Rob Williams - Senior Vice President of Investor Relations Tom Sweet - Chief Financial Officer Tyler Johnson - Treasurer David Goulden - President Steve Price - Chief Human Resources Officer

Thomas Eagan - JPMorgan Frank Jarman - Goldman Sachs David Phipps - Citigroup Arun Seshadri - Credit Suisse Daniel Fuss - Morgan Stanley Steven Milunovich – UBS

Good morning and welcome to the First Quarter Fiscal Year 2018 Earnings Conference Call for Dell Technologies Inc. I’d like to inform all participants this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies Inc. Any rebroadcast of this information, in whole or part, without the prior written permission of Dell Technologies is prohibited. As a reminder, the company is also simulcasting this call at investors.delltechnologies.com. A replay of this webcast will be available at the same location for 30 days. Following prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I’d like to turn the call over to Rob Williams, Senior Vice President of Investor Relations. Mr. Williams, you may begin.

Thanks, Regina. Good morning and thanks for joining us. With me today is our Chief Financial Officer, Tom Sweet; our President of Infrastructure Solutions Group, David Goulden; and our Treasurer, Tyler Johnson. We posted our first quarter press release and web deck on our website, where this call is also being webcast. Q1 financial results will be filed on Form 10-Q tomorrow June 9. I encourage you to review these documents for additional perspective. Consistent with prior periods, our Q1 non-GAAP operating income excludes approximately $2.7 billion of adjustments. The majority of these are non-cash and relate to purchase accounting and amortization of intangible assets. Please note that due to the EMC merger, and to a lesser extent, the Dell go-private transaction, there will continue to be significant bridging items between our GAAP and non-GAAP results for the next few years, although, the impact will decline in each subsequent quarter. Please refer to the web deck as well as our SEC filings for more details on our total non-GAAP adjustments. As a reminder, please note that our first quarter fiscal year 2017 historical results do not include EMC and unless otherwise specified growth percentages refer to fiscal year-over-year changes, which may not be comparable due to the merger. During this call, we will generally refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, EBITDA and adjust EBITDA on a continuing operations basis. A reconciliation of these measures to its most directly comparable GAAP measure can be found on Form 10-Q and in the supplemental material in our web deck. Finally, I’d like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in the cautionary statement section in our web deck. We assume no obligation to update our forward-looking statements. Now, I’ll turn it over to Tom.

Thanks, Rob. We were pleased with the overall results, given some of the dynamics we’ve worked through during the quarter. We completed our first quarter under the fully integrated annual plan and the new go-to-market structure. We aligned the family of businesses to the Dell Technologies fiscal year calendar, and we faced component cost headwinds in certain areas. We feel good about the velocity we saw in many areas of the business, the work we’ve done on integration, our cash and balance sheet management and the success that we’re seeing in our Dell Financial Services or DFS business. While we made progress, there’s still more work to do and we will discuss this in more detail later in the call. Now jumping into the Q1 results. GAAP revenue was $17.8 billion, with a GAAP operating loss of $1.5 billion. Non-GAAP revenue was $18.2 billion. While year-over-year compares for ISG and VMware segments are not meaningful, CSG revenue grew 6%. On a standalone basis, last week VMware reported a growth rate of 9%. Our ISG business saw revenue growth in PowerEdge servers and strengthened our newer solutions, including all-flash arrays, hyperconverged systems and software defined storage, with softness in traditional hybrid storage arrays. We are focused on improving overall storage velocity as we move forward and in balancing server revenue growth and profitability, given the challenging component cost environment. Gross margin at the consolidated level was $5.6 billion, or 31.1% of revenue, and was impacted by pricing actions in both ISG and CSG, as we navigated through the component cost increases, as well as mix shifts within ISG. As a reminder, there are some instances, where pricing commitments are already in place, and we can’t always bridge that gap with pricing adjustments when the cost environment moves as quickly as we’ve seen it move recently. Going forward, we do anticipate memory and SSD cost to be a headwind to the remainder of the year. OpEx is $4.4 billion, or 24.5% of revenue. We continue to execute on our cost initiatives, while also investing back in the business to drive growth in today’s changing IT environment. Operating income was $1.2 billion, or 6.6% of revenue. Now, let me turn it over to Tyler to provide additional commentary on adjusted EBITDA, cash flow and capital structure.

