DELL TECHNOLOGIES INC. 
This management's discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company's annual report on Form 10-K for the fiscal year endedJanuary 31, 2020 and the unaudited Condensed Consolidated Financial Statements included in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and that are subject to numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied in any forward-looking statements.
Unless otherwise indicated, all results presented are prepared in a manner that
complies, in all material respects, with accounting principles generally
accepted in
Unless the context indicates otherwise, references in this report to "we," "us," "our," the "Company," and "Dell Technologies" meanDell Technologies Inc. and its consolidated subsidiaries, references to "Dell" meanDell Inc. andDell Inc.'s consolidated subsidiaries, and references to "EMC" meanEMC Corporation andEMC Corporation's consolidated subsidiaries. Our fiscal year is the 52- or 53-week period ending on the Friday nearestJanuary 31 . We refer to our fiscal year endingJanuary 29, 2021 and our fiscal year endedJanuary 31, 2020 as "Fiscal 2021" and "Fiscal 2020," respectively. Fiscal 2021 and Fiscal 2020 include 52 weeks.
INTRODUCTION
Dell Technologies is a leading global end-to-end technology provider, with a comprehensive portfolio of IT hardware, software, and services solutions spanning both traditional infrastructure and emerging multi-cloud technologies that enable our customers to build their digital future and transform how they work and live. We operate globally across key functional areas such as technology and product development, marketing, go-to-market, and global services, and are supported byDell Financial Services . We continue to seamlessly deliver differentiated and holistic IT solutions to our customers, which has driven significant revenue growth and share gains.Dell Technologies operates with significant scale and an unmatched breadth of complementary offerings. Digital transformation has become essential to all businesses, and we have expanded our portfolio to include holistic solutions that enable our customers to drive their ongoing digital transformation initiatives.Dell Technologies' integrated solutions help customers modernize their IT infrastructure, address workforce transformation, and provide critical security solutions to protect against the ever increasing and evolving security threats. With our extensive portfolio and our commitment to innovation, we have the ability to offer secure, integrated solutions that extend from the edge to the core to the cloud, and we are at the forefront of the software-defined and cloud native infrastructure era. Our end-to-end portfolio is supported by a differentiated go-to-market engine, which includes a 43,000-person sales force, a global network of channel partners, and a world-class supply chain that together drive long-term growth and operating efficiencies. 57
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Products and Services
We design, develop, manufacture, market, sell, and support a wide range of
comprehensive and integrated solutions, products, and services. We are organized
into the following business units, which are our reportable segments:
•
transformation of our customers through our trusted multi-cloud and big
data solutions, which are built upon a modern data center infrastructure.
ISG works with customers in the area of hybrid cloud deployment with the
goal of simplifying, streamlining, and automating cloud operations. ISG
solutions are built for multicloud environments and are optimized to run
cloud native workloads in both public and private clouds, as well as
traditional on-premise workloads.
Our comprehensive portfolio of advanced storage solutions includes traditional
storage solutions as well as next-generation storage solutions (such as
all-flash arrays, scale-out file, object platforms, and software-defined
solutions). We have simplified our storage portfolio to ensure that we deliver
the technology needed for our customers' digital transformation. Our server
portfolio includes high-performance rack, blade, tower, and hyperscale servers,
optimized for artificial intelligence and machine learning workloads. Our
networking portfolio helps our business customers transform and modernize their
infrastructure, mobilize and enrich end-user experiences, and accelerate
business applications and processes. Our strengths in server, storage, and
virtualization software solutions enable us to offer leading converged and
hyper-converged solutions, allowing our customers to accelerate their IT
transformation by acquiring scalable integrated IT solutions instead of building
and assembling their own IT platforms. ISG also offers attached software,
peripherals, and services, including support and deployment, configuration, and
extended warranty services.
Approximately half of ISG revenue is generated by sales to customers in the
•
desktops, workstations, and notebooks) and branded peripherals (such as
displays and projectors), as well as third-party software and peripherals.
Our computing devices are designed with our commercial and consumer
customers' needs in mind, and we seek to optimize performance,
reliability, manageability, design, and security. In addition to our
traditional hardware business, we have a portfolio of thin clientofferings that we believe will allow us to benefit from the growth trends
in cloud computing. For our customers that are seeking to simplify client
lifecycle management, Dell PC as a Service offering combines hardware,
software, lifecycle services, and financing into one all-encompassing
solution that provides predictable pricing per seat per month through
Financial Services. CSG also offers attached software, peripherals, and
services, including support and deployment, configuration, and extended
warranty services.
Approximately half of CSG revenue is generated by sales to customers in the
•
of
customers in the areas of hybrid and multi-cloud, modern applications,
networking, security, and digital workspaces, helping customers manage
their IT resources across private clouds and complex multi-cloud,
multi-device environments. VMware's portfolio supports and addresses the
key IT priorities of customers: accelerating their cloud journey,
modernizing their applications, empowering digital workspaces,
transforming networking, and embracing intrinsic security.
its customers to digitally transform their operations as they ready their
applications, infrastructure, and employees for constantly evolving
business needs.
During the third quarter of Fiscal 2020, VMware, Inc. completed its acquisition
of Carbon Black, Inc. ("Carbon Black "), a developer of cloud-native endpoint
protection.
On December 30, 2019 , VMware, Inc. completed its acquisition of Pivotal
Software, Inc. ("Pivotal"). Before the transaction, Pivotal was a majority-owned
subsidiary of Dell Technologies through EMC and VMware, Inc. Pivotal provides a
leading cloud-native platform that makes software development and IT operations
a strategic advantage for customers. Pivotal's cloud-native platform, Pivotal
Cloud Foundry, accelerates and streamlines software development by reducing the
complexity of building, deploying, and operating new cloud-native applications,
and modernizing
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legacy applications. With the acquisition, which aligns key software assets,VMware, Inc. will drive and build on a comprehensive development platform with Kubernetes.Dell Technologies now reports Pivotal results within theVMware reportable segment, and the historical segment results have been recast to reflect this change. Pivotal results were previously reported within other businesses. See Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report for the recast of segment results.
Approximately half of
Our other businesses, described below, consist of product and service offerings of Secureworks, Virtustream, Boomi, andRSA Security , each of which is majority-owned byDell Technologies . These businesses are not classified as reportable segments, either individually or collectively, as the results of the businesses are not material to our overall results and the businesses do not meet the criteria for reportable segments.
•
intelligence-driven information security solutions singularly focused on
protecting its clients from cyber attacks. The solutions offered by
Secureworks enable organizations of varying size and complexity to fortify
their cyber defenses to prevent security breaches, detect malicious
activity in near real time, prioritize and respond rapidly to security
incidents, and predict emerging threats.
• Virtustream offers cloud software and infrastructure-as-a-service
solutions that enable customers to migrate, run, and manage
mission-critical applications in cloud-based IT environments.
• Boomi specializes in cloud-based integration, connecting information
between existing on-premise and cloud-based applications to ensure that
business processes are optimized, data is accurate and workflow is
reliable.
• RSA Security provides essential cybersecurity solutions engineered to
enable organizations to detect, investigate, and respond to advanced
attacks, confirm and manage identities, and, ultimately, help reduce IP
theft, fraud, and cybercrime. In February 2020 , Dell Technologies
announced its entry into a definitive agreement to sell RSA Security to a
consortium of investors in an all-cash transaction for approximately
expected to close in the third quarter of Fiscal 2021, is intended to
further simplify our product portfolio and corporate structure.
We believe the collaboration, innovation, and coordination of the operations and
strategies across all segments of our business, as well as our differentiated
go-to-market model, will continue to drive revenue synergies. Through our
coordinated research and development activities, we are able to jointly engineer
leading innovative solutions that incorporate the distinct set of hardware,
software, and services across all segments of our business.
Our products and services offerings are continually evolving in response to
industry dynamics. As a result, reclassifications of certain products and
services solutions in major product categories may be required. For further
discussion regarding our current reportable segments, see "Results of Operations
- Business Unit Results" and Note 17 of the Notes to the Condensed Consolidated
Financial Statements included in this report.
Dell Financial Services and its affiliates ("DFS") support our businesses by offering and arranging various financing options and services for our customers inNorth America ,Europe ,Australia, and New Zealand . DFS originates, collects, and services customer receivables primarily related to the purchase or use of our product, software, and service solutions. We also arrange financing for some of our customers in various countries where DFS does not currently operate as a captive. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, providing them with financial flexibility to meet their changing technological requirements. The results of these operations are allocated to our segments based on the underlying product or service financed. For additional information about our financing arrangements, see Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report. 59
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Strategic Investments and Acquisitions
As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm,Dell Technologies Capital , with a focus on emerging technology areas that are relevant to all segments of our business and that will complement our existing portfolio of solutions. Our investment areas include storage, software-defined networking, management and orchestration, security, machine learning and artificial intelligence, Big Data and analytics, cloud, Internet of Things ("IoT"), and software development operations. In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives. As ofMay 1, 2020 andJanuary 31, 2020 ,Dell Technologies held strategic investments of$1.0 billion and$0.9 billion , respectively.
