’s probably something after that is the whole thing as a Service, right?
And it is a pretty big expansion of TAM because you’re effectively taking on major task for the customer. And you think about our partnership with Equinix as an example, right. We’re taking on colo, telecom, that’s all included in. I mean, draw your attention to our remaining performance obligations.

At the end of the last quarter, it was $42 billion. It’s a substantial sum, right, if you compare to other companies, up 15%. If you take ex-VMware, it’s $32 billion, up 18% and has been growing quite a bit faster than overall revenues. So as we’ve continued to grow the kind of managed services, data centers a Service, utility, flex on the and now APEX bring all that together making easy for not just the really big customers to do this but for any customer to do it. Yes I think it’s a massive expansion of our available market opportunity.

Toni Sacconaghi
Okay. So Michael, I have a number of questions that have been voted on. So I’ll – in the spirit of we have about 10 more minutes, I’ll rapid-fire some of those at you. So first, if there is a more serious chip shortage, just Dell actually gained share given its lead times and availability to secure supply?

Michael Dell
It’s hard to see kind of super bad things happening because if components are really in short supply other than just lead times are long and it’s very difficult for customers. But what happens within that of course as you prioritize the more valuable places for those components to go and you prioritize the long term and better customer. So I think we’re advantaged if that were to occur.

Toni Sacconaghi
And your ability to prioritize relative appear – to appear is advantage, why Michael?

Michael Dell
Direct. You know, we’re more indexed to direct than competitors

Toni Sacconaghi
Okay. So a couple of questions.

Michael Dell
And you see that in the profitability of our PC business, relative to the others who have many more units but less profit.

Toni Sacconaghi
Right, Yes, I mean maybe I’ll just follow up on that before asking the next one. You have talked about as a company sort of normalized PC margins being around 5% than they were that for several years prior to the last couple of years. They were 8% in the last quarter. You talked about this very benign pricing environment, obviously when demand is greater than supply or isn’t lot of discounting. People are kind of taking what they can get.

Has your view on sort of the right level of profitability for the PC industry and for Dell change because of this pandemic? Or should we be thinking of the historical levels that you guys have alluded to around 5% is sort of being normalized long-term profitability for PCs?

Michael Dell
Well, I’m not going to update the guidance that Tom gave you just last week, Toni. That’s a great question for our Analyst Day in September. Look, I think as we continue to make progress on expanding the TAM, some of these areas where we’re expanding the TAM do have very attractive margin profiles. So let’s see how we do. Come to our Analyst Day. We’ll have a good chat about it.

Toni Sacconaghi
Okay. Now just on VMware, there are a couple of questions about what happens in terms of your relationship with VMware post the spin. So very specifically, today or in the past year, you accounted for 35% of VMware sales. A lot of that was re-selling their product. Some of that was jointly developed and delivered product like VxRail but a lot of it was just reselling VMware.

So you’ve talked about a commercial agreement where I presume that will occur. But be getting – be getting paid for selling $4 billion a year of VMware stuff going forward and it sounds like today you’re not really getting paid and you’re getting paid in the virtue of the fact that you own VMware but in the future that won’t be the case.

So should we be thinking about a commission stream that Dell will be able to achieve by continuing the resell VMware going forward? And why wouldn’t that be the case? I presume you receive commissions for bundling exchange and other forms of software. So how do we think about that and how do we think about that relationship with VMware post the spin?

Michael Dell
Yes, we will get paid. And it’s worth – it’s worth it for us to continue to grow that business. And you know, I would think about this a little bit differently because when I see our customer relationships, basically these customers are like, I don’t want to deal with 20 different companies and integrate all the stuff myself. Dell Technologies, if you could bring all this together and provided to me as one provider, that’s fantastic. I’d rather do that with you than have to go, assemble at all myself.

And VMware is a big part of that solution. We certainly continue to build new capabilities together and innovate together and yes, it’ll – I think it will be a win-win. At the same time, both companies have an ability and have before to work with others. VMware is great but it’s not the only solution out there and Dell Technologies works with all the other ones as well.

