Rob Williams - SVP of IR Tom Sweet - CFO Jeff Clarke - Vice Chairman, Products and Operations Tyler Johnson - SVP and Treasurer

David Eller - Wells Fargo Thomas Egan - JPMorgan Jeff Harlib - Barclays Karl Keirstead - Deutsche Bank Frank Jarman - Goldman Sachs Jason Kilgariff - Bank of America Philip Winslow - Wells Fargo

Good morning and welcome to the Fiscal Year 2018 Fourth Quarter and Year End 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 one year. 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 CFO, Tom Sweet; our Vice Chairman Products and Operations, Jeff Clarke and our Treasurer, Tyler Johnson We've posted our fourth quarter press releases and web deck on our website. I encourage you to review these documents for additional perspective. Full year fiscal 2018 financial results will be filed on Form 10-K on Thursday, March 29. I'd like to highlight a few items related to this quarter's results. Beginning in Q4, we now have fully comparable year-over-year quarterly results. So unless otherwise specified, all growth percentages refer to year-over-year change. Please note that Q4 of fiscal 2017 was a 14-week quarter as compared to this year's 13-week quarter in Q4. Also note that all financial results reported today are based on our historical revenue standard, ASC 605, and do not reflect the impact of the adoption of ASC 606. We intend to hold a separate call for investors in late April to walk through the impact of ASC 606 adoption and provide restated financial information. During this call, we will reference non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, EBITDA and adjusted EBITDA on a continuing operations basis. A reconciliation of these measures to its most directly comparable GAAP measure can be found in a supplemental material in our web deck and the tables accompanying our press release. Our Q4 non-GAAP operating income excludes - excuse me, excludes approximately $2.4 billion of adjustments and our full year non-GAAP operating income excludes approximately $10.2 billion of adjustments. The majority of these are non-cash and relate to purchase accounting and amortization of intangible assets. There will continue to be significant bridging items between our GAAP and our non-GAAP results for the next few years, although the impact will decline in each subsequent quarter. Please refer to Slide 3 in the web deck for additional detail on the non-GAAP – non-cash adjustments and the supplemental slides beginning on Slide 21 for more details on our total non-GAAP adjustments. 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. Finally, before I turn it over to Tom, I want to dress the amended 13-D we filed on February 2, disclosing that the Dell Technologies' Board of Directors is evaluating a number of potential business opportunities. This is part of our ongoing multiyear strategic planning, and we are doing this from a position of strength. We are leaders in 21 of the top market share categories, and we have leadership in 13 Gartner Magic Quadrant reports. As Tom will discuss in his remarks, we're in solid financial condition with the strong cash flow generation, and we have made significant progress on paying down debt. With that said, we will not address the filing any further or take questions related to this topic. Now I'll turn it over to Tom.