Thanks, Tom. Adjusted EBITDA for the quarter was $1.6 billion, or 8.6% of non-GAAP revenue. Please see Slide 17 in the web deck for more details on our EBITDA adjustments. In Q1, we generated cash from operations of $240 million. Operating cash flow during the quarter was driven predominantly by profitability and working capital benefits. Cash flow was in line with expectations and normal Q1 seasonality. Our cash and investments balance was $14.9 billion, down approximately $300 million versus the prior quarter. During Q1, we paid approximately $100 million in term loan amortization. In addition, as discussed on the Q4 earnings call, we closed on the repricing and upsizing of our Term Loan B, using the incremental $500 million to reduce our margin loan bridge from $2.5 billion to $2 billion. Subsequently, we refinanced the bridge into a $2 billion margin loan now at the five-year maturity. Since closing the EMC transaction, we have paid down $7.1 billion of gross debt, excluding Dell Financial Services related debt, resulting a $200 million reduction in annualized interest expense on a run rate basis. We ended the quarter with $50.7 billion in total principal debt, up $400 million due to the growth in our DFS business. Of this amount, $41.9 billion is core debt, the remainder included approximately $5.2 billion of debt that funds our DFS business. The $2 billion margin loan and a $1.5 billion bridge facility backed by VMware legacy intercompany notes due to EMC Corp. Moving to our share purchase program. Today, we have repurchased approximately 13 million shares of Class V common stock under the Class V Group repurchase program totaling approximately $800 million. As a reminder, this portion of the repurchase program has been funded through a share purchase agreement to sell VMware Class A common stock to VMware. Since closing the EMC transaction, we’ve repurchased approximately 19.7 million shares of Class V common stock for a total of $1.1 billion, when including the DHI Group repurchase program. We’ll continue to evaluate repurchase opportunities in the context of our broader capital allocation strategy. Before I turn the call over to David, I’d like to highlight the portfolio of growth momentum we are seeing in our DFS business. DFS is now the exclusive originator of the Dell EMC business and the preferred finance partner for VMware, which we expect to enable incremental revenue and profitability across our portfolio of solutions over time. In Q1, DFS originations approached approximately $1.1 billion and financing receivables grew to approximately $6 billion, up 19% year-over-year. As the DFS business grows so our DFS-related debt, which includes both allocated corporate debt and structured financing. I also wanted to comment briefly on the new consumption models we announced to Dell EMC World at the beginning of May. We are seeing growing customer interest in flexible consumption models, as they work through their digital transformation. We expect the impact of cash to be immaterial. To close, I want to reiterate what I said on our last earnings call and at the recent Investor Meeting. We remain committed to our conservative financial policy and overall capital allocation strategy. We continue to prioritize deleveraging and optimizing the balance sheet to a profitable growth and strong cash flow generation. Let me turn it over to David.

Thanks, Tyler. Overall, the Information Solutions Group or ISG performed well in its first quarter with our new go-to-market structure, as demand across the ISG portfolio grew mid single digits. While I was relatively pleased with the demand and overall revenue performance, we still have work to do to improve our execution in some areas as we move forward. I’ll provide more details on that in just a moment. At Dell EMC World in May, we announced major updates across our portfolio. These new solutions are designed to help our customers realize their IT and digital transformation goals, while letting them choose the pace and consumption model best suited for their organization. In servers, we enhanced our position as the industry’s leading vendor with our new 14G line that provides a more scalable business architecture, intelligent automation and integrated security. This new generation of servers is the bedrock of the modern datacenter creating a common platform that is essential in a server-centric software defined world. In hyperconverged infrastructure, we announced several updates to our portfolio, including a new VxRail 4.5 appliance, extend the capabilities for our XC series on VxRack Systems, as well as new flexible consumption models aimed at making hyperconverged infrastructure easier and simpler to acquire, deploy and manage. In storage, we announced a full lineup of new all-flash solutions, including the new VMAX 950F, which is up to four times faster than our newest competitor for mission critical workloads; XtremIO X2, with three times more capacity, 25% better storage efficiency and 80% better response times than the prior generation. We also introduced new Unity, SC and Isilon solutions to round out our midrange and unstructured all-flash portfolio. In data protection, we introduced a new turnkey integrating data protection appliance, which combined storage protection, search and analytics and easy to deploy solution. In networking, we introduced the industry’s first 25 gig E open networking switch for the software defined datacenter designed to go hand in hand with our new 14G services. Additionally, we enhanced our software defined storage solutions with new scale I/O and ECS updates. For full list of product announcements from Dell EMC World, please visit our website. Now turning back to results for the quarter. Total Q1 revenue for the IT business was approximately $6.9 billion with operating income of $323 million, or 4.7% of revenue. There are a couple of factors to note regarding our operating margin performance. First, consistent with historical trends, Q1 is typically the seasonally low point for the year and we expect operating margins to build through the year with volume. Second, we had some gross margin headwinds, including higher commodity costs and a mix shift between servers and storage. And third, the quarter was impacted by a backlog build and some non-cash charges from the decision to discontinue certain products. So overall, we were relatively pleased with our top line performance and we’re laser focused on improving profit margins in Q2 and beyond. Looking at results by segments, our server and networking revenue of $3.2 billion increased 5%. We remain the worldwide market leader in X86 server units, driven by our mainstream business, where we gained 200 basis points of unit share and 260 basis points of revenue share according to IDC. We continue to see strength in our mainstream PowerEdge business with units and revenue up double digits in the fiscal quarter, while a high volume cloud business declined. In storage, we generated revenue of $3.7 billion. To give you a sense of our performance, orders demand in fiscal Q1 was down mid single digits, a similar rate to Q4. As a reminder results from market research firms are based on calendar quarters, and the change in our fiscal year caused our calendar Q1 results to be void of a typical month three, as the quarter linearity shifted towards April. While we were pleased with the performance of our high-end all-flash, hyperconverged infrastructure and software defined storage solutions, we still have work to do in midrange storage. Our improvement in this space will start by taking advantage of the products we announced at Dell EMC World and by focusing on direct and channel teams on this market opportunity. We also plan to extend a lead across all-flash storage with the broad range of product announcements I mentioned earlier. All-flash demand in the fiscal quarter grew very high double digits, as customers modernize their IT infrastructure with our market leading solutions. Demand in our hyperconverged portfolio, including VxRail and XC appliances, as well as VxRack Systems continue to grow triple digits, driven by customer demand portfolio integrated solutions. Additionally, the early response from our new Cloud Flex consumption model has been very positive with initial interest exceeding our expectations. We also drove strong performance against the rest of our cloud strategy this quarter as well. Demand for our Virtustream public cloud for mission critical applications grew approximately 100%. And later this year, we’ll introduce a Virtustream addition of our Enterprise Hybrid Cloud to encompass mission critical worloads on-prem with seamless connections to Virtustream public cloud. We also saw growth in our Native Hybrid Cloud solutions, which are powered by Pivotal Cloud Foundry, the world’s most powerful software, the world’s most powerful developer platform and used by organizations to rapidly develop and run modern and legacy applications at startup speeds. In summary, I’m extremely excited by our position in the market and our ability to help our customers with the most critical IT translation needs. We had a solid start to the year in most parts of the ISG business with some work to do in midrange storage. Profitability will improve as we move through the year, driven by volume, mix and the removal of some of the factors the impacting Q1. With that, let me turn it back over to Tom, who will walk you through the Client Solutions Group.

