Dell Technologies Inc.

Good afternoon and welcome to the fiscal year 2020 second quarter financial results conference call for Dell Technologies, Inc. I'd like to inform all participants this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies, Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question and answer session. If you have a question, simply press star then 1 on your telephone keypad at any time during the presentation. I'd now like to turn the call over to Rob Williams, head of investor relations. Mr. Williams, you may begin.

Thanks, Erica, and thanks for joining us. With me today are our Vice Chairman Jeff Cole, our CFO Tom Sweet, and our Treasurer Tyler Johnson. During this call, we will reference non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, EPS, EBITDA, adjusted EBITDA, and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our Web Deck and press release. Please also note that all growth percentages refer to year over year change unless otherwise specified. I want to mention that we will not be taking questions related to the Pivotal or Carbon Black transactions that VMware announced on August 22. Finally, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties which are discussed in our Web Deck. We assume no obligation to update our forward-looking statements. Now I'll turn it over to Jeff.

Thanks, Rob, and thanks to all of you for joining us. Since we launched Dell Technologies, we have been consistent about our long-term view on global technology investment and what we have to do to realize this unprecedented opportunity. We have to innovate and integrate across the full Dell Technologies portfolio. Doing this creates the next generation of technology infrastructure that enables digital organizations operating in the data economy. We have to continue innovating within our business units to win the consolidation and generate cash. And of course, we have to do this with an eye towards the inevitable fluctuations in near-term demand. Today, I would like to touch on each of these areas and share some of the progress we have made executing against our strategic priorities. To begin, let me emphasize the long-term drivers for our business remain intact. We are in the early stages of a technology-led investment cycle that is accelerating digital transformation. That investment cycle is fueled by the exponential increase in data and data-centric workloads that drive better business outcomes alongside an increasingly diverse and mobile workforce. But to realize these outcomes, customers are grappling with increasing complexity across their operating environments and infrastructure including data proliferation, multi-cloud management, security, new software architectures, application, artificial intelligence, and machine learning, all the while defining their approach to cloud and increasingly the edge in IoT. Take hybrid cloud as an example. Companies deploying hybrid cloud strategies want seamless compatibility, consistent infrastructure and operations across private clouds, public clouds, and the edge. We are optimistic about IT spending because customers need a partner to help them address these challenges, one who is innovating and delivering a comprehensive -to-end IT strategy. In fact, the latest IDC forecast for IT spending through 2023, excluding Telco, backs up our optimistic view. IDC projects growth will be more than 2X real GDP or about .3% per year on average. So as I said, we believe the long-term drivers of our business are intact. This brings me to my second point. Dell Technologies is uniquely positioned to capitalize on this enormous opportunity. We have been hard at work innovating and integrating across the portfolio to deliver the future of technology infrastructure with solutions that dramatically simplify IT management. Last quarter, we made major progress with the announcement of Dell Technologies Cloud and Unified Workspace. Interest remains high in our Dell Technologies Cloud platform, the easiest and fastest way to a consistent hybrid cloud experience. It brings together Dell EMC's VxRail hyperconverged infrastructure with VMware's Cloud Foundation software stack, offering customers a single, consistent platform for both traditional and cloud-native workloads with full automation and integration for hybrid and multi-cloud environments with consistent SLAs, tools, services, and management from VMware and Dell EMC. The customer pays subscription fees for as long as they use it, the same way they pay for public cloud infrastructure. CapEx becomes OpEx. Earlier this week at VMworld, we announced several other enhancements to our Dell Technologies Cloud offerings, including new validated designs for storage arrays and servers, initial availability of the industry's first fully managed on-premise data center as a service offering, and general availability of new -you-use flexible consumption models. In addition, we announced Dell Technologies Cloud platforms now support VMware Pivotal container service. And with VMware's recent announcement of its intent to acquire Pivotal, our solutions and speed to market get even stronger. Pivotal further extends VMware's Kubernetes capabilities for building, running, managing modern applications on any cloud. Another powerful example of how we're innovating across Dell Technologies is unified workspace. The solution integrates capabilities across Dell devices and services, VMware and SecureWorks. And now includes Dell ProManage, managed services that integrate Dell's highly skilled experts as part of the customer's IT teams. Think about the IT investment cycle I mentioned earlier and the needs of the growing diverse and mobile workforce. Unified workspace is an intelligent solution that tells you the specific devices and applications your workforce needs on their specific usage. Then it delivers those personalized devices directly to the end user, pre-configured and pre-loaded with all the applications and security features they need. IT never has to touch the device. With VMware's acquisition