10-QPeriod: Q3 FY2017

Dell Technologies Inc. Quarterly Report for Q3 Ended Oct 28, 2016

Filed December 9, 2016For Securities:DELL

Summary

Dell Technologies Inc.'s (DELL) Q3 2017 Form 10-Q reveals a company undergoing a significant transformation, primarily driven by the recent completion of the EMC merger. This merger, finalized on September 7, 2016, has substantially increased Dell's asset base, liabilities, and has significantly altered its revenue and expense structure. For the period ending October 28, 2016, the company reported a net loss of $2.06 billion, a substantial increase from the prior year's period, largely due to merger-related costs, integration expenses, and purchase accounting adjustments. Despite the reported net loss, the underlying operational performance, when viewed through non-GAAP measures, shows growth. Non-GAAP net revenue increased by 31% year-over-year for the quarter, and non-GAAP operating income saw a significant increase of 225%. This highlights the accretive nature of the EMC acquisition on the operational front. Investors should note the substantial debt incurred to finance the merger, which has significantly increased interest expenses. The company is actively managing its debt and has initiated divestitures of non-core assets to streamline operations and manage its capital structure.

Financial Highlights

50 data points
Beta

Revenue

$16.25B

24.0% Gross Margin

Net Income

-$2.06B

-12.7% Net Margin

Total Assets

$125.63B

Cash & Equivalents

$8.82B

Free Cash Flow

-$428.00M

Financial Statements
Beta
Revenue$16.25B
Cost of Revenue$12.35B
Gross Profit$3.90B
R&D Expenses$855.00M
SG&A Expenses$4.56B
Operating Expenses$5.41B
Operating Income-$1.51B
Net Income-$2.06B

Key Highlights

  • 1Completion of the EMC merger on September 7, 2016, fundamentally changing the company's financial structure.
  • 2Significant increase in total assets to $125.6 billion from $45.1 billion in the prior year, reflecting the acquisition.
  • 3Total liabilities also surged to $105.6 billion from $43.5 billion, primarily due to debt incurred for the merger.
  • 4Reported a net loss attributable to Dell Technologies Inc. of $2.06 billion for the period, impacted by merger-related costs.
  • 5Non-GAAP net revenue showed strong growth of 31% to $16.78 billion, and non-GAAP operating income increased by 225% to $1.98 billion, indicating underlying operational improvements.
  • 6Divestiture of Dell Services and Dell Software Group (DSG) completed, with the Enterprise Content Division (ECD) pending.
  • 7Increased debt financing, with total debt principal reaching $56.8 billion, up from $14.0 billion in the prior year, leading to higher interest expenses.

Frequently Asked Questions

The primary driver of the significant changes is the completion of the acquisition of EMC Corporation on September 7, 2016. This merger substantially increased the company's assets and liabilities, including a significant increase in debt, and has altered the revenue and expense structure.

While the reported net loss of $2.06 billion is substantial, the company's non-GAAP measures indicate operational strength. Non-GAAP net revenue grew 31% year-over-year to $16.78 billion, and non-GAAP operating income increased by 225% to $1.98 billion for the quarter. This suggests that the core operations are performing well, and the net loss is largely attributable to merger-related costs and accounting adjustments.

The EMC merger was financed with significant debt, leading to a substantial increase in total debt principal to $56.8 billion as of October 28, 2016, up from $14.0 billion in the prior year. This increase in debt has consequently led to higher interest expenses, as seen in the 'Interest and other, net' line item in the income statement.

The Class V Common Stock was issued as part of the EMC merger consideration. It is a tracking stock intended to track the economic performance of approximately 65% of Dell's economic interest in the combined company's VMware business. The earnings per share are presented separately for the Class V Common Stock and the DHI Group (representing Dell's other businesses).