Business Trends and Challenges
COVID-19 Pandemic and Response - InMarch 2020 , theWorld Health Organization ("WHO") declared the outbreak of the coronavirus disease 2019 ("COVID-19") a global pandemic. This declaration has been followed by significant governmental measures implemented inthe United States and globally, including travel bans and restrictions, shelter-in-place orders, limitations and closures of non-essential businesses, and social distancing requirements in efforts to slow down and control the spread of the virus. The health of our employees, customers, business partners, and communities remains our primary focus. We have taken numerous actions to date in response to COVID-19, including a swift implementation of our business continuity plans. Our crisis management team is actively engaged to respond to changes in our environment quickly and effectively, and to ensure that our preparedness plans and response activities are aligned with recommendations of theWHO , theU.S. Centers for Disease Control and Prevention and governmental regulations. We have implemented broad travel restrictions and moved to virtual-only events. Most of our employees were previously equipped with remote work capabilities over the past several years, thus we were able to quickly establish a work from home posture for the majority of our employees. Further, we implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with customers. Certain regions and municipalities withinthe United States and internationally are beginning to lift stay-at-home and quarantine mandates, and we are actively developing return-to-site protocols to ensure the health and safety of our employees, customers, and business partners. We are working closely with our customers and business partners to support them as they expand their own remote work solutions and contingency plans, helping them access our products and services remotely. We have benefited from our agility, our breadth, and our scale. Notable actions we have taken include the following:
• Our global sales teams embraced a new selling process and are successfully
supporting our customers and partners remotely.
• We are helping to address our customers' cash flow requirements by
expanding our as-a-service and financing offerings.
• Our close relationships and ability to connect directly with our customers
through our e-commerce business have enabled us to quickly meet the
immediate demands of the new work and learn from home environments.
• The strength, scale, and resiliency of our global supply chain have
afforded us flexibility to manage through this challenging time. Weadapted to events unfolding real-time by applying predictive analytics to
model a variety of outcomes to respond quickly to the changing
environment. We were able to keep factories open by working through
various local governmental regulations and mandates. During this time, we
established robust safety measures to protect the health and safety of our
essential team members.
• We continue to drive innovation and excellence in engineering with alargely remote workforce. Engineers and product teams recently delivered
several critical solutions, including cloud updates, and key client
product refreshes, as well as the May 2020 launch of the PowerStore
midrange storage solution.
During the first quarter of Fiscal 2021, we also took certain precautionary measures to increase our cash position and preserve financial flexibility. For additional information regarding our cash position, liquidity and capital structure, see "Market Conditions, Liquidity and Capital Commitments."
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We saw unique demand dynamics over the course of the quarter and see an uncertain environment as we look ahead. We made a series of prudent decisions to manage expenses and preserve liquidity including but not limited to global hiring limitations, reduction in consulting and contractor costs, global travel restrictions, and, subsequent toMay 1, 2020 , a temporary suspension of theDell 401(k) match program forU.S. employees. All of these decisions are aligned with our strategy, which remains unchanged, of focusing on gaining share, integrating and innovating across theDell Technologies portfolio, and strengthening our capital structure.
For additional information about impacts of COVID-19 on our operations, see "Results of Operations-Consolidated Results" and "-Business Unit Results."
We are unable to accurately predict the full impact that this unprecedented environment may have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties involved, including the progression of the COVID-19 pandemic, governmental responses, and the timing of recovery. We will continue to actively monitor global events and make prudent decisions to navigate in this uncertain and ever-changing environment. We believe we are well-positioned for long-term success, and that we will continue to lead the industry with innovative solutions and the essential technology that the world needs now more than ever. Dell Technologies Vision and Innovation - Our vision is to be the essential technology company for the data era and a leader in end-user computing, software-defined data center solutions, data management, virtualization, IoT, and cloud software. We believe that our results will benefit from an integrated go-to-market strategy, including enhanced coordination across all segments of our business, and from our differentiated products and solutions capabilities. We intend to continue to execute on our business model and seek to balance liquidity, profitability, and growth to position our company for long-term success. We are seeing an accelerated rate of change in the IT industry. We seek to address our customers' evolving needs and their broader digital transformation objectives as they embrace the hybrid multi-cloud environment of today. New technologies are being introduced and adopted quickly. In light of this rapid pace of innovation, we continue to invest in research and development, sales, and other key areas of our business to deliver superior products and solutions capabilities and to drive execution of long-term sustainable growth. ISG - We expect that ISG will continue to be impacted by the changing nature of the IT infrastructure market and competitive environment. The overall server demand environment was down for the quarter and remains varied among international regions. We will continue to be selective in determining whether to pursue certain large hyperscale and other server transactions as we drive for balanced growth and profitability. With our scale and strong solutions portfolio, we believe we are well positioned to respond to ongoing competitive dynamics. We continue to focus on customer base expansion and lifetime value of customer measurements. Cloud-native applications are expected to continue as a primary growth driver in the infrastructure market as IT organizations increasingly adopt cloud native architectures. We believe the complementary cloud solutions across our business strongly position us to meet these demands for our customers,who are increasingly looking to leverage cloud native architectures, whether on-premises, private or public. The unprecedented data growth throughout all industries is generating continued demand for our storage solutions and services. We benefit by offering solutions that address the emerging trends of enterprises deploying software-defined storage, hyper-converged infrastructure, and modular solutions based on server-centric architectures. These trends are changing the way customers are consuming our traditional storage offerings. We continue to expand our offerings in external storage arrays, which incorporate flexible, cloud-based functionality. Through our research and development efforts, we are developing new solutions in this rapidly changing industry that we believe will enable us to continue to provide superior solutions to our customers. CSG - Our CSG offerings are an important element of our strategy, generating strong cash flow and opportunities for cross-selling of complementary solutions. Given current market trends, we expect that the CSG demand environment will continue to be cyclical. Although CSG demand was robust for portions of the first quarter of Fiscal 2021, industry analysts are forecasting overall demand for our CSG solutions will decelerate in Fiscal 2021 given the current macro-economic environment, including the effects of COVID-19. Competitive dynamics will continue to be a factor in our CSG business as we seek to balance profitability and growth. We are committed to a long-term growth strategy, and beyond Fiscal 2021 we believe the CSG demand environment will strengthen due to continued innovation across our solutions portfolio and the ongoing need for work from home solutions, as well as the consolidation trends that are occurring in the markets in which we compete. 61
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Recurring Revenue and Consumption Models - Our customers are interested in new and innovative models that address how they consume our solutions. We offer options including as-a-service, utility, leases, and immediate pay models, all designed to match customers' consumption and financing preferences. Our multi-year agreements typically result in recurring revenue streams over the term of the arrangement. We expect our flexible consumption models will further strengthen our customer relationships and provide a foundation for growth in recurring revenue. Supply Chain - During Fiscal 2020, we recognized benefits to our ISG and CSG operating results from significant component cost declines. During the first quarter of Fiscal 2021, the cost environment continued to be deflationary in the aggregate for both ISG and CSG, but at a lower rate than in Fiscal 2020. We currently expect the component cost environment to be inflationary during the second quarter of Fiscal 2021 and to continue to be inflationary for the second half of Fiscal 2021. This may result in consolidated operating results for Fiscal 2021 that trend more toward Fiscal 2019 levels. The component cost trends and forecasts are dependent on the strength or weakness of actual end user demand and supply dynamics, which will continue to evolve and ultimately impact the translation of the cost environment to pricing and operating results.Dell Technologies maintains limited-source supplier relationships for processors, because the relationships are advantageous in the areas of performance, quality, support, delivery, capacity, and price considerations. In recent periods, we have been impacted by processor and other supply constraints in certain product offerings. Delays in the supply of limited-source components, including as a result of COVID-19, are affecting the timing of shipments of certain products in desired quantities or configurations. Macro-Economic Risks and Uncertainties - The impacts of trade protection measures, including increases in tariffs and trade barriers, and changes in government policies and international trade arrangements may affect our ability to conduct business in some non-U.S. markets. We monitor and seek to mitigate these risks with adjustments to our manufacturing, supply chain and distribution networks. We manage our business on aU.S. dollar basis. However, we have a large global presence, generating approximately half of our revenue by sales to customers outside ofthe United States during both the first quarter of Fiscal 2021 and Fiscal 2020. As a result, our revenue can be impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts.
Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted EBITDA, and cash flows from operations, which are discussed elsewhere in this report.