Thanks, Rob. I was pleased with our results for fiscal 2018 as we have made significant progress in a number of areas. We drove strong top line velocity, delivering revenue of $80 billion for the year, and we saw revenue and profit momentum improve as we move through the year, all while navigating through one of the toughest component cost environments we've seen. We delivered strong operating cash flow of $6. 8 billion and adjusted EBITDA of $8.2 billion, allowing us to make good progress on delevering, paying down $10 billion of gross debt since the closing of the EMC transaction. The teams did a good job on integration, and we're seeing strong coordination across the entire Dell Technologies family. This collaboration is paying off with better-than-expected revenue synergies and strong customer acceptance of our broad solutions portfolio. We increased our global coverage by investing significantly in our sales team and channel program, and we've made changes in the Infrastructure Solutions Group that Jeff will discuss in more detail. Now let me turn to results for the fourth quarter. GAAP revenue for the quarter was $21.9 billion, with a GAAP operating loss of approximately $320 million. Non-GAAP revenue was up 8% to $22.2 billion, with strong top line velocity for client, servers and VMware, along with improving demand for storage. Gross margin was $7 billion, up 6% and was 31.6% of revenue, which was down 40 basis points, driven by mixed dynamics within ISG given the strength we've seen in servers. OpEx was $4.9 billion, up 3% and was 22.1% of revenue, which was down 100 basis points as we continue to drive OpEx discipline across the business even as we selectively invest in growth opportunities. Operating income was up 15% to $2.1 billion or 9.5% of revenue, up 50 basis points. Adjusted EBITDA for the quarter was up 13% to $2.5 billion or 11.1% of revenue. Please see Slide 22 in the web deck for more details on our EBITDA adjustments. Deferred revenue was $22.2 billion, up $3. 6 billion year-over-year and up $2.2 billion sequentially, driven by growth in maintenance, flexible consumption models an extended warranty. Specific to flexible consumption models, we continued to respond to customers' request for choice in how they procure and utilize our solutions. Though the revenue and margin is not immediately recognized, these arrangements will provide a more predictable long-term recurring revenue and profit stream. Before I jump into segment results, let me make a couple of additional comments. First, as we've seen in prior years, Q1 is typically down sequentially given the seasonal patterns of the business. We also see a use of cash in the first quarter given historical seasonal patterns. Looking at historical trends, we then build momentum through the remainder of the year. Second, I also want to touch on tax reform. As you know, a comprehensive tax reform bill was passed in December. We view tax reform as a positive for the overall U.S. economy and IT spending. Due to the complex nature of the tax reform bill, it requires extensive tax analysis, and the government continues to issue guidance and clarifications. Today, I will provide our estimates of the impact that are based on our current analysis of the new tax rules. During the fourth quarter, we recorded a benefit of $316 million for the net impact of tax reform driven by a benefit of $1.3 billion related to the re-measurement of deferred tax assets and liabilities, offset, in part, by current and future income tax expenses of approximately $1 billion related to the transition tax. The cash tax impact to the repatriation total charge will be substantially offset by other tax attributes. Going forward, we continue to evaluate the impact of tax reform on our effective tax rate. Given what we know today, our expectation is that tax reform will not materially change our effective tax rate as the positive impact should roughly offset the negative impacts when fully interpreted and implemented. Now let me give you a summary view of the financial performance of our business segments for the fourth quarter. Revenue for our Infrastructure Solutions Group was $8.8 billion, up 5%. The revenue increase was primarily driven by servers and networking, which were up 27% to $4.6 billion. Servers delivered its third consecutive quarter of record revenue, with double-digit growth from both PowerEdge and cloud servers as we continue to see strong demand for PowerEdge servers along with ongoing expansion of our server average selling prices. Storage revenue was $4.2 billion and was down 11%. But for the first time since the transaction closed, storage demand grew year-over-year. One of the drivers behind the variance between demand and reported results is due to deferred revenue primarily related to maintenance and our flexible consumption models. We are encouraged that we exited the quarter with better storage velocity on a demand basis, and we expect a gradual recovery over the coming quarters as the actions and investments we put in place this year gain traction. Operating income for ISG was $748 million or 8.5% of revenue, which is a 350 basis point decline over the prior year, primarily due to a higher mix of servers and, to a lesser extent, higher component costs. We are focused on improving the overall profitability of the business, balancing velocity and profitability in servers while growing storage and data protection. Revenue for our Client Solutions Group was $10.6 billion, up 8%, driven by higher average selling prices across both commercial and consumer and double-digit growth in client, software and peripherals. Commercial revenue grew 9% due to average selling price expansion for notebooks and workstations, as well as double-digit revenue growth in displays. Consumer revenue was up 6%, driven by growth in average selling prices for both notebooks and XPS products. CSG operating income was up 70% to $581 million, which is a - which was 5.5% of revenue, as the team did a good job of offsetting component cost headwinds through repricing and also focused on attaching higher-margin services in S&P. VMware had another strong quarter. Revenue for the VMware segment was up 20% to $2.3 billion and operating income was $834 million or 35.8% of revenue. Revenue from our other businesses, which include SecureWorks, RSA, Pivotal and Boomi, was $492 million, which was up 3%. Now turning to the balance sheet and capital allocation. We had strong cash flow generation in Q4 as cash from operations was $3.1 billion, predominantly due to improved overall profitability and the seasonal increase in maintenance and services contracts, which are paid upfront. Our cash and investments balance was $20. 3 billion, up approximately $2.3 billion versus the prior quarter. On the debt side, since closing the transaction, we've paid down $10 billion of gross debt, excluding DFS debt, and remained fully committed to delevering the balance sheet. During Q4, we paid down approximately $300 million in debt, ending the quarter with $52.7 billion in total debt. Total debt is $200 million higher than the prior quarter due to an increase of approximately $450 million in DFS debt. Core debt ended the quarter at $39.9 billion, down from $48.8 billion at the time we closed the EMC transaction. As a reminder, core debt excludes DFS-related debt, unrestricted subsidiary debt and the margin loan and is aligned with how we present the capital structure to the rating agencies for leverage discussions. For additional detail on what is included or excluded in our debt balances, please see Slide 9 of the web deck. Demand for financial services is strong across the Dell Technologies family. In Q4, DFS originations were approximately $1.9 billion, up 23%. As of the end of fiscal 2018, financing receivables now stand at $7.6 billion, up 30%. As we've discussed on prior calls, the growth in financing receivables drives an increase in our DFS debt as we continue to fund the business. Now let me turn it over to Jeff to walk you through the operational highlights of CSG and ISG.