Toni Sacconaghi
Right. So Michael, post the VMware transaction, Dell will trade as a – Dell Technologies will continue to trade, but it does have a super voting structure, effectively your shares count for higher amounts about and that means you have majority voting share. But you also majority economic share.

And unfortunately because of the super voting structure, Dell Technologies cannot be part of the S&P 500. And so that’s sort of the drawback, that’s associated with it. Would you consider abandoning that super voting structure and why is it necessary if ultimately you control the majority economic interest to have such a structure in place?

Michael Dell
Don’t have any plans to change it. And look, I think there are plenty of companies that have a similar structure and it doesn’t seem to have slowed down too much so.

Toni Sacconaghi
Right. But you our shareholder friendly, Michael, I mean you talked about this transitioning and listening to shareholders. There – I think it could elevate the importance in terms of becoming a benchmark for more investors and so hence the question and many people have asked.

Michael Dell
No plans to change it.

Toni Sacconaghi
Okay. So Michael, post the VMware spend, can you talk about your priorities for free cash flow post the spin, starting with the highest priority.

Michael Dell
Yes. So this is going to be something we’re going to talk about in September. Obviously for now we’ve been singularly focused on debt reduction. I think you can expect us to have a more balanced approach as we look at capital allocation. But I wouldn’t expect to be too surprised with what you see in September.

Toni Sacconaghi
And Michael, when you say more balanced approach, balance between debt reduction and?

Michael Dell
And another other alternatives for capital.

Toni Sacconaghi
Okay. But that would include M&A and return of capital?

Michael Dell
Sure.

Toni Sacconaghi
Or anything else we should be thinking about?

Michael Dell
I mean there are – I don’t have to solve the blanks for you on all the categories that could fall into return of capital. But certainly we’re going to be thinking about how we create value for our shareholders and continue to drive the great returns that we have.

Toni Sacconaghi
Right. Mike, I’m going to ask you two more questions. One is, 20 years from now, who are the leading IT vendors?

Michael Dell
You know it’s a great question. And if you go back and look at history, what it would tell you is that, it’s probably not the ones that are the leading ones now. Right. And so this is an industry that is constantly changing and evolving and success in the present is in no way a guarantee of success in the future and certainly not if you take your crystal ball out 20 years.

Toni Sacconaghi
Okay. And then final question, maybe briefly you can just make a quick pitch on why Dell Technologies’ stock at today’s levels? And you also have a book coming out in October called Play Nice, but when? Feel free to pitch that as well.

Michael Dell
Great. So look, I think we have attractive long-term opportunities to grow. We have a huge TAM. We have a differentiated business model. We have leading positions and we’re investing to grow that business. I think we also have a long-term track record of creating value for shareholders.

So excited about the future of the business, and certainly this is going to be a great year. I do have a book coming out. You’re in it, Toni. So you have to look forward to that. And it’s been a fun last couple of decades and certainly some great stories to tell about my adventures and about the future as well. So book has come out in October, 336 pages of funs. So look forward to it.

Toni Sacconaghi
Great. Well, I listened to your highlight built this podcast which I thought was terrific for those of you haven’t listened to it. It’s an MPR podcast with Michael, which is great. So I look forward to the book.

Thank you very much for your time today Michael for your support of the Bernstein Strategic Decisions Conference and I look forward to hopefully seeing you in person soon. SeekingAlpha

Michael Dell presents at annual Bernstein Strategic Decisions Conference

Good afternoon, everyone and welcome to Bernstein Strategic Decisions Conference. I’m Toni Sacconaghi, Bernstein’s IT Hardware Analyst, and I am really excited and pleased to have Michael Dell, the Founder, Chairman and CEO of Dell Technologies join us this afternoon.

Michael really needs no introduction. He founded a computer company in his dorm at the University of Texas. And at age 27 was CEO of a Fortune 500 company. He is really the inspiration for many young entrepreneurs and we’re thrilled to have them here today.