Class
OnDecember 28, 2018 , we completed a transaction ("Class V transaction") in which we paid$14.0 billion in cash and issued 149,387,617 shares of our ClassC Common Stock to holders of our Class V Common Stock in exchange for all outstanding shares of Class V Common Stock. The non-cash consideration portion of the Class V transaction totaled$6.9 billion . As a result of the Class V transaction, the tracking stock feature ofDell Technologies' capital structure was terminated. The ClassC Common Stock is traded on theNew York Stock Exchange . 62
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NON-GAAP FINANCIAL MEASURES
In this management's discussion and analysis, we use supplemental measures of
our performance which are derived from our consolidated financial information
but which are not presented in our consolidated financial statements prepared in
accordance with GAAP. These non-GAAP financial measures include non-GAAP product
net revenue; non-GAAP services net revenue; non-GAAP net revenue; non-GAAP
product gross margin; non-GAAP services gross margin; non-GAAP gross margin;
non-GAAP operating expenses; non-GAAP operating income; non-GAAP net income;
earnings before interest and other, net, taxes, depreciation, and amortization
("EBITDA"); and adjusted EBITDA.
We use non-GAAP financial measures to supplement financial information presented
on a GAAP basis. We believe that excluding certain items from our GAAP results
allows management to better understand our consolidated financial performance
from period to period and better project our future consolidated financial
performance as forecasts are developed at a level of detail different from that
used to prepare GAAP-based financial measures. Moreover, we believe these
non-GAAP financial measures provide our stakeholders with useful information to
help them evaluate our operating results by facilitating an enhanced
understanding of our operating performance and enabling them to make more
meaningful period to period comparisons. There are limitations to the use of the
non-GAAP financial measures presented in this report. Our non-GAAP financial
measures may not be comparable to similarly titled measures of other companies.
Other companies, including companies in our industry, may calculate non-GAAP
financial measures differently than we do, limiting the usefulness of those
measures for comparative purposes.
Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net
revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP
gross margin, non-GAAP operating expenses, non-GAAP operating income, and
non-GAAP net income, as defined by us, exclude amortization of intangible
assets, the impact of purchase accounting, transaction-related expenses,
stock-based compensation expense, other corporate expenses and, for non-GAAP net
income, fair value adjustments on equity adjustments and an aggregate adjustment
for income taxes. As the excluded items have a material impact on our financial
results, our management compensates for this limitation by relying primarily on
our GAAP results and using non-GAAP financial measures supplementally or for
projections when comparable GAAP financial measures are not available. The
non-GAAP financial measures are not meant to be considered as indicators of
performance in isolation from or as a substitute for net revenue, gross margin,
operating expenses, operating income, or net income prepared in accordance with
GAAP, and should be read only in conjunction with financial information
presented on a GAAP basis.
Reconciliations of each non-GAAP financial measure to its most directly
comparable GAAP financial measure are presented below. We encourage you to
review the reconciliations in conjunction with the presentation of the non-GAAP
financial measures for each of the periods presented. The discussion below
includes information on each of the excluded items as well as our reasons for
excluding them from our non-GAAP results. In future fiscal periods, we may
exclude such items and may incur income and expenses similar to these excluded
items. Accordingly, the exclusion of these items and other similar items in our
non-GAAP presentation should not be interpreted as implying that these items are
non-recurring, infrequent, or unusual.
Revenue Reclassification - During Fiscal 2020, Dell Technologies made certain
reclassifications of net revenue between the products and services categories on
the Consolidated Statement of Net Income (Loss), which impacted previously
reported amounts for the first quarter of Fiscal 2020. The reclassifications
were made to provide a more meaningful representation of the nature of certain
service and software-as-a-service offerings of VMware, Inc. The
reclassifications resulted in an increase to services revenue and an equal and
offsetting decrease to product revenue of $179 million for the first quarter of
Fiscal 2020. Total net revenue as previously reported remains unchanged. The
Company did not recast cost of goods sold for the related revenue
reclassifications due to immateriality.
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The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:
• Amortization of Intangible Assets - Amortization of intangible assets
primarily consists of amortization of customer relationships, developed
technology, and trade names. In connection with our acquisition by merger of
acquisition of Dell Inc. by Dell Technologies Inc. on October 29, 2013 ,
referred to as the going-private transaction, all of the tangible and
intangible assets and liabilities of EMC and Dell , respectively, were
accounted for and recognized at fair value on the transaction dates.Accordingly, for the periods presented, amortization of intangible assets
represents amortization associated with intangible assets recognized in
connection with the
Amortization charges for purchased intangible assets are significantly
impacted by the timing and magnitude of our acquisitions, and these charges
may vary in amount from period to period. We exclude these charges for
purposes of calculating the non-GAAP financial measures presented below to
facilitate a more meaningful evaluation of our current operating performance
and comparisons to our past operating performance.
• Impact of Purchase Accounting - The impact of purchase accounting includes
purchase accounting adjustments related to the
a lesser extent, the going-private transaction, recorded under the
acquisition method of accounting in accordance with the accounting guidance
for business combinations. This guidance prescribes that the purchase price
be allocated to assets acquired and liabilities assumed based on the
estimated fair value of such assets and liabilities on the date of the
transaction. Accordingly, all of the assets and liabilities acquired in the
and recognized at fair value as of the respective transaction dates, and the
fair value adjustments are being amortized over the estimated useful lives in
the periods following the transactions. The fair value adjustments primarily
relate to deferred revenue, inventory, and property, plant, and equipment.
Although the purchase accounting adjustments and related amortization of
those adjustments are reflected in our GAAP results, we evaluate the
operating results of the underlying businesses on a non-GAAP basis, after
removing such adjustments. We believe that excluding the impact of purchase
accounting provides results that are useful in understanding our current
operating performance and provides more meaningful comparisons to our past
operating performance.
• Transaction-related Expenses - Transaction-related expenses typically consist
of acquisition, integration, and divestiture related costs and are expensed
as incurred. These expenses primarily represent costs for legal, banking,
consulting, and advisory services. During both the first quarter of Fiscal
2021 and Fiscal 2020, transaction expenses related to
acquisitions. From time to time, this category also may include
transaction-related gains on divestitures of businesses or asset sales.
During the first quarter of Fiscal 2021, we recognized a gain of
on the sale of certain intellectual property assets. We exclude these items
for purposes of calculating the non-GAAP financial measures presented below
to facilitate a more meaningful evaluation of our current operating
performance and comparisons to our past operating performance.
• Stock-based Compensation Expense - Stock-based compensation expense consists
of equity awards granted based on the estimated fair value of those awards at
grant date. We estimate the fair value of service-based stock options using
the Black-Scholes valuation model. To estimate the fair value of
performance-based awards containing a market condition, we use the Monte
Carlo valuation model. For all other share-based awards, the fair value is
based on the closing price of the Class
NYSE on the date of grant. Although stock-based compensation is an important
aspect of the compensation of our employees and executives, the fair value of
the stock-based awards may bear little resemblance to the actual value
realized upon the vesting or future exercise of the related stock-based
awards. We believe that excluding stock-based compensation expense for
purposes of calculating the non-GAAP financial measures presented belowfacilitates a more meaningful evaluation of our current operating performance
and comparisons to our past operating performance.
• Other Corporate Expenses - Other corporate expenses consists primarily of
severance, facility action, and other costs. Severance costs are primarily
related to severance and benefits for employees terminated pursuant to cost
savings initiatives. We continue to integrate owned and leased facilities and
may incur additional costs as we seek opportunities for operational
efficiencies. Other corporate expenses vary from period to period and are
significantly impacted by the timing and nature of these events. Therefore,
although we may incur these types of expenses in the future, we believe that
eliminating these charges for purposes of calculating the non-GAAP financial
measures presented below facilitates a more meaningful evaluation of our
current operating performance and comparisons to our past operating
performance.
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• Fair Value Adjustments on Equity Investments - Fair value adjustments on
equity investments primarily consists of the gain (loss) on strategic
investments, which includes the recurring fair value adjustments of
investments in publicly-traded companies, as well as those in privately-held
companies, which are adjusted for observable price changes and, to a lesser
extent, any potential impairments. Given the volatility in the ongoing
adjustments to the valuation of these strategic investments, we believe that
excluding these gains and losses for purposes of calculating non-GAAP net
income presented below facilitates a more meaningful evaluation of our
current operating performance and comparisons to our past operating
performance.
• Aggregate Adjustment for Income Taxes - The aggregate adjustment for income
taxes is the estimated combined income tax effect for the adjustments
described above, as well as an adjustment for discrete tax items. Due to the
variability in recognition of discrete tax items from period to period, we
believe that excluding these benefits or charges for purposes of calculating
non-GAAP net income facilitates a more meaningful evaluation of our current
operating performance and comparisons to our past operating performance. The
tax effects are determined based on the tax jurisdictions where the above
items were incurred. This category includes discrete tax benefits of
million and
completed during the first quarter of Fiscal 2021 and Fiscal 2020,
respectively. See Note 11 of the Notes to the Condensed Consolidated
Financial Statements for additional information on our income taxes.