Thanks, David. The Client Solutions business had a good quarter. According to IDC, the overall market was better than expected for calendar Q1. Worldwide PC unit shipments for calendar of Q1 grew by 0.8%, exceeding IDC’s forecast of a negative 1.8%. This was the first positive year-over-year growth quarter for the industry since calendar Q1 of 2012. We gained share year-over-year for the 17th consecutive quarter seen positive unit growth in every region. According to IDC, Dell outperformed the worldwide market in both notebooks and desktops and in both commercial and consumer. We will continue to take share in this consolidating market, but we will do this while balancing growth and profitability. Moving to fiscal Q1 results, revenue for CSG was $9.1 billion, up 6%. Both commercial and consumer saw growth in the quarter, up 3% and 12%, respectively, as we are seeing the benefits of improved go-to-market execution in investments that we’ve made in premium products and innovative form factors. Operating income was $374 million, down 3% on a tough compare and was 4.1% of revenue. The decline was primarily due to increases in certain component costs that were not – we were not able to fully offset through pricing actions within the quarter. We saw strong momentum continue across both high-end consumer and commercial notebooks as XPS and Mobile Workstations each saw double-digit growth and Latitude saw high single-digit. In addition, we continue to focus on driving higher attach of serviced and accessories, which also drive higher margins to our Client Solutions. Specifically, we continue to see higher attach rates for our ProSupport offerings for commercial client, and our displays business also had another solid quarter of revenue growth. We also mentioned during the Q4 call in the April Investor Meeting that we’re making investments back in the business in emerging growth areas. Specifically, for the client business, these investments include gaming, high-end notebooks and displays. In addition, we are expanding our consumer and small business focus to 12 countries, as we build on the momentum we’ve achieved from the five countries where this program was initially launched. As Tyler and David have both mentioned, we are starting to see a change in how organizations address their IT needs, looking for new and more flexible consumption models to balance operating expenses and capital expenditures. In the client space, we introduce the Dell Technologies PC as a Service solution, which combines the latest Dell Technologies PC hardware, software and end-to-end services including deployment, management, security and support, for a single, predictable price per seat per month. We were generally pleased with the performance of CSG this quarter, especially given the component cost environment. Going forward, we are focused on driving velocity in our commercial client business and expanding our customer base through profitable share gains. Now shifting to the VMware segment and other businesses. VMware had another strong quarter. Revenue from the VMware segment was $1.7 billion and operating income was $486 million, or 28% of revenue. We have started to see revenue synergies materialize as our innovation activities continue, and we see momentum across most of VMware’s portfolio that continued. Specifically, emerging technology saw strong growth, driven by vSAN and NSX. Revenue from our other businesses, which include SecureWorks, RSA, Pivotal and Boomi was $462 million. In the first quarter of fiscal 2018, Pivotal delivered strong top line results, primarily driven by its subscription software products, Pivotal Cloud Foundry and Pivotal Data Suite. The team’s momentum is being driven by new customer wins, increasing customer footprint and an expanding partner ecosystem, including deeper engineering collaboration with cloud infrastructure players. For example, in March 2017, Pivotal was named Google Cloud Technology Partner of the Year. The SecureWorks reported in their earnings release on Tuesday, standalone revenue was approximately $114 million, up 14%, as this business continues to focus on growing monthly recurring revenue. With the breadth of the Dell Technologies portfolio, we are uniquely positioned to win in today’s IT environment and meet our customer’s needs in their transformation journey. We believe our position is getting even stronger with our recent product announcements made at Dell EMC World and our new flexible consumption models offered to Dell Financial Services. In closing, we remain focused on executing our strategy and providing the right solutions for customers, as they move towards digital transformation. This was the first full quarter with a go-to-market changes and we made reasonable progress to-date. As a reminder, we discussed in previous calls that this transition could impact our results in the short-term. We will continue to refine our sales coverage models as we move forward. As outlined at the Investor Meeting in April, we’re focused on several key themes for fiscal 2018. We want to strengthen our position as the essential infrastructure provider for our customers. We’re a one-stop-shop that offers customers a single set of solutions to help them navigate through the rapid transformation occurring in IT today. We want to grow at a premium to the market across product and solution categories, including servers, storage and commercial client. As we’ve said for several quarters, we will grow our top line, but it needs to be profitable growth and it makes sense for the overall business. We want to accelerate and move faster in the emerging growth opportunity, such as all-flash, converged and hyperconverged and high-end notebooks and gaming. We will win in the hybrid and multi-cloud environment, which is the compute model of the future. We have great capabilities in reach and breath both from an infrastructure and from a management and orchestration perspective. We expect that customers will increasingly look for flexible solutions and as a service models, as they enable their digital transformation. And finally, we will continue to work on cost and revenue synergies in driving a successful integration as we move forward. We know, we still have work to do, but we’re optimistic about the opportunities ahead with the Dell Technologies family of solutions and capabilities. We expect improvement over the course of the year as we refine the alignment of our sales force and our go-to-market changes mature and as we improve storage velocity. Now, I’ll turn it back to Rob to begin Q&A.