of Carbon Black, unified workspace will only improve with a comprehensive intrinsic security portfolio for the multi-cloud world and for modern applications and devices. As you can see, we are delivering on our promise to innovate across Dell Technologies to create the future of technology infrastructure from the cloud to the edge while dramatically simplifying the customer experience. And this brings me to our next strategic priority, which is all about what we are creating in our business units to drive and win in the consolidation, generate cash flow and fuel innovation. We have the strongest solution set in our history with businesses that are consistently outperforming their competitors. In the data center, we are seeing significant traction from our new Unity XT mid-range storage solution. And the strong acceptance of XT in the market gives us confidence as we ramp the solution and prepare to bring our next generation mid-range storage offering to the market. We are also seeing strong receptivity of our PowerProtect X400 and PowerProtect software. The X400 delivers next generation data management and protection in a software-defined, scale-out appliance. It is highly complemented by our PowerProtect software offering that delivers data protection, deduplication, operation agility, self-service and IT governance. In Q2, the X-Rail orders grew 77% as organizations continue to benefit from its simple integration with VMware Cloud Foundation to enable hybrid cloud environments. It is just another example of how we are collaborating with VMware to bring another first and best solution to the marketplace. In Client Solutions, we introduced new XPS products with leading design and user experience, including more powerful processing and applications matched with thinner and lighter designs like our new XPS 13 -in-1. And our Dell RATITUV 7400 -in-1 continues to receive incredible praise from the media and customers alike, with PC World deeming it a nearly perfect combination of power and battery life. It is the first commercial laptop with built-in sensing technology. Our teams are turning out the industry's best products and solutions, executing in our priority to win the consolidation and generate cash flow. Which brings me to my final point. As we invest and innovate to capture on the enormous opportunity in front of us, we must remain disciplined and mindful of the near-term environment in which we operate in. So before I turn it over to Tom, let me shift gears to the current demand environment and our view on component cost. Our Core Dell orders were up 4% excluding China, and we are seeing a clear split between enterprise infrastructure and PC spending globally. In enterprise infrastructure, the market is softer than we and the industry anticipated. We expect it to remain soft through the balance of the year, particularly in China. We feel really good about our ISG execution in Q2, given the market context. In the first half, we have farred approximately 21,000 ISG customers, up 11% from the prior year. And more of our ISG customers are purchasing multiple lines of businesses. Our storage business remains healthy in Q2, with orders up 1%, and first half orders up 4%. Our sales team remain optimistic about our portfolio and positioning as we head into the second half of the year. Turning to servers. The industry saw unprecedented growth last year, and many customers are still digesting their CapEx investments. We are balancing revenue and profitability as we navigate through the current server dynamics. Our Q2 server revenue declined, but we realized higher margin dollars as we were consciously more selective on large, low margin deals in all geographies. Outside of China, our server orders were up 1%, and we expect a gain share this quarter in North America and EMEA when IDC publishes results next week. Our server ASPs remain strong, up high single digits, as customers are increasingly buying higher end systems to support their high value workloads. In Q2, CSG delivered record performance driven by strong execution, the Linten refresh, and a declining component cost environment. Longer term, we expect to continue to drive share gains through innovation and execution as the industry continues to consolidate among the top vendors. We will continue to focus on commercial, high end consumer, and gaming as well as increasing our attach of services, financing, and software and peripherals. In the supply chain, we expect the component cost environment to remain deflationary and aggregate through at least the end of the year. Though it's important to note, we expect the decline to significantly slow down in the second half, measured against the first half. This quarter, we clearly benefited from the strength of our broad IT solutions portfolio, which helped us deliver strong results amid short term market volatility. While we saw soft spending in pockets of the marketplace, our overall performance in Q2 reflected our competitive advantage. In the second half, you should expect us to continue to balance growth and profitability, though with a slightly higher bias towards maintaining growth at the portfolio level. We have built a business to be successful in any environment. We are differentiated by our broad portfolio in the industry with leading solutions, our direct model including services and financing, and our world class supply chains at size and scale. Whether the market expands or declines, we expect that to perform the industry. To recap, we believe strongly that our long term growth drivers are intact. We are innovating across the portfolio to create the infrastructure for the digital future. We are investing and innovating to win the consolidation. We are mindful of the near term environment and we are confident we can outperform. Ultimately, it's all about the customer and no one is better positioned than Dell Technologies to be our customers best, most trusted partner on their digital transformation journey. With that, I'll turn it over to Tom to talk about our Q2 results.

