Dell Technologies Inc.

Good afternoon and welcome to the fiscal year 2022 fourth quarter and year-end 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, Inc. 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 like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Thanks, Erica, and thanks, everyone, for joining us. With me today are Jeff Clark, Chuck Witten, Tom Sweet, and Tyler Johnson. Our earnings materials are available on our IR website, and guidance will be covered on today's call. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, earnings per share, EBITDA, adjusted EBITDA, and adjusted free cash flow. A reconciliation of these measures to their most directly comparable gap measures can be found in our web deck and press release. All financial numbers in our earnings materials are now presented on a continuing operations basis unless otherwise noted. See Appendix C in our presentation for a recast of our P&L numbers. Growth percentages refer to year-over-year change unless otherwise specified. Statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and SEC filings. We assume no obligation to update our forward-looking statements. During the call today, Jeff will recap FY22, the demand environment heading into FY23, and supply chain dynamics in CSG. Chuck will cover ISG and our growth initiatives, and Tom will cover our Q4 financial results, capital allocation, and guidance. Now I'd like to turn it over to Jeff. Thanks, Rob.

FY22 was a historic year for Dell Technologies. In fact, the best in our company's history. We reached more than $100 billion in revenue and grew 17%, a huge achievement for a company of our scale and ahead of our long-term value creation growth rates. and our opportunity continues to grow as we look ahead to FY23. We are more vital than ever to our customers in an expanding market fueled by digital transformation. IT investments remain a top priority for our customers as technology has become even more essential to their business. It's how you turn data into insight and action into better customer experience and competitive advantage. Customers also want choice and a trusted partner. Our position at the center of our customers' digital agenda and at the center of the technology ecosystem makes Dell the logical choice. You can see in how we're winning with the customers like the Miami Dolphins, AT&T, and Vodafone. With the world's largest reinsurer, Munich Re, and one of India's largest manufacturers, Greenpanel. across data storage, hyper-converged infrastructure, and in adjacent opportunities like multi-cloud, as-a-service, edge, and telecom. We are continuing to gain share in our core businesses and these emerging opportunities where we can bring our advantages to bear. We have differentiated ourselves through consistent performance across different economic environments, unprecedented challenges, and unforeseen events, and we have leaned into new opportunities always with an eye toward our customers. In FY22, we delivered record revenue of $101.2 billion, record operating income of $7.8 billion, diluted EPS of $6.22, and record cash flow from operations of $7.1 billion, truly a record year. And Q4 was no different. We saw 17% growth in demand of our products and services in the quarter, with broad growth across geos, industry vertical, and business units. As a result, we delivered record revenue up 16%. Operating income was a record up 1%, but slightly below our November guidance as we optimized our performance based on customer needs, parts availability, and backlog dynamics. Being trusted partners to our investors and lenders as well as our customers is important to us. And in FY22, we unlock shareholder value by the spin of VMware, simplifying our capital structure, deleveraging our balance sheet, returning to investment-grade ratings, approving a share buyback program for up to $5 billion, and today, announcing a quarterly dividend and an initial annual rate of $1.32 a share. Now, let me shift gears and share a little color on the current supply chain dynamics, and then we will move into BU performance. The global supply chain shortage of semiconductors and global logistics challenges for goods and components continues to impact just about every industry. We are still experiencing shortages of integrated circuits across a wide range of devices, including network controllers and microcontrollers that go into our products and solutions. The result? We are seeing an impact across client systems, servers, and storage. In addition, freight costs have continued to rise due to increased logistics rates, a higher mix of air due to ocean network congestion, and increased in part expedites to meet customer needs. We have reduced our PC backlog over the last two quarters, and it is nearing the high end of its normal range. However, we expect PC backlog to grow in Q1. Our higher margin ISG backlog increased again in Q4 to a record level due to a combination of very strong demand and a lack of component availability. We expect our ISG backlog to remain elevated through at least the first half of the year as part shortages continue. As we head into Q1, we do expect component costs to improve with modest deflation while freight costs remain elevated. We are awaiting information from the recent NAND contamination announcement from Kioxa and Western Digital to evaluate the impact on Dell. Our supply chain speed, agility, and flexibility has enabled us to meet customer needs in this environment, though challenges remain. And our supply chain continues to be a durable competitive advantage as we navigate the unprecedented supply uncertainty. Turning to CSG. Our PC business logged another record year. We delivered record revenue of $61.5 billion, up 27%. Record operating income of $4.4 billion, or 7.1% of revenue. Record unit shipments of 59.3 million units in calendar 21, up 18%, growing faster than any of the top three. In calendar year 2021, commercial share growth was up 70 basis points, more than any of the top three, and has now been up 470 basis points over the last five years. Turning to Q4, we delivered our sixth consecutive record CSG revenue quarter with $17.3 billion, up 26%, with healthy demand up 21%. Operating income was a record of $1.2 billion. We shipped a record 17.2 million PCs in calendar Q4, up 9%, and now have gained share in 32 of the last 36 quarters. Our leading innovation continues to build a strong foundation for future CSG results. We won 47 awards at CES in January, where we introduced our new XPS 13, our thinnest ever gaming notebook, the Alienware 14, and an advanced commercial notebook concept built around sustainability, recyclability, and reuse. Hybrid work, learning, shopping, socializing, entertainment, and travel is all here to stay. And we expect commercial PC and premium consumer growth in FY23, albeit at moderating rate relative to our record year. Clearly, CSG had a fantastic year, and we are well-positioned heading into FY23, as the client systems TAM has reset to a higher level. I am very proud of our FY22 results, our team, and the company and the culture we've created. And I'm incredibly excited about the road ahead with all of you. We expect another year of growth as we modernize the data center with automation and intelligence, deploy IT at the edge, and simplify multi-cloud for our customers. And with that, I'll turn it over to Chuck for some color on ISG and our growth initiatives. Chuck?