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The table below presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for the periods indicated:
Three Months Ended
May 1, 2020 % Change May 3, 2019
(in millions, except percentages)
Product net revenue $ 16,038 (3 )% $ 16,575
Non-GAAP adjustments:
Impact of purchase accounting 4 4
Non-GAAP product net revenue $ 16,042 (3 )% $ 16,579
Services net revenue $ 5,859 10 % $ 5,333
Non-GAAP adjustments:
Impact of purchase accounting 44 78
Non-GAAP services net revenue $ 5,903 9 % $ 5,411
Net revenue $ 21,897 - % $ 21,908
Non-GAAP adjustments:
Impact of purchase accounting 48 82
Non-GAAP net revenue $ 21,945 - % $ 21,990
Product gross margin $ 3,234 (7 )% $ 3,496
Non-GAAP adjustments:
Amortization of intangibles 372 519
Impact of purchase accounting 7 6
Transaction-related expenses - (2 )
Stock-based compensation expense 4 2
Other corporate expenses 2 4
Non-GAAP product gross margin $ 3,619 (10 )% $ 4,025
Services gross margin $ 3,619 10 % $ 3,301
Non-GAAP adjustments:
Impact of purchase accounting 44 78
Transaction-related expenses - (3 )
Stock-based compensation expense 36 24
Other corporate expenses 7 9
Non-GAAP services gross margin
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Three Months Ended
May 1, 2020 % Change May 3, 2019
(in millions, except percentages)
Gross margin $ 6,853 1 % $ 6,797
Non-GAAP adjustments:
Amortization of intangibles 372 519
Impact of purchase accounting 51 84
Transaction-related expenses - (5 )
Stock-based compensation expense 40 26
Other corporate expenses 9 13
Non-GAAP gross margin $ 7,325 (1 )% $ 7,434
Operating expenses $ 6,151 (2 )% $ 6,247
Non-GAAP adjustments:
Amortization of intangibles (483 ) (698 )
Impact of purchase accounting (12 ) (17 )
Transaction-related expenses (76 ) (47 )
Stock-based compensation expense (330 ) (237 )
Other corporate expenses (86 ) (10 )
Non-GAAP operating expenses $ 5,164 (1 )% $ 5,238
Operating income $ 702 28 % $ 550
Non-GAAP adjustments:
Amortization of intangibles 855 1,217
Impact of purchase accounting 63 101
Transaction-related expenses 76 42
Stock-based compensation expense 370 263
Other corporate expenses 95 23
Non-GAAP operating income $ 2,161 (2 )% $ 2,196
Net income $ 182 (45 )% $ 329
Non-GAAP adjustments:
Amortization of intangibles 855 1,217
Impact of purchase accounting 63 101
Transaction-related (income) expenses (44 ) 42
Stock-based compensation expense 370
263
Other corporate expenses 95
23
Fair value adjustments on equity investments (94 ) (62 ) Aggregate adjustment for income taxes (284 ) (704 ) Non-GAAP net income$ 1,143 (5 )%$ 1,209 67
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In addition to the above measures, we also use EBITDA and adjusted EBITDA to provide additional information for evaluation of our operating performance. Adjusted EBITDA excludes purchase accounting adjustments related to theEMC merger transaction and the going-private transaction, acquisition, integration, and divestiture related costs, severance, facility action, and other costs, and stock-based compensation expense. We believe that, due to the non-operational nature of the purchase accounting entries, it is appropriate to exclude these adjustments. As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance. EBITDA and adjusted EBITDA do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. In particular, EBITDA and adjusted EBITDA are not intended to be a measure of free cash flow available for management's discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.
The table below presents a reconciliation of EBITDA and adjusted EBITDA to net income for the periods indicated:
Three Months Ended
May 1, 2020 % Change May 3, 2019
(in millions, except percentages)
Net income $ 182 (45 )% $ 329
Adjustments:
Interest and other, net (a) 566 693
Income tax benefit (b) (46 ) (472 )
Depreciation and amortization 1,316 1,616
EBITDA $ 2,018 (7 )% $ 2,166
EBITDA $ 2,018 (7 )% $ 2,166
Adjustments:
Stock-based compensation expense 370 263
Impact of purchase accounting (c) 48 83
Transaction-related expenses (d) 76 42
Other corporate expenses (e) 95 19
Adjusted EBITDA $ 2,607 1 % $ 2,573 ____________________
(a) See "Results of Operations - Interest and Other, Net" for more information on
the components of interest and other, net.
(b) See Note 11 of the Notes to the Condensed Consolidated Financial Statements
included in this report for additional information on discrete tax items
recorded during the first quarter of Fiscal 2021 and Fiscal 2020.
(c) This amount includes the non-cash purchase accounting adjustments related to
the
(d) Transaction-related expenses consist of acquisition, integration, and
divestiture related costs.
(e) Other corporate expenses includes severance, facility action, and other
costs.
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RESULTS OF OPERATIONS
Consolidated Results
The following table summarizes our consolidated results for each of the periods
presented. Unless otherwise indicated, all changes identified for the current
period results represent comparisons to results for the prior corresponding
fiscal period.
Three Months Ended
May 1, 2020 May 3, 2019
% of % % of
Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Net revenue:
Products (a) $ 16,038 73.2 % (3 )% $ 16,575 75.7 %
Services (a) 5,859 26.8 % 10 % 5,333 24.3 %
Total net revenue $ 21,897 100.0 % - % $ 21,908 100.0 %
Gross margin:
Products (b) $ 3,234 20.2 % (7 )% $ 3,496 21.1 %
Services (c) 3,619 61.8 % 10 % 3,301 61.9 %
Total gross margin $ 6,853 31.3 % 1 % $ 6,797 31.0 %
Operating expenses $ 6,151 28.1 % (2 )% $ 6,247 28.5 %
Operating income $ 702 3.2 % 28 % $ 550 2.5 %
Net income $ 182 0.8 % (45 )% $ 329 1.5 %
Net income attributable to Dell
Technologies Inc. $ 143 0.7 % (51 )% $ 293 1.3 %
Non-GAAP Financial Information
Non-GAAP net revenue:
Product $ 16,042 73.1 % (3 )% $ 16,579 75.4 %
Services 5,903 26.9 % 9 % 5,411 24.6 %
Total non-GAAP net revenue $ 21,945 100.0 % - % $ 21,990 100.0 %
Non-GAAP gross margin:
Product (a) $ 3,619 22.6 % (10 )% $ 4,025 24.3 %
Services (b) 3,706 62.8 % 9 % 3,409 63.0 %
Total non-GAAP gross margin $ 7,325 33.4 % (1 )% $ 7,434 33.8 %
Non-GAAP operating expenses $ 5,164 23.6 % (1 )% $ 5,238 23.8 %
Non-GAAP operating income $ 2,161 9.8 % (2 )% $ 2,196 10.0 %
Non-GAAP net income $ 1,143 5.2 % (5 )% $ 1,209 5.5 %
EBITDA $ 2,018 9.2 % (7 )% $ 2,166 9.8 %
Adjusted EBITDA $ 2,607 11.9 % 1 % $ 2,573 11.7 %
____________________
(a) During Fiscal 2020,
revenue between the products and services categories on the Consolidated
Statement of Net Income (Loss), which impacted previously reported amounts
for the first quarter of Fiscal 2020. The Company did not recast cost of
goods sold for the related revenue reclassifications due to immateriality.
The reclassifications resulted in an increase to services revenue and an
equal and offsetting decrease to product revenue of
first quarter of Fiscal 2020. Total net revenue as previously reported
remains unchanged.
(b) Product gross margin percentages represent product gross margin as a
percentage of product net revenue, and non-GAAP product gross margin
percentages represent non-GAAP product gross margin as a percentage of
non-GAAP product net revenue.
(c) Services gross margin percentages represent services gross margin as a
percentage of services net revenue, and non-GAAP services gross margin
percentages represent non-GAAP services gross margin as a percentage of
non-GAAP services net revenue.
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Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, EBITDA, and adjusted EBITDA are not measurements of financial performance prepared in accordance with GAAP. Non-GAAP financial measures as a percentage of net revenue are calculated based on non-GAAP net revenue. See "NonGAAP Financial Measures" for additional information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Overview
During the first quarter of Fiscal 2021, both our net revenue and non-GAAP net revenue remained flat, as we benefited from the strength of our broad technology solutions portfolio, which helped us navigate market volatility and competitive pressures, particularly due to the COVID-19 environment. CSG andVMware net revenue increased, offset by a decline in ISG net revenue. The increase in CSG net revenue was primarily driven by increased demand for work and learn from home solutions, particularly commercial notebooks.VMware net revenue increased due to broad-based strength across the portfolio, including growth in software license revenue, new contracts and renewals ofVMware enterprise agreements, maintenance contracts sold in previous periods, and additional maintenance contracts sold in conjunction with new software license sales. ISG net revenue decreased primarily due to a weaker demand environment as customers shifted to investments in remote work solutions as part of business continuity plans. Although we are in the midst of unprecedented uncertainty as a result of the ongoing COVID-19 pandemic, we believe we are well-positioned for long-term profitable growth while also maintaining the ability to adjust as needed to changing market conditions with complementary solutions across all segments of our business, an agile workforce, and the strength of our global supply chain. During the first quarter of Fiscal 2021, our operating income increased 28% to$702 million due to an increase in operating income forVMware and a decrease in amortization of intangible assets. These benefits were partially offset by a decrease in operating income for CSG and ISG and an increase in stock-based compensation expense. Amortization of intangible assets and stock-based compensation expense that impacted our operating income totaled$1.2 billion and$1.5 billion for the first quarter of Fiscal 2021 and Fiscal 2020, respectively. Excluding these costs, the impact of purchase accounting, transaction-related expenses, and other corporate expenses, our non-GAAP operating income was$2.2 billion during both the first quarter of Fiscal 2021 and Fiscal 2020. Our non-GAAP operating income decreased 2 percent for the first quarter of Fiscal 2021 due to decreases in operating income for ISG and CSG, which were partially offset by increases in operating income forVMware and other businesses. Cash used in operating activities was$0.8 billion for the first quarter of Fiscal 2021 compared to cash provided by operating activities of$0.7 billion for the first quarter of Fiscal 2020. The decrease in operating cash flows during the first quarter of Fiscal 2021 was attributable to unfavorable working capital impacts related to the COVID-19 pandemic on timing of collections and higher inventory, most of which we expect to normalize by fiscal year-end. See "Market Conditions, Liquidity, and Capital Commitments" for further information on our cash flow metrics. Net Revenue
During the first quarter of Fiscal 2021, our net revenue and non-GAAP net
revenue remained flat, primarily due to increases in net revenue in CSG and
• Product Net Revenue - Product net revenue includes revenue from the sale of
hardware products and software licenses. During the first quarter of Fiscal
2021, product net revenue and non-GAAP product net revenue both decreased 3%
primarily due to a decrease in product net revenue for ISG.