Thanks, Tom. Let’s get to the Q&A. We ask that each participant ask one question with one follow-up if you have one. Regina, can you please introduce the first question?

Our first question will come from the line of Thomas Eagan with JPMorgan. Please go ahead.

Good morning. Thank you for taking my question. Let’s start with this. Tom, you talked a couple of times about investing back in the business. Could you expand on that a little bit? You talked about what sort of things you’re doing, but maybe if you could give us sort of a bigger than a breadbox idea of how much you’re putting back into the business? And where on the income statement, we’ll see that as mainly SG&A is it going to show up as some CapEx? That would be helpful.

Sure, Tom. Hey, I’m happy to do that. So, look, as we talked about at the Investor Meeting in April, and as we’ve talked about in the past, as we look at the areas of focus as we moved the company forward, there were a couple of incremental areas that we wanted to put some funding in. So if you think about the business units with ISG, we looked at it and have invested incremental dollars into the hybrid cloud and converged and hyperconverged capabilities and solutions. You’re going to see that in a couple of spots in the P&L, in the R&D spot, and the SG&A spot. We also have put money back into expand and accelerate Virtustream. And so that – those dollars are flowing in primarily in sales and primarily in some of the R&D capabilities that they’re accelerating. If you think about just business, the client business, we put – we’re putting money into the sales area in terms of the expansion of the consumer and small business, capability sales and marketing, I should say, as we move from five countries to 12 countries. We’re putting incremental dollars into its R&D budget and into this marketing budget around the high-end notebooks and around the gaming capabilities. So those are a few of the areas that we’re investing in. We haven’t quantified those investments publicly and by line item. But our expectation is, they’re in a sort of in a range between $150 million to $300 million over the course of the year, and we’ll throttle those and adjust those as we need to, given the dynamics of the business.

Okay, that’s very helpful. And then my follow-up question is on ISG. You mentioned softness in traditional hybrid arrays. So I wondered if maybe you could talk a little bit about why you’re seeing that? And if some of that softness is due to new products coming in and pushing aside some of the traditional sales, or is it more customers maybe mixing hybrid with more public cloud business? If you could just give us a sense of what you saw and why you think that was a little bit soft this quarter?

Yes, Tom, this is David, I can answer that as well. So let’s kind of step back and talk about their overall storage business we said that we saw demand on a comparable basis down mid single digits in total, as well as we are very pleased with. We like how we did in high-end, we like how we did in all-flash with very high double-digit growth rates. We like how we did in hyperconversion and conversion – hyperconverged combined, software defined storage was also strong. So the area where we didn’t do quite so well was that traditional mid-tier section, the IDC mid-tier price band, and we see a couple of things there. We do have two prop families in that space, we’ve worked hard to position them. We just introduced new versions of them, which is giving our customers and our partners a boost. We have our refocusing, our go-to-market teams on that mid-tier. We’ve got a channel program of focus on those opportunities. So we think it’s much more focused and clarifying our product range than it is a market area. We probably think the market for traditional mid-tier raising total of hybrid and flash is actually growing. So when we look at our overall portfolio compared to market, which is my comment, the mid-tier band for the traditional kind of file block storage arrays, combination of a hybrid and flash is the area we’re doing a little worse in the market, and we believe it’s due to the factors that we spoke about. As I mentioned, we have plans in place to address that. We just announced new versions of our mid-tier Unity platform, new versions of our SC platform that gives people a comfort that both platforms are being invested in. And we mentioned, we’ve got our sales teams focused. We’ve adjusted compensation a little bit. We’ve rolled out some more aggressive channel programs, and we’re also going out more aggressively to our big installed base across both of those families. So, those are the factors that kind of led to the comment relative to the market and also what we’re doing about it.

Okay, thank you very much.

Your next question comes from the line of Jeff Harlib with Barclays. Please go ahead.

Good morning. This is Jacob filling in for Jeff. Thanks for taking my question. I was wondering if you could provide some extra color on operating margins and the impact of higher component costs, particularly on the ISG side, margins were down roughly 7% sequentially. And we were just wondering if you could quantify sort of what portion was driven by higher component costs versus seasonality versus pricing? And then when it comes to servers, just wondering where you see your ability to raise prices going forward and sort of what the strategy is in that market? Thanks.

