The News: Dell Technologies reported 3rd quarter results for fiscal 2022 after the market closed on November 23, 2021, delivering both record revenue and profitability.
Here’s a quick breakdown of the headline numbers:
- Second quarter revenue record of $28.4B, up 21%,
- Operating income was a third quarter record of $1.3 billion, a 19% increase over the same period the prior year
- non-GAAP diluted earnings per share was $2.37, up 17%
This strong financial performance represents the best third quarter in Dell Technologies history, and is driven by robust demand, durable competitive advantages and strong execution especially in the face of the technology sector facing significant challenges due to continued semiconductor supply shortages and demand shocks driven by the global impact of the pandemic. Read the full release on Dell’s Investor Relations Page.
Analyst Take: Much has been written about the long-term strategic bet that Michael Dell made to take Dell Technologies private and then re-list the company, as well as the decisions to acquire and subsequently spin off VMware. Today’s earnings are another data point on the company’s journey to delivering on its strategic intent, highlighting the strong execution of Dell Technologies. With that, Dell outperformed expectations with yet another record Q3 set of numbers-driven by growth in business units, customer segments and geographies, and strength in key solutions areas such as commercial PC’s servers and storage.
Dell Technologies has a considerable footprint in the IT sector and spans everything from consumer gaming-focused PCs to Enterprise Class storage and everything in between. The company identifies its core business Total Addressable Market (TAM) as $670B and estimates this TAM to grow at 3% through 2024. The company is also actively pursuing growth in adjacent markets with a TAM of almost the same value again as the core business at $650B. The growth rate of the adjacent TAM is significant as Dell estimates this TAM will grow at 8% through 2024. The adjacent markets Dell Technologies are focused on include; System Infrastructure Software, Data Management, Technology Outsourcing, and IaaS. I see Dell extending comfortably into these areas, given how well the company is positioned today with its core offerings.
Overall Q3 Growth and Performance
Overall quarterly revenues were up 21% YoY to $28.3 billion. Diluted Earning per share rose to $2.37, up 17%.
Revenues were up across all 3 business units; CSG, ISG and VMware, and all geographies. Against the backdrop of disappointing storage performance particularly in the high end segment last quarter, the storage number reflected strong storage demand, with robust order growth in Hyperconverged Infrastructure up 47%, Data Protection up 26% and Midrange up 18%.
Business Unit Growth
Dell’s Infrastructure Solutions Group (ISG) provides technology and services designed to help business customers digitally transform their organizations. ISG revenue was up 5% YoY to $8.4 billion, which was flat growth QoQ. Operating Income is up 1% YoY, but down 8% QoQ. Servers and networking reported its fourth consecutive quarter of positive year-over-year growth.
Client Solutions Group (CSG) saw FY22 YTD revenue up 28% Y/Y with operating Income up 40%. This performance was driven by ongoing strong demand across the board with commercial and consumer notebooks and desktops – showing growth across all regions. The company reported Overall PC share gains of over 300 bps within the PC business, with the commercial client group gaining nearly 400 bps. The commercial client business is the most profitable segment within the client business, so the enhanced market share in this segment is an encouraging dynamic as it demonstrates the core value of the offerings.
VMware is highlighted later in this research note.
Infrastructure Solutions Group
The company highlighted how it plans to modernize its core offerings and highlighted three key examples that speak to the innovation that is going on across the company. Dell is a market leader in the storage space and has a wide breadth of solutions in various technical solution swim lanes and price points. According to IDC, the company highlighted that they are both #1 in external enterprise storage with 26.8% share and the highly lucrative storage software market with 10,5%. However, for me, the key lead indicator for where the ISG group is going is what the company is doing with APEX. The APEX approach will be critical as Dell customers look to make the transition to hybrid cloud and as Dell looks to increase ARR. I was encouraged to see further innovation with APEX Cloud Services with VMware Cloud. This solution allows customers to move workloads across multiple cloud environments and scale resources with transparent and predictable costs. I envision partnerships with Red Hat, and more hyper-scale cloud providers will be coming in the near to mid-range time horizon.
Client Solution Group
CSG revenue up 35% YoY with operating income up 14%. Given the quarter-over-quarter comparison stacks up directly against a quarter where the pandemic shift to remote work was at its strongest for Dell to post 35% YoY growth is frankly astounding. The PC era is alive and robust, at least from a Dell perspective. When you factor in how the company has had to navigate industry-wide supply and input cost challenges, these numbers look even more impressive and demonstrate the company’s reputation for solid execution and strict supply chain management.