Before we just begin the discussion, let me just mention that Dell Technologies statements that relate to future results and events are forward-looking statements and are based on Dell Technologies’ current expectations. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in Dell Technologies’ periodic reports filed with the SEC. Dell Technologies assumes no obligation to update these forward-looking statements.

So with that, welcome, Michael, and thanks again for joining us.

Michael Dell

Great to be with you, Toni.

Toni Sacconaghi

So you guys just reported last week, your fiscal Q1 ’22 results. They were really strong, better than the Street expected. Maybe you can just talk a little bit about what you’re seeing in IT spending right now and what you’re hearing from customers?

Michael Dell

So yes, very happy with the first quarter results. And looking back at the sort of last 12 months, record cash flow $14.4 billion from operations, pretty happy about the ability to drive profitability and cash flow through the business. I think the – right now, certainly there is generally more demand than supply and technology investments are highly prioritized by companies as it relates to their spending.

As you’ve heard, I’m sure from many speakers, the digital transformation is been accelerated huge priority inside companies. And we’re seeing that and well positioned in our various businesses to benefit from.

Toni Sacconaghi

Well, maybe we can talk a little bit about the demand profile of each of your major businesses. So PCs grew revenues 20% in the quarter. I think, consumer was 40% plus, commercial which includes Chromebooks was also double digits. What is driving this? And you guys have talked about an elevated backlog in PCs, that probably likely to last through year-end. How do we think about what is happening and how you think about the sustainability of what might be happening? Just on the PC side and we’ll talk about enterprise.

Michael Dell

Sure. So, you know, you’ve got this sort of work from anywhere world and, it’s sort of transitioned from what it was before to one PC per person. And in some cases, more than one PC per person and the PC has sort of cemented itself as the most important tool that people have to stay connected and do work in a hybrid world.

And along with that, this move toward more notebooks, they have a 1.5 year roughly quicker refresh cycle that creates demand. Average selling prices are going up as people want bigger displays and more capable systems. The oldest PC in your house can’t really do a zoom meeting like this. You know, gaming is up big time. We have Alienware, notebooks up 76%.

So – and then of course, you’ve got a big expansion of the TAM for us as we’ve added software, peripherals, more services and support and we’ve done a great job in particularly adding to the TAM with services and support.

So, commercial demand is quite strong right now. And as people go back to offices, is a really interesting phenomenon. This has never happened before. Let’s say you go back to your office, September 1, will everything there is year and a half old. Right. And by the way, it’s not very capable of performing in the way that we’ve been used to during this period.

So feeling very good about the overall demand trends. We’re on the supply chain side, like everybody else dealing with the challenges that are out there. I think we did anticipate some of this and have ordered ahead and forecasted reasonably well.

But there are there are challenges and having a large supply chain and being a, what I am going to call a permanent customer, for a lot of these CapEx intensive businesses is super important. If you are putting $10 billion in the ground, every time you dig a hole, you are really focused on not just what happens next quarter, but over the next 10 years. And, these CapEx intensive companies know our company. They know me. They know Jeff Clarke, as a permanent customer and a permanent home for their output.

Toni Sacconaghi

So, Michael, let me just follow up with a couple of questions on that PC demand environment. One, you and others have talked about an elevated backlog. And I think you guys said and so did HP, probably your principal competitor of PCs, that the backlog would probably be elevated through year end? How do we know that there isn’t a lot of double ordering in that backlog, and that, you know, in this rush to raise supply, if ultimately that backlog isn’t as strong as people think that we could potentially have a harder landing So let’s talk about the backlog question. And then I want to just talk about sustainability of demand after that.

Michael Dell

Yes, so the thing that we watch very closely is the cancellation rate of orders in the backlog and backlog is one of these terms that has different meanings for different companies. So I’m just going to define it for our business. Dell – when we talk about backlog, we’re generally referring to orders that the customer wants now, right. So, this is not scheduled backlog.