Hi, Jacob, thank you. Again, it’s David, let me take that. So let me kind of walk you through a little bit of a bridge from the 12 points of operating margin in Q4 to approximately the 5 points in Q1. The biggest factor about 5 points in total of that difference came from a combination of the volume trend, the seasonally volume obviously down from Q4 to Q1, particularly in the storage business, and the related mix that had on the overall income statement as storage became a small part of the business. But also very unusually for Q1, we actually built backlog in Q1. Think about a normal Q1, we would actually drain a lot of backlog, but given the changes from the fiscal to the calendar, we actually built backlog in Q1, that was a headwind compared to Q4. So the combination of that volume trend, or the mix related to it the backlog build were about 5 points of margin. And the rest came from a number of factors, the increased commodity cost that we talked about, some pricing impact in the market, and the impact of some of the one-time items I mentioned that related to the decisions we made to rationalize some products in Q1 So those are the dynamics that relate to the basically approximately 7 points of operating margin from Q4 to Q1. Relative to servers, we are moving and have been moving to increase the pricing. We’ve made a number of pricing actions in line with the component costs. So as Tom mentioned, there’s only a certain percentage of that that flows through in any period of time. A lot of customers have pricing structures in place that you can’t adjust until they take their next order, plus there’s a kind of competitive dynamic around who’s moving pricing and when. We do expect to continue to move pricing up in service. We’ve made a couple of actions this quarter. We think, we’ll probably have a bit more yield from that in Q2 than we had in Q1, because we’ve had a little bit longer to get in front of it, but that’s the dynamic that’s going on in the server pricing market.

Hey, David, maybe if I could add in terms of the component cost environment. I did mention that we have seen increases particularly in memory and SSDs, and to get – if you just look at spot year-over-year in terms of some of the memory, I mean, it’s up roughly a 100% year-over-year, and you’ve got SSDs up roughly in the 20 to the low 20s type of year-over-year. So there is a headwind out there in component cost. As David mentioned, we are – we have moved down pricing in a number of areas. But that is a – you typically can’t catch it fast enough. And that’s just an area we have to continue to focus on as we expect that those cost – that cost environment is going to continue to be a bit of a headwind as we go through the rest of the year at this point.

Yes, and this is Rob. I think it’s important to remember that when you’re in an environments where you’ve got component costs changing either in a deflationary environment or in an inflationary environment, there’s a lag effect. So we caught the benefit of the deflationary environment last year, and we’re pushing against that headwind in the first part and through this year. And so, as you think about this over a longer time period, we’re pretty happy with the profitability of the business. But you’re going to have some peaks and some lower points as you work through a rapidly changing component cost environment. So, we’ll lean into this and we feel pretty good about it over the longer-term.

Great, thanks. That’s very helpful.

Your next question comes from the line of Frank Jarman with Goldman Sachs. Please go ahead.

Great. Thanks, guys. Just to follow-up on that last answer, so as I understand it, the 5 points of margin was basically impacted by, it sounds like some one-time items, whether it was seasonal or some of the backlog issues you were talking about. And then 2 points of margin was impacted by this increase in costs – input costs. As you think about the rest of the year and these higher input costs, can you just help us better understand your ability to pass through some of these to the customer base? And is there a time at which you expect to sort of crossover with regards to being able to fully pass through all of these input costs?

Frank, this is David, again. Let me just go back and clarify what contributed to the 5 points and what contributed to the rest of it. So there are three factors that contributed to the 5 points. One was the sequential volume change in Q4 to Q1, that would – that’s a normal factor. That in turn impacted mix that drive margin rate. The unusual thing that was in the 5 points was the fact that we actually built backlog during a Q1, which we typically haven’t done prior to this. So those are things that impacted the 5 points. There are three factors again impacted the rest. One of which was the increased component costs. The other, which is general pricing pressure in the marketplace and the one-time items related to the product rationalization we did are in the rest. So just to clarify three things that made the 5 points, three things that make the rest. Now, back to your comments, I’m really going to pick up, where Rob left off. So in an environment, where component costs are increasing and continue to increase, there is clearly a balance here in terms of, we’re trying to push as much of that in through the channel and rate prices and make those prices stick. Customers, of course, don’t like paying more for what they paid for last quarter typically in IT that’s not being the case. Typically, in the IT industry, there are expected price decreases on a sequential basis, not price increases. So it’s a fairly complex dynamic here, where first of all for existing contracts, we’ve been going back and talking to customers about raising prices on their existing orders. That’s sometimes a challenging conversation, but in some cases, it’s a positive outcome, some cases it’s not. Then for the new orders, we are trying to get the right balance between increasing our prices just at the same time as our component cost increase vis-à-vis trying to get away in front of that, because we want make sure we maintain the momentum we have in the market. Bear in mind that in the server business, where this is the most acute area, we had a great quarter. We gained significant basis points of market share and we gained even more significant points of relative market share compared to our closest competitor. So it’s a definitely a balance here. We at the point at which those component costs stabilize, then all things kind of go back to normal and you go back to this environment, where hopefully they will start coming down again. But in this period where they’re going up, there’s a yield expectation as we talked about. A certain amount of the pricing increase will actually stick and yield the incremental return, others will not, because the customer either won’t go there, or somebody else in the market hasn’t increased their price and you wind up in a competitive environment. So those are the things that go into it. It’s not a precise science. But I just want to give you a bit more flavor as to the dynamics underneath it.