Thanks, Jeff. Our model is focused on long term profitable growth with the ability to adjust as needed based on market conditions. We are focused on growing faster than competitors in the industry, growing operating income and EPS faster than revenue, and generating strong cash flow over time. We executed well against these priorities again in Q2 as we balanced revenue and profitability with market conditions. While we saw a softer enterprise IT market this quarter, we continued to benefit from having the industry's broadest portfolio of solutions. Revenue was $23.5 billion up 1 percent, with core orders revenue up 4 percent excluding China. And our deferred revenue balance increased to $25.3 billion up 17 percent. FX remained a headwind this quarter, impacting near-year growth rates by approximately 150 basis points. Gross margin was up 13 percent to 8 billion and was 34 percent of revenue up 340 basis points driven by lower component cost and pricing discipline. Operating expenses were $5.2 billion, up 6 percent due in part to investments we have made in sales coverage to expand our buyer base. In the quarter, new enterprise and commercial customer acquisitions were up over 10 percent from the prior year. In over the last six quarters, approximately 80 percent of our top 30,000 customers have purchased four or more lines of business from us. We are pleased with our operating income, which was up 30 percent to 2.7 billion, or 11.7 percent of revenue. Our EPS was $2.15, benefiting from strong operating profitability and a lower tax rate in the quarter due to revenue mix. Adjusted EBITDA was 3.2 billion, or 13.5 percent of revenue, and 11.2 billion on a trailing 12-month basis. We had a record cash flow quarter, generating $3.4 billion of adjusted free cash flow driven by strong profitability and working capital discipline. Some of our working capital benefit came from reduced inventory, as we are working through the supply chain dynamics that impacted cash flow last year. We also saw deferred revenue increase 17 percent to $25.3 billion, with recurring revenue now making up 20 to 25 percent of our revenue each quarter. Our services and software businesses continue to grow as we expand the portfolios, adding revenue and cash flow stability and predictability. We repaid approximately $2 billion of gross debt in the quarter in 2.4 billion year to date, and we are well positioned to repay approximately $5 billion of gross debt in total in fiscal year 20. We have now paid down $17 billion of gross debt since the EMC merger. Shifting to our business unit results, ISG revenue was $8.6 billion, down 7 percent. Storage revenue was flat at $4.2 billion. As Jeff mentioned, orders were up 1 percent, driven by strength in Isilon and our industry-leading HCI solutions. We are seeing strong receptivity for our new Unity XT solution in the mid-range, and we continue to press on growth levers within the broadest and most diverse portfolio in the industry. Servers and networking revenue was $4.4 billion, down 12 percent. The global server market remains softer than anticipated coming into the year and has affected our server growth. The impact to our business was most pronounced in China again this quarter, where we were more selective on larger deals and focused on building sustainable, long-term customer relationships. ISG operating income was $1.1 billion, or 12.2 percent of revenue. Operating income percentage was up 120 basis points, largely due to our business and geography mix as well as pricing disciplines. Our VMware business unit had another good quarter, with revenue of $2.5 billion, up 12 percent. Operating income was $762 million, or 30.9 percent of revenue. Based on VMware's standalone results reported last week, VMware's growth in total revenue, plus the sequential change in total unearned revenue, was 17 percent. Core software-defined data center license bookings grew in the high single digits. NSX license bookings were up over 30 percent, and vSAN license bookings grew over 45 percent. CSG delivered record revenue in units with strong profitability in Q2. Revenue was $11.7 billion, up 6 percent. Within CSG, commercial revenue was $9.1 billion, up 12 percent, driven by double-digit growth in commercial notebooks, desktops, and workstations. Consumer revenue was $2.7 billion, down 12 percent, as we continue to prioritize commercial mix and the higher end of consumer PCs. We saw strong profitability in CSG this quarter due to component cost declines, commercial consumer mix, and pricing discipline. CSG operating income was $982 million, or 8.4 percent of revenue. Going forward, you will continue to see us balance revenue and profitability against market dynamics. Dell Financial Services originations were $2 billion, up 3 percent. We did record a non-cash charge of $619 million, or $524 million net of tax benefits after a strategic review of our VirtuStream business. We remain committed to serving our customers as we reposition the business. Turning to our balance sheet and capital structure, we grew cash and investments in the quarter to approximately $10 billion, even after the Q2 debt paydown of $2 billion. Our core debt balance ended the quarter at $36.4 billion, down over $12 billion since the EMC acquisition. And net core debt ended Q2 at $30.5 billion. Please see slide 14 in our web deck for more details. We are focused on maximizing free cash flow, and our capital allocation strategy remains unchanged. We are committed to reducing leverage and achieving investment grade ratings. Given our recent debt paydown and refinancing activity, we have only $2.3 billion due in the next 18 months, excluding VMware. And we will continue to look for additional opportunities to smooth our debt maturity profile and optimize our capital structure. We will maintain pricing discipline as we move into the back half of the year, while adjusting as appropriate given market and competitive dynamics. We are still monitoring the macroeconomic and IT spending environments, as well as ongoing trade discussions between the U.S. and China. Moving to guidance, based on Q2 results and our current expectations for the balance of the year, and excluding the impact of VMware's pivotal and carbon black acquisitions, we now expect fiscal year 20 gap revenue of $92.7 to $94.2 billion, operating income of $2.9 to $3.3 billion, and EPS of $5.45 to $5.90. We are narrowing our non-gap revenue range for the current fiscal year to $93 to $94.5 billion. Due to our strong profitability in the first half of the year, we are increasing our non-gap operating income guidance range to $9.8 to $10.2 billion, and increasing our non-gap EPS guidance range to $6.95 to $7.40. We expect our non-gap tax rate to be 16% plus or minus 100 basis points. In closing, we are well positioned. We are innovating to drive growth and future value, and we are driving the core for share gain and cash flow. We have one of the industry's strongest and most comprehensive portfolios, its largest direct sales force, and a world-class supply chain with size and scale. And we are focused on enabling our customers' digital future. With that, I'll turn it back to Rob to begin Q&A. Thanks, Tom. Let's get to Q&A. We ask that each participant ask one question to allow us to get to as many of you as possible. Erika, could you please introduce the first participant?

