Dell: ‘Challenging’ Year Ahead With ‘Cautious’ Storage Spending And PC ‘Weakness’

‘Underlying demand in PCs and servers remains weak, and we are seeing signs of changing customer behavior in storage. Though Q4 was a very good storage demand quarter, we saw lengthening sales cycles and more cautious storage spending with strength in very large customers offset by declines in medium and small business. Given that backdrop, we expect at least the early part of FY24 to remain challenging,’ says Chuck Whitten, Dell’s co-chief operating officer.

Chuck Whitten, Dell’s co-chief operating officer

Dell Technologies Thursday cautioned that it sees macroeconomic headwinds impacting its business in its upcoming fiscal year.

“Underlying demand in PCs and servers remains weak, and we are seeing signs of changing customer behavior in storage,” Chuck Whitten, Dell’s co-chief operating officer, told analysts on the company’s conference call Thursday. “Though Q4 was a very good storage demand quarter, we saw lengthening sales cycles and more cautious storage spending with strength in very large customers offset by declines in medium and small business. Given that backdrop, we expect at least the early part of FY24 to remain challenging.”

Whitten praised the Round Rock, Texas-based company’s fiscal 2023 execution and financial results given the macroeconomic backdrop.

However, Whitten said, “[2023] was ultimately a tale of two halves, with 12-percent growth in the first half and revenue down 9 percent in the second half as the demand environment weakened over the course of the year.”

Dell stock was down more than 3 percent in after-hours trading Thursday to $38.88.

[Related: Michael Dell: Tech ‘Built For AI First’ Will Dominate Computing]

Dell delivered record revenue of $102.3 billion during fiscal 2023, with the company’s ISG, or Infrastructure Solutions Group, seeing record revenue of $38.4 billion, including record revenue in both servers and networking and storage, Whitten said.

“Importantly, we are structural share gainers, and continue to outperform the industry,” he said. “We expect to gain over a point of share in mainstream server and storage revenue when the IDC calendar results come out later this month.”

Dell remains the IT market’s largest server vendor, and has gained nine points of mainstream server revenue share over the last 10 years, Whitten said. In storage, Dell is larger in revenue terms than the next three vendors combined, he said. Dell also gained PC market share for the tenth consecutive year, he said.

Dell during the fourth fiscal quarter 2023 delivered record storage revenue of $5 billion, up 10 percent, including demand growth in its PowerFlex, VxRail, data protection, and PowerStore lines, Whitten said.

“We are pleased with our momentum in storage,” he said. “The investments we‘ve made over the years strengthening our portfolio are paying off and have allowed us to drive growth and share gain in what was a resilient storage market in 2022. [And] we grew servers and networking 5 percent in a challenging server demand environment by optimizing server shipments along with strong attach and growing ASPs, a clear indication that we continue to sell deeper into customers’ digital agendas.”

The PC market, on the other hand, remains challenged, Whitten said.

From a historic 2021, the PC market slowed markedly in June and experienced a sharp

decline in the fourth calendar quarter of 2022, Whitten said, leading to a fiscal fourth quarter 2023 drop in Dell’s Client Solutions Group, or CSG, revenue of 23 percent, he said.

“It was a continuation of trends we’ve seen in recent quarters,” he said. “Commercial revenue fared better than consumer, down 17 percent as customers delayed PC purchases in the face of macroeconomic and hiring uncertainty. Consumer was down 40 percent.”

Dell’s CSG business is seeing revenue decline faster than operating expenses coming from increasing competitive pressures and elevated industry channel inventories, Whitten said.

“But we continue to maintain pricing discipline, execute our direct attach motion, and focus on our relative performance in the most profitable segments of the PC market,” he said.

Dell during the fiscal fourth quarter continued to take decisive action and extend existing cost controls, including pausing external hiring, limiting travel, and reducing outside services spend, Whitten said. “We also made the difficult decision to

reduce our work force by an additional 5 percent as announced in February,” he said.

The macroeconomic environment is not looking good for fiscal 2024 as customers continue to scrutinize every dollar, Whitten said.

Dell in fiscal 2023 saw select growth in verticals like financial services, transportation, and construction and real estate, but continued to see demand softness across most other verticals, customer types, and regions, he said.

Even so, Dell’s fundamental belief in both the long-term health of its markets and the

advantages of its business model haven‘t changed, Whitten said.

“Data continues to increase exponentially in both quantity and value, and customers continue to see us as trusted partners helping them navigate the complexities of hybrid work, multi-cloud, and the edge,” he said. “Unlike in prior cycles, customers are not outright stopping digital investments. They continue to plan projects even as they scrutinize spend. This gives us confidence that we will see a rebound in spending and a return to sequential growth later this year.”

During the call, Dell also said that Tom Sweet, a 26-year Dell veteran, will retire as executive vice president and chief financial officer at the end of its fiscal second quarter. Taking over for Sweet will be Yvonne McGill, currently the company’s corporate controller. Dell Chairman and CEO Michael Dell, who normally does not join the financial conference calls, joined the call at the end and said of McGill, “She’s a proven finance leader, and we are all thrilled to have her as our next CFO.”

For its fourth fiscal quarter 2023, which ended February 3, Dell reported total revenue of $25.04 billion, down 11 percent from the $28.00 billion the company reported for its fiscal fourth quarter 2022.

That included product revenue of $19.04 billion, down 15 percent, and services revenue of $6.00 billion, up 9 percent.

Dell’s ISG revenue for the quarter was $9.91 billion, up 7 percent over last year, with servers and networking revenue of $4.94 billion, up 5 percent, and storage revenue of $4.97 billion, up 10 percent. Revenue for the quarter beat analyst expectations by $1.53 billion, according to Seeking Alpha.

Dell’s CSG revenue, however, fell 23 percent over last year to $13.36 billion. That included commercial revenue of $10.70 billion, down 17 percent, and consumer revenue of $2.66 billion, down 40 percent.

For the quarter, Dell reported GAAP net income of $614 million or 84 cents per share, up significantly from a net loss of $29 million or 4 cents per share a year ago.

On a non-GAAP basis, Dell reported net income of $1.32 billion or $1.80 per share, down from last year’s $1.39 billion or $1.72 per share. The non-GAAP earnings beat analyst expectations by 16 cents per share, according to Seeking Alpha.

For fiscal year 2023, Dell reported total revenue of $102.31 billion, up 1 percent over the $101.20 billion the company reported for fiscal year 2022.

That included product revenue of $79.25 billion, down 1 percent, and services revenue of $23.05 billion, up 8 percent.

Included was ISG total revenue for the year of $38.36 billion, up 12 percent. Within ISG, Dell reported server and networking revenue of $20.40 billion, up 14 percent, and storage revenue of $17.96 billion, up 9 percent.

On the CSG side, Dell reported total revenue of $58.21 billion, down 5 percent year-over-year. Within that was commercial revenue of $45.56 billion, essentially flat with last year, and consumer revenue of $12.66 billion, down 20 percent.

For the year, Dell reported GAAP net income of $2.42 billion or $3.33 per share, down from last year’s $4.95 billion or $6.49 per share.

On a non-GAAP basis, Dell reported net income of $5.73 billion or $7.61 per share, up from last year’s $4.92 billion or $6.22 per share.