Thanks, Tom. We ended the year on a high note, with improved performance across the business in the fourth quarter. Client, servers, hyperconverged infrastructure and our all-flash products have continued the strong growth trajectory we've seen in prior quarters, and we saw improvement in the traditional storage demand as we exited the year. Since we last spoke in December, we've already made changes that set us up for success moving forward. We simplified the ISG organization, aligning leaders and product categories more effectively for improved speed and accountability. We've already started to simplify our product offerings in how to go to market. For example, we will be aligning our software-defined storage strategy to vSAN, offering VxRail and VxRack SDDC. We started shipping the enhanced mid range storage products we announced in November and expanded the Future-Proof Storage Loyalty Program to all of our storage products shortly after it launched. Lastly, we've increased collaboration across our strategically aligned businesses to leverage our selective strengths and to build better solutions for things like cloud, software-defined storage, software-defined data center, infrastructure as a service and hyperconverged infrastructure. A simpler organization with simpler portfolios and targeted solutions means faster decisions and faster innovation. It also promotes faster go to -- it also promotes a faster go-to-market engine, benefiting both businesses and our customers. Looking at the full fiscal year 2018 results for ISG and CSG, they were solid overall with a few areas that we are addressing. External feedback has been positive, with a survey conducted by IDC finding that 91% of customers say that Dell and EMC have delivered on our pre-merger promises. It's clear the Dell Technologies' value proposition of leading the digital, IT, security and workforce transformation is resonating with customers, partners and industry analysts. We recognize that we have some areas that need focus, and we are working to improve as we move into FY '19. Let me touch on some of the highlights. For the full year, CSG delivered excellent results, reporting revenue of $39.5 billion, which was up 7%. Operating income of $2.2 billion was up 19% and was 5.6% of revenue. We had a record holiday season in consumer, and the investments we've made in clients are paying off as premium notebooks, including workstations, latitudes and XPS, all grew-double digits in FY '18, and we saw double-digit growth in demand for gaming and rugged notebooks. We received a record-high 87 awards at CES this year, which was our fourth year in a row of setting a record. In calendar Q4, we delivered our 20th straight quarter of year-over-year worldwide PC unit share gains. That said, our growth premium has slowed the past two quarters. So we're focused on driving higher relative unit growth in a consolidating market while maintaining profitability in FY '19. As Tom mentioned, client S&P saw a good growth this year, driven by double-digit growth in displays and also in peripherals, which includes items like docking stations. Dell continues to be the number 1 display provider in the world and gained 110 basis points of unit share on a year-over-year basis based on calendar Q3 from display search. ISG performance was mixed this past year. Revenue for the fiscal year was $30.7 billion and above our expectations while operating income was $2.2 billion or 7.1% of revenue, which was below our expectations. Servers and networking revenue was $15.4 billion, up 20%. FY '18 was a record year for servers for revenue and units. It was the second time we've shipped 2 million servers in a year. Q4 marked the third consecutive quarter of record revenue, and we continue to see strong unit growth for both PowerEdge and cloud servers. We saw higher ASPs for servers as we continued to see more richly configured servers, the ramped up 14th [ph] generation PowerEdge server, and we've effectively managed pricing to partially mitigate the ongoing memory cost inflation. In Q3, we became the worldwide leader for x86 servers based on both units and revenue, and we finished the calendar year at the number 1 spot for both categories for x86 according to IDC. This is the first time since we've entered the server market that we've been the undisputed market leader. Moving to storage. Revenue was $15. 3 billion for the full year. Our market-leading hyperconverged portfolio saw triple-digit demand growth with strength in VxRail while demand for our Isilon scale-out NAS and our all-flash arrays grew double-digits over the year. Our all-flash business exited the year at a demand rate of nearly $5 billion, and we remain the undisputed leader in all-flash arrays with nearly one third of the worldwide revenue market share. As we've discussed on previous calls, traditional storage and data protection were challenged, both on a financial results and market share, and we are laser focused on improving this business. We made investments and have implemented action plans over the past few months to improve storage growth, particularly in midrange, and we expect the benefits of these actions to materialize through the next year. Looking forward, we want to build on the momentum and velocity we've seen while we continue to drive hard against the operational improvements. Our priorities for FY '19 are to continue to deliver world-class quality and service; reduce the complexity of the portfolio - or excuse me, reduce complexity across the portfolio; accelerate storage and data protection velocity; maintain server velocity while improving profitability; ramp sales productivity, which will be a multi quarter journey; and accelerate client unit velocity with market consolidation while maintaining profitability. The technology and market trends plays directly into our hands and we're positioned to win. We have the right strategy, the right team and an unmatched portfolio to lead our customers on this journey through their digital future. With that, let me turn it back over to Tom.

Thanks, Jeff. We made solid progress and leaned in some challenges in fiscal '18. Overall, we feel good about our performance against the four strategic goals we laid out at the April Analyst Meeting. We made strides to drive client, server and services velocity and grew at or above market in multiple areas of the business. And the team navigated through some tough component cost headwinds. We generated strong cash flow and successfully delivered working capital efficiencies, allowing us to make great progress on delevering the balance sheet. We are well into the integration efforts, but we still have more work to do related to product positioning and solutions, as well as systems and tools. Finally, we brought the full capabilities of Dell Technologies to customers in a more comprehensive and seamless experience and this is resonating with our customers. As we move forward into fiscal '19, we want to continue to execute our strategy in order to fully embrace the opportunities we see. We believe the macro environment and the IT market are setting up to be stronger as global economic sentiment has improved and GDP expectations have grown. The U. S. tax reform changes has had - have had a positive impact on expectations for capital expenditures, and customers are being driven towards digital transformation, which requires more compute from the edge to the core to the cloud and requires more capacity, storage, data protection and security, all of which are good for our business. We must improve a few areas of the business to strengthen our position and take advantage of these factors. With that in mind, let me outline our four strategic areas of focus for fiscal '19. The first is to have a change that much from fiscal '18. We want to continue growing above the market and drive share gains, with particular focus on storage and client. And we have to continue to generate strong cash flows and delever the balance sheet. The third goal is capturing the priorities that Jeff outlined during his remarks. We need to drive profitability in ISG as we balance server velocity and profitability and accelerate storage and data protection velocity. The last goal is to continue to delight customers by listening to and addressing their needs for their digital transformation journey through our full range of capabilities. In closing, we believe we have the right strategy and given the market trends, we feel good about our position headed into fiscal '19 as we focus on executing the business model and serving our customers. With that, I'll turn it back to Rob to begin the Q&A.