And as lead times have increased and also pricing has firmed, we have not seen cancellations. And we have not seen cancellation rates go up. And so we are delivering record numbers of PCs and the output continues to grow. And if you were going to see double ordering, you would also see cancellations coming through the backlog. We’re just not seeing that.

Toni Sacconaghi

And can you qualify some way what the size of that backlog might be relative to history? So typically, on average you deliver in two weeks, and now your expectedly time as X weeks? Or is there a volume in terms of months of sales of backlog that you have, just so you can provide some context for how different that might be today relative to sort of historical time periods?

Michael Dell

Yes, I don’t think we’ve – I don’t think we’ve put any parameters around it. I mean, obviously, there are folks who spend a fair bit of time, you know, going through dell.com and trying to figure out what the lead times are and coming up with analytical models. And that’s probably not a bad way to assess it at one level.

Certainly, we’re also I think, reasonably good at demand shaping, which is to say, oh, you know, you wanted this model, but that’s all at three week lead time. You know, if you go to the website, we have quick ship systems. We have systems you can get right away. And a surprising percentage of people will pick a system that they can get right away.

So, yes, backlogs are certainly higher than normal, higher than we would like. And the pricing environment has been kind of what you would expect in a situation like this?

Toni Sacconaghi

Right? I’m sure that quick ship models have decent margins. So Michael, if we step back just think…

Michael Dell

Everything has pretty decent margins.

Toni Sacconaghi

Right now and certainly does. So Michael, if we kind of step back, I mean I think the big debate among the investor community, and I’m sure OEMs like yourself are thinking about this carefully. Is you had PCs that where growth industry till about 2011, they peaked at 360 million units. They then basically fell for seven years from 2011 to 2018 to about 260 million units. And this year they’re going to be backup at 360 million units. So we’ve had an abrupt sort of change and you highlighted this PC per person type phenomena. But at least from our analysis, consumer PCs have gone from like 100 million a couple of years ago to 160. Chrombox have gone from 15 million units to 60 million in two years.

So you’ve had tremendous additions invariably new users, invariably accelerated replacement cycles. And I guess that PC intensity might be higher going forward but given the strength we had over the last four quarter and probably continue to have for another two or three quarters, what is the risk that there’s a period of digestion for one or two years, and that PC units fall 5%, 10% in 2022 or 2023. And how do you as a company think about that?

Michael Dell

Well, first of all I think if you look at our business as you know Toni we are very much more commercial business than a consumer business. And as we have grown the TAM for CSE business, it’s kind of broaden out the set of opportunities that we’re going after. And there are $150 PCs, then there are $3,000 PCs. And if you look at sort of the last 6, 7 years and you overlay those unit trends with the Dell CSG revenue, you saw some pretty interesting separation in terms of our ability to grow through periods where maybe units are not really growing.

And we are growing PC as a service, and overall feel very good about our ability to gain share. Our share is not all that high and there is plenty to room to grow and to do so profitably and to increase the TAM. We joke a lot about the wonderful displays, well Dell has been in number one in displays in the world for 12, 14 years something like that, it’s growing superfast, right. As you think about the hybrid world, and multiple locations where you might be working, people love the widescreen 49-inch display, if you don’t have one of those, you should get a couple of them.

Toni Sacconaghi

Got it. But if — and Dell has a proven track record of gaining share in PCs. It’s been pretty inexorable throughout Dell’s history. But if I were to have you put your industry pundit hat on, our PC units down in 2022 and calendar 2022, and could they be down double digits in aggregate?

Michael Dell

Obviously, I don’t think anybody knows. You know, what I see is, is, you know, the PC getting more important, not less important. I see hybrid, increasing demand, as the notebooks increasing the replacement cycle. You know, gaming is certainly growing superfast. And, look, I think our ability to grow through all of that, particularly as we moved more towards as a service and expand the TAM, you know, I’m feeling good about our opportunities.

And look, I think, I think there are exciting things happening in user computing. And there’s a lot of energy in the ecosystem around continuing to drive the refresh. And, you know, people are energized around the new things that they could do with the latest and greatest PCs.

Toni Sacconaghi

All right, I want to – I am going to come back and revisit sort of standalone Dell, because there’s an important event happening this fall, maybe we can back up half as that and just talk about the spin-out. So you confirmed in April, that Dell Technologies is going to spin-out VMware to existing Dell technology shareholders.

And I guess the question is, how did you come to this conclusion? I think you may have seen in our written notes that, and I don’t think we’ve actually talked since the event happened, that I wasn’t sure you were actually going to do it.

Michael Dell

But now you are sure.

Toni Sacconaghi

Now I am. But, and so I’d like to say why I did – why I was questioning whether you would do it and then maybe you can take us through the process of how you got there. But you know, my question was, look, one, this was an asset that you spoke a lot about synergies together and the value that it brought to Dell Technologies, when you bought it, VMware as part of EMC. It accounts for it historically has accounted for up to half of Dell’s cash flow, it’s faster growing, it has higher margins, it’s more recurring revenue. Those are all aspirations for Dell.

And, you know, you’re not cashing out, my guess is, you’re going to continue to be a majority shareholder in Dell Technologies, you’re going to continue to own the very large stake about 40% in VMware. And so, you know, this wasn’t about, enriching your pocket, because, you know, you’re a long term investor, and I suspect you will continue to be. So how do I jive those observations with the ultimate decision that you said, hey, this is best that we spin-out VMware to shareholders?

Michael Dell

Sure, well, it’s certainly a considered decision, right. So something we thought about for some time, and took a lot of input from shareholders and understood what was going on with customers. And if you go back to 2016, you know, all those things that you said absolutely true. And we did all those things. Right. You know, we drove a lot of revenue synergies, you know, drove the revenue from Dell Technologies at VMware, you know, from a single digit percentage to over 30%. And, you know, that created a ton of value.

But still, you know, shareholders didn’t really appreciate the holding inside the company. And so you know, this structure allows us to continue all the great things we’ve been doing commercially and really doesn’t change anything for customers, but is a great benefit to our shareholders. And, you know, I think that’s, that’s obviously super important. You know, I think standalone Dell, core Dell has tons of great opportunities, not only in the alliance of partnership with VMware and multi-cloud but in edge, and telco and 5G, in the business model transformation to as-a-Service through APEX, which is also a TAM expansion.

And obviously, this structure is highly favorable for our shareholders. We solve the kind of debt issue, you know, put both companies on a great track with an investment grade and simplify the structure. And as you said, Dell technology shareholders will benefit from their holdings in VMware, which has a great future as the multi cloud platform for digital transformation.

Toni Sacconaghi

Right. But if I think really long term, like, like 20 years, and you’ve been in this industry for more than 30 and you will in some way, you shape or form VM probably for another 30. So if I think about that long term lens, is Dell Technologies as powerful a marketplace player without VMware as it would be with VMware? I mean VMware is a force in the cloud and by owning it invariably, you do shape its fortunes in terms of its acquisitions and its strategic direction and its integration with Dell more tightly than if you don’t own it. And so if you think out 20 year, I get the release of value to shareholders near term. But if you think out 20 years, is Dell Technologies stronger without VMware than with VMWare?

Michael Dell

Well, Toni, we’re building value here. We’re not building pyramids. So – I think ultimately this is a great decision for our shareholders. I think 20 years from now, our shareholders will have benefited from the holdings of the two companies. Hey, it might be five companies by then who the heck knows, right.

But four years is a long time. But look, the structure that we’ve chosen the path, we’ve chosen clearly preferred by shareholders. And I think preserves all the great things we’ve been doing for customers and so feel great about the direction, both short term and long term.

Toni Sacconaghi

So, Michael if we think about the standalone Dell going forward, how do you think about its competitive positioning and sort of what might be a realistic growth profile of that? I think your last Analyst Day was in 2019. A lot has changed since then obviously with the pandemic. But you were talking about low single-digit growth for the industry and without VMware that might even be lower. Dell gaining share, having operating leverage and EPS leverage on top of that.