• Services Net Revenue - Services net revenue includes revenue from our
services offerings and support services related to hardware products and
software licenses. During the first quarter of Fiscal 2021, services net
revenue and non-GAAP services net revenue increased 10% and 9%, respectively.
These increases were primarily attributable to an increase in services
revenue for hardware support and deployment and software maintenance due to
growth in CSG and
derived from offerings that have been deferred over a period of time, and, as
a result, reported services net revenue growth rates will be different than
reported product net revenue growth rates.
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From a geographical perspective, net revenue generated by sales to customers in theAmericas increased during the first quarter of Fiscal 2021 due to strong performance in CSG andVMware . In EMEA, net revenue from sales to customers increased during the first quarter of Fiscal 2021 due to demand for CSG solutions. Net revenue from sales to customers in APJ decreased during the first quarter of Fiscal 2021, primarily as the result of a weaker demand environment for CSG and ISG servers and networking, particularly inChina .
Gross Margin
During the first quarter of Fiscal 2021, our gross margin increased 1% to$6.9 billion , and our gross margin percentage increased 30 basis points to 31.3%. The increases in our gross margin and gross margin percentage during the first quarter of Fiscal 2021 were primarily driven by a favorable impact of gross margin increases forVMware and our other businesses, and a decrease in amortization of intangible assets and purchase accounting adjustments. These impacts were largely offset by decreases in gross margins for ISG and CSG. Our gross margin for the first quarter of Fiscal 2021 and Fiscal 2020 included the impact of amortization of intangibles and purchase accounting adjustments of$0.4 billion and$0.6 billion , respectively. Excluding these costs, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP gross margin decreased 1% to$7.3 billion , and non-GAAP gross margin percentage decreased 40 basis points to 33.4%. The decreases in our non-GAAP gross margin and non-GAAP gross margin percentage were attributable to component costs that were deflationary in the aggregate for ISG and CSG (although to a lesser extent than in the first quarter of Fiscal 2020), increased supply chain costs to expedite product delivery for CSG sales in the COVID-19 environment, and a shift in product mix due to strong CSG performance. These negative impacts were partially offset by increases in gross margin and gross margin percentage forVMware and other businesses.
• Products - During the first quarter of Fiscal 2021, product gross margin
decreased 7% to
90 basis points to 20.2%. The decreases in product gross margin and product
gross margin percentage were primarily driven by component costs that were
deflationary in the aggregate for ISG and CSG (although to a lesser extent
than in the first quarter of Fiscal 2020) and increased supply chain costs to
expedite product delivery for CSG sales. These unfavorable impacts were
partially offset by a decrease in amortization of intangibles. During the
first quarter of Fiscal 2021, non-GAAP product gross margin decreased 10% to
basis points to 22.6% due to the same ISG and CSG dynamics discussed above.
• Services - During the first quarter of Fiscal 2021, services gross margin
increased 10% to
10 basis points to 61.8%. Services gross margin increased due to growth in
adjustments. Excluding purchase accounting adjustments, transaction-related
expenses, stock-based compensation expense, and other corporate
expenses, non-GAAP services gross margin increased 9% to
primarily due to growth in
gross margin percentage decreased 20 basis points to 62.8% due to a decline
in ISG services gross margin percentage, which was partially offset by an
increase in VMware services gross margin percentage.
Vendor Programs and Settlements
Our gross margin is affected by our ability to achieve competitive pricing with
our vendors and contract manufacturers, including through our negotiation of a
variety of vendor rebate programs to achieve lower net costs for the various
components we include in our products. Under these programs, vendors provide us
with rebates or other discounts from the list prices for the components, which
are generally elements of their pricing strategy. We account for vendor rebates
and other discounts as a reduction in cost of net revenue. We manage our costs
on a total net cost basis, which includes supplier list prices reduced by vendor
rebates and other discounts.
The terms and conditions of our vendor rebate programs are largely based on
product volumes and are generally negotiated either at the beginning of the
annual or quarterly period, depending on the program. The timing and amount of
vendor rebates and other discounts we receive under the programs may vary from
period to period, reflecting changes in the competitive environment. We monitor
our component costs and seek to address the effects of any changes to terms that
might arise under our vendor rebate programs. Our gross margins for the first
quarter of Fiscal 2021 and Fiscal 2020 were not materially affected by any
changes to the terms of our vendor rebate programs, as the amounts we received
under these programs were generally stable relative to our total net cost. We
are not aware of any significant changes to vendor pricing or rebate programs
that may impact our results in the near term.
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In addition, we have pursued legal action against certain vendors and are currently involved in negotiations with other vendors regarding their past pricing practices. We have negotiated settlements with some of these vendors and may have additional settlements in future periods. These settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment.
Operating Expenses
The following table presents information regarding our operating expenses for
the periods indicated:
Three Months Ended
May 1, 2020 May 3, 2019
% of % % of
Dollars Net Revenue Change Dollars Net Revenue
(in millions, except percentages)
Operating expenses:
Selling, general, and
administrative $ 4,886 22.3 % (4 )% $ 5,071 23.1 %
Research and development 1,265 5.8 % 8 % 1,176 5.4 %
Total operating expenses $ 6,151 28.1 % (2 )% Other Financial Information Non-GAAP operating expenses$ 5,164 23.6 % (1 )%
During the first quarter of Fiscal 2021, total operating expenses decreased 2% primarily due to a decrease in selling general and administrative expenses, offset partially by an increase in research and development expenses. Our operating expenses include amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, and other corporate expenses. In aggregate, these items totaled$1.0 billion for both the first quarter of Fiscal 2021 and Fiscal 2020. Excluding these costs, total non-GAAP operating expenses decreased 1% for the first quarter of Fiscal 2021.
• Selling, General, and Administrative - Selling, general, and administrative
("SG&A") expenses decreased 4% during the first quarter of Fiscal 2021
primarily due to measures taken in
pandemic which included a global hiring freeze, reduction in consulting and
contractor costs, and global travel restrictions, as well as a decrease in
amortization of intangibles.
• Research and Development - Research and development ("R&D") expenses are
primarily composed of personnel-related expenses related to product
development. R&D expenses as a percentage of net revenue were approximately
5.8% and 5.4% for the first quarter of Fiscal 2021 and Fiscal 2020,
respectively. R&D expenses as a percentage of net revenue increased during
the first quarter of Fiscal 2021 primarily due to an increase in
compensation-related expense, including stock-based compensation expense,
driven by
customers evolve, we intend to support R&D initiatives to innovate and
introduce new and enhanced solutions into the market.
We continue to make selective investments designed to enable growth, marketing,
and R&D, while balancing our efforts to drive cost efficiencies in the business.
We also expect to continue to make investments in support of our own digital
transformation to modernize and streamline our IT operations.
Operating Income
During the first quarter of Fiscal 2021, our operating income increased 28% to$702 million . The increase in our operating income for the first quarter of Fiscal 2021 was primarily attributable to an increase in operating income forVMware and a decrease in amortization of intangible assets. These benefits were partially offset by a decrease in operating income for CSG and ISG and an increase in stock-based compensation expense.
Amortization of intangible assets and stock-based compensation expense that
impacted our operating income totaled
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purchase accounting, transaction-related expenses, and other corporate expenses, our non-GAAP operating income decreased 2% to$2.2 billion during the first quarter of Fiscal 2021. The decrease in our non-GAAP operating income for the first quarter of Fiscal 2021 was primarily due to decreases in operating income for ISG and CSG, which were partially offset by increases in operating income forVMware and other businesses.
