Dell Technologies(DELL) - 2022 Q4 - Annual Report

Business Overview Dell Technologies focuses on IT solutions, digital transformation, and multi-cloud strategies, supported by a robust supply chain, R&D, and a commitment to ESG goals Company Profile and Strategy Dell Technologies strategically divested VMware and Boomi in Fiscal 2022 to reduce debt and achieve an investment-grade rating, while focusing on modernizing core IT solutions and pursuing new growth areas - Completed the spin-off of VMware on November 1, 2021, receiving a special cash dividend of $9.3 billion[17] - Completed the sale of Boomi on October 1, 2021, for approximately $4.0 billion in cash consideration[19] - Achieved an investment grade rating from three major credit rating agencies following significant debt reduction[20] - The company's two main strategic priorities are to grow and modernize its core offerings and to pursue new growth opportunities in areas like Edge, Telecom, and as-a-Service models[28] Products and Services Dell's core operations are divided into Infrastructure Solutions Group (ISG) for data center and multi-cloud solutions, and Client Solutions Group (CSG) for hardware and peripherals, complemented by other businesses like VMware resale and cybersecurity - Infrastructure Solutions Group (ISG) enables customers' digital transformation via multi-cloud and big data solutions built on modern data center infrastructure, including servers, networking, and storage[31] - Client Solutions Group (CSG) includes branded hardware (desktops, workstations, notebooks) and peripherals (displays, projectors), along with attached software and services[37] - Other businesses consist of VMware Resale, where Dell acts as a key channel partner, Secureworks for cybersecurity solutions, and Virtustream for cloud software and IaaS[38][39][41] Operations, R&D, and Sales Dell manages a $75 billion supply chain, invests $2.6 billion in R&D, leverages a hybrid sales model with over 50% revenue from partners, and supports sales through Dell Financial Services' $8.5 billion originations R&D Expenses (Fiscal Years 2020-2022) | Fiscal Year | R&D Expense (in billions) | | :--- | :--- | | Fiscal 2022 | $2.6 | | Fiscal 2021 | $2.5 | | Fiscal 2020 | $2.5 | - The company's sales channels, including value-added resellers, system integrators, distributors, and retailers, contributed over 50% of net revenue in Fiscal 2022[66] - Dell Financial Services (DFS) funded $8.5 billion of originations in Fiscal 2022 and maintains an $11 billion global portfolio of financing receivables[27] Human Capital and ESG Dell's "Progress Made Real" 2030 plan targets net-zero emissions by 2050 and sets ambitious diversity goals, including 50% women in the global workforce and 25% Black/African American and Hispanic/Latino representation in the U.S. workforce - The company's "Progress Made Real" 2030 plan focuses on four key areas: Advancing Sustainability, Cultivating Inclusion, Transforming Lives, and Upholding Ethics and Privacy[80][81][82] - Dell aims to achieve net-zero greenhouse gas emissions across Scopes 1, 2, and 3 by 2050[85] 2030 Diversity & Inclusion Goals | Metric | 2030 Goal | | :--- | :--- | | Women in Global Workforce | 50% | | Women in Global People Leaders | 40% | | Black/African American & Hispanic/Latino in U.S. Workforce | 25% | | Black/African American & Hispanic/Latino in U.S. People Leaders | 15% | Risk Factors Dell faces diverse risks including business and industry competition, operational challenges from supply chain and cybersecurity, financial exposures from debt and economic conditions, and governance issues related to its multi-class stock structure Business and Industry Risks Dell faces business and industry risks from the potential failure of the VMware spin-off to yield benefits, ongoing COVID-19 impacts on supply chains and demand, and intense competition affecting market share and profitability - The spin-off of VMware may not achieve the intended benefits, and the separation could lead to business disruption, customer uncertainty, and significant costs[122] - The COVID-19 pandemic continues to adversely affect the business through supply constraints, increased freight costs, and uncertain demand for products and services[123][124] - Aggressive product and price competition from both branded and generic competitors, as well as non-traditional IT companies, may adversely affect unit share, revenue, and profitability[63][129] Strategic and Operational Risks Operational risks include reliance on limited suppliers, evolving cybersecurity threats, challenges in executing M&A strategies, and managing extensive international operations amidst geopolitical and regulatory uncertainties - The company relies on single-source or limited-source suppliers for many components, creating a risk of shortages, delivery delays, and cost increases that could harm the business[131][132][134] - Cyber-attacks and other security incidents pose a significant risk of disrupting operations, compromising confidential data, and exposing the company to costly litigation and regulatory