We'll take our first question from Katie Heppardy with JPMorgan.

Thank you. Good afternoon. You mentioned a bias towards growth in the second half of the year. Does that imply that you expect to pass through more of the lower memory prices into the next couple of quarters? And if so, which segments of your business would you expect to see the most price elasticity?

Hey, Katie, it's Tom. So, look, I mean, what we were trying to signal there is that as we think about the business and the business velocity, which we like the ramp in business velocity during the quarter, we are starting to, you know, as we think about cost trends and the deflationary cycle that we're seeing, which is slowing, we do expect that we'll pass, particularly in some of the server space, probably have to pass more of those cost declines through. And in fact, we are seeing, you know, a little bit more aggressiveness in some of those large enterprise and large deals that we mentioned in the first quarter. So, you know, the bias towards growth was really directed at, you know, trying to make sure, you know, we're a company that drives on scale. We're going to be balanced in the back half of the year. But, you know, I do think that, you know, from the dynamics that we're seeing right now that I would expect that we're going to see a bit more pricing aggressiveness in the back half. And I would probably point towards servers. I think we feel good about where the client business is and the storage business is from a pricing perspective, but I think servers may have

some pressure points.

Thank you. That's very helpful.

I would add to that. We've certainly spent much of the first half of the year in servers keeping our product line in our traditional price position. And we're going to continue to price the product lines going forward to do that. And as Tom said, that's going to be our bias towards growth. And I think the other thing that we're signaling and we mentioned a couple of times is the fuel of that, is the commodity deflation substantially slows in the second half. So we have to watch that. But we're going to have a slight bias towards growth, keeping our eye on profitability and both of the businesses.

All right. Thanks, Katie.

Our next question is from Rod Hall with Goldman Sachs.

Yeah, hi, guys. Thank you for the question. I wanted to ask about the trajectory of demand and where you guys have seen weakness, where you've seen strength. When we look at other companies that have reported in enterprise, we've seen a pattern of weakness in large enterprises that seems to have developed in, let's say, the June timeframe. And so I'm wondering whether that has been the same for you and whether you've seen that continue to weaken or you think it's stabilized. And then I'd also love to get a comment on small and medium businesses. Those seem to have been more stable. And I'm wondering if you could just confirm that that's also what you're seeing.

Thanks. Sure. Rod Jeff here. I want to look at the server business in particular. The softness that we've seen and we actually talked about it last quarter as well is in large bids and in China. So those large enterprise bids that you mentioned, we continue to see softness there as well as in China. In fact, if you were to look at our server business excluding China, we were actually at growth. Our business is up 1 percent in orders. We continue to see that pressure in the second half of the year. Tom alluded to just moments ago about the price aggressiveness that we think is turning up in the second half in those large orders, those large enterprise accounts. So I think that's consistent with what you've seen. And then on MB&SB, we continue to see that business perform. We don't break out the segment performance of the businesses, but it's been an area of growth for us and we'll continue, I think, to see that going forward.

Great. Thanks, Jeff.

Our next question is from Tony Sikhanagi with Alliance Bernstein.

Yes, thank you. I'm wondering, given your significant overage and operating profit year to date, why you wouldn't look to pay down more debt this year? I think your target was 4.8. You mentioned close to 5, which sounds pretty similar. But perhaps you can give us an updated view on what you think operating income will be for the year and why you wouldn't want to more aggressively pay down debt.

Hey, Tony, it's Tom. Let me start and then I'll let Tyler talk a little bit about our debt plans. And look, I mean, the guidance we gave clearly ups the range around operating income, given the overperformance in the first half. You know, we are – we did end the quarter at $10 billion of cash, of which $6 billion of that you should think about is core. So, look, I mean, I think we're going to have some flexibility if all things fold like we think it does to take a look at that as we go through the year. Right now, as we look at the maturity stacks that we're pulling on addressing, I think we feel good about the 5. We'll have to see what we – where we – how the rest of the year unfolds and whether we would commit to doing anything more

than that. Tyler, I don't know if you would add anything. No, I think you said it. I mean, you know, the debt pay down will remain the priority, so we'll continue to focus on that. We'll see how cash continues to come in for the remainder of the year, but feel very confident about the $5 billion we talked about. So making really good progress. If you look at our leverage ratios, you know, we improved about a half a turn going from the end of last year to where we are now, so making great progress.

Okay. And if I could just sneak in another one. I missed a couple minutes because I got disconnected on the call, so I apologize if you addressed this during that period. But you seem to suggest that you see more incremental price aggression in servers but are pretty confident on the PC side. Are you suggesting that sort of the more normalized PC operating margin, which is, you know, more than 300 basis points above – currently above your prior indicated range, that we should be thinking, A, about sustainability in mid to high single digits or high single digits for PC operating margins at least for a few more quarters? Or how much do you think the falling component prices has boosted PC op margins above a normalized rate?

Hey, Tony. It's Tom. So let me start – Jeff can chime in here as well. As we think about, you know, our guidance as we think of – you know, the guidance as we gave, which was from 98 to 10.2, which was a raise of about $700 million from this point to this point. As we think about the back half of the year, it's clear as we look at PC that the PCAP margins have benefited from a couple of things, one being the significant cost decline, of which we have probably increased to about 60 percent of that cost. And we've obviously let some of that cost fall through the bottom. The other piece of the dynamic there has been the commercial client mix, and we're up about 4 percent year on year from 69 to 73 percent of mix. And so that's been beneficial as we've navigated through the first half. I think as we step through the back half, I think we're going to see PC margins gradually normalize back towards the historic norms. You know, we'll have to see how that unfolds, but the rate of cost decline is significantly less than it is in the second half than it was in the first half. You know, and as you think about pricing normalizing and that the prices in the market beginning to capture – you know, have captured a lot of that cost decline already. So we are thinking that PC margins gradually come back to more historical norms, not in any sort of dramatic cliff-like fashion, but I just think we're going to see those things gradually migrating back. Jeff, I don't know what you would add.