Interest and Other, Net
The following table provides information regarding interest and other, net for
the periods indicated:
Three Months Ended
May 1, 2020 May 3, 2019
(in millions)
Interest and other, net:
Investment income, primarily interest $ 24 $ 44
Gain on investments, net 94 62
Interest expense (672 ) (699 )
Foreign exchange (99 ) (45 )
Other 87 (55 )
Total interest and other, net $ (566 ) $ (693 )
During the first quarter of Fiscal 2021, the change in interest and other, net
was favorable by $127 million , primarily due a gain of $120 million recognized
from the sale of certain intellectual property assets.
Income and Other Taxes
For the first quarter of Fiscal 2021, our effective income tax rate was -33.8% on pre-tax income of$136 million . For the first quarter of Fiscal 2020, our effective income tax rate was 330.1% on pre-tax losses of$143 million . The change in our effective tax rate was primarily driven by discrete tax items and a change in our jurisdictional mix of income. Our effective tax rates include discrete tax benefits of$59 million and$405 million resulting from intra-entity asset transfers of certain of our intellectual property to Irish subsidiaries for the first quarter of Fiscal 2021 and Fiscal 2020, respectively. The tax benefit for each intra-entity asset transfer was recorded as a deferred tax asset in the period of transaction and represents the book and tax basis difference on the transferred assets measured based on the applicable Irish statutory tax rate. We applied significant judgment when determining the fair value of the intellectual property, which serves as the tax basis of the deferred tax asset, and in evaluating the associated tax laws in the applicable jurisdictions. The tax deductions for amortization of the assets will be recognized in the future, and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax laws. We expect to be able to realize the deferred tax assets resulting from these intra-entity asset transfers. Our effective income tax rate can fluctuate depending on the geographic distribution of our worldwide earnings, as our foreign earnings are generally taxed at lower rates than inthe United States . The differences between our effective income tax rate and theU.S. federal statutory rate of 21% principally result from the geographical distribution of income, differences between the book and tax treatment of certain items, and the discrete tax items discussed above. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and lower tax rates is attributable toSingapore ,China , andMalaysia . A significant portion of these income tax benefits relates to a tax holiday that will be effective untilJanuary 31, 2029 . Our other tax holidays will expire in whole or in part during Fiscal 2022 through Fiscal 2030. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. As ofMay 1, 2020 , we were not aware of any matters of non-compliance related to these tax holidays. The effective income tax rate for future quarters of Fiscal 2021 may be impacted by the actual mix of jurisdictions in which income is generated.
For further discussion regarding tax matters, including the status of income tax audits, see Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report.
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Net Income
During the first quarter of Fiscal 2021, net income decreased 45% to$182 million . The decrease in net income during the first quarter of Fiscal 2021 was primarily due lower discrete tax benefits, which were partially offset by an increase in operating income and a decrease in interest and other, net. Net income for the first quarter of Fiscal 2021 and Fiscal 2020 included amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, stock-based compensation expense, other corporate expenses, fair value adjustments on equity investments, and discrete tax items. Excluding these costs and the related tax impacts, non-GAAP net income decreased 5% to$1.1 billion . The decrease in non-GAAP net income during the first quarter of Fiscal 2021 was primarily attributable to a decrease in non-GAAP operating income and an increase in non-GAAP interest and other, net.
Non-controlling Interests
During the first quarter of Fiscal 2021, net income or loss attributable to non-controlling interests consisted of net income or loss attributable to our non-controlling interests inVMware, Inc. and Secureworks. During the first quarter of Fiscal 2020, net income or loss attributable to non-controlling interests consisted of net income or loss attributable to our non-controlling interests inVMware, Inc. , Secureworks, and Pivotal. Pivotal was acquired byVMware onDecember 30, 2019 and, as a result, we no longer have a separate non-controlling interest in Pivotal. During the first quarter of Fiscal 2021 and Fiscal 2020, net income attributable to non-controlling interests was$39 million and$36 million , respectively. The increase in net income attributable to non-controlling interests during the first quarter of Fiscal 2021 was attributable to an increase in net income attributable to our non-controlling interest inVMware, Inc. For more information about our non-controlling interests, see Note 13 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Net Income Attributable to
Net income attributable toDell Technologies Inc. represents net income and an adjustment for non-controlling interests. During the first quarter of Fiscal 2021 and Fiscal 2020, net income attributable toDell Technologies Inc. was$143 million and$293 million , respectively. The decrease in net income attributable toDell Technologies Inc. during the first quarter of Fiscal 2021 was primarily attributable to the decrease in net income for the period. 74
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Business Unit Results
Our reportable segments are based on the following business units: ISG, CSG, andVMware . A description of our three business units is provided under "Introduction." See Note 17 of the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income, respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
Three Months Ended
May 1, 2020 % Change May 3, 2019
(in millions, except percentages)
Net revenue:
Servers and networking $ 3,758 (10 )% $ 4,180
Storage 3,811 (5 )% 4,022
Total ISG net revenue $ 7,569 (8 )% $ 8,202
Operating income:
ISG operating income $ 732 (13 )% $ 843
% of segment net revenue 9.7 % 10.3 %
Net Revenue - During the first quarter of Fiscal 2021, ISG net revenue decreased
8% due to decreases in sales of servers and networking and storage. ISG net
revenue decreased primarily due to a weaker demand environment, as customers
shifted to investments in remote work solutions as part of business continuity
plans. Revenue from the sales of servers and networking decreased 10% during the
first quarter of Fiscal 2021, primarily driven by a decline in units sold of our
PowerEdge servers due to a weaker demand environment, particularly in China , and
a decrease in average selling prices for servers resulting from competitive
pressures in certain geographies. Storage revenue decreased 5% during the first
quarter of Fiscal 2021 primarily due to a decline in demand. We continue to make
enhancements to our storage solutions offerings and expect that these offerings,
including the release of our new PowerStore storage array in May 2020 , will
drive long-term improvements in the business.
ISG customers are interested in new and innovative models that address how they
consume our solutions. We offer options including as-a-service, utility, leases,
and immediate pay models, all designed to match customers' consumption and
financing preferences. Our multi-year agreements typically result in recurring
revenue streams over the term of the arrangement. We expect our flexible
consumption models will further strengthen our customer relationships and
provide a foundation for growth in recurring revenue.
From a geographical perspective, net revenue attributable to ISG decreased in
all regions during the first quarter of Fiscal 2021, with the largest decline in
EMEA, driven by a weaker demand environment as a result of pervasive global
COVID-19 disruptions, which persisted for the majority of the quarter.
Operating Income - During the first quarter of Fiscal 2021, ISG operating income
as a percentage of net revenue decreased 60 basis points to 9.7% primarily
driven by weakness in gross margin for servers and networking due to competitive
pricing dynamics. The decline in gross margin percentage during the first
quarter of Fiscal 2021 was also attributable to component costs that were
deflationary in the aggregate for ISG, although to a lesser extent than in the
first quarter of Fiscal 2020. For the remaining nine months of Fiscal 2021, we
currently expect an inflationary component cost environment, which may put
pressure on ISG operating results, particularly from sales of servers and
networking. We will continue to monitor our pricing in response to the changing
competitive and cost environment.
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Client Solutions Group
The following table presents net revenue and operating income attributable to CSG for the periods indicated:
Three Months Ended
May 1, 2020 % Change May 3, 2019
(in millions, except percentages)
Net revenue:
Commercial $ 8,634 4 % $ 8,307
Consumer 2,470 (5 )% 2,603
Total CSG net revenue $ 11,104 2 % $ 10,910
Operating income:
CSG operating income $ 592 (25 )% $ 793
% of segment net revenue 5.3 % 7.3 %
Net Revenue - During the first quarter of Fiscal 2021, CSG net revenue increased
2% due to an increase in commercial sales, partially offset by a decrease in
consumer sales. Commercial revenue increased 4% during the first quarter of
Fiscal 2021 primarily due to increased demand from large commercial and
governmental customers for work and learn from home solutions, particularly
driving strong demand for commercial notebooks. Consumer revenue decreased 5%
during the first quarter of Fiscal 2021 due to lower consumer demand,
particularly in retail, as a result of the COVID-19 market disruption.
From a geographical perspective, net revenue attributable to CSG increased in
the Americas and EMEA during the first quarter of Fiscal 2021. In APJ,
particularly in China , net revenue decreased during the first quarter of Fiscal
2021.
Operating Income - During the first quarter of Fiscal 2021, CSG operating income
as a percentage of net revenue decreased 200 basis points to 5.3%. The decrease
was primarily due to a decrease in CSG gross margin percentage, which was
principally driven by increased supply chain costs to expedite delivery of
certain products to meet strong demand in this environment, as well as by
competitive pricing dynamics. Also impacting the decrease in gross margin
percentage, the aggregate CSG component cost environment was deflationary in the
first quarter of Fiscal 2021, although to a lesser extent than in the first
quarter of Fiscal 2020. We expect an inflationary component cost environment in
the remaining nine months of Fiscal 2021, which will put pressure on CSG
operating results. We will continue to monitor our pricing in response to the
changing competitive and component cost environment.