Yep, that’s super helpful. Just as a follow-up on the balance sheet debt reduction now since EMC is about $7.1 billion, as you mentioned earlier. It only increased by about $100 million in the quarter though. So I wanted to understand – obviously, you continue to prioritize deleveraging. But can you help us think a little bit more about the seasonal cadence with regards to how you are thinking about paying down debt? And any kind of longer-term targets you might be willing to share at this point? Thank you.

Yes, look, Frank, this is Tyler. So, I guess, starting with your last point first. I mean, nothing has changed in our desire to get back to investment grade metrics. And so, we are going to be very focused on working towards that. The timing, I mean, look, it’s going to be a little bit lumpy right. And some of this is going to be driven by the timing or interest payments, which happen in predominantly in Q2 and Q4, some of it is going to be the – our positioning for upcoming maturities. For example, in the first-half of next year, we’ve got some of the legacy investment grade stuff that’s coming off. So it’s not going to be a straight linear path. But I think if you, if I look forward at the end of the year, we are going to take more debt out. Now our kind of bifurcate or separate out DFS, because that that debt related to DFS, that’s good debt right. We want that business to grow. And we saw the good growth this quarter is that the originations grew. And so you mentioned a little bit of our debt going up. I mean, that was the result of the adding the additional structured financing debt. So without getting into which quarter are we going to pay down meaningful amount, just stay tuned right, because you’ll see this come off at a pretty regular pace over time.

And, Frank, look, it’s Tom, also remember that Q1 is seasonally our lowest cash generation quarter, given it tends to be our weakest quarter from an overall business philosophy perspective, as well as we typically see higher bonus-related payments and things like that in Q1. So we – our expectation was that, we weren’t going to do much from a debt reduction perspective in Q1. And I think we’re right, where we thought we would be at this point.

Absolutely. Look, if you look at our balance sheet right, I mean, kind of focused just on the Dell Technologies side ex-VMware. We ended the quarter with more than $6 billion. So we obviously have some room there. And like I said, some of this is going to be around positioning for whether the next quarter is larger interest payments. And we do have some areas, where we’ve got some trapped cash that we have to be focused on. This does include the cash that we used to fund our FABs right, so ex-VMware like Pivotal and Boomi.. And so that’s just the expectation that I will set and what you can see going forward.

Okay, great. Thanks, guys.

Your next question comes from the line of David Phipps with Citi. Please go ahead.

Hi, thanks for taking my question. And David, I guess, you get the bonus prize for questions today, because credit investors in Dell aren’t as familiar with the storage business, and I guess a lot of the questions are going to be around that. And so, we look at typical seasonality for the storage market, it’s like you were reasonably pleased with how the quarter went from the transition from the fourth quarter to the first quarter. And can you talk about how that seasonality plays out and through, because it sounds like operating leverage was the biggest factor in some of the margins and the margin decline in the first quarter of this year. And then maybe you could talk about the – how the sales force is adapting to what is now a Dell quarter end as opposed to a calendar quarter end and how – what kind of disruptions that made?

All right, David, thank you, and I appreciate the bonus question from your end. So storage, yes, much more seasonally variable than the server business, for example. So a fairly large ramp at the end of the year and then obviously a sequential decline in Q1. Typically, the storage business then builds up from there with Q2 being a fairly large uptick sequentially from Q1 to Q2, Q2 and Q3 being approximately the same absolute revenues, then Q4 being another uptick. So absolutely, David, to your point, as we go through the year, we do expect to see operating margins in ISG increase and they will be driven by a number of different factors. So we’re going to see that seasonal volume improvements, that in turn will create a mix shift back towards storage that will help. We expect that the backlog build that impacts in Q1 will kind of normalize out and hopefully backlog will not build in Q2 or Q3. It might build a little bit and typically does build in Q4, but it doesn’t matter because the volume levels are so high. We will across the business see the impact of pricing action kick in, which we talked about. I’m going to come back to the go-to-market question, because that will help drive and some of the one-time factors that we saw in Q1, we don’t expect to be there. So those are all things that will bode positive going through the year. Also related to go-to-market, I will come back to the specifics. We do expect to see total storage velocity improve as we move throughout the year as we expected it to from product announcements and also just from the vetting in of the go-to-market teams. Now to your question on the go-to-market side, obviously as Tom has talked about on prior calls, what we did at the start of the year in January was a fairly significant change. We went from two forces that were legacy Dell, legacy EMC, focused upon the way that they were structured and within those structures there were differences to two combined and integrated units. So one focused upon enterprise customers, the largest few thousand customers in about 20 different segmented countries and one focused on everything else. So there are a lot of moving parts in the sales force and not surprisingly that did cause a little bit of disruption. We had to get quotas out, territory assignment, planning, training people in all the new products. So we expected some impact in Q1. And actually when you look at it, I said that from an ISG point of view, demand grew at mid single digits in total. I’m actually quite pleased about that given all the things we changed in the sales structure. And the last comment you made was relative to moving towards the quarter end. We did see demand shift a little bit out of what would have been a calendar quarter to or fiscal quarter. So we saw the quarter end effect with more business in April than we saw in March, which would have been the traditional quarter end. The good news was that that was a bit more smooth in terms of less of a hockey stick if I can call it at the quarter end than it would have been when we were still tied to the fiscal quarters. So all in all, with everything else moving on, I’m quite pleased about that. The one comment I will come back to is, of course, that demand shift means we didn’t have a traditional month three in the calendar quarter. And when you see the IDC data this week market share things, we expect that to reflect the fact that essentially the quarter end moved into the next quarter and therefore year-on-year compares are going to be a little funky.