enforcement[149][150][151] - Failure to successfully implement its acquisition strategy or manage divestitures could result in unforeseen operating difficulties, increased costs, and disruption to existing business[156][157][159] - Approximately half of the company's net revenue comes from outside the U.S., exposing it to risks from political instability, trade protection measures, and foreign currency fluctuations[160] Financial and Market Risks Financial risks include adverse global economic conditions, substantial indebtedness of approximately $27.0 billion requiring significant cash flow, and potential impacts from changes in tax laws or unfavorable tax audit outcomes - As a global company, performance is affected by adverse economic conditions, international conflicts like the one in Ukraine, trade disputes, and public health issues that can reduce customer demand and disrupt supply chains[138] - As of January 28, 2022, the company had approximately $27.0 billion in aggregate principal amount of indebtedness, which requires a substantial portion of cash flow for interest and principal payments, reducing funds available for other purposes[205] - The company's profitability could be adversely affected by changes in tax laws, the expiration of tax holidays in various jurisdictions, or unfavorable outcomes in tax audits[184][185][186] Ownership and Governance Risks Risks related to Class C Common Stock include the multi-class structure granting Michael Dell and Silver Lake 94.4% voting power, ineligibility for major S&P indices, and exemptions from certain NYSE corporate governance requirements as a "controlled company" - The multi-class common stock structure grants Michael Dell and Silver Lake stockholders approximately 94.4% of the total voting power, allowing them to effectively control corporate actions[209][217] - The multi-class structure makes the company ineligible for inclusion in key S&P indices (S&P 500, MidCap 400, SmallCap 600), which may depress the stock's valuation[210] - As a "controlled company" under NYSE rules, Dell is exempt from certain corporate governance requirements, including having a compensation committee and a nominating/corporate governance committee composed entirely of independent directors[226][227] Financial Performance Analysis (MD&A) Fiscal 2022 was a transformative year for Dell, marked by strategic divestitures, significant debt reduction, strong revenue growth across business units, and enhanced capital return initiatives, despite ongoing supply chain challenges Executive Summary & Key Developments Fiscal 2022 was transformational for Dell, marked by the VMware spin-off and Boomi divestiture, which facilitated significant debt reduction and an investment-grade rating, alongside 17% revenue growth to $101.2 billion despite supply chain constraints - Completed the spin-off of VMware, receiving a $9.3 billion special cash dividend, which was used for debt paydown[261][264] - Completed the sale of Boomi for approximately $4.0 billion in cash, supporting focus on core infrastructure and high-priority growth areas[263] - Achieved an investment grade rating from three major credit rating agencies as a result of significant deleveraging[264] - Experienced strong demand, particularly for CSG offerings, but faced industry-wide supply chain constraints, leading to elevated backlog and increased component and logistics costs[266][308] Consolidated Results of Operations In Fiscal 2022, Dell's total net revenue grew 17% to $101.2 billion, operating income increased 26% to $4.7 billion, and net income from continuing operations surged 120% to $4.9 billion, significantly impacted by the Boomi sale gain and debt extinguishment fees Consolidated Results of Operations (GAAP) | Fiscal Year Ended | Jan 28, 2022 ($M) | Jan 29, 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | Total net revenue | 101,197 | 86,670 | 17% | | Products | 79,830 | 67,744 | 18% | | Services | 21,367 | 18,926 | 13% | | Total gross margin | 21,891 | 20,140 | 9% | | Operating income | 4,659 | 3,685 | 26% | | Net income from continuing operations | 4,942 | 2,245 | 120% | Non-GAAP Financial Highlights | Fiscal Year Ended | Jan 28, 2022 ($M) | Jan 29, 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | Non-GAAP net revenue | 101,229 | 86,776 | 17% | | Non-GAAP operating income | 7,785 | 6,949 | 12% | | Adjusted EBITDA | 9,660 | 8,645 | 12% | - The change in interest and other, net was favorable by $2.6 billion, primarily driven by the $4.0 billion pre-tax gain on the Boomi sale, partially offset by $1.6 billion in debt extinguishment fees[390][391] Business Unit Performance Dell's business units showed strong Fiscal 2022 growth, with Client Solutions Group (CSG) revenue up 27% to $61.5 billion and Infrastructure Solutions Group (ISG) revenue up 4% to $34.4 billion Infrastructure Solutions Group (ISG) In Fiscal 2022, ISG net revenue grew 4% to $34.4 billion, driven by servers and networking, while operating income remained stable at $3.7 billion, with margin contracting to 10.9% due to mix shift and cost pressures ISG