A couple things. Part of our improvement or performance in the first half – you talked about two of them being the commercial mix and pricing through about 60 percent of the cost decline – our direct commercial PC business group, Double Bridges, which drives higher attach rates of services, peripherals, and financing themselves. And we've seen an SRU improvement in there as well, and that's led to the performance that you just spoke about, Tony. Conversely, when I look at the second half, the second half tilts towards consumer, and consumer has a lower margin structure than our commercial business. We certainly have the uncertainty with trade and the associated costs that go along with trade as we head into the second half. And then I would point to some of the publicly available data, which I know you know very, very well, but to make our point, DRAM – if I look at DRAM exchange, if I look at where we started the first of the year to where we are today, DRAM has fallen 60 percent, nearly 60 percent. If I look at what they say, the projection is for the remainder of the year, we see a 3 percent cost decline. So the rate of deflation is changing, and we think the pricing environment will reflect that towards the end of the year.

Thanks, Dan. Can I help?

Yes, it does. Thank you.

Our next question is from Paul Koester with JPMorgan.

Thanks for taking my question. I'll sneak into two quick ones if I may. First up, to what extent do you think Windows 10 is kind of fueling the CSP growth this year, and does that kind of set you up for tough comps next year? And on the China front, the business that you're kind of foregoing at the moment, is that business that you think you'll come back to at some future point, or are you kind of moving on from that very competitive segment of the market? Thank you.

Hey, Paul, why don't you – Jeff, why don't you take the Windows 10 comment, and I'll take China.

Yeah, Paul, I mean, industry data varies, but we're roughly 60-ish percent plus through the Windows 10 migration. And that has clearly been a source of growth for the commercial PC business for the past year and a half or so. We see that continuing to be a source of growth for the remaining part of the year and probably into the very early part of next calendar year. Tough comparison – of course, if you look at what the commercial PC business has performed after the past six quarters and what's in front of us, it will be tougher comparison next year. You see that in the industry forecast for PC growth next year, which is going to be down. The latest forecast, I believe, has PCs down 4 percent next year. This year, it's roughly flat, heavily biased towards commercial consumer being down. And that will be a headwind as we go into the business next year. I would also tell you the things that we've done in the business to prepare us for that I think are pretty encouraging. We're going to focus on the consolidation that's underway, that the PC industry continues to consolidate towards the top three manufacturers. We have made investments in coverage and capacity across all sorts of customers from the smallest businesses to the largest businesses in the world. We think that expansion of coverage and capacity helps us in the long term. And then we have new technologies that we think help us with our unified workspace, driving a differentiated solution into the marketplace that will be a source of growth for the business. And then clearly our focus on our direct commercial business and then the high-end consumer and gaming business. You'll see our focus as we head into next year.

And Paul, as it relates to China, the business that we've essentially chosen to not participate in this year has generally been in the hyperscale server space where the pricing dynamics have not made a lot of sense to us. And the other thing that we looked at when we looked at and evaluated large kids or large opportunities is to what extent is that business strategic to us and sticky?

Meaning

is there a long-term customer acquisition play where we're going to buy multiple lobs and have the opportunity to sell them multiple different types of solutions and service capabilities? What we have generally seen with that, the hyperscale business in China, is that it tends to be very transactional where you're getting, you know, that business is rebid every quarter or every half year. And so given that pattern and what we've seen, we've chosen not to participate in it. And if that's the pattern that continues, you'll see us continue to not participate in it. Instead, we're very focused on growing the customer base in China and about building lasting, sustainable customer relationships. So we have shifted the focus of the China business to we'd much rather them go out and build the server buyer base into the mid and small enterprise and larger enterprise space, absent the hyperscale, you know, and not participate in that hyperscale space just given the purchasing behavior and the buying behaviors that we're seeing. So I don't think that with what we know right now that that piece of that market is a, well, it will still probably be there. It's not of a lot

of interest to us at this point in time. But the same characteristics we see globally are occurring in China. It's the second largest market in the world. We're entering a data economy. There's a big opportunity. The role of hybrid cloud is important. Data analytics are the long-term attributes of the marketplace remain strong, and we're very optimistic about that over the long term.

Which

is why we want the

business building the customer base, right? Correct. And we want them out foundationally improving the scale.

Thank

you. Our next question is from Aaron Rekers with Wells Fargo.

Yeah, thanks for taking the question. I wanted to ask about the storage business. As you look at, you know, storage demand being healthy, that the revenue was only about slashed this past quarter. And, you know, we've seen bookings growth or orders growth kind of playing into effect here, you know, up 4% for the first half. But how do I think about the progression of growth as you kind of think about the product cycle and dynamics? What's your expectation for the back half of the year in terms of the storage growth specifically?