All right. That’s helps very much. Thank you. And can we talk just kind of on the overall component costs? You’ve mentioned it’s not due to typical that you go back to your clients and say, hey, memory prices are up for whatever 100% year-over-year and we’d like to charge you more sequentially. So two things. One, has the rate of increase on memory prices, has that slowed recently? And where do you peak out on the year-over-year ramp? It looks like it’s sometime in this quarter. And have you talked to some of your customers and maybe one of the things that’s happened when memory prices have changed, you’ve said, well, we will use a little bit less memory, or a little bit slower memory. So how has the management of all that process gone?

Hey, David, it’s Tom. Let me take that. So, I would tell you that from a taste of – you don’t have perfect clarity here. But our expectation is that, Q2 is the most significant move in terms of component cost increases. Although right now, we’re also looking into Q3 and seeing where we originally had thought it might stabilize and perhaps even potentially drop. It now looks like it’s going to continue to rise on us, but perhaps not as fast as it has been over the last quarter or two. So I think that we still have to – and all this obviously is a function of the demand supply balance out there in the market right. And so to the extent that, demand softens in some of the other areas, where memory is used and that perhaps will help us from a PC and server memory to the extent it stays strong. Then I think the dynamics are going to continue to be tight from that overall balance. So, it’s one of those things that we periodically go through from a cycle perspective. It’s been five or six years, I think, since we last went through one of these cycles, where we got into an inflationary environment, but that’s where we are right now. And again, that’s just part of being in this industry and we’re going to have to work our way through it. And so, look, I’m optimistic that we’ll manage our way through this. But there’s a lot of moving pieces here. In terms of your question on, hey, as you think about how do you manage your way through it, do you go back and talk to customers about perhaps de-scaling their memory inputs. And that’s – as well that would be a logical conversation that generally is not what we’re seeing. In fact, what we are seeing right now is increased memory on the units that are going out, given all of the demands of the application environment and workloads today. And so, it’s a bit of a double whammy if you think about it. We’ve got incremental component cost increases as well as you’ve got more memory on a per unit basis. And the combination of that is put some pressure on the pricing dynamic that you’ve got to work your way through. But that’s what we pay the organization to go out and manage their way through, and that’s what we’re all trying to adjust. So through all of the actions that David mentioned, whether it’s list price moves, conversation with customers about raising contract prices, all of those levers are being pulled in a balanced way, such that we don’t stall the business and that’s what we’re trying to navigate through.

Okay. Thank you. That’s all my questions.

Your next question comes from the line of Arun Seshadri with Credit Suisse. Please go ahead.

Good morning, everyone. Thanks for taking my questions. First, probably a question for Tyler. I just wanted to understand working capital for the balance of the year. Are we still pretty consistent with our, I guess, original expectations of some modest cash recovery from working capital for the balance of the year?

Yes, that’s exactly right. I mean, I think, look, I think last quarter if you looked specifically at DPO, it probably kind of unwound a little bit. And so you’re seeing some of that benefit come back this quarter. And then, look, in addition to that you’re starting to see really some of those working capital initiatives, you are seeing some of that flow through DPO as well. So, there’s always going to be some seasonality and fluctuations in how our working capital adjusts quarter-over-quarter. But to your point, I think, as you work through the end of the year, you will see some benefits coming in.

Got it. Thank you. And then just a broader question probably for Tom. Just wanted to understand, on the cost side, how are you – are you thinking about any sort of additional cost savings plans or sort of any acceleration on that front since it sounds like you’re expecting the margin from the component side to be a little bit sort of – continue to be sort of the elevated in terms of pressure for the back-half of the year? Thanks.

Hey, Arun. Yes, look, I mean, we’re on track on our synergy – on track on our synergy, given the actions that we’ve been driving. But the reality of our business is we’re always looking at costs. So it’s not like we set a target and we all go away and do something else, and I know you didn’t mean it like that. But we’re constantly looking at, are there other efficiencies we can drive, and what can we do to improve the cost structure. And so we’re continuing to look at that. We’re already into sort of the next generating planning around cost and what’s the activities we need to get at. So we’re monitoring sort of the status of the business as we move through the year, and we’re ultimately looking at how do we deliver operating income. And so, the levers you are pulling are around what kind of margin delivery do you have versus the cost environment. To the extent that things are moving around on us we will adjust as we need to as we go forward. So I’m optimistic on our cost programs, and we’ll continue to take a look at them and balance as we go forward.

Okay. Thank you.

Your next question comes from the line of Dan Fuss with Morgan Stanley. Please go ahead.

Great. Thanks for the question. You mentioned changing consumption models earlier, I believe, it was in the context of the hyperconverged products, if I heard correctly. But could you just clarify which products you expect to see kind of the most change in terms of consumption models? And perhaps, if there is anyway to quantify it, how much of the revenue base you could see this in?

