Q1 FY'18 Performance Review
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Q1 FY’18 Performance Review June 08, 2017 Legal Note Non-GAAP Financial Measures This presentation includes information about non-GAAP revenue, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, EBITDA, and Adjusted EBITDA (collectively the “non-GAAP financial measures”), which are not measurements of financial performance prepared in accordance with U.S. generally accepted accounting principles. We have provided a reconciliation of the historical non-GAAP financial measures and of free cash flow, which is also a non-GAAP measure, to the most directly comparable GAAP measures in the slides captioned “Supplemental Non-GAAP Measures.” Special Note on Forward Looking Statements Statements in this material that relate to future results and events are forward-looking statements and are based on Dell Technologies' current expectations. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “confidence,” “may,” “plan,” “potential,” “should,” “will” and “would,” or similar expressions. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors. Dell Technologies assumes no obligation to update its forward- looking statements. Special Note on the Divestiture On March 27, 2016, Dell entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services for cash consideration of approximately $3.0 billion. On June 19, 2016, Dell entered into a definitive agreement with Francisco Partners and Elliot Management Corporation to divest substantially all of Dell Software Group ("DSG") for cash consideration of approximately $2.4 billion. On September 12, 2016, EMC entered into a definitive agreement with OpenText to divest the Dell EMC Enterprise Content Division ("ECD") for cash consideration of approximately $1.6 billion. In accordance with applicable accounting guidance, the results of Dell Services, DSG, and ECD are presented as discontinued operations in the Condensed Consolidated Statements of Income (Loss) and, as such, have been excluded from both continuing operations and segment results for all periods presented. 2 Combined Company Reporting Considerations in Financial Reporting Non-Cash Purchase Accounting Adjustments1 GAAP to Non-GAAP OpInc Impact ($B) • 4Q’17 results included a full quarter for EMC / VMware while 3Q’17 included only a 52-day period for EMC / VMware (Sep 7th – Oct $3 th 28 ). $2 • Historical results prior to 3Q’17 do not include EMC / VMware. • FY17 includes an extra week of results relative to a typical year $1 (extra week in 4Q’17). $0 • GAAP results will include substantial non-cash purchase accounting 4Q'17 1Q'18 2Q'18E 3Q'18E 4Q'18E for the next several years related to the EMC merger and going- private transaction. $8 • VMware moved to Dell Technologies’ fiscal calendar starting in $6 1Q’18 (Feb 2017) after previously reporting results on a calendar $4 quarter basis. $2 • Dell Services, Dell Software Group, and Enterprise Content Division $0 are presented as discontinued operations in the prior quarters due to FY17 FY18E FY19E FY20E FY21E FY22E the recent divestitures of these businesses. Revenue COGS Operating Expenses 1 Purchase accounting adjustments (including amortization of intangibles and impact of purchasing accounting) reflect continuing operations only. Dell Services, Dell Software and Enterprise Content Division businesses have been reclassified out of the activity from continuing operations, and listed separately in the category for discontinued operations. Dell Services includes process outsourcing, application management and infrastructure services. Dell Software includes Systems & Information Management, security solutions, and Statistica businesses. 3 Q1 FY’18 Consolidated GAAP Results 1 1 1 $ in millions 1Q'17 4Q'17 1Q'18 Y/Y Q/Q • 1Q’18 includes $0.4B in purchase accounting adjustments to revenue Revenue 12,241 20,074 17,816 46% -11% • 1Q’18 gross margin includes $1.3B in purchase accounting Gross Margin 2,193 4,531 4,302 96% -5% adjustments and amortization of GM % of revenue 17.9% 22.6% 24.1% 620 bps 150 bps intangibles, compared to $2.0B in 4Q’17 Operating Expenses 2,332 6,199 5,802 149% -6% Opex % of revenue 19.1% 30.9% 32.5% 1340 bps 160 bps • 1Q’18 operating expenses includes $1.4B in purchase Operating Income (Loss) (139) (1,668) (1,500) OpInc % of revenue -1.1% -8.3% -8.4% accounting, amortization of intangibles and transaction costs Income Tax 66 (996) (690) related to the EMC transaction Effective Tax Rate % -18.4% 41.3% 33.3% Net Income (Loss) 55 (270) (1,383) NI % of revenue 0.4% -1.3% -7.8% 1 Includes substantial adjustments to Net Income related to purchase accounting and other items. For additional detail on these adjustments, please refer to supplemental slides at the end of this presentation. 