Well, when I look at the storage performance through the quarter, I certainly point to areas that I think are positive. We see our HCI business continuing to grow. I think we made reference earlier that our HCI business, specifically the VXRail component of that, grew 77%. Our converged infrastructure business grew this past quarter. The broad category of unstructured data grew. And we saw actually good performance in our Unity and the new Unity XT mid-range product had -over-year growth as well. In addition to the PowerMax 2000 that we introduced early last fall for the high price bands in the mid-range all grew. I think we've positioned the product line in a great way. You'll see some more announcements through the remainder of the year that will continue to refresh it and keep it competitive. And we expect that to grow the marketplace. The marketplace is expected to grow with the last forecast, I think just under 3%. I would expect this to help perform in the market. The investments that we've made in capacity and coverage, the tenure of that sales force continues to grow by the day, literally. And we're pretty optimistic about our prospects to help perform in the marketplace in the second half of the year. Aaron, one thing I would add

to that, and Jeff, I've actually highlighted a lot of the problem of thinking about it, is one of the things we've been very focused on with the investment we've made in the selling capacity has been around customer-based expansion, which is why we highlighted the fact that in an ISG, year over year, 21,000 new buyers come back into the ISG. Whether they're buying one lob or two lobs, but the point of it is that we're expanding the customer base, which gives us a broader feel, a broader base to set into. And so we're encouraged by that. Obviously, you've got to go out and execute and make sure that the sales motion is right on the coverage model. But one of the investment paybacks we've been looking for from this -to-market investment that we've made over the last two years has been around, are we expanding the customer base? So,

encouraged

by the trends we're seeing, but clearly, you know, we're pushing the protocols.

But we need to get the marketplace. We're certainly in the early stages of the data era that we've referenced. There is more data being created. There will be more data created on the edge. We have a leadership position across HCI, CI, and external storage. And we've improved the development of our available adage and new models, passing the coverage that we talked about, possibly putting them out on the market.

Thank you.

Our next question is from Shannon Cross with Cross Research. Thank you very much.

Jeff, can you talk a bit about what you're seeing from customers with initial response to Dell Technologies Cloud and maybe more in general, just commentary from clients about cloud adoption, both hybrid and public? Thank you.

I'd be happy to. We had a good week this week. At VMworld, we talked about our Dell Technologies Cloud platform. We actually made several announcements to extend that platform from what we announced at Dell Technologies World the last week of April. The interest this week has been very high. Specifically, we extended the platform of validated designs to support our PowerMax storage arrays and our Unity and Unity XT storage arrays and our PowerEdge MX compute. We also, which is the thing I'm most excited about, and the patent team did a great job on stage earlier in the week, is we announced the initial availability of the first on-prem data center as a service. So a managed service for a data center on-prem, the first or the initial availability of that product, which is pretty exciting for us. And then on top of that, acknowledging or building upon what we announced back in that last week of April, we talked about new consumption models and we've added our Dell Technologies Cloud platform and our on-demand payment terms that we can pay in any form of consumption. So very similar to how a public cloud operates today, we can actually build a -by-usage, and that's been received quite well. So we're pretty excited about that capability. You think about we added VMware for a pivotal container service support on top of that, and we have a very comprehensive multi-cloud hybrid cloud in the marketplace. In fact, the only one that allows you to move data workloads across the edge to on-prem private data centers to the public clouds. That's what our customers are asking for. The ability to do that in an automated way, to be able to manage it in a consistent way, and our Dell VMware Cloud allows us to do that. So I'm pretty bullish on the opportunities going forward. Does that make sense?

Yes, thank you. Our next question comes from Matt Cabral with Credits Lease.

Yeah, thank you. On ISG margins, I'm wondering if you could bridge the strength you saw in the quarter between mix, the commodity tailwinds, and maybe other factors. In particular, just if you can touch a little bit on what margins for servers versus storage did for you on a -over-year basis.

Well, hey, Matt, it's Tom. We don't typically parse. We give you a revenue and an opt-in, but let me sort of try and give you some – because I'm feeling nice today, I'm going to give you some color around it, right? So, look, if we look at our margin – gross margin – or operating margin performance, let me start there. What I would tell you is that it was up 190 basis points. I'm talking about Q on Q now. So from 10.3 to 12.2, I think that if you were to think your way through that, most of that goodness was principally op-ex goodness. And the actual gross margins were actually plated slightly down. And if you parsed that margin, what you would see is storage margins were stable, and we saw some server – we had server margins declining slightly. And if you think about what's driving the server margin decline, it's really the kind of thing that we just have previously talked about, which we saw some pricing aggressiveness in large enterprise deals, and we saw some mixed dynamics within China, which drove some margin pressure downward. So that's sort of the environment we saw, and that's also why we're essentially sort of flashing the headlights on the fact that we do think that we'll see a bit more server pricing aggressiveness as we go through the back half. So that's sort of our current thinking. I don't know, Jeff, if you would add anything, but I think that's how we thought about it right now. Spot on? That's

very helpful. Thank you.

Our next question is from Amit Daryanani with Evercore ISI.

Thanks a lot, guys. I guess maybe I'm going to have a broader question, but when I think about getting into this learning style, the expectation was Dell, and you guys would essentially miss revenues, miss EPS, given what all your peers have talked about because of the negative commentary. Your numbers are clearly much more better than that fear was. So I'm curious, what do you think is driving the Delta, the better performance at Dell, which your peers have been talking about? And importantly, do you think this performance is sustainable as you go forward?