How do we think about realistically with end markets historically that haven’t grown much PCs and servers and storage? What do you think of, sort of, kind of what is a realistic kind of growth rate for stand-alone Dell going forward, and how do you sort of get there between end market growth versus share gains?

Michael Dell

So, I think we have an attractive long-term financial model in the core business. And as I think about growth, I would characterize the longer-term picture as GDP or perhaps a little bit north of GDP growth overtime with strong cash flow and compounding EPS. We have large and growing long term available markets, and we’re well positioned across multiple sectors.

We have as you said, a history of gaining share in x86, in hyper converse, in PCs. I think you’ll see us grow operating fast in revenue. I think we’ll have EPS accretion through debt reduction. And I think there is tons of value to continue to be created inside the core, when you lay all that out over three to five year timeframe. And we’re certainly looking forward to our Analyst Day to elaborate some of that.

Toni Sacconaghi

Right. And we talk a little bit about PCs. We didn’t touch as much on enterprise, Michael. And so again, I think if you look at the market research data, it would paint a picture of limited market growth in both servers and storage from a revenue perspective. Do you have a different view or is it really your confidence that Dell can take share in both of those markets that drives you to something that’s more GDP type growth?

Michael Dell

Well, I think we can take share, and I also think that there are emerging growth vectors. For example in edge, there are very significant. We’re starting to see hundreds of edge projects that are meaningful by customers, which obviously – were more indexed to those multi-cloud continues to proliferate. And look, we are providing a lot of infrastructure to a lot of the CSPs out there.

I mean if you look at our top 1,000 ISG customers, the demand from software as a service from cloud hosting companies, from telco, consumer web tech, FinTech, it’s grown double digits in the last 12 months. And it’s roughly 30% of our orders from our top 1000 customers are in those categories. And yes, I mean the growth trends in ISG have been improving. And I think in the second half of the year, feeling optimistic about what we’ll continue to see there and I think we will gain share.

Toni Sacconaghi

Right. So, Michael, just, I know you’ve alluded to this number on earnings calls before. So the – you’re suggesting or you’re stating that 30% of orders, that’s 30% of revenues from the 1,000 largest customers are coming from CSPs. Is that correct?

Michael Dell

Yes.

Toni Sacconaghi

Okay. And if I were to sort of say, look, one question that I get a lot is, how does Dell participate in the cloud? And how do you measure your cloud revenues? Would that be the statistic that you would site or how would you discuss Dell’s both cloud strategy, participation and revenue profile today?

Michael Dell

No, I would say it’s quite a bit broader than that. I mean first of all, I think about – think about the cloud in terms of hybrid cloud and solutions that span across both public and private. And if you look at private cloud, it’s significant, right. There’s a lot of private cloud and it’s continuing to grow. It’s not going away and we’re number one in that.

And VMware is number one in hybrid cloud management and you know 600,000 VMware customers, is sort of migrating from the virtualization company to the software defined data center to the multi-cloud company and Dell Technologies is a leading way to deploy that.

And what we’re doing with APEX is sort of moving the whole business to as-a-Service and consumption model. And so it’s much broader than just selling equipment to the CSPs. You take our VxRail system and we just announced some new enhancements to that. It is by far and away kind of the leading platform for hybrid cloud and super easy for customers to deploy that kind of solution.

And if you think about moving that into an as-a-Service consumption model, the TAM grows quite nicely for us. And all of that is to say I think we have a very attractive opportunity in ISG as well.

Toni Sacconaghi

Right and just on APEX because we’ve heard more OEMs move towards as-a-Service models. Obviously Delta had Dell Financial Services for a long time and so consumers have been able to consume in various kinds of pay-as-you-go manners before. Maybe you can just succinctly suggest why APEX is different and why is it necessarily lead you into bigger TAM?