Yes, Dan, let me start. It’s David. I will talk to you about kind of what we announced and where the product impact is. So we announced a couple of new programs. One is called Cloud Flex, which is a – basically a fixed and reducing monthly payment that applies to a hyperconverged system. So your right. Our XC series and VxRail very simple, customer signs up. We ship them the box, they have a 12-month minimum and if they don’t like it after 12-month they stop paying and return the box to us. That obviously puts that products on a ratable revenue recognition. There is another offering we introduced called Flex On Demand, which applies to things that we can meter or monitor. So it could be storage arrays, it could be our data protection appliance, et cetera. And in that environment, the customer basically is charged based upon usage. And then we do have the ability for certain situations to go to a full broader datacenter utility. If a customer wants to take their entire environment and put it into a variable mode. So those are the three things that we announced. And obviously, Cloud Flex applies to hyperconverged. The Flex On Demand is more storage and backup, and the datacenter utility could be a broader engagement across the full portfolio with a customer. And finally, our software license agreements, we also and we introduced some changes to those. We call them our transformational license agreements, or TLAs. They’re making it more flexible for the customer in terms of the customer’s ability to substitute titles and pay for maintenance. And they start using things rather than all up front. And that was applied to the software portfolio inside of Dell EMC. So those are kind of the four things that we rolled out at Dell EMC World. In terms of impact and timing, I’ll turn it over to Tom or Tyler.

Hey, let me also just also reference the fact that, as we announced that Dell EMC World, we also announced the PC as a Service model, right? And so, I think overall what we’re – which is the opportunity for customers for one monthly price per seat to get the hardware, the services, the support model, all wrapped into one price. And so we are seeing significant interest in customers thinking through how do they convert CapEx to OpEx, how do they provide more flexibility in their cost structure. And so all of the programs that David just talked about and the ones that and the PC as a Service are generating pretty good interest from a customer perspective. And so we’re happy with the receptivity, it’s early, the impact to-date is relatively small. And generally, they don’t have a significant cash impact. So – but we’re optimistic that there’s a framework here that is attractive to our customers in the sense of how do they manage their own economics even as they make their digital transformation.

Great. All right.

Great.

Sorry about that. I didn’t mean to cut you off. All good. We’re going to take one more question, Regina.

Our final question comes from the line of Steven Milunovich with UBS. Please go ahead.

Great, thank you. I wonder if you could comment on your ability to raise prices on PCs relative to servers? HPE has talked about trying to raise server prices, but having difficulty in the US and Europe due to price competition. And then I also wonder if you could comment your – you mentioned that your cloud volume business was weak. Is that specifically Hyperscaler, and is that temporary, or is that something that’s going to be more ongoing?

Let me take the PC comment and then maybe, David, you’ll take the cloud question. Look, I mean, the PC pricing dynamic first and foremost as all of you know right, it is a pretty competitive pricing environment out there. But having said that, we are – we have been able to move prices up right? Now, again, you get a yield effect right, because the quarter you do it, you don’t get the entire impact and you’ve got in our business, given the direct model that we have in many instances you have a pool of quotes out there that you have to work through. But we have been, I would say, reasonably successful and adjusting prices and that adjustment comes in a number of ways. One is, it could be less price, it could be the pricing authority that we give our sales organization and perhaps lowering that those discount thresholds a little bit to or adjusting those discount thresholds to narrow their pricing flexibility and/or. And in many instances it’s also about ensuring that we’re configuring the right product for the customer needs. And so, as much like the motion we have in servers, it’s a variety of actions that we’re driving here to manage our way through the cost environment. And so, look, we’re – again, I think this is just is a fact of life in the business that we’re in that every software are going to hit these cycles. And I think it’s going to be up to us to ensure that we execute our way through this in a way that manages the P&L as best as we can given the environment. And remember that we’re doing all the pricing adjustments while not wanting to stall out demand, because we are pleased with the velocity of the business and the PC business had a – the client business had a really nice quarter. And so we – the last thing we want to do is shut that spigot off. But we do want to try and feather this a little bit and since we’re trying to creep margin dollars up as we drive through the year. So that’s the activity we have going on, work to do. But and part of that will also depend upon how the component cost environment turns, behaves as we go through the year and since our overall success and being able to do that. David, do you want to address that cloud comment?

Yes, Steve, I do I think, you’re talking about the dynamics within the server business, where as I said, our mainstream PowerEdge business we saw units of revenue of double digits. We got – we gained significant share points in terms of 200 basis points unit share, 250 basis points of revenue share in mainstream. And as we said on the call, the high volume in terms of volume of servers going out, but still a small percentage of our overall server business, that business selling to the cloud hyperscale providers was down during the quarter. Bear in mind that tends to be lumpy and it’s also lower octane fuel, lower octane business than the mainstream PowerEdge. So those are the dynamics we talked about inside of servers if that helps.

Hey, David, let me just add one other thing on the PC space, which is – I failed to mention it. As we think about how do we manage margin, if you will, as we go through this, one of the things you’ve got to remember is that, we have an advantage with our direct sales force is our attach motion, right? So one of the things you also try to do in an environment like this is make sure that you are attaching extended service opportunities, SMP opportunities. And we saw a nice growth in both of our – in our attach rates both in the server space and in the client space in terms of ProSupport Plus, and we also saw good attach and good velocity in our displays business. So those are – again, as you think about how do you portfolio your way through some of these challenges you pull all the levers that are available to you.

Great. All right. Thanks, Tom, that wraps Q&A. As a reminder, we’ll be at the Barclays High Yield Conference today and tomorrow. We’re also at Goldman Sachs Leverage Finance Conference in a couple of weeks on the West Coast. So thanks for joining us today.

This concludes today’s conference call. We appreciate your participation. You may disconnect at this time.