Thanks, Tom. Let's get to Q& A. [Operator Instructions] Regina, can you please introduce the first question?

Our first question will come from the line of David Eller with Wells Fargo. Please go ahead.

Good morning and thank you for taking the call. You know, performance was very strong in the CSG segment, and I was wondering if there were any onetime items in the operating income? In the past, there have been settlements and things like that, that have helped.

Hey, David, it's Tom. No, there were not. It was just a pure performance-oriented quarter based upon the execution of the team did principally around pricing and the work that they do to ensure that with the component cost dynamics that we had, that we were pricing properly and ensuring that we had value for our solutions. So no. In terms of one-ff, not really anything there in the quarter.

And David, I would add to what Tom said that good performance in our commercial PC, good performance in our premium notebooks, rugged, XPS, the gaming side, and those all bring good margin profiles to our business, so we did execute quite well in Q4.

And your cat [ph] mentioned was better, Jeff, in terms of when you think about displays and some of those services attached…

Plus I'll say our display business continued to do quite well and then our accessories business, particularly around docs [ph] was an opportunity for us with that notebook performance to drag along more revenue with our attach, attach, attach.

Okay. That's very helpful. And then you laid out your focus areas for FY 2019 on Slide 18. That was very helpful. But could you take a step back and maybe just frame your market expectations for each segment for the coming years? So the competitive environment, where we are in the cycle for each?

Well, let me start, and then Jeff will probably give you some more insights. So as we think about the business for the coming year in the market segment, so, look, if you think about PCs, for instance, right, you would - IDC would say that the market in calendar ‘18 is roughly a minus 1.5, 1.7, although commercial client - commercial will be up marginally. So pretty much sort of that status quo, what's been going on in the market of late. On the server market, particularly in the mainstream servers, IDC says 2.1% growth for next year, which is slightly down from where it is - where it ended in the fourth quarter or, I guess, it's flat with the fourth quarter. In terms of where we are, in terms of those cycles, and I'll get to storage in a second. So look, we feel pretty good about the velocity in the server business right now. I mean, there's clearly a - we believe that the industry dynamics and trends are coming our way around more compute-centric platforms. Also feel really good about where we are with our PC offerings and our commercial client offerings. And as Jeff mentioned, the thin and light, the gaming capabilities, the XPS products in the new latitude lines, and so we feel like we're pretty well covered there. The market looks relatively stable. The macros look relatively stable. So we'll have to see how that progresses. In the storage market, and maybe Jeff can add some insight there for us, is it's forecasted to be about a flat market, although you're supposed - IDC would say there's growth in the midrange and continued softness on the high-end, although not as soft in the high end as it was this year. So that's clearly an area of focus for us as we position and think our way through how do we drive storage velocity and get production velocity, so...

No. Tom, I think you hit all the right points. We would look at PC growth to be in the low negative single digits; consumer, more negative; commercial, slightly positive. Commercial notebooks being the shining spot of the PC business, which we have tremendous focus on. I look at the x86 business to be - x86 server business to be in the low single digits of positive growth. The storage market, as Tom said, is roughly flat. So our external storage marketplace is there. Within that, I think there is clearly the midrange that Tom called out and also the all-flash growth opportunity, which we are a market leader in that category. And then the hyperconverged category continues to grow in low double-digits.

Thanks for taking the question.

Our next question comes from the line of Thomas Egan with JPMorgan. Please go ahead.

Good morning. Thanks for taking the question. I'm not going ask anything about your amended 13-D. What I'd like to do is ask you a little bit about prioritization. How you think about prioritization and where you want your cash flows to go given the status quo? You've got the bulk of the cash is at VMware today? The bulk of the cash from operations is being generated by VMware today. And you've got some debt coming due, and you've also got the tracking stock, which looks pretty attractive because it's selling at such a discount. Then you probably got some changes in how you have to pay taxes given some of the changes in the tax laws and repatriation of some of that cash. So could you just try to give us a holistic view, Tom, of how you're prioritizing debt repay down? Binding and tracker? Paying taxes? And where you think you're going to be able to get that cash from to do all of those things?