So I get the fact that if you have someone on a subscription and a solution. You can probably have higher support attach rates and you can work with them on a larger part of the solution. But specifically what is – what do you believe is distinctively different relative to the various consumption models that you’ve offered over the last several years particularly with your DFS capability?

Michael Dell

Sure. So what I’m seeing in our business is, we’re increasingly winning data centers service projects and managed services is growing. And if you think about the sort of evolution of this business, right, you kind of starts as a product business, then you add services, then you add managed services and sort of the next destination, not going to call it the ultimate destination because it’s probably something after that is the whole thing as a Service, right?

And it is a pretty big expansion of TAM because you’re effectively taking on major task for the customer. And you think about our partnership with Equinix as an example, right. We’re taking on colo, telecom, that’s all included in. I mean, draw your attention to our remaining performance obligations.

At the end of the last quarter, it was $42 billion. It’s a substantial sum, right, if you compare to other companies, up 15%. If you take ex-VMware, it’s $32 billion, up 18% and has been growing quite a bit faster than overall revenues. So as we’ve continued to grow the kind of managed services, data centers a Service, utility, flex on the and now APEX bring all that together making easy for not just the really big customers to do this but for any customer to do it. Yes I think it’s a massive expansion of our available market opportunity.

Toni Sacconaghi

Okay. So Michael, I have a number of questions that have been voted on. So I’ll – in the spirit of we have about 10 more minutes, I’ll rapid-fire some of those at you. So first, if there is a more serious chip shortage, just Dell actually gained share given its lead times and availability to secure supply?

Michael Dell

It’s hard to see kind of super bad things happening because if components are really in short supply other than just lead times are long and it’s very difficult for customers. But what happens within that of course as you prioritize the more valuable places for those components to go and you prioritize the long term and better customer. So I think we’re advantaged if that were to occur.

Toni Sacconaghi

And your ability to prioritize relative appear – to appear is advantage, why Michael?

Michael Dell

Direct. You know, we’re more indexed to direct than competitors.

Toni Sacconaghi

Okay. So a couple of questions.

Michael Dell

And you see that in the profitability of our PC business, relative to the others who have many more units but less profit.

Toni Sacconaghi

Right, Yes, I mean maybe I’ll just follow up on that before asking the next one. You have talked about as a company sort of normalized PC margins being around 5% than they were that for several years prior to the last couple of years. They were 8% in the last quarter. You talked about this very benign pricing environment, obviously when demand is greater than supply or isn’t lot of discounting. People are kind of taking what they can get.

Has your view on sort of the right level of profitability for the PC industry and for Dell change because of this pandemic? Or should we be thinking of the historical levels that you guys have alluded to around 5% is sort of being normalized long-term profitability for PCs?

Michael Dell

Well, I’m not going to update the guidance that Tom gave you just last week, Toni. That’s a great question for our Analyst Day in September. Look, I think as we continue to make progress on expanding the TAM, some of these areas where we’re expanding the TAM do have very attractive margin profiles. So let’s see how we do. Come to our Analyst Day. We’ll have a good chat about it.

Toni Sacconaghi

Okay. Now just on VMware, there are a couple of questions about what happens in terms of your relationship with VMware post the spin. So very specifically, today or in the past year, you accounted for 35% of VMware sales. A lot of that was re-selling their product. Some of that was jointly developed and delivered product like VxRail but a lot of it was just reselling VMware.

So you’ve talked about a commercial agreement where I presume that will occur. But be getting – be getting paid for selling $4 billion a year of VMware stuff going forward and it sounds like today you’re not really getting paid and you’re getting paid in the virtue of the fact that you own VMware but in the future that won’t be the case.

So should we be thinking about a commission stream that Dell will be able to achieve by continuing the resell VMware going forward? And why wouldn’t that be the case? I presume you receive commissions for bundling exchange and other forms of software. So how do we think about that and how do we think about that relationship with VMware post the spin?