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The following table presents net revenue and operating income attributable toVMware for the periods indicated. During Fiscal 2020, the Company reclassified Pivotal operating results from other businesses to theVMware reportable segment. Prior period results have been recast to conform with the current period presentation. Three Months Ended May 1, 2020 % Change May 3, 2019 (in millions, except percentages) Net revenue: VMware net revenue$ 2,755 12 %$ 2,457 Operating income: VMware operating income$ 773 30 %$ 595 % of segment net revenue 28.1 % 24.2 % Net Revenue -VMware net revenue, inclusive of Pivotal, primarily consists of revenue from the sale of software licenses under perpetual licenses and subscription and software-as-a-service ("SaaS") offerings, as well as related software maintenance services, support, training, consulting services, and hosted services.VMware net revenue for the first quarter of Fiscal 2021 increased 12% primarily due to growth in sales of subscriptions and SaaS, as well as an increase in sales of software maintenance services. Software maintenance revenue benefited from new contracts and renewals ofVMware enterprise agreements, revenue recognized from maintenance contracts sold in prior periods, and additional maintenance contracts sold in conjunction with new software license sales. From a geographical perspective, approximately half ofVMware net revenue during the first quarter of Fiscal 2021 was generated by sales to customers inthe United States .VMware net revenue for the first quarter of Fiscal 2021 increased in boththe United States and internationally. Operating Income - During the first quarter of Fiscal 2021,VMware operating income as a percentage of net revenue increased 390 basis points to 28.1%. The increase was driven by an increase in gross margin as a percentage of net revenue. During the first quarter of Fiscal 2021,VMware net revenue growth outpaced increased operating expenses, particularly R&D compensation-related expenses resulting from acquisitions and additional investments. While the COVID-19 pandemic has not had a significant adverse financial impact onVMware operations to date, in future periods we expect a negative impact onVMware results of operations, the size and duration of which we are currently unable to predict. 77
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Table of Contents OTHER BALANCE SHEET ITEMS Accounts Receivable We sell products and services directly to customers and through a variety of sales channels, including retail distribution. Our accounts receivable, net, was$10.8 billion and$12.5 billion as ofMay 1, 2020 andJanuary 31, 2020 , respectively. We maintain an allowance for expected credit losses to cover receivables that may be deemed uncollectible. The allowance for expected credit losses is an estimate based on an analysis of historical loss experience, current receivables aging, and management's assessment of current conditions and reasonable and supportable expectation of future conditions, as well as specific identifiable customer accounts that are deemed at risk. Our analysis includes assumptions regarding the impact of COVID-19 and continued market volatility, which is highly uncertain and subject to significant judgment. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. As ofMay 1, 2020 andJanuary 31, 2020 , the allowance for expected credit losses was$144 million and$94 million , respectively. Allowance for expected credit losses of trade receivables as ofMay 1, 2020 includes the impact of adoption of the new current expected credit losses ("CECL") standard, which was adopted as ofFebruary 1, 2020 using the modified retrospective method. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We will continue to monitor the aging of our accounts receivable and take actions, where necessary, to reduce our exposure to credit losses.
Dell Financial Services and its affiliates ("DFS") supportDell Technologies by offering and arranging various financing options and services for our customers globally, including through captive financing operations inNorth America ,Europe ,Australia, and New Zealand . DFS originates, collects, and services customer receivables primarily related to the purchase of our product, software, and service solutions. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. New financing originations were$1.8 billion and$1.7 billion for the first quarter of Fiscal 2021 and Fiscal 2020, respectively. In response to the COVID-19 pandemic, we are focused on supporting our customers and intend to provide up to$9 billion in financing support by offering low or zero percent interest rate programs as well as payment deferral options. The financial impact to DFS and our securitization and structured financing programs is not expected to be material. Pursuant to the current lease accounting standard effectiveFebruary 2, 2019 , new DFS leases are classified as sales-type leases, direct financing leases, or operating leases. Amounts due from lessees under sales-type leases or direct financing leases are recorded as part of financing receivables, with interest income recognized over the contract term. On commencement of sales-type leases, we typically qualify for up-front revenue recognition. On originations of operating leases, we record equipment under operating leases, classified as property, plant, and equipment, and recognize rental revenue and depreciation expense, classified as cost of net revenue, over the contract term. Direct financing leases are immaterial. Leases that commenced prior to the effective date of the current lease accounting standard continue to be accounted for under previous lease accounting guidance. As ofMay 1, 2020 andJanuary 31, 2020 , our financing receivables, net were$9.5 billion and$9.7 billion , respectively. We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. Allowance for expected credit losses of financing receivables as ofMay 1, 2020 includes the impact of adoption of the CECL standard referred to above. Our analysis includes assumptions regarding the impact of COVID-19 and continued market volatility, which is highly uncertain and subject to significant judgment. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. For both the first quarter of Fiscal 2021 and Fiscal 2020, the principal charge-off rate for our total portfolio was 1.0%. The credit quality of our financing receivables has improved in recent years due to an overall improvement in the credit environment and as the mix of high-quality commercial accounts in our portfolio has continued to increase. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables without recourse to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved. 78
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We retain a residual interest in equipment leased under our lease programs. As ofMay 1, 2020 andJanuary 31, 2020 , the residual interest recorded as part of financing receivables was$551 million and$582 million , respectively. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, we assess the carrying amount of our recorded residual values for impairment. Generally, residual value risk on equipment under lease is not considered to be significant, because of the existence of a secondary market with respect to the equipment. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. Our remarketing sales staff works closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure. No impairment losses were recorded related to residual assets during the first quarter of Fiscal 2021. As ofMay 1, 2020 andJanuary 31, 2020 , equipment under operating leases, net was$975 million and$840 million , respectively. Based on triggering events, we assess the carrying amount of the equipment under operating leases recorded for impairment. No material impairment losses were recorded related to such equipment during the first quarter of Fiscal 2021. DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing. For DFS operating leases, which have increased under the current lease standard, the initial funding is classified as a capital expenditure and reflected as an impact to cash flows used in investing activities. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our financing receivables and the associated allowances, and the equipment under operating leases. Off-Balance Sheet Arrangements As ofMay 1, 2020 , we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations. 79
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MARKET CONDITIONS, LIQUIDITY, AND CAPITAL COMMITMENTS
Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties. We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized credit rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments. We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than theU.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See Note 7 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our use of derivative instruments. We are exposed to interest rate risk related to our variable-rate debt portfolio. In the normal course of business, we follow established policies and procedures to manage this risk, including monitoring of our asset and liability mix. As a result, we do not anticipate any material losses from interest rate risk. The impact of any credit adjustments related to our use of counterparties on our Condensed Consolidated Financial Statements included in this report has been immaterial.
Liquidity and Capital Resources
To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our strategic initiatives. In addition to internally generated cash, we have access to other capital sources to finance our strategic initiatives and fund growth in our financing operations. Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost-effective manner. In this unprecedented environment resulting from the COVID-19 pandemic, we are taking actions to increase our cash position and preserve financial flexibility. InMarch 2020 , as previously reported, we drew$3.0 billion under the Revolving Credit Facility as a precautionary measure given the uncertainty in the global markets, which we repaid during the quarter. Additionally, we accessed the debt markets in the first quarter of Fiscal 2021, in which we issued$2.25 billion aggregate principal amount ofFirst Lien Notes andVMware, Inc. issued$2.0 billion aggregate principal amount of senior notes. The proceeds from the issuance of these notes are expected to be used for general corporate purposes, including planned repayment of upcoming debt maturities. Subsequent to the first quarter of Fiscal 2021,VMware, Inc. repaid$1.25 billion principal amount of its 2.30% Notes dueAugust 2020 . 80
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The following table presents our cash and cash equivalents as well as our available borrowings as of the dates indicated:
May 1, 2020
(in millions)
Cash and cash equivalents, and available borrowings: Cash and cash equivalents (a)
$ 12,229 $
9,302
Remaining available borrowings under revolving credit facilities
5,472 5,972
Total cash, cash equivalents, and available borrowings$ 17,701 $ 15,274 ____________________
(a) Of the
billion was held by
Our revolving credit facilities as ofMay 1, 2020 include the Revolving Credit Facility. The Revolving Credit Facility has a maximum aggregate borrowing capacity of$4.5 billion . Available borrowings under this facility are reduced by draws on the facility and outstanding letters of credit. As ofMay 1, 2020 , there were no borrowings outstanding under the facility and remaining available borrowings totaled approximately$4.5 billion . Subsequent to the first quarter of Fiscal 2021 onMay 25, 2020 , we entered into a new revolving credit facility forChina (the "China Revolving Credit Facility"). The new terms provide for collateralized and non-collateralized principal amounts not to exceed$1.0 billion Chinese renminbi and$1.8 billion Chinese renminbi, respectively, or equivalent amounts inU.S. dollars. We may regularly use our available borrowings from both our Revolving Credit Facility and our China Revolving Credit Facility on a short-term basis for general corporate purposes. See Note 19 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about the new China Revolving Credit Facility. The VMware Revolving Credit Facility has a maximum capacity of$1.0 billion . As ofMay 1, 2020 ,$1.0 billion was available under the VMware Revolving Credit Facility. The VMware Term Loan Facility had a borrowing capacity of up to$2.0 billion throughFebruary 7, 2020 . As ofMay 1, 2020 , the outstanding borrowings under the VMware Term Loan Facility were$1.5 billion , with no remaining amount available for additional borrowings. None of the net proceeds of borrowings under the VMware Revolving Credit Facility or the VMware Term Loan Facility will be made available to support the operations or satisfy any corporate purposes ofDell Technologies , other than the operations and corporate purposes ofVMware, Inc. andVMware, Inc.'s subsidiaries.