Tom, let me -- I'm happy to address that, and let me just start with us. We think about our cash flow from operations, which was roughly about $6.8 billion this last year, $3.2 billion of that was VMware. So roughly $3.4 billion was the core Dell, Dell EMC. We do expect, and we don't give guidance, but we do expect that, that will continue to expand as we continue to execute on our storage on strategy and as we continue to execute on some of the priorities that we laid out in the call. As we think about our priorities, they really haven't changed, which is you know, it's not just cash flow from operations that have helped us. We've also driven great efficiency off our balance sheet from the working capital initiatives that we've driven. And as we think about priorities, it's going to continue to be primarily a delevering priority. So I don't really think there's a big change in strategy from what we've been doing over the last 18 months or so. I will tell you that as we analyze it today, the tax impact - the tax reform impact from a cash perspective is relatively minimal and very manageable. And so that, at present time, is not a significant driver or causing us to change or rethink our strategy. So we have about $8.5 billion of cash and investments at our core Dell, Dell EMC if you exclude the VMware cash and investments. That's more than enough to help us manage our way through current maturities, continue delevering even as we think about how we drive future cash flows from operations. So I'd really think my priorities are relatively unchanged that we're committed to delevering the balance sheet. We're committed to getting back to sort of investment-grade like metrics. We'll do that over the right period of time even as we invest back into the business. And so that's sort of our current thinking. And maybe I'll ask Tyler to comment on if he's got any other insights or anything you would add to that, Tyler.

Okay. I think you really said it all. I mean, Tom, the same thing we've been saying essentially the beginning of call [ph] on the EMC transaction that we're going to delever. We've paid down $10 billion. Tom talked about the $8.5 billion that we have on the balance sheet and where we added the balance sheet in Q4, which is excluding VMware cash, which puts us in a very healthy position as we kind of go into next year and with the roughly $4.5 billion that we're planning on paying down. We've talked about that, but we're going to use cash in the balance sheet. We might have to dip into our revolver a little bit, but that would be only for short term to manage some gaps in timing. And so it was a strong cash flow quarter in Q4. I feel really good where we ended up. And as it relates to tractor, I mean, look, we'll continue to be opportunistic around that as we have in the past, but deleveraging really continues to be our focus.

Okay. Thank you. That's helpful. And then for my follow-up, on storage. The turnaround in demand seems to me to be a pretty important point because it's been sort of the thorn in your side since you've done the EMC deal. And I wondered if you could just give us - can you give is a little bit of color about some parts of it? But if you're saying that demand is up year-over-year for the first time, that strikes me as being pretty important. Could you talk a little bit about maybe just give us a little color around on that. Like what total demand was? How you're measuring demand? Is it dollars? And then what may be the deferred revenue increase was? Because obviously, we can't see it in the GAAP revenue? Thanks.

Yes. Look, Tom, I'll probably ham and egg [ph] this one. Look, it is encouraging when you look at our orders demand in Q4, the exit velocity. I would use the word encouraging. We haven't set a trend yet. But we think the hard work that we put in place, the fact that we've added capacity, that we've improved our product competitiveness, that we've increased the speed in our decision, customer loyalty program that we put in place at the very end of last year is beginning to pay dividend. So we're encouraged. You saw the Q4 market share data. We have work to do. It is, without question, something Tom and I have tremendous focus on in the organization to change the performance of our storage business. And again, we've exit the fiscal year with a bit of encouragement. We saw good performance in our HDI business. We saw good performance on our all-flash business, and that encourages us to where we think where we're again have expectations of a better year. We've built our plan in FY '19 as a take share plan, as a growth plan. And we've set the tone in the organization that we are expecting to grow in the external storage business and take share. Tom?

I think that's right, Jeff. I mean, in the comment around the fact that we said our plan around a take share plan is consistent with how we think about generally our business in the other lobs, for instance, right? I mean, in some of these markets, which are consolidating markets, you have to take share. You have to grow, and Jeff has been very focused with his ISG team on how does he position both the product and the offer and the selling motion to be aligned to take share. We also have to think about the fact that our selling models are changing a little bit or the types of consumption models are changing a little bit around things like flexible consumption. We're now offering customers more choice in how they contractually work with us, and a lot of them are wanting more flexibility, and typically, when you provide flexibility in some of these contractual arrangements that you end up deferring revenue. And so we did see pretty strong growth in our - really strong growth in our deferred revenue, and that was mostly storage related as it relates to the ISG side of the business. And so that's why for the first time, I think you saw us talk a little bit more around deferred revenue and talking points just because I'd like to sensitize you guys to the fact that the models are changing some right now. It's not going to happen overnight, and we'll see what the natural sort of framework looks like in terms of how big some of these offerings get. But between flexible consumption models, utility models as a service type models, there are some dynamics out there in the industry that - and with the customer environment, I should say, that are changing. That doesn't get counted in IDC share, but it does sort of count in some of the order demand data that Jeff is talking about. So let me just finish with - I'll echo Jeff. We are encouraged. We're not confused about what we have left to do. There's a lot of work left to do. We have work to do ensuring that we, one quarter, this instance becomes a trend over time. And Jeff's done a lot of work particularly in the midrange offering. We've got more work to do there. That's growth area for us that we need to attack and ensure that we're taking our fair share of that marketplace. So that's the work we have in front of us. It connects back to your first question, which is we're very focused on storage. It's a strong margin profile for us, so it drives good cash. And we need to get it growing and going in the right direction.