Well, hey, it's Tom. Look, I won't comment on our peers. I mean, what I would tell you is that if you think about the broad set of capabilities and solutions and the comprehensive portfolio we have, we think we have more growth levers and more levers that we can address and build upon with our customers, right? And so we have the most comprehensive portfolio in the IT infrastructure industry from our perspective. You think about the work that we've done on -to-market over the last two years with the building of the customer base. As we've highlighted this quarter, whether it's around 21,000 new buyers in ISG -over-year, or whether it's around the 11% growth or the 10% growth in customers, new acquisition customers. And so we've been very focused on building our customer base as well. Now, look, and we've obviously, if you think about the financial performance, we've clearly been aided by, we've had some deflationary cost environment in the first half of the year. We are obviously signaling through my guidance that, and we have said that that cost decline, that cost deflation substantially slows in the second half of the year. But our job and our model that we build is to grow at a premium to the market, take share, take relative share, and generate cash flow. And so that's the model we've built. We think that's the model that sustains in all the different types of economic environments. And look, we're doing our best to execute the model. And I think we've had a pretty good execution quarter from my perspective. But again, I think it gets back to the broadness of the portfolio. If you looked at the results, obviously we're aided by a strong CSG business this quarter. You know, if we were solely an infrastructure data center business, it would have been quite a little bit of a different story. But our broad portfolio allows us to play the growth levers that are available in the marketplace. And I think the team did a pretty good job on that. Thank

you.

Our next question is from Wenzi Mohan with Bank of America.

Yes, thank you. Can you comment on the ability to absorb the higher tariffs coming here shortly in LISPOR, particularly around notebook and displays? And your message is very clear around server pricing, but how should we think about pricing as a lever for share gains in storage? And if you intend to use pricing as a lever there, can you be a little more specific around API and All Flash? Thank you.

Sure. Why don't I take the tariff question? Wenzi, this is Jeff. Clearly we have spent a lot of time planning and working through the very dynamic situation that we're living in today with tariffs. Our global supply chain with 25 manufacturing sites around the globe allows us to have the agility and flexibility we need to honestly move fast and to minimize the impact. We're focused on continuity of supply and continuity of supply and delivery to our customers and managing that. But quite honestly, we're working through the challenges of LISPOR, which is what you're specifically talking about. We've mentioned LISP 1 through 3 in the previous calls. We've successfully mitigated that cost impact to the vast majority of our product. There have been cases where we have not and we've raised price. And we will continue to work to mitigate the impact to our customers with LISPOR, starting with O-1 from September the 1st, followed December the 15th with flat time of monitors and notebooks. In some cases, our costs are going to go up and we will have to move price. It's one of the comments I made earlier. When you think about the second half and what's different on our client business, we have the uncertainty of tariffs and the uncertainty of the associated costs that go along with it. We cannot absorb all of that cost and we will pass that along to our customers in the form of price in various ways. How we do that, we're still working our way through. We spent a lot of time making sure that we have our manufacturing capabilities in place, that the manufacturing sites are prepared, the manufacturing processes are prepared for the changes, sourcing operations for notebooks, O-1s and flat time monitors. So that's where we are. I think that's the best answer I can give today. More to come. It is pretty dynamic. It has changed a couple of times.

And we'll probably continue to change. That's our guess. Hey, Juan, seeing your other comment around pricing, obviously we did signal or are signaling that we are seeing a bit more pricing and recognition in the server space as it relates to our intention, our strategy around pricing on storage and some of our other product lines. I mean, we're not driving any sort of significant change from our pricing strategy and our other LOPs. So, you know, we'll obviously react to ensure that we're price competitive and relative to the environment and the market. But, you know, at this point, there's no intention to use price as a lever on some of these other areas.

OK, thanks a lot.

Our next question is from Simon Leopold with Raymond James.

Great. Thanks for taking the question. I wonder if maybe you could talk a little bit more about trending from a geography and market vertical beyond what you've mentioned China a number of times. But I guess I'd like to hear a little bit more detail maybe versus Europe. And then you also talked about sort of the large enterprise weakness. Could you maybe touch on some other verticals such as government, sled type markets and maybe some of the dynamics? Because it sounds to me that maybe Europe's a little bit better, government's a little bit better, like some color beyond what we've talked about already. Thank you.

Let's, Tom, let me start and maybe Jeff can jump in. And I'm going to try and keep this at a reasonably high level. But, you know, as we think about just geo based right now, we would tell you that in general we've seen North America demand has generally been quite, has been healthy. And we're pleased with that. We're pleased with our Latin America demand. I think we have seen some softening in Europe. And whether that's Brexit related or just sort of general economic dynamics, you know, hard to parse that. But I think we've seen some softening there. I mean, you go to Asia, clearly we've talked about China being a sort of a softer market for us this year. Pleased with what we're seeing in Japan. We're starting to see better velocity coming out of Australia and New Zealand. So I think in general, I mean, that would be how I would frame it for you. On a vertical basis, our customer segment perspective, you know, Q2, which is obviously the quarter we're reporting on, is generally a strong education state and local government market in the U.S. And I would tell you that that spending seems to be holding up fine. We're optimistic about the federal business going into Q3 in the U.S. You know, so across the, you know, I think across the globe, you know, government procurement continues to be on track. So, you know, that's sort of what we're seeing right now. Jeff, I don't know if you would add anything to that.