Michael Dell

Yes, we will get paid. And it’s worth – it’s worth it for us to continue to grow that business. And you know, I would think about this a little bit differently because when I see our customer relationships, basically these customers are like, I don’t want to deal with 20 different companies and integrate all the stuff myself. Dell Technologies, if you could bring all this together and provided to me as one provider, that’s fantastic. I’d rather do that with you than have to go, assemble at all myself.

And VMware is a big part of that solution. We certainly continue to build new capabilities together and innovate together and yes, it’ll – I think it will be a win-win. At the same time, both companies have an ability and have before to work with others. VMware is great but it’s not the only solution out there and Dell Technologies works with all the other ones as well.

Toni Sacconaghi

Right. So Michael, post the VMware transaction, Dell will trade as a – Dell Technologies will continue to trade, but it does have a super voting structure, effectively your shares count for higher amounts about and that means you have majority voting share. But you also majority economic share.

And unfortunately because of the super voting structure, Dell Technologies cannot be part of the S&P 500. And so that’s sort of the drawback, that’s associated with it. Would you consider abandoning that super voting structure and why is it necessary if ultimately you control the majority economic interest to have such a structure in place?

Michael Dell

Don’t have any plans to change it. And look, I think there are plenty of companies that have a similar structure and it doesn’t seem to have slowed down too much so.

Toni Sacconaghi

Right. But you our shareholder friendly, Michael, I mean you talked about this transitioning and listening to shareholders. There – I think it could elevate the importance in terms of becoming a benchmark for more investors and so hence the question and many people have asked.

Michael Dell

No plans to change it.

Toni Sacconaghi

Okay. So Michael, post the VMware spend, can you talk about your priorities for free cash flow post the spin, starting with the highest priority.

Michael Dell

Yes. So this is going to be something we’re going to talk about in September. Obviously for now we’ve been singularly focused on debt reduction. I think you can expect us to have a more balanced approach as we look at capital allocation. But I wouldn’t expect to be too surprised with what you see in September.

Toni Sacconaghi

And Michael, when you say more balanced approach, balance between debt reduction and?

Michael Dell

And another other alternatives for capital.

Toni Sacconaghi

Okay. But that would include M&A and return of capital?

Michael Dell

Sure.

Toni Sacconaghi

Or anything else we should be thinking about?

Michael Dell

I mean there are – I don’t have to solve the blanks for you on all the categories that could fall into return of capital. But certainly we’re going to be thinking about how we create value for our shareholders and continue to drive the great returns that we have.

Toni Sacconaghi

Right. Mike, I’m going to ask you two more questions. One is, 20 years from now, who are the leading IT vendors?

Michael Dell

You know it’s a great question. And if you go back and look at history, what it would tell you is that, it’s probably not the ones that are the leading ones now. Right. And so this is an industry that is constantly changing and evolving and success in the present is in no way a guarantee of success in the future and certainly not if you take your crystal ball out 20 years.

Toni Sacconaghi

Okay. And then final question, maybe briefly you can just make a quick pitch on why Dell Technologies’ stock at today’s levels? And you also have a book coming out in October called Play Nice, but when? Feel free to pitch that as well.

Michael Dell

Great. So look, I think we have attractive long-term opportunities to grow. We have a huge TAM. We have a differentiated business model. We have leading positions and we’re investing to grow that business. I think we also have a long-term track record of creating value for shareholders.

So excited about the future of the business, and certainly this is going to be a great year. I do have a book coming out. You’re in it, Toni. So you have to look forward to that. And it’s been a fun last couple of decades and certainly some great stories to tell about my adventures and about the future as well. So book has come out in October, 336 pages of funs. So look forward to it.

Toni Sacconaghi

Great. Well, I listened to your highlight built this podcast which I thought was terrific for those of you haven’t listened to it. It’s an MPR podcast with Michael, which is great. So I look forward to the book.

Thank you very much for your time today Michael for your support of the Bernstein Strategic Decisions Conference and I look forward to hopefully seeing you in person soon. SeekingAlpha

 

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