Tom, I'd add one thing. I think you'd agree with this, and we talked about it in the last call. As we head into FY '19, we've really honed in the compensation plan for our sales force to focus on storage in FY '19. And I think that is a key difference between our FY '18 performance and what we'll achieve in FY '19.

We clearly have put more dollars at risk as it relates to storage market. So they need to sell storage too, due to their plan.

Great. Thank you.

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

Hi, good morning. Just -- I just want to talk about margins. As you look into that next fiscal year, some of the puts and takes, I mean, the $2 billion cost-savings program I think you had said that will be done fiscal 2Q. You're also reinvesting, which is somewhat of an offset. And then you have some mix challenges across the business with better servers. And then on computing, it seemed to be the last two quarters trending solidly above your prior margin target. So maybe just an overall discussion on margin puts and takes and outlook?

Hey, Jeff, it's Tom. Let me start, and then I'll let Jeff jump in here as well. So look, I mean, we obviously don't give guidance around margin. So let me start with that. But as we think about the environment, let me give you a couple of thoughts. First, as we've talked about, fiscal 2018 was a pretty tough component cost environment. And I think I'm publicly on record is saying that the absolute swing from FY '17, which was a deflationary environment to an inflationary environment in FY '18 was roughly about a $2.5 billion swing that we had to go adjust pricing for or navigate our way through. So - and what you saw as we think about our fiscal '18 results from the first half to second half, as you saw us in the first half dealing with a lot of that inflation plus the go-to-market implementation. And then you saw the business accelerating as we went through the year to the point where we felt reasonably good, not around some of our exit velocity as we got through the Q4. So component costs will not be as big - as we understand it right now, will not be as big of a headwind as it was the last year and perhaps it's even a slight tailwind. We'll have to see how we - that progresses through the year. We think that's helpful from a pricing perspective, from pricing medical perspective. So that's a positive from margin perspective. Look, it's competitive out there from pricing perspective. So we're always going to be competitive and make sure that our - we've got the price point set properly. From a mix dynamic, if we go execute our plan, if we go execute our plan, you would think that you would see some margin help there from the storage and data protection because that's high-margin products and solutions, and so that's a focus area for us as well. Servers is going to be an area that we set on our top track that while we're extraordinarily happy with the velocity of servers, we've got a little bit of work to do around improving some of their gross margin dollar contribution there. And so that's a focus area for us. So look, if anything, it's about how we go execute next year. And so I think margins have an opportunity to be better, but there's work to do to make sure that we go execute around that model. So Jeff, I don't know what you would add.

Maybe a couple of points though. One on - we'll start with CSG. We're going to try to maintain the profitability that you see while increasing the unit velocity. While we did achieve 20 straight quarters of year-over-year share gain, our unit velocity slowed in the second half of the year, and that's a priority of the organization to pick up the unit velocity while maintaining the same level of profitability. And we believe we can do that with our bias towards commercial and our attach[ph] motion where we can drag peripherals, services and financing with each purchase. We have a unique ability to do that, so I'm encouraged there. I'm also encouraged where we're winning, which is as I mentioned earlier, in some of the premium price bands, the premium categories, latitude, commercial notebooks, precision workstations, XPS, rugged notebooks and our gaming categories. Displays is a great business for us there. We continue to be the market leader. And we are working to expand that position as we head into this fiscal year. On servers, I don't want to slow down. Our mix issue in ISG is not an issue, servers grew too fast or mix issues didn't grow storage enough. So we want to continue to grow servers and take advantage of the opportunity of access to new customers that we did not have before. That the benefited the EMC acquisition has given us access to enterprise customers that we did not grow in, and we want to continue to do that. And then at the end of the day, I have to drive storage growth. Storage growth will change the fundamental composition of the ISG profitability. In [indiscernible] terms, I guess, I need to sell a lot more 60% gross margin than things than we are today. And by doing so, we'll lift the aggregate ISG portfolio. Does that make sense?

Yes, great. That was very helpful. And that my follow-up would be just on the free cash flow. The core Dell free cash flow of about $2 billion was very strong in the quarter, well above what we were modeling. I'm just wondering if there are there unusual? I know there's seasonal benefits. Any unusual timing issues of some of these kind of permanent changes you've made in your processes? And then just to follow up on that. The flexible consumption models, how do you see them - the shift to that, how do you see them impacting cash flow over the next year or 2?