Financial Performance | Fiscal Year Ended | Jan 28, 2022 ($M) | Jan 29, 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | Total ISG net revenue | 34,366 | 33,002 | 4% | | Servers and networking | 17,901 | 16,592 | 8% | | Storage | 16,465 | 16,410 | 0% | | ISG operating income | 3,736 | 3,753 | 0% | - ISG operating income as a percentage of net revenue decreased 50 basis points to 10.9% due to a decline in gross margin percentage, driven by a mix shift to servers, competitive pricing, and supply chain cost pressures[410] Client Solutions Group (CSG) CSG achieved record Fiscal 2022 performance, with net revenue surging 27% to $61.5 billion and operating income growing 31% to $4.4 billion, expanding its operating margin to 7.1% due to lower operating expenses CSG Financial Performance | Fiscal Year Ended | Jan 28, 2022 ($M) | Jan 29, 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | Total CSG net revenue | 61,464 | 48,387 | 27% | | Commercial | 45,576 | 35,423 | 29% | | Consumer | 15,888 | 12,964 | 23% | | CSG operating income | 4,365 | 3,333 | 31% | - CSG operating income as a percentage of net revenue increased 20 basis points to 7.1%, primarily due to a decrease in operating expenses as a percentage of revenue[423] Liquidity and Capital Resources Dell ended Fiscal 2022 with $9.5 billion cash, $10.3 billion operating cash flow, and reduced total debt by $12.4 billion to $27.2 billion, while initiating a $5 billion share repurchase program and a $0.33 per share quarterly dividend - Cash provided by operating activities was $10.3 billion in Fiscal 2022, compared to $11.4 billion in Fiscal 2021[452] Debt Reduction (FY2022) | Debt Category | Jan 29, 2021 ($B) | Jan 28, 2022 ($B) | Change ($B) | | :--- | :--- | :--- | :--- | | Core Debt | 29.2 | 16.1 | (13.1) | | Total Debt (Principal) | 39.7 | 27.2 | (12.5) | - A new $5 billion stock repurchase program was approved in September 2021. In Fiscal 2022, the company repurchased approximately 12 million shares for $659 million[462][853] - Announced a new dividend policy to begin in Q1 Fiscal 2023, with an initial quarterly dividend of $0.33 per share[464][943] Critical Accounting Estimates Critical accounting estimates involve significant judgment in revenue recognition for multi-element contracts, annual impairment testing of goodwill and intangibles using discounted cash flow models, and determining income tax provisions including deferred tax assets and uncertain tax positions - Revenue Recognition: Involves significant judgment in identifying distinct performance obligations and estimating their standalone selling prices (SSP) to allocate contract value[491][492][495] - Goodwill and Intangible Asset Impairment: Fair value is estimated using discounted cash flow and market multiple methods, which require significant judgment in forecasting future revenues, margins, and selecting appropriate discount rates[496][498] - Income Taxes: Requires significant judgment in determining the consolidated provision for income taxes, assessing the need for valuation allowances on deferred tax assets, and evaluating uncertain tax positions[501][502] Financial Statements and Notes The financial statements provide a comprehensive view of Dell's financial position, performance, and cash flows, supplemented by detailed notes on key accounting policies, the VMware spin-off, debt, and segment information Consolidated Financial Statements Overview As of January 28, 2022, Dell reported $92.7 billion in total assets, $94.3 billion in total liabilities, and a $1.6 billion stockholders' deficit, with Fiscal 2022 generating $101.2 billion in revenue and $10.3 billion cash from operations Consolidated Balance Sheet Highlights (As of Jan 28, 2022) | Account | Amount ($M) | | :--- | :--- | | Total Assets | 92,735 | | Total Liabilities | 94,315 | | Total Stockholders' Equity (Deficit) | (1,580) | Consolidated Income Statement Summary (FY 2022) | Account | Amount ($M) | | :--- | :--- | | Total Net Revenue | 101,197 | | Operating Income | 4,659 | | Net Income from Continuing Operations | 4,942 | | Net Income Attributable to Dell | 5,563 | Consolidated Cash Flow Summary (FY 2022) | Activity | Amount ($M) | | :--- | :--- | | Cash from Operations | 10,307 | | Cash from Investing | 1,306 | | Cash from Financing | (16,609) | | Change in Cash | (5,102) | Key Accounting Notes Key accounting notes detail the VMware spin-off as discontinued operations, Dell Financial Services portfolio, significant debt reduction, segment performance, and post-spin-off related-party transactions with VMware Discontinued Operations (VMware) Post-November 1, 2021 spin-off, VMware's results are reported as discontinued operations, yielding $765 million income in Fiscal 2022 and a $9.3 billion special cash dividend to Dell, with an ongoing commercial relationship - The VMware spin-off was completed on November 1, 2021. Dell received a special cash dividend of $9.3 billion from VMware[668][670] - The results of VMware, excluding Dell's resale of VMware offerings, are presented as discontinued operations for all periods[675] Income from