No, I don't. There's the period.

Great.

Thank you. Our next question is from Jury Long with Deutsche Bank.

Thanks, guys. So let me ask a question. I'm trying to reconcile the storage. The storage, you guys mentioned storage is going to grow more than 3% -on-year, it seems. But yet enterprise IT spend is going to continue to be weak throughout the rest of the year. It seems like if I model your top line guidance that at least on a -on-year basis between 3Q and 4Q, I'm actually seeing that -on-year's revenue should accelerate. Could you verify if that's true and kind of help me reconcile some of these statements and how that impacts your full year guidance? Thanks.

Well, I'm not sure. It's Tom, Jerome. So I'm not sure of what, how you're modeling. And so maybe the team can help you with that offline. I would tell you that as we think about storage, I mean, the market is sort of, you know, low single digits. And so that's the forecast from IDC. Jeff talked about the fact that we saw storage demand at 1% in Q2. The broader ISG column, which I think you're referring to, is that we continue to see softness in servers. And so you've got to think about that mixed dynamic. You know, IDC is forecasting negative growth in servers for mainstream servers for the rest of the year. And so there are some interplay between those two logs as you model ISG. So, you know, maybe the team can take that offline and take a look at how you're thinking about it. But, you know, as we look at the business, we expect to see server revenue, you know, that's the server market to continue to be challenging for the remainder of the year with what we know today. We are more optimistic about the storage market. Now, you know, it's still a, it's not a double-digit growth market, but we are optimistic that given the improvements in the coverage model, all the work that Jeff has done with his team on product and product-line positioning, that, you know, that we expected to see better results in storage. And so that's how we've thought about the year at this point.

Appreciate it.

Thanks. Our next question is from Andrew Badan with Wolf Research.

Hi. Thank you. So to start the year, you discussed the expectation that investments in sales capacity and coverage would add op-acks, and that you begin to see the benefit of these investments ramp as you moved into the second half of the year. But it seems like today's commentary was that the second half will balance growth and profitability, but maybe leaning towards growth. Can you just kind of level set where we are with regards to sales productivity?

Well, look, hey, it's Tom. We don't sort of talk about those numbers publicly, but I would tell you that we are seeing the capacity that we've added sort of ramping on the sort of the normal productivity curves that we would expect. Right? You know, now you have to balance that against it is a bit tougher market than it was a year ago. And so there are macro dynamics that you're managing as you think about productivity, although we don't tend to get the sales orders a lot of breaks on, you know, we'll just ask them to drive to the productivity levels that they're committed to. But to be fair, it's a bit, you know, it's a bit choppier market out there, particularly, like in servers. So, but the productivity curves that they're on, you know, and to your comment, we're biasing ourselves towards growth. And what we're trying to signal is that, you know, we do want to make sure that the growth engine stays intact and that we have a bias towards customer base expansion, revenue base expansion, even in a tougher market. You know, the benefits of scale for us are quite significant and we want to make sure that that scale advantage continues. So, you know, as we think about the back end of the year, that was what we were trying to signal. And we're still investing in sales capacity, I might add, particularly as we think about some of the market opportunities as we set up for next year. So, you know, that's how we're thinking about it. Great. Thank you. Okay, here it goes. One more question.

Yes, we'll take our final question from John Warrick with UBS.

Great. Maybe as a final up, you've been talking a lot about enterprise weakness and through now into the back half year. Maybe if you could give us some color on why you think that the enterprise are doing that. Is it macro? Is it trade? Cloud? Is it really just digestion? Is it something else? Maybe if you just kind of order what you're seeing out there and why the enterprises seem to be softer.

I think we've talked about it before and I think even made reference in our talking points earlier. Coming off the best server year in time and the best storage year in times in calendar 2018. If memory serves me, we roughly had the storage market growing 12 percent last year and the server market 30-ish percent if memory serves me right. There's been a digestion of that that's taken longer than I think all of the industry expected. And by and large, that's what we're dealing with combined with the softness that we talked about and what has been one of the fastest growing markets in the world,

China. I

would also add that if you just think, and I'm not, we don't have enough visibility to parse it I think in the way you're asking it, but most of us that are running large enterprises don't like uncertainty. And then you think about the macro environment, whether it's tariffed or Brexit or some of the other macro dynamics around interest rates and where GDP is trending. It does create potentially an air of uncertainty and so that also probably has some level of dampening effect on the market. Having said that though, we think that we're optimistic about the back half of the year. We think we're set up to continue to execute and companies are still spending and companies are still in their digital transformation and they need to and they think about some of these IT investments as a central to their business model evolution. So we'll continue to press forward and drive the business. Great. Thank

you.

Thanks, John. Hey, as a reminder, we'll be at the Citi Global Technology Conference in New York on September the 4th and 5th. We'll also be hosting our business update for the investment community in New York on September the 26th. So we look forward to continuing the dialogue. Thanks for joining us today.

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