I'll start, and then Tyler can probably answer it more intelligently than I can. So look, there really wasn't - as we think about free cash flow other then some of the standard of working capital dynamics we get out of a strong, stronger demand and shipment quarter, there really wasn't anything unusual in that other than the one comment I would give you is we were pleased with the deferred revenue growth, right? And in many respects, that deferred revenue growth drives from - whether it's from whether prepaid maintenance or some of the flexible consumption models drove the - drives cash up front and. But it all comes down to -- when we drive velocity through the business model, whether that's through PCs, servers and as we continue to build velocity in storage, we get the effects of our a very effective and efficient use of working capital. So nothing unusual other than deferred revenue. As it relates to flexible consumption models, look, we're going to - it's a careful balance, right? Because we like the flexible consumption models in the context of they're typically multiyear arrangements. They typically build a better and stronger and deeper customer relationship. They're generally quite profitable over time. But the opposite, these have some short-term P&L dynamics as you work your way through that even in some instances, particularly with some of our licensing arrangements where we get the cash upfront. Utility models are something different where we get the cash [indiscernible] on a subscription basis per se over time. So they're going to continue to grow. In many respects, we want them to grow. We just want to make sure that we have the right balance in terms of the mix of our business to properly manage both our cash, our P&L commitments and our relationship with our customers. And we also have some new and emerging businesses that are continuing to grow quite fast like I think about Pivotal, a Boomi, an RSA where their business model is, in many respects, are subscription based models. And so we'll continue to see some elements of deferred revenue growth coming from some of those new and emerging businesses. Would you add anything to that?

Yes, look, I think you covered it. I guess, the only thing I would add, and Jeff maybe just kind of reinforcing and agreeing with what you said, right? Like depending on how you calculate your free cash flow, when you take into account that we had a $600 million impact from growth in our financing receivables, we paid out $900 million approximately if interest expense. It was a really strong Q4. So really happy about where we ended up

Thank you.

Your next question comes from the line of Karl Keirstead with Deutsche Bank. Please go ahead.

Thanks very much. So if this question pushes too close to your 13-D filing, I'll understand. But I wanted to ask you in general how you view the protection of DVMT shareholder rights? How important is it to Dell to treat this constituency fairly beyond any current business combination review? Just in general. Thank you.

Hey, Karl, we'll have to defer on that question. If you want to take another question not related to the 13-D, the amended 13-D, we'd be happy to take it.

Got it. Okay. I will follow-up with one financial question, and that is we are in a rising interest rate environment, and I don't think your financial results disclose necessarily an interest expense. But maybe you could just offer a little bit of context around the portion of debt that's variable. And if there's any color you can offer in terms of exposure to rising interest rates, maybe there's a rule of thumb that might help us on the modeling front, much appreciated?

Hi. This is Tyler. I mean, look, the - we look at our capital structure really kind of from broad perspective, right? So actually do have a target around floating rate debt. I think the floating rate debt over time actually outperforms fixed-rate debt, and our floating rate debt now is roughly about 27%. Because if you go back and look at what we've been paying down since the close of the transaction, it really has been floating rate. I probably target somewhere between 25% to 40% floating. So we're actually at the lower end of that range. So feel very comfortable about that position. And yes, even though the LIBOR is higher and that piece of interest expense is higher, if you take into account the debt we've paid down, the repricings that we've gone through, we've more than compensated. So our actual overall annualized interest expense is lower than where we closed the deal, and that will continue to be driven down. I mean, once again, we're looking for, to this year to paying down, call it, $4.5 billion to $5 billion. And so we'll continue to take interest expense out of the balance sheet.

Right. Thank you so much.

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

Great thanks for taking my questions guys. I guess I just wanted to focus again on the revenue growth and specifically the ASP's. I think you said they were higher, but can you give us any more granularity specifically maybe in kind of think about storage versus servers versus PCs and really what the component is related to the higher component costs. With regards to how you guys are passing that on versus what you're seeing sort of more broadly across the business as well? Thank you.

Let me start maybe Jeff can add some comments. And look I mean we did talk about that a lot of you know some of the revenue growth was driven from ASP or a pure TRU [ph] expansion and principally as a result as you know typically in peak season servers we had a higher input costs in terms of the component cost environment. So we you know, we generally try to price our way through that to ensure that we cover it off. But also, well, I won’t give you exact percentages, I also want to echo what Jeff said around, as we think about our revenue velocity in PCs and servers in particular. Well we're overall very pleased with that. We are careful as we think our way through how much was ASP driven versus how much was units driven. And So you know for instance in servers where revenue growth is roughly about 22% you know, if you think about how we should know the unit shipments over half of that revenue growth is driven by TRU expansion versus units and that's what we want to think our way through in terms of how do we balance that, in PCs as much the same. If you think about our PC business being up 7% from a revenue basis and here is been roughly you know 2% to 3% or something like that. So we know that we've got ASP expansion there. The question is can you hold onto it as a component cost change that will be a function of the competitive environment as we go forward. So it's a dynamic we watched pretty carefully. ASP within the storage businesses are really sort of a different thought process. We don't really think about it like that. The configurations are so different from calling offerings and software that software - that's embedded in it, so ASPs are a little less. We don't think about velocity in the same ways as it relates to ASPs in the storage business. Jeff, did I missed anything or would you highlight…

I would add if you start with the CSG business, the dynamics of our revenue growth are a combination of - you hit them pricing efficiency, mix exposure to commercial, exposure to notebooks, exposure to premium notebooks. So mix helps us, as well as our attach [ph] motion of attaching more financing services and peripheral speech opportunities, so that helps us on the CSG side. I think that's sustainable. On the server side. We are in the longest protracted DRAM price increase that we've seen in the last 25 years. Combine that with that we're putting more DRAM into server today than we were last quarter than we were a year ago. We need to have a compounding effect. So that is some part of our revenue increase on the server side. For me it's encouraging that the average amount of DRAM going in our servers and the SSD - the average SSD size going into our servers is increasing tells me we are selling higher in the enterprise workload. We are selling more higher value solutions inside our customers, penetrating deeper configurations than we had in the past. And I believe that is sustainable in time. Does that help?