Discontinued Operations, Net of Tax | Fiscal Year | Amount ($M) | | :--- | :--- | | 2022 | 765 | | 2021 | 1,260 | | 2020 | 5,008 | Financial Services (DFS) Dell Financial Services (DFS) originated $8.5 billion in new financing in Fiscal 2022, maintaining $10.6 billion in net financing receivables and $9.6 billion in DFS-specific debt at year-end - New financing originations were $8.5 billion in Fiscal 2022, compared to $8.9 billion in Fiscal 2021 and $8.5 billion in Fiscal 2020[705] - Total net financing receivables were $10.6 billion as of January 28, 2022, compared to $10.5 billion as of January 29, 2021[710] - Total DFS debt was $9.6 billion at the end of Fiscal 2022, compared to $9.7 billion at the end of Fiscal 2021[724] Debt Dell significantly reduced its total debt by $12.2 billion to $27.0 billion in Fiscal 2022, primarily using the $9.3 billion VMware dividend, and established a new $5.0 billion senior unsecured revolving credit facility Debt Summary (Carrying Value) | As of | Jan 28, 2022 ($M) | Jan 29, 2021 ($M) | | :--- | :--- | :--- | | Senior Notes | 16,100 | 20,900 | | Senior Secured Credit Facilities | 0 | 6,277 | | DFS Debt | 9,646 | 9,666 | | Total Debt, Carrying Value | 26,954 | 39,222 | - Entered into a new $5.0 billion senior unsecured revolving credit facility on November 1, 2021, which matures on November 1, 2026[754][755] - In December 2021, completed debt tender offers to retire $1.7 billion of high-coupon senior notes, incurring $1.2 billion in debt extinguishment fees[752][753] Segment Information Dell's Fiscal 2022 segment performance shows ISG with $34.4 billion revenue and $3.7 billion operating income, CSG with $61.5 billion revenue and $4.4 billion operating income, and 54% of total revenue from foreign countries Segment Revenue and Operating Income (FY 2022) | Segment | Net Revenue ($M) | Operating Income ($M) | | :--- | :--- | :--- | | Infrastructure Solutions Group (ISG) | 34,366 | 3,736 | | Client Solutions Group (CSG) | 61,464 | 4,365 | | Other businesses | 5,388 | (319) | - In Fiscal 2022, net revenue from the United States was $46.8 billion (46%) and from foreign countries was $54.4 billion (54%)[907] Related Party Transactions (VMware) Post-spin-off, VMware is a related party, with Dell purchasing $4.1 billion in products and services for resale and selling $188 million in products to VMware in Fiscal 2022, resulting in a $710 million net tax receivable - Dell's purchases of VMware products and services for resale totaled $4,064 million in Fiscal 2022 ($1,577M products, $2,487M services)[930] - Dell's sales and leases of products to VMware totaled $188 million in Fiscal 2022[930] - As of January 28, 2022, Dell had a non-current net receivable from VMware of $710 million, primarily related to tax agreements[934][937] Other Information This section covers Dell's common stock market, including new dividend and share repurchase programs, disclosures on market risks like foreign currency and interest rates, and the effectiveness of internal controls over financial reporting Market for Common Equity Dell's Class C Common Stock trades on NYSE, with a new $0.33 per share quarterly dividend commencing in Fiscal 2023, complementing a $5 billion share repurchase program under which $659 million in stock was bought back in Fiscal 2022 - Announced a new dividend policy with an initial quarterly dividend of $0.33 per share, with the first payment scheduled for April 29, 2022[245][943] - A new stock repurchase program for up to $5 billion of Class C Common Stock was approved in September 2021[250][853] - During the fourth quarter of Fiscal 2022, the company repurchased 11.6 million shares of Class C Common Stock for approximately $659 million[250][462] Market Risk Disclosures Dell manages market risks including foreign currency and interest rate fluctuations, with a 100 basis point interest rate increase on $0.9 billion unhedged variable-rate debt resulting in a $9 million annual interest expense increase, and holds $1.4 billion in non-marketable strategic investments - The company uses foreign currency forward and option contracts to hedge its exposure on forecasted transactions denominated in currencies other than the U.S. dollar[508][771] - As of January 28, 2022, a 100 basis point increase in interest rates would increase annual interest expense by approximately $9 million on its $0.9 billion of unhedged variable-rate debt[511][512] - The carrying value of strategic investments in non-marketable securities was $1.4 billion as of January 28, 2022[516][694] Controls and Procedures Management, including the CEO and CFO, concluded that Dell's disclosure controls and internal control over financial reporting were effective as of January 28, 2022, a conclusion affirmed by an unqualified audit opinion from PricewaterhouseCoopers LLP - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 28, 2022[950] - Management concluded that internal control over financial reporting was effective as of January 28, 2022[952] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting as of January 28, 2022[522][953]