See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about each of the foregoing revolving credit facilities.
We believe that our current cash and cash equivalents, together with cash that
will be provided by future operations and borrowings expected to be available
under our revolving credit facilities, will be sufficient over at least the next
twelve months to fund our operations, debt service requirements and maturities,
capital expenditures, share repurchases, and other corporate needs.
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Debt
The following table summarizes our outstanding debt as of the dates indicated:
May 1, 2020 Increase (decrease) January 31, 2020
(in millions)
Core debt
Senior Secured Credit Facilities and
First Lien Notes $ 31,857 $ 2,193 $ 29,664
Unsecured Notes and Debentures 1,352 - 1,352
Senior Notes 2,700 - 2,700
EMC Notes 1,600 - 1,600
DFS allocated debt (863 ) 632 (1,495 )
Total core debt 36,646 2,825 33,821
DFS related debt
DFS debt 8,269 504 7,765
DFS allocated debt 863 (632 ) 1,495
Total DFS related debt 9,132 (128 ) 9,260
Margin Loan Facility and other 4,014 (10 ) 4,024
Debt of public subsidiary
VMware Notes 6,000 2,000 4,000
VMware Term Loan Facility 1,500 - 1,500
Other 55 (5 ) 60
Total public subsidiary debt 7,555 1,995 5,560
Total debt, principal amount 57,347 4,682 52,665
Carrying value adjustments (619 ) (10 ) (609 )
Total debt, carrying value $ 56,728 $ 4,672 $ 52,056 During the first quarter of Fiscal 2021, the outstanding principal amount of our
debt increased by
During the first quarter of Fiscal 2021, our core debt increased by$2.8 billion to$36.6 billion as ofMay 1, 2020 . We define core debt as the total principal amount of our debt, less DFS related debt, our Margin Loan Facility and other debt, and public subsidiary debt. The increase in core debt was primarily due to the issuance of multiple series of First Lien Notes in an aggregate principal amount of$2.25 billion onApril 9, 2020 . See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our debt. The change in DFS allocated debt also contributed to the increase, and is discussed further below. During the first quarter of Fiscal 2021, we issued an additional$0.5 billion , net, in DFS debt to support the expansion of our financing receivables portfolio. DFS related debt primarily represents debt from our securitization and structured financing programs. The majority of DFS debt is non-recourse toDell Technologies and represents borrowings under securitization programs and structured financing programs, for which our risk of loss is limited to transferred lease and loan payments and associated equipment, and under which the credit holders have no recourse toDell Technologies . To fund expansion of the DFS business, we balance the use of the securitization and structured financing programs with other sources of liquidity. We approximate the amount of our debt used to fund the DFS business by applying a 7:1 debt to equity ratio to the sum of our financing receivables balance and equipment under our DFS operating leases, net. The debt to equity ratio used is based on the underlying credit quality of the assets. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about our DFS debt.
As of
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Debt of public subsidiary representsVMware, Inc. indebtedness. The increase in debt of public subsidiary during the first quarter of Fiscal 2021 was due to the issuance of VMware Notes in an aggregate principal amount of$2.0 billion onApril 7, 2020 . See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information aboutVMware, Inc. debt.VMware, Inc. and its respective subsidiaries are unrestricted subsidiaries for purposes of the core debt ofDell Technologies . NeitherDell Technologies nor any of its subsidiaries, other thanVMware, Inc. , is obligated to make payment on the VMware Notes or the VMware Term Loan Facility. None of the net proceeds of the VMware Notes or, as discussed above, the VMware Term Loan Facility will be made available to support the operations or satisfy any corporate purposes ofDell Technologies , other than the operations and corporate purposes ofVMware, Inc. and its subsidiaries. Our requirements for cash to pay principal and interest on our core debt increased significantly due to the borrowings we incurred to finance theEMC merger transaction and, to a lesser extent, the Class V transaction. We have made good progress in paying down core debt since theEMC merger transaction. We believe we will continue to be able to make our debt principal and interest payments, including the short-term maturities, from existing and expected sources of cash, primarily from operating cash flows. Cash used for debt principal and interest payments may also include short-term borrowings under our revolving credit facilities. We will continue to focus on paying down core debt. Under our variable-rate debt, we could have variations in our future interest expense from potential fluctuations in LIBOR, or from possible fluctuations in the level of DFS debt required to meet future demand for customer financing. We or our affiliates or their related persons, at our or their sole discretion, may purchase, redeem, prepay, refinance, or otherwise retire any amount of our outstanding indebtedness under the terms of such indebtedness at any time and from time to time, in open market or negotiated transactions with the holders of such indebtedness or otherwise, as appropriate market conditions exist.
Cash Flows
The following table presents a summary of our Condensed Consolidated Statements of Cash Flows for the periods indicated:
Three Months Ended
May 1, 2020 May 3, 2019
(in millions)
Net change in cash from:
Operating activities $ (796 ) $ 682
Investing activities (485 ) (458 )
Financing activities 4,264 (719 )
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash (136 ) (36 )
Change in cash, cash equivalents, and restricted
cash $ 2,847 $ (531 )
Operating Activities - Cash used in operating activities was $0.8 billion for
the first quarter of Fiscal 2021 compared to cash provided by operating
activities of $0.7 billion for the first quarter of Fiscal 2020. The decrease in
operating cash flows during the first quarter of Fiscal 2021 was attributable to
unfavorable working capital impacts related to the COVID-19 pandemic on timing
of collections and maintenance of higher inventory levels for continuity of
supply, most of which we expect to normalize by fiscal year-end.
Cash flow from operating activities during the first quarter of the fiscal year
is typically lower due to parts of Dell Technologies' business being subject to
seasonal sales trends as well as timing of annual personnel-related payments.
DFS offerings are initially funded through cash on hand at the time of
origination, most of which is subsequently replaced with third-party financing.
For DFS offerings which qualify as sales-type leases, the initial funding of
financing receivables is reflected as an impact to cash flows from operations,
and is largely subsequently offset by cash proceeds from financing. For DFS
operating leases, which have increased under the current leasing standard, the
initial funding is classified as a capital expenditure and reflected as cash
flows used in investing activities. DFS new financing originations were $1.8
billion and $1.7 billion during the first quarter of Fiscal 2021 and Fiscal
2020, respectively. As of May 1, 2020 , DFS had $9.5 billion of total net
financing receivables and $1.0 billion of equipment under DFS operating leases,
net.
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Investing Activities - Investing activities primarily consist of cash used to fund capital expenditures for property, plant, and equipment, which includes equipment under DFS operating leases, capitalized software development costs, strategic investments, and the maturities, sales, and purchases of investments. During the first quarter of Fiscal 2021, cash used in investing activities was$485 million and was primarily driven by capital expenditures, which were partially offset by net cash proceeds from the sale of certain intellectual property assets. In comparison, cash used by investing activities was$458 million during the first quarter of Fiscal 2020 and was primarily driven by capital expenditures, which were partially offset by net cash proceeds from the net sales of strategic investments. Financing Activities - Financing activities primarily consist of the proceeds and repayments of debt, cash used to repurchase common stock, and proceeds from the issuance of common stock. Cash provided by financing activities of$4.3 billion during the first quarter of Fiscal 2021 primarily consisted of cash proceeds from the issuances of multiple series of First Lien Notes in an aggregate principal amount of$2.25 billion and VMware Notes in an aggregate principal amount of$2.0 billion , as discussed above. In comparison, cash used by financing activities of$719 million during the first quarter of Fiscal 2020 primarily consisted of repurchases of common stock of subsidiaries.
Capital Commitments
Capital Expenditures - During the first quarter of Fiscal 2021 and Fiscal 2020, we spent$0.5 billion and$0.6 billion , respectively, on property, plant, and equipment. These expenditures were incurred in connection with our global expansion efforts and infrastructure investments made to support future growth, and the funding of equipment under DFS operating leases. During the first quarter of Fiscal 2021 and Fiscal 2020, funding of gross equipment under DFS operating leases was$0.2 billion and$0.3 billion , respectively. Product demand, product mix, and the use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2021 are currently expected to total between$2.3 billion and$2.5 billion , of which approximately$1.0 billion is expected for equipment under DFS operating leases. Purchase Obligations - Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be canceled without penalty. We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for our production. 84
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