Thanks, Jeff. FY22 was indeed one for the record books. We're in a privileged strategic position. We ended the year with great momentum, and we're incredibly optimistic about FY23 and beyond. Turning to full-year ISG results, fiscal 22 revenue was $34.4 billion, up 4% for the year, and underpinned by four consecutive quarters of growth. Widespread digital transformation continues to accelerate growth and infrastructure spend, and we were encouraged by growing demand across our portfolio of ISG solutions. Specifically, FY22 storage orders grew at the fastest rate since the EMC acquisition, and all geographies grew storage for the year. Mid-range storage orders were up double digits in FY22, and PowerStore remains the fastest ramping storage product in our company's history. and demand for our leading server products accelerated over the course of the year, culminating with record server demand in Q4. ISG operating income was $3.7 billion, flat year over year, as both ISG revenue and margin were gated by supply constraints and corresponding backlog growth. As Jeff highlighted, we will continue to navigate the challenging supply environment with our differentiated business model. our advantage supply chain, our product design flexibility, and our unique direct go-to-market, which creates a high-quality demand signal and gives us the ability to shape demand to where we have supply. Turning to Q4, our final fiscal quarter of FY22 was a microcosm of ISG's year, with strengthening demand across our storage and server portfolios. ISG demand was up 17%, with revenue up 3% to $9.2 billion. Storage demand growth was up for a third consecutive quarter and in the high single digits. Our leading storage portfolio, where we're number one in high end, mid-range, entry, unstructured, object, all flash, HCI, and data protection, enabled us to capture growth across a variety of storage architectures and customer sizes. For example, we saw double-digit demand growth in the high end, driven by select enterprise customers, 25% demand growth for our unstructured storage solutions, and 8% growth for HCI, despite a tough year-over-year comparison. Within mid-range, PowerStore demand continued to ramp in Q4, up 34% sequentially, and now approximately 50% of our mid-range SAN mix. Encouragingly, 26% of PowerStore buyers are new to Dell Storage, and 29% were repeat buyers, important leading indicators of future growth. Servers and networking revenue was up for a fifth consecutive quarter, up 7%. Storage revenue was roughly flat year over year due to the aforementioned backlog build and storage software and services content that gets deferred and amortized over time. ISG operating income was $1.1 billion, down 7%, due primarily to backlog growth, component inflation, and logistics costs. We continue to take pricing actions to mitigate cost increases, though component shortages and turbulent logistics markets remain risks that we are actively managing. In summary, FY22 was a solid year for ISG. As infrastructure markets rebounded, the business returned to growth, our leading indicators of server and storage demand were ahead of revenue, and our integrated business model continued to deliver despite challenging supply dynamics. ISG is poised for a strong FY23 given the momentum in the business. Tom will share thoughts on forward guidance in a moment. Before handing over to Tom, let me touch briefly on our priority growth initiatives. At our September analyst meeting, we highlighted multiple growth opportunities both inside and outside our core business, including over $650 billion in TAM adjacent to our core, where our asset positions and durable competitive advantages give us a right to win. These are distinct markets like Edge and Telco, but also growth opportunities like our Apex-branded as-a-service solutions that provide a modern consumption experience to our customers. Customers can buy our solutions, subscribe to our solutions, and select from different types of services, including fully managed service offerings depending on their needs. FOA 22 was an important year as we launched solutions in these spaces, engaged customers, and made investments that positioned us for future growth. We were pleased with our strategic, technical, and commercial momentum in these businesses. In particular, we saw rapid acceleration of our APEX Flex on Demand subscription offering as the year progressed, an important market indicator that our APEX strategy is resonating with customers. We also delivered a steady stream of innovations and customer wins in Edge and Telco in FY22, giving us conviction in our long-term strategy. Noteworthy in Q4 was the expansion of our APEX Cloud Services portfolio with two new offers. APEX multi-cloud data services, which delivers storage and data protection as a service with simultaneous access to all major public clouds through a single console. The solution allows customers to access the cloud services they want while maintaining control of their data on-premise, avoiding lock-in and egress fees, and enabling customers to meet regulatory and compliance requirements. And APEX backup services. which provides scalable, secure data protection with centralized monitoring and management for SaaS applications, endpoints, and hybrid workloads. The solution offers all-in-one protection with backups, disaster recovery, and long-term data retention in 100% SaaS-based offering with no infrastructure to manage. FY23 will be about continuing to push the innovation agenda in Apex, Telco, Edge, and Multicloud. As these growth initiatives become more financially material, we will provide more detail. In closing, we enter FY23 in a solid demand environment across our businesses and with a lot of confidence. And with that, I will turn it over to Tom.