Yeah, it's great. Thank you. And then I guess just a second follow up on the tax comments that you made earlier in the call, I think you said a net impact of about $300 million which was a function of $1.3 billion of benefit related to the change in deferred tax assets and liabilities offset by $1 billion of a future transition tax. And how should they think about that future transition tax. Is that number one is that specifically related to the repatriation provisions? And then secondly is there any sort of granularity you can give us with regards to thinking about it on the Dell EMC versus the VMware side? Thank you.

Okay, I’ll take. Frank, its Tom. Look, so let me try and give you some thoughts around that and let me first and say hey look we’re obviously the big supporters of tax reform. We do know and the move to territorial. It's good for the economy work. We're reasonably optimistic that some of the immediate expensing around the CapEx will have a helpful impact on our business as we go through the year. So as we talk about the - you know it's also a very complex calculation and as we thought about the piece parts right, so $1 billion of transition tax is how we think about the overall impact that the Dell technologies family some of that is clearly coming out of VMware you know, but I'm not going to parse it for you per se. But we think it's in a very manageable in the sense of the cash impact of that, which really its going to be substantially less from some NOL positions that we have. So look I think it's very manageable, I think it's you know, we're continuing to evaluate it because the environment and the regulatory guidance is continues to get issued. So you know, but I'm reasonably optimistic around you know, the go forward positions and go forward impacts as we – due to tax [indiscernible]

Okay, great. Thanks so much guys.

Your next question comes from the line of Jason Kilgariff with Bank of America. Please go ahead.

Hey. Good morning, guys. Just wanted to I guess kind of clarify something that's been touched on a couple of times. So you’ve remind us that fiscal first quarter is typically a down quarter. You've got about $3 billion maturities in the next three months or so is the current thinking you're still going to pay those off the maturity?

Its Tom, we are and the current – the maturities schedule looks something like that will pay, I don't know, we’ve got a $500 million sort of legacy piece debt coming due in April. We've got a $2.5 billion coming due in June and we then have some normal amortization of some of the term loan…

We've got - A3 matures at the end of the year in December.

Yeah but in terms of what can we do in the next quarter is only $500 million in Q2 and then you have $2.5 billion sorry. And then Q4 is when your term loan ends. Its spread out through the year. And yeah, the intention is to pay them off in full, right now. We may dip into the line to manage some intra quarter dynamics around liquidity and to position of cash around the globe. But that's the plan which is why you’ve seen us build cash.

Okay, great. And then on the cash side, I think in the past you said that you're comfortable going to about $4 billion to $5 billion of cash at Dell. Is that still the right level to think about?

Yeah I mean look it fluctuates. I mean, but yeah, I think that’s - I think that's fair. It's probably currently closer to 5 and it really kind of depends as cash kind of sits temporarily in different locations like China and India which we continue to work to get out when we can.

Great, guys. Thank you very much.

Regina, I think we've got time for one more.

Our final question comes from the line of Philip Winslow with Wells Fargo. Please go ahead.

Hey. Thanks for taking my question. Obviously just looking at VMware’s filings, we’ve seen the relationship with Dell ramp in terms of that that reseller agreement. You know, when you look at the go to market synergies that you realized, year to date post the transaction. I wonder if you kind of just give your self a grade. Obviously it's ramping but what's work - what's still on the com and when you think about 2019 here, fiscal ’19, like what are focused area in terms of just the – whether it be go to market or product synergies?

Yeah, look I'm pretty happy actually with the work that’s been done on the synergy front in terms of revenue and the think the teams have worked well together, I think we’re working effectively as the family of Dell Technology’s. We've exceeded you know, we had some good first year synergy targets that we've exceeded as a result of the work that’s been done by the collective teams. We think there is more to do. Think about the position where technology trends are headed and we think about things like ready ReadyNode's, PC and ReadyNode's that were driving some of the software defined movements that are more server oriented, so we think is better - continued opportunity to do a more holistic integration with some of our hardware products with the VMware offerings. So we think this is going to continue to ramp, as we go through FY ’19 we think it's beneficial both for our customers and clearly for Dell Technology’s and for VMware. And so we're very optimistic about the opportunities. It doesn't mean we have you know, we still have work to do in some of these areas as we continue to align you know our go to market positioning, the coordination and efficiency at a customer level ensuring that we present one face to the customer. So there's some work to do in that area, but overall pretty optimistic about and pleased I would say with where we are to date on the revenue synergy side.

Thanks, guys.

All right, great. Thanks everyone for joining.

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