4 Q1 FY’18 Consolidated Non-GAAP Results $ in millions 1Q'17 4Q'17 1Q'18 Y/Y Q/Q • Increase in revenue primarily attributable to EMC acquired businesses and, to a lesser extent, an increase in revenue Revenue 12,319 20,581 18,171 48% -12% from CSG • Increases in gross margin and Gross Margin 2,385 6,595 5,646 137% -14% operating expenses primarily GM % of revenue 19.4% 32.0% 31.1% 1170 bps -90 bps attributable to EMC acquired businesses Operating Expenses 1,846 4,752 4,449 141% -6% Opex % of revenue 15.0% 23.1% 24.5% 950 bps 140 bps • 1Q’18 excludes $2.7B of adjustments to operating income Operating Income (Loss) 539 1,843 1,197 (amortization of intangible assets OpInc % of revenue 4.4% 9.0% 6.6% and non-cash purchase accounting adjustments) Net Income (Loss) 264 1,091 581 NI % of revenue 2.1% 5.3% 3.2% • Pleased with overall results despite navigating challenging Adjusted EBITDA1 643 2,184 1,567 component cost environment Adj EBITDA % of revenue 5.2% 10.6% 8.6% 1 See Appendix Supplemental Non-GAAP Measures for adjustments to EBITDA. 5 Q1 FY’18 Cash Flows from Operations and Adjusted EBITDA Cash Flows from Operations1 $1.9B $0.7B $0.2B -$0.1B -$0.3B • Cash and investments balance of $14.9B 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 • Cash flow was driven predominantly by profitability and working capital benefits; was in-line with normal Q1 seasonality Adjusted EBITDA2 • Adjusted EBITDA 8.6% of non-GAAP revenue $2.2B $2.2B $1.6B $0.6B $0.9B 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 1 Q1’17 – Q4’17 include Discontinued Operations. 1Q’17 through 2Q’17 do not include EMC. 3Q’17 only includes 52 days of EMC results. 2 Results represent Continuing Operations. 1Q’17 through 2Q’17 do not include EMC. 3Q’17 only includes 52 days of EMC results. 6 Q1 FY’18 Capital Structure As of • Repaid approximately $7.1B of gross debt, excluding DFS-related $ in billions transaction 4Q'17 1Q'18 close debt, since transaction, including: Revolver $ 2.0 $ 0.4 $ 0.4 – $2.2B Asset Sale Bridge facility paid off Term Loan A 9.4 6.3 6.2 Term Loan B 5.0 5.0 5.5 – $3.2B Term Loan A-1 repayment Investment Grade Notes 20.0 20.0 20.0 – $1.7B revolver pay down and term loan amortization DFS Allocated Debt (1.0) (1.7) (1.4) 1 Total Core Secured Debt 35.4 30.0 30.7 • $0.2B reduction of annualized interest expense on a run-rate basis from debt reduction and refinancing since closing the EMC High Yield Notes 3.3 3.3 3.3 Asset Sale Bridge 2.2 transaction Legacy Dell Investment Grade Notes 2.5 2.5 2.5 Legacy EMC Investment Grade Notes 5.5 5.5 5.5 • Saw growth in our DFS business; In Q1, DFS originations Total Core Debt 2,4,5 48.9 41.2 41.9 approached ~$1.1B and financing receivables grew to ~$6.0B DFS Structured 3.5 3.5 3.9 • Since closing the EMC transaction, we've repurchased Margin Loan5 2.5 2.5 2.0 Mirror Loan 1.5 1.5 1.5 approximately 19.7M shares of Class V Common Stock for a total DFS Allocated Debt 1.0 1.7 1.4 of $1.1B when including the DHI Group Repurchase Program Other - 0.1 0.1 • Remain committed to our long-term de-levering efforts while Total Debt 3,4 $ 57.4 $ 50.4 $ 50.7 continuing to invest in the business 1 Core Secured Debt represents secured term loans, investment grade notes, and revolver. It excludes DFS allocated debt based on a 7:1 leverage ratio of DFS financing receivables. 2 Core Debt represents debt allocated to Dell Technologies' core business. As of Q1 FY18, core debt excludes DFS structured and allocated debt, VMware Note Bridge Facility, and other items. 3 Principal Face Value. 4 Debt amounts are based on underlying data and may not visually foot due to rounding. 5 Q1’18 Margin Loan categorized as non-core debt; Q4’17 Margin Loan Bridge was previously included in Total Core Debt (not reflected in table above). 7 Q1 FY’18 Results by Business1 Revenue Non-GAAP Operating Income $18.2 billion $1.2 billion Business revenue mix Business operating income mix Client Solutions Group 50% Client $374M Solutions Group Infrastructure 38% Infrastructure $323M Solutions Group Solutions Group VMware 10% VMware $486M Other2 $3M Other2 2% 1 Reflects business unit results; the sum of the business unit revenue and operating income will not equal consolidated non-GAAP results due to unallocated items that remain at a corporate level.