Thanks, Chuck. In Q4, we delivered record revenue of $28 billion, up 16%, driven by another record quarter for CSG and continued growth in ISG with demand for servers and storage well ahead of revenue. Gross margin was $5.8 billion, flat year-over-year, at 20.8% of revenue. Gross margin as a percentage of revenue was 320 basis points lower primarily due to higher than anticipated component and logistics costs and higher CSG mix. We continue to take pricing actions to manage the impact of commodity and logistics cost variability. Part shortages and supply chain risks remain across the economy, and we expect ISG backlog to remain elevated through at least the first half of fiscal 23. Operating expense was $3.6 billion, roughly flat year-over-year, at 13% of revenue, with the full-year fiscal year 22 OPEX rate at 14.7%. We continued to invest for long-term growth, but did benefit from lower compensation and benefits in the period. Looking ahead to fiscal year 23, we expect OPEX as a percentage of revenue to be slightly higher than fiscal year 22. As we invest in the business, employees return to work, and we engage in more business-related travel. Operating income was a record $2.2 billion, up 1% at 7.8% of revenue. This was slightly lower than our November guidance, given the impact of supply chain disruptions. Net income was $1.4 billion, up 2%, with growth in operating income and a decline in interest expense due to the reduced debt balances, offset by an increase in our effective tax rate. Our tax rate was 25.1%, higher than we expected at the time of our Q3 earnings call. The higher rate was driven by corporate transactions, including the refinancing and tender we executed in December. The combined effect reduced income in higher tax jurisdictions, resulting in lower utilization of available tax credits. The total tax impact was a reduction of approximately 19 cents to diluted non-GAAP EPS. Fully diluted EPS was $1.72, down 2%, with diluted share count increasing to 810 million shares as a result of the VMware spin. Adjusted EBITDA was $2.7 billion, up 3% at 9.6% of revenue. and was $9.7 billion, up 12% for the full year. Our recurring revenue is approximately $5 billion a quarter, up 12%. Our remaining performance obligations, or RPO, is approximately $42 billion, up 20%, and includes deferred revenue plus committed contract value not included in deferred revenue. Dell Financial Services originations in Q4 were $2.7 billion, up 12%. DFS ended the quarter with $13.5 billion in total managed assets. Turning to our cash flow and balance sheet, we generated strong cash flow as our cash flow from operations was $3.1 billion in Q4, mainly driven by top-line growth and $2.7 billion of adjusted EBITDA. Q4 adjusted free cash flow was $3 billion. We are happy with the disciplined management of our working capital, although we continue to see higher inventory levels given the supply chain dynamics and component availability. We expect inventory balances to come down as the supply chain situation improves over the coming year. We repaid $10.6 billion of debt in Q4, funded primarily with $9.3 billion in VMware dividend proceeds and retired $1.7 billion in existing long-dated high-coupon notes, funded through $2.25 billion in new bonds and balance sheet cash. The refinancing activity will save approximately $70 million in annual interest expense. We exited Q4 with a core debt balance of $16.1 billion, and a cash and investments balance of $11.3 billion. Turning to capital allocation, as we have previously mentioned, we intend to return on average 40% to 60% of our adjusted free cash flow to shareholders over time. We repurchased 11.6 million shares of Class C common stock in Q4, totaling $659 million. and our intent is to continue buying shares going forward programmatically as we manage dilution and opportunistically return capital to shareholders, consistent with our capital allocation framework. Additionally, since the end of Q4 and through the close of business last Friday, we have repurchased an additional 4.2 million shares for $248 million. Programmed to date, we have repurchased approximately 5.4% of the outstanding Class C common stock. To complement our share repurchase program, our board has approved a Q1 dividend of $0.33 per share. We expect the cash impact of our quarterly dividend payments to be approximately $1 billion, or roughly $1.32 per share for the full year. and we expect to have the opportunity over time to grow our dividend at least consistent with our long-term EPS growth, in each case subject to future Board approvals. For more details on the dividend announcement, please review today's press release in Form 8-K. Alongside capital return to shareholders, we will continue to invest in the business, de-lever toward our 1.5 times gross core leverage goal, and pursue targeted M&A. Before I provide thoughts on Q1 and full year guidance, I would like to invite Jeff back for a few comments on Ukraine.

Thanks, Tom. Regarding Ukraine, first and foremost, our thoughts are with those families who have lost loved ones and all who are impacted. Our top priority at this time is supporting our Ukrainian team members as they attempt to relocate to a safe and secure environment. We are closely monitoring things, and are working with employees to address their personal and family situations. As for business operations in the region, the situation is rapidly evolving, and we will share more details as they become available. Back to you, Tom.

Thanks, Jeff. Turning to Q1 in fiscal year 23, we're optimistic about the overall macroeconomic environment with global IT spending projected in the mid-single digits. Digital transformation is a top priority for our customers, and it's fueling our growth as our customers look to Dell as their partner in their multi-cloud journey. Against that backdrop, we expect Q1 revenue between $24.5 billion and $25.7 billion, up 11% at the midpoint, with CSG and ISG growing. For non-GAAP tax rate, you should assume 20% plus or minus 100 basis points, driven by higher overall U.S. tax on foreign earnings and lower interest expense going forward. This guidance assumes U.S. rates are not affected by any tax reform. And based on my earlier share repurchase commentary, we expect Q1 diluted share count between 785 to 790 million shares. Netting this out, we expect non-GAAP diluted EPS in the range of $1.25 to $1.50, up 2% at the midpoint. I recognize that our EPS range is slightly wider than normal, but given a more dynamic component availability in a logistics environment and elevated backlog, particularly in ISG, I believe it is appropriate. For fiscal year 23, we're coming off a very strong year with record performance in fiscal year 22. As a starting point, we suggest you align fiscal year 23 financial expectations with our long-term value creation framework, and we will provide an updated perspective on the year as we move forward. As a reminder, that's revenue growth in the 3% to 4% range and EPS growth at 6% or better over the long term. We also expect to deliver solid free cash flow and return significant capital back to shareholders with our announced dividend and share buybacks. As we think about Ukraine, I will reiterate that, first and foremost, our thoughts are with everyone who has been impacted and supporting our team members in the region as we closely monitor the developing news there. While our direct revenue exposure to Ukraine and Russia is minimal on a percentage basis, it is too early to determine any broader potential impact to our Q1 guidance and our initial thoughts on fiscal year 23. In closing, we delivered an extraordinary year with record revenue, operating income, EPS, and cash flow. We delivered significant shareholder value through the spinoff of VMware, the sale of Boomi, and disciplined and consistent debt paydown, resulting in an investment-grade rating. We also introduced a comprehensive capital allocation framework and began shareholder capital return actions with share buybacks and the announcement of a dividend. We remain focused on executing our strategy to consolidate and modernize our core and build new growth engines that enable our customers' multi-cloud future, while delivering revenue and EPS growth with strong free cash flow to our shareholders over time. With that, I'll turn it back to Rob to begin Q&A.

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

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

Thank you very much for taking my question. I was wondering if you can talk about how, you know, in general how you're managing price increases. And given, you know, the pressures you're seeing on components and obviously the questions geopolitically and everything that's going on right now, you know, how should we think about timing of the benefit of these price increases to run through both CSG and ISG? And also if you can talk about whether or not you think the moves will be sufficient enough to offset inflation and the component costs or – if at some point you start to see some pushback because of elasticity of demand. Thank you.

Hey, Shannon, let me chat a little bit about that. Then I'll ask Jeff and potentially Chuck to weigh in as well. Look, in general, as you think about management of price increases, What we have been doing as we see costs that have been moving upward on us effectively, given the volatility we're seeing, particularly in the semiconductor space and the dynamics of when parts are arriving at our various factories, we have been adjusting prices as appropriate. I think part of the dynamic that we're seeing right now, though, is that given the fact that we do have elevated backlogs, Any price increases you're seeing are generally somewhat muted as you think through the impact to the P&L, given that it's got to flow through backlog. And so to the extent you have elevated backlog, which we clearly do in ISG, and we're at the upper end of what we would characterize as the new normal in CSG, that's going to be a bit of a headwind in terms of the pricing activities ultimately manifesting themselves in the P&L. But our perspective is, look, to adjust prices as appropriate, we're always mindful of the market dynamic, to your point around elasticity. But we're also in an inflationary environment, which we're in, and we see that across multiple industries, as you would all know. It's appropriate that we adjust pricing and make sure that we're getting appropriate value for our solutions. Jeff or Chuck, I don't know if you would add anything to that.

Maybe a couple of comments, Shannon. One is, as we look at total input costs, we just went through an inflationary period in Q4. We think component costs go down slightly in Q1, offset by a flat to probably slightly increasing logistics costs to move material around to the factories when they're delivered. So one of our biggest challenges that we've been working through is chasing those costs that are associated with the volatility, the uncertainty of when parts show up out of factories that we can move them to our sub-assembly facilities to turn them into finished products. And it's that volatility, if you will, or uncertainty that certainly is catching us a little bit maybe surprised. We didn't see as much expedites of moving material around, which led to some of the compression and gross margin that we've talked about. And so it's that precise thing that we're trying to get even more accurate about. When you look at the pricing environment that we're operating in today, as costs go up, it's being transferred into price, whether that's commercial PCs, whether that's the premium consumer side of our business. We're seeing the same thing broadly across the server base, and the same is true in our storage base. So that cost is being transferred into price as efficiently as we can where we understand it and be planful and mindful. It's that volatility and uncertainty that is, I don't know if it's the right word to describe it, that you can't plan for it and we're responding as fast as we can. And the higher levels of backlog, we're less efficient at capturing it. I hope that helped. Good.

Thank you.

Yeah, thanks, Shannon.

We'll take our next question from David Vaught with UBS.

Great. Thanks, guys, for taking my question. So just maybe when we think about the context of the full year from a demand perspective and all of the different moving pieces from a supply chain, I think Tom and Jeff and Chuck all mentioned the second half of the year is at the earliest. We're going to see some improvement. Is that what's sort of underpinning sort of the long-term framework sort of reiteration that we're thinking about? And if so, Is there a way to quantify potentially what that revenue impact is from supply chain right now? I know it's sort of a difficult question to answer, but just trying to get a sense for how revenue is being held back by the supply chain at this point. Thanks.

Hey, David, I think you have to think about it like that. And as we think about the year right now, and let me reiterate that we're optimistic about the year from a demand environment perspective with what we know today. that we do expect, you know, the guidance I gave you around Q1 revenue in a midpoint of 11% year-over-year growth, you know, we will continue to work our way through the supply chain dynamics, but particularly within, first with ISG, we do expect those headwinds to be with us at least through the first half of the year, right? And so, you know, I think you've got, as we laid out the long-term guidance for you, I want you to think about how your sequentials interact as you go through the year, but I think a good starting point is the long-term framework, and clearly as the situation becomes clearer in terms of the logistics dynamics and supply chain that we're seeing will update you. The other point I'd like to make, though, is around we've talked about ISG backlog being at an elevated level. We do expect, quite frankly, a little bit of headwind in the CSG space in Q1, particularly with desktops, given some of the component shortages we're seeing. So those are the navigation that we're going to have to do as we work our way through the first quarter and, quite frankly, I think the first half. But optimistic about the year, and as you work your way through your modeling, I think just keep in mind that You know, the concept of perhaps normal sequentials aren't quite as, you know, it's been a few years of variability as we've worked our way through the year. But again, I think the year, as we see it today, we're optimistic about the full year framework that we've laid out.

Hey, thanks, David. Thanks, Rob.

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

Yes, thank you. Jeff, you noted growth in commercial PC and premium consumer to continue into fiscal 23. I was wondering how you're thinking about the growth. How concerned are you about inventory levels? I know you noted that CSG backlog is expected to increase here in the near term. Any help you can give us about how you're thinking about ASP trends as well, given the moving pieces on the commodity environment? Thank you.

Sure, Wamsi. I think that was three different questions. I'll try to get to all of them. So first off, we step back and we look at the environment. We've just gone through three consecutive years of growth, getting the PC industry back to roughly 350 million units, and the TAM, we believe, has been reset. And if you look at where a large percentage of that growth has come from, it's come from commercial PCs and consumer PCs. generally an area that we're very strong in. Commercial PCs represent roughly 75% of our revenues. Our view is those two premium sectors continue to grow in calendar 22, our fiscal 23. We have commercial PCs growing mid-single digits, and we have premium consumer PCs growing low single digits. We obviously expect to take share on top of those numbers. Where the pressure will be is in low-end and mid-consumer price bands and in chrome. You've heard us probably talk about this. Not all units are created equal. Some units are more valuable than others. We believe we play in the most valuable space, commercial PCs and premium consumer PCs. So we're optimistic that we grow those valuable sectors, so the market grows in those valuable sectors, and we can continue to be a consolidator there. We look at the ASP trends. The ASP trends have continued to move up as the commodity base has been inflationary. And then clearly what I mentioned earlier, the increased cost in moving material, moving parts, the associated logistics costs have certainly driven a pricing action as well. The pricing environment that we see today that I mentioned a little bit earlier is there is pressure as inventory levels come back to norm on mid-range to low-end consumer price spans and into Chrome, we still see challenges in getting all of the material for the premium price points in consumer and in commercial. So that's why Tom just made a reference, for example, in desktops and displays. We actually see backlog building demand ahead of supply, if you will, in Q1 as we've spent the last two quarters reducing the backlog of our PC business. And in terms of absolute inventory, we've continued to take material we know that we need because if you don't take it, it's going somewhere else. That environment largely exists in the most valuable commodities. I think I got all of those answered. Well done, Jeff.

Thank you.

Our next question comes from the line of Tom Suginovich with Bernstein.

Hi, it's Tony Sacconeghi. Hey, Tony. I've had my last name massacred a lot, but not my first name. Thanks for taking the question. I just wanted to peel back the guidance a little bit more. So if I look at Q1, you're guiding for down about 11%. Sequentially, you're typically down eight, I think, is the average over the last five years. it sounds like you're going to build backlog in PCs. Are you anticipating that your ISG backlog is also going to grow, or is it solely attributable to PCs? And then, again, thinking about the full year, if you're guiding for 11% growth in Q1 and you have kind of normal seasonality in Q2, it calls for negative growth in the second half. And it sounds like ISG will get stronger over the course of the year. So that means pretty negative growth in PCs overall. Is that the message you're trying to communicate or what's wrong with my logic there?

Yeah, look, I don't think we see negative growth in PCs overall, Tony. And I think what we see... We expect ISG and CSG to grow in Q1. Yes, there are headwinds, and we do expect ISG backlog to expand in Q1. And with what we understand about PC component availability, we do expect some PC backlog growth. That's the reason for some of the caution in the revenue dynamics I gave you, but more importantly in some of the EPS spread that I gave you, just given some of the variability that we see. As we work our way, if you think about sort of the midpoint of that guidance, I think that we see positive growth through the remainder of the year overall with what we know today. We can take this offline from a modeling perspective, but that's our thinking right now. We're optimistic about the year. The trends are in our favor. There is some short-term navigation we need to do with the supply chain dynamics. All right.

Thanks, Tony.

We'll take our next question from Jim Suva with Citigroup.

Thank you. I just have one question, and that is you commented on your prepared comments about assessing the Western digital situation. I just wanted to get some colors. I assume it's not that you got some contaminated bad drives out into your inventory and into the system. I assume it has more to do with supply availability. and maybe even pricing. Is that right? And I assume our team does know that you have more than one supplier for that and kind of what you meant by those commentaries for various outcomes. Thank you.

Happy to answer, Jim. Yes, we have multiple partners in the world of NAND and SSDs for both client and enterprise class products. The reference that I was making is the announcement by Tunisia and Western Digital about the contamination that occurred in their factories. which means product in the factories today is contaminated, and sometime in the future there's going to be a gap. Typically when there's a gap of supply in a commodity that is in great demand, we see pricing pressure. So what we're trying to communicate is there's an unknown of a reasonably large size. Those two companies represent a large percentage of output, and that output is at risk with the contaminated factories, That will have a supply impact in the future, and we're just signaling that going forward. I hope that – did I answer it? I think I did.

That was great, Culler. Thank you so much for the details. My pleasure.

All right. Thanks, Jim.

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

Thanks for taking the question. You've made this comment about having drawn down some of the backlog in PCs but then expecting backlog – to build after the quarter. And I guess I'm trying to really split hairs a bit and understand is the rebuild up of backlog the result of demand or supply constraints or a combination? If you could unpack what's leading to backlog rising again, thank you.

If we look at each of the categories, what we're signaling is the semiconductor shortage that we've been talking about for a long time persists. Trailing nodes, whether it be a 40 nanometer node, a 55 nanometer node, a 60 nanometer node, etc., a plethora of parts that go across all our devices continue to be in short supply. The output of that supply is nonlinear. meaning that sometimes it comes and sometimes it doesn't, sometimes it shows up on time, sometimes it's delayed. Working through that and taking advantage of our assembly capacity is ultimately the challenge in timing and the optimization that we're running through. So what we're signaling is that semiconductor shortage continues to hit our CSG product, most notably in our high-end display business and desktops, as Tom called out. and we see demand continuing and our supply is short of that demand, hence the backlog growth. On the server side, same sort of thing with network controllers and microcontrollers and power ICs. Those have been the ones that I've called out into the past. They continue to be in short supply and demand is ahead of that supply, hence the backlog build. And then a very similar trend, which we saw in Q4, we believe continues through the first half of this year, notably around the FPGAs and CPLDs, all of the high-speed programmable logic devices that are in those controllers that we need, again, demand ahead of supply backlog build. So that's what we're signaling. We're signaling, I think in Chuck's remarks and my remarks, growth in our businesses, but it's challenged with the supply.

So just to paraphrase to make sure we all understand, demand is stable, supply chain worse.

Supply chain continues to be challenged. It's pretty dynamic. There's a fair amount of uncertainty. It has worsened in Q4 in servers and in storage. We think that continues into the first half, and after two quarters of backlog burndown on the PC side, These categories of displays and desktops, it has worsened. Thank you. You're welcome. All right.

Thanks. Next question, Erica.

We'll take our next question from Amit Daryanani with Evercore.

Thanks for taking my question. I guess I'll have one as well. If I think about the EPS growth in fiscal 23 and suddenly talk about a long-term framework of 6% EPS growth, How does that break up, you think, in 2023 between stock buybacks versus operating profit dollar growth? And maybe on that operating profit dollar growth, you can just talk about, do you see CSG and ISG margins, you know, going up in 2023? Or what other puts and takes there that would be helpful?

Yeah, hey, Amit, as it relates to, you know, the EPS growth that we chatted about are 6% plus, right? So... Look, I think you've got to think about it like this. You know, when we introduced, if you remember, as you recall, the capital allocation framework, which is 40% to 60% shareholder capital return through a combination of share buyback and dividends, you know, obviously we've enacted that. We are using the share buyback program to manage dilution, principally coming out of the LGI programs and the dilution that came out of the VMware spend. And so... From our perspective as you move forward, if you think about our Q1 guidance, for instance, I do think that you should expect that we're in the quarter somewhere around 785 to 790 million shares from an EPS or share count perspective. And then we'll be somewhat programmatic as we move forward. And so while I don't want to get into forecasting share buyback, I will tell you that we'll be thoughtful about how we do that. We do expect, as it relates to operating profit margin, look, I think overall on an overall annual basis, somewhere in the I think if you look at consistently, we've been around 7.7, 7.8 over the last number of years from an op-inc perspective. I think we're probably somewhere 7.7, maybe slightly right around that range as you look for the year. I don't want to get into overall op margins by business. That's not something we give guidance on, but I will tell you that, look, I mean, Part of what's going to be interesting for us is as we continue to drive storage demand, there is opportunity for operating margin and ISG to continue to expand. Obviously, from a CSG perspective, the last couple of years have been quite strong from an operating market perspective. More historically, they have not been quite as strong. There will be some variability this year as we work our way through supply chain. the mix of the business and the demand dynamics. But overall, we think profitability should be a reasonable issue. All right, perfect. Thank you.

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

Yeah, hi, guys. Thanks for the question. I just wanted to ask about the implied margin trajectory into fiscal Q1 and the guidance. It looks like you're guiding at least down at the EBT level that margin down a little bit. And I wonder whether at least you'd be willing to say that that's kind of where you see the bottom on margins, or do you think there's potential for margins to deteriorate further? Then I have a follow-up to that.

Hey, Rod, I would think as you think about... Our guidance for Q1, I think if I walk the P&L for you a little bit, we gave you a revenue range, obviously, of 24.5 to 25.7. We did talk about a tax rate of 20%. I gave you some indication on where we think OPEX needs is probably going to trend for the year, but I would think in Q1 that's pretty consistent as you bring OPEX up from that 14.7 by roughly, call it, 40 basis points, 40 to 50 basis points as we move through the year. And then you think about the EPS I gave you. You've gotten the tax rate. I think interest in other is an area that we should chat about quickly just because, you know, if you did Q4 times 4 given the amount of debt repay, you get somewhere around $1.3 billion of interest in other. I do think there will be at some point during the year, probably later in the year, as we continue to focus on delevering, as we talked about moving the 1.8 times down to 1.5 times core leverage, that we will do some debt repayment. Since I don't have any more prepayable debt, that's probably somewhere there will be a make well premium there. So probably safe to say somewhere in the $150 to $200 million for the full year for I&O, so you're closer to a 1.5%. I think if you put all of those pieces together, you're going to come up to an operating or a gross margin in Q1 that's slightly higher than where we ended Q4, given some of the mix of business as we look at it today. So that's generally how we're thinking about Q1.

I'm going to try and keep moving here just in the interest of folks get on the call for a question. So I appreciate your question. Thanks, Rob. Yeah, you bet.

We'll take our next question from Samik Chatterjee with JP Morgan.

Hey, thanks for taking my question. My question was really on the VMware relationship or the vSeller relationship here. If I'm doing my math right, it does look like the revenue is translating to the profit line at all. roughly an operating loss in the quarter of over $70 million or so. So I just want to check. I'm doing the math right there. And if that's the quarterly run rate we should be assuming going forward, or is there some seasonality to it that we should be mindful of? And certainly how to think about sort of getting that back to a positive run rate in the future, what time period we should be thinking about. Thank you.

Yeah. Hey, Sonek. It's... 70 is what's the total of that other business, which includes both principally VMware resale. It also has Virtustream and SecureWorks in it. I think on the broader frame in terms of VMware and what that resale relationship looks like, we've spent the last five years growing that business and that relationship with VMware, and we've taken the VMware revenue the Dell contribution of VMware revenue up to somewhere roughly in the mid-30% range in terms of VMware total contribution. As we've talked about in the past, our focus over that period of time was about velocity of VMware in terms of driving revenue margin on the VMware solution capability. So with that said, as we now have separated, if you will, through the VMware spin, we do have work to do on pricing and on working our way through the five years of those VMware relationships and contracts with our customers, and we are focused on resetting pricing and process over time. So I do think that it's going to take us a bit of time to move that needle in terms of the operating loss you're seeing, which is, to be fair principally, A lot of that is the – most of that is the VMware resale dynamic. And so I think that's probably at least, you know, a 24-month journey as we think about how do we move that forward. I view it as an opportunity. We've got opportunity to improve that and drive better profitability there over time, but it will – it's going to take some work there. All right.

Thank you. Yeah, I appreciate it, Thomas. All right.

We'll take our next question from Krish Sankar with Cowan & Company.

Hi, thanks for taking my question. My question is more about the forecast. I think Jeff or Tom talked, you mentioned about 2% to 4% revenue growth. And given the fact that demand is exceeding supply, supply constraint, and you kind of missed the growth margin numbers, I'm kind of curious, like, you know, Dell has historically been known for excellent inventory management. So how much of the demand forecast is actually tied to supply? And could supply constraints impact the demand forecast at this point? Thank you.

Well, look, and Jeff and Chuck should jump in here. I tend to think about it like that. You know, supply is constrained right now, but supply, Our job, working with our selling organization, working with our customers, is to try and capture demand and bring demand in-house and make sure we're selling the configurations that we believe we have component availability for. I think the team does a great job with that. If you think about our model being roughly 50% direct and 50% through the channel, we have the opportunity to shape demand. That said, I mean, there are supply constraints throughout the industry that are impacting us and are causing incremental cost, as Jeff highlighted, as given the logistics chain as parts are arriving late and we're having to move product around. So there has been some pressure on gross margin, and you notice that in Q4. I think that's something that we're pricing for as we see it. Pricing efficiency, as long as you have an elevated backlog, is a bit challenging, and ultimately that pricing will manifest itself through the P&L as we clear backlog. So look, I think overall, as we think about gross margin for the year, I do think that our perspective is that it does tend to trend up gradually over the course of the year, but there's work to do to get it there.

I mean, Tom, maybe an addition to that is, look, we spent the quarter looking at the part profile and optimizing shipments, taking care of our customers and the commitments we gave to our customers. We know we incurred incremental costs to do that. There's no question. And we were chasing costs with price. And with a building backlog with the demand that we spoke to, we didn't catch it. But we know we made the right decision in the best long-term interest of the company by serving our customers. Our business, our Dell model, we'll work through this. This is what our supply chain team does. Our model is differentiated. We believe the purest demand signal in the marketplace. We transmit that to our supply chain quicker and better than most in the industry. We're capable of demand shaping with our direct selling model. And our product leverage and product development model allows us to move and qualify more materials. which is what we've been doing. I think we've navigated the last two years quite well. As much as we may be saying backlog or headwinds in front of us, our supply chain team loves this stuff. This is what they do, and we're going to serve our customers, and we will find a way to overcome.

Very helpful. Thank you very much.

Appreciate it, Chris.

We'll take our next question from Aaron Rakers with Wells Fargo.

Thanks for taking the question. I wanted to ask a little bit about backlog. I know in the slide deck you talk about, I think it was 41 or 42 billion of remaining performance obligations. And if I look at that number, you know, last quarter I think you actually disclosed that that was 36, but today you're disclosing that was 41. So I guess I'm curious of what the difference is, if there's a change in the accounting of that. And then when I look at that, that difference of that RPO relative to deferred, that $14 billion that's up from $9.4 billion a year ago, is that how we should think about the backlog that you've built? And do you think that you exit this next year at a more normalized backlog level? And what would that maybe look like?

Well, look, hey, Aaron, it's Tom. So as you think about RPO, again, If I look at Q3 backlog, our RPO, I apologize, it was $41 billion, moved to $42 billion. And you look at the ins and outs of that, which is we had talked about the fact that backlog build was pretty significant at the end of Q3. What you saw happen in Q4 was we were actually able to reduce backlog in the client space but we built backlog in the ISG space. And as you might imagine, those businesses have different margin profiles, which was one of the sort of constraints or impacts on Q4 gross margin and profitability that was recorded in the P&L. In terms of what's in the RPO, I mean, there's backlog change, plus there's, you know, long-term contracts that we have not yet recognized in deferred revenue, but where we have performance obligations remaining. There's a mix of types of services and capabilities in there. We can further go through that with you if that would be helpful.

I appreciate the question, Aaron. Erica, let's get one last question in here to our newest lead analyst in the space. You joined a little late here.

We'll take our final question from Eric Woodridge of Morgan Stanley.

I appreciate it, guys. Thank you. Thanks for fitting me in here. Maybe I'll just end the Q&A with a question on cash flow. Maybe how should we think about cash flow growth tracking relative to operating your net income next year? I realize you don't guide to it, but just any qualitative or quantitative thoughts that you can share there and then any specific puts and takes we should be thinking about as we go through the year, either on a seasonal basis or just overall for the year. But that's it for me. Thanks, guys.

Yeah, hey, look, and Eric is welcome, by the way. But, hey, as we think about cash flow, we don't guide on cash flow. But if you remember our long-term financial framework where you talked about adjusted free cash flow being at least 100%, or better from net income. I think that trend holds true. If you look at our historical performance, you'd be somewhere around 1.1 to 1.3 sort of ratios there over the last number of years. It's probably a reasonable proxy to think about for the coming year. Look, I think we do have seasonal patterns in our cash flow. I think you realize that, right? 2.1 typically is our weakest cash flow quarter. Q2 and Q4 have generally been our stronger cash flow quarters based upon seasonal patterns of revenue. And Q3 has been relatively a little bit softer. Those are historical patterns. Having said that, I'll tell you that over the last few years, some of those patterns have changed on us given how demand has flown and given the effects of the pandemic. But I think overall, we feel really good about our cash flow generation ability. If you look over the last four years, On average, we've grown adjusted free cash flow by roughly 9% CAGR over that period of time, while growing revenue at a 6% CAGR and growing EPS at a 16% CAGR. Our cash flow generation, I think, is quite strong. I think the team has done a nice job of managing their way with the balance sheet or managing and disciplining the balance sheet. And so, you know, I feel good about our cash flow generation. I don't know, Tyler, if you'd add anything to that. I think you gave a pretty good overview.

So, no, Tom, nothing to add. All right. All right. Thanks, everyone. We'll see you in two weeks in Morgan Stanley in San Francisco and Raymond James in Orlando. And look for information from us on a technology-based discussion from Dell Technology World in early May. That wraps it. Talk to you soon.

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