Windows 11 is starting to be reflected in the numbers at volume and represents another tailwind that I see having a strong effect, at least for the next couple of quarters, if not longer. I continue to watch the consumer/commercial mix to see whether this trend continues and the impact of edge computing use cases as Dell looks to drive use cases close to the edge.
VMware and Broader Recurring Revenue
VMware saw strong performance delivering $3.2B of revenue, up 10% YoY. More crucially, the business unit saw Subscription and SaaS revenue up 21% Y/Y, which now represents 26% of total revenue. The largest offerings within Subscription and SaaS are VMware Cloud Provider Program, Modern Applications, and End- User Computing, benefiting from broader secular trends in the industry.
It’s well known that this will be the company’s final quarter reporting VMware revenues, which had been steadily around 10% for a prolonged period. The VMware growth rate, while steady, does lag the likes of rising competitors such as Red Hat and SUSE, which are direct competitors in the high growth Kubernetes space. However, VMware growth does currently compound on a more significant gross revenue base meaning the market share it is protecting is still largely intact.
The company highlighted that Subscription and SaaS revenue was 21% YoY and now represent 26% of total revenue. These results reflect great progress and show significant opportunity as a substantial portion of the remaining 74% of revenue is converted to aaS and subscription-based services. The pivot to ARR is key for Dell Technology’s long-term share price appreciation and is a lead indicator for how well the solution resonates with customers.
Overall Impression of Dell Technologies Q3 Results
Dell is well-positioned to take advantage of secular trends such as edge computing, hybrid (multi) cloud, and increased focus on data management. Dell continues to ruthlessly execute on the supply chain side despite headwinds driven by supply chain issues, parts supply price increases, and the overall chip shortages. The tailwinds I highlighted last quarter, driven by the shift to work-from-anywhere, continue with solid results across all elements of the CSG business unit.
The company continues to pay down long-term debt, achieving an investment-grade for its debt. The company has paid down $15.9B YTD, including $2B paid during the quarter. The return to investment grade was a key target for the VMware divestiture. The company hitting this milestone early after the split is significant and encouraging.
Dell Technologies – Continuing to Execute and Prosper in Uncertain Times
While many companies have highlighted supply chain woes in quarterly earnings, it is as if the Dell technologies team are relishing the challenge, almost as if the company has trained for this specific scenario and is relying on muscle memory. The company has probably the most diverse supply chain in the industry, and for all business units and segments, report growth across all markets is impressive.
The TAM that Dell Technologies faces off against is growing at 3% through 2024, and I see strong logic in the plans highlighted for the company to expand into an adjacent TAM of $650B that is growing at 8%. The competitive landscape in this adjacent TAM is fierce, so I will be watching closely to see how Dell talks about successes in subsequent quarters, particularly as it pushes further into the sectors like Telco and deeper into services with Apex.
Regarding Apex, I will be looking first to see a growing number of customer references, and then ideally, we begin to hear about material revenue. The subscription service component of the company’s business will be a beacon of its longer-term growth and profit prospects. While its outstanding operational performance has been noteworthy throughout the pandemic, getting its subscription services right for multi-cloud will increasingly become its Northstar.
As of this quarter’s competition, Dell completed the spin-off of VMware, which had been a long time in the making. While the spin-off did bring several longer-term questions for the company’s cloud and multi-cloud strategy, as addressed above, I believe the company has a significant set of routes to address this, and the financial benefits that this spin provided the company from an investor perspective outweighed the downside in my eyes.
For a deeper dive into the divestiture, check out my conversation with Patrick Moorhead on the Six Five Podcast.
Dell’s results this quarter against tough headwinds are nothing short of stellar. For Dell Technologies to deliver in every business segment and geography is impressive. When you couple this operational and execution focus with the plans to expand into adjacent markets, I remain bullish on the prospects for Dell to continue to post strong growth in the quarters ahead.
Dell gave guidance revenue would continue in the $27-28B range with 12-16% YoY growth and that the next quarter would be the first where Dell’s numbers reflect VMware reseller revenue.
The leadership under Michael Dell, Jeff Clarke, and the entire executive team should provide investors, partners, and onlookers immense confidence in the longer-term narrative that will play out at Dell Technologies. From the investment-grade position created by the payment of its debt to the well-outpaced growth on the client-side of the business, Dell continues to show that markets should never underestimate the company. This quarter’s outsized results are just one more proof point.
This article included insights from Futurum Research VP and Senior Analyst Steven Dickens.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
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Image: Dell Technologies
The original version of this article was first published on Futurum Research.