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Dell Delivers a Solid Quarter as Client and VMware Demand Grows
by Daniel Newman | November 24, 2020

The News: Dell Technologies (NYSE: DELL) announces financial results for its fiscal 2020 third quarter. Revenue was up 3% to $23.5 billion. The company generated operating income of $1.1 billion, a 35% increase over the same period in the prior year, and non-GAAP operating income of $2.7 billion, up 12%. Net income was $881 million, non-GAAP net income was $1.7 billion and adjusted EBITDA was $3.2 billion. Net cash from operating activities was $3.0 billion. Diluted earnings per share was $1.08, up 64% and non-GAAP diluted earnings per share was $2.03, up 16%. Read the full news item on Dell’s investor relations site.

Highlights Include:

• Third quarter total revenue up 3% to $23.5 billion
• Record Client Solutions Group revenue of $12.3 billion, up 8%, operating income of $1.0 billion
• Diluted earnings per share up 64% to $1.08, non-GAAP diluted earnings per share up 16% to $2.03 • Operating income up 35% to $1.1 billion, non-GAAP operating income up 12% to $2.7 billion Full story

Analyst Take: Dell’s fiscal Q3 provides a good look at an improving set of economic conditions as well as a strongly diverse and resilient company that is finding a path to growth despite several challenging circumstances, most notably the continued pandemic, which has had a big impact on IT infrastructure spend for most industries. 

Dell’s revenue came in above expectations as its client computing (PC) business had a solid performance, also buoyed by VMware’s consistency. Still, the company also flexed its operational muscles as it delivered operating income that was up 35% for this period YoY. This was a huge contributing factor to the significant EPS beat ($2.03 vs. $1.42 EST) for Dell this quarter.

This was a big turning point for Dell as the business returned to YoY growth in this quarter. Given the global pandemic and its impact on supply chain and capital expenditures, this is an important inflection point showing a resilient business and an improved economy. While the overall growth did hinge on certain portions of the business outperforming, these results reflect Dell’s strong overall performance. 

ISG Lags as Client Solutions See Record Results 

When it comes to the big infrastructure investments for enterprise, I feel the need to stay consistent in saying that keeping revenue close to the year before in the current economic situation is solid. ISG was down 4% from this time last year, delivering $8.0 Billion for the quarter versus $8.4 a year ago same period. This is a byproduct of the continued Covid-19 related economic slow down that has hit on-prem infrastructure spend especially hard as spend has tilted toward SaaS and Cloud. I still believe we will see this continue to improve in the coming quarters, and its single-digit decline could see a break out as pent up demand will be substantial as we see a return to the office. 

The client business is a bit different. Dell’s client solutions results continued to deliver strong numbers to its commercial clients as corporations sought to put PCs in remote workers’ hands. This quarter, the consumer saw the most material spike in demand as it saw a 14% jump YoY. I expect the client demand to be sustained for the next few quarters through the holiday with commercial picking back up after the initial wave that drove buying due to work-from-home requirements. 

Year over year, the client segment turned positive this quarter jumping to an overall growth rate of 2%. This turned from a 5% decline at the end of last quarter, showing the pent up demand turned the year positive, leaving growth in sight for the full 12 months ending in January. 

Dell’s Project Apex and Recurring Revenue for Dell Picks Up Steam

One of the areas that I have been watching closely has been the company’s overtures into consumption-based IT. More OEMs, especially HPE and Lenovo, and recently joined by Cisco, have made significant investments into delivering IT on-premises in a consumption model. Dell has also been showing strong growth in this area with its “On Demand” offerings, now officially called “Project Apex,” reaching $1.3 billion last quarter, which represented a solid growth from around $900 Million in the 4th quarter of its last fiscal year. (will update these numbers upon receipt of Q3 data) 

VMware Solid as Always — Hybrid Cloud is HOT

VMware continues to be the bright spot for dell, once again delivering just below double-digit growth (8%) YoY on $2.9 billion. As companies are making sizable investments in public and hybrid cloud, VMware is a staple, and this has been a driver of growth for this business unit. 

Of course, Dell filed a 13D as it looks at possible divestitures or spinoffs of VMware. This has proven to be an exciting prospect for investors as VMware has performed admirably under Dell Technologies, and with Red Hat going for a hefty $34 Billion to IBM, rumor has it that VMware could fetch a number significantly larger–This will be a situation to pay close attention to. 

Overall Impressions on Dell Q3 Earnings 

This quarter was solid overall for Dell. With the circumstances that we are facing worldwide, the company’s return to YoY growth is a really solid result that should give the leadership and investors confidence about the road ahead. 

Broadly speaking, Dell’s strong operating income and revenue outpaced the year before, showing a resilient business model that is anchored by the strength of work from home, notebooks, and hybrid cloud (VMware). The continued generation of free cash flow keeps the company in a good position to move on opportunities. The significant reduction ($4.6 Billion) in debt paid off this quarter is also a good sign as its improving balance sheet increases the perceived “Investibility” in Dell.

Last quarter, I suggested that the market would be anxious to see YoY growth return as well as increased indications of enterprise CapEx spending. This quarter’s YoY was exactly what I had said the company needed, and I believe the market should largely react positively, with the exception of the somewhat straggling growth of ISG. With the vaccine making rapid progress, I believe work mobility will increase, and hybrid and in-office work will return in 2021. This should see a spike in on-prem investment with Dell being a material beneficiary. 

Of course, as mentioned above, Dell still has the lingering 13D filing regarding VMware, which analysts and shareholders will be watching closely. This has the makings of a big spinoff, but that most likely will not happen before the tax situation is optimal.

Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio