Summary #DellTechnologies came together through the acquisition of #EMC by #Dell. With significant amounts of public debt, this private company files results with the SEC. Lacking publicly traded shares, it has two publicly traded subsidiaries, #VMware and #SecureWorks. A remarkable amount of information has emerged in recent weeks about Dell Technologies (NYSE:DVMT), which rightly claims to be the world's largest privately-held technology company. The company was formed by the acquisition last September of EMC, a leading enterprise storage company, by Dell, Inc., a leading PC and server company. And Dell, in turn, was itself was taken private in 2013 in a leveraged buyout by Michael Dell, MSD Partners and Silver Lake Partners. With these transactions, two major tech players may well have passed from the public view afforded through SEC filings, earnings calls and analyst meetings. Yet circumstances arising out of the acquisition require the merged entity to file quarterly and annual results with the SEC, even as a private company. Not only has it issued a significant amount of publicly-traded debt, it is associated with two tracking stocks. Given these circumstances, we can analyze these otherwise private businesses. In recent weeks, Dell Technologies has reported its fourth quarter and full-year results, filed its first 10-K, and held both its year-end earnings conference call and its first analyst meeting as a merged company. Through these events, and the fiscal third quarter earnings report and conference call, the company has shared a significant amount of information about its structure and finances. First we will review the transaction itself as it was announced and ultimately achieved. Then we will review the constituent businesses of Dell Technologies before we conclude with a review of its first full quarter as a merged entity. The Transaction Announced October 12th, 2015, Dell's acquisition of EMC was complicated from the start by the need to capitalize EMC's interest in its publicly traded subsidiary, VMware (NYSE:VMW). The deal was structured as follows: Each EMC share was to generate payment of $24.05 in cash and 0.111 shares of a newly created tracking stock. As part of the financing of the transaction, Dell parent #DenaliHolding, Inc. issued $23.250 billion in senior notes, partially funding the mezzanine needed to conclude the deal. A new class of shares (Class V) was created for the tracking stock, which was intended to track the performance of VMware. Class V shares correspond on a one-for-one basis to EMC's shares in VMware. When the deal closed on September 7th, 2016, this new tracking stock, with the ticker DVMT, traded at $48.00 per share. This added $5.35 to the cash consideration per share, or $29.40, thereby generating a transaction value of $58.8 billion. Note that this transaction value is below the $67 billion mentioned in the press release announcing the deal, which was predicated on a share price of $81.78 for the tracking stock. To finance the transaction, Dell issued $45.9 billion in new debt and $4.4 billion in a private placement of stock in its parent, Denali Holding, Inc. In addition, Dell made available $2.95 billion in cash and EMC $4.75 billion, for a total of $57.0 billion in financing for the banking conduit that achieved the transaction. Based on our estimate of total EMC shares outstanding at close, we calculate that EMC shareholders received $48.1 billion in cash consideration and DVMT share consideration of $10.7 billion.
As the transaction progressed and concluded, Dell and EMC each divested businesses. Dell sold Dell Services to NTT for cash consideration of $3.0 billion in a transaction that was announced in late March and closed in early November of 2016. Then in mid June, the company sold Dell Software, including Quest Software and SonicWall, to Elliott Management and Francisco Partners, generating cash consideration of $2.4 billion. A third asset sale occurred after the transaction close, when OpenText (NASDAQ:OTEX) acquired the Dell EMC Enterprise Content Division for $1.6 billion. ECD essentially comprised EMC's Documentum business. A final asset monetization occurred earlier in the transaction process when Dell arranged an IPO of Class A shares of its SecureWorks business, which it acquired in 2011. Dell Technologies retains an 87.5% interest in the company. The proceeds of these transactions have allowed the company to pay down $7.0 billion of its debt since the close of the transaction.
The Company
Very large entities can be hard to fully embrace. In presentations, #DellTechnologies identifies the seven major technology leaders that comprise the company. They include:
#Dell − PCs and devices for consumers and business
#DellEMC − IT solutions for the Enterprise
#VMware (with an 82.5% stake) − virtualization software and business mobility products
#RSA − security solutions (identity and threat management products)
#SecureWorks (Nasdaq:SCWX, with an 87.5% stake) − security solutions (offering protection from cyber attacks)
#VirtusStream − cloud solutions for Enterprise mission critical applications
#Pivotal (77.8% stake) − cloud native application and data infrastructure software
The businesses of #DellTechnologies are thus numerous and diverse, including the large hardware businesses of Dell and EMC, the large software business of VMware, as well as five smaller software businesses. In addition to the four listed above, there is Boomi, a provider of an integration platform for on-premise and cloud-based applications. Two of the five offer software security solutions (RSA and SecureWorks) and the remaining three are cloud computing companies (VirtusStream, Pivotal and Boomi). As noted above, it has partial but controlling stakes in three of these businesses and two of the have publicly-traded shares.
Dell has structured these businesses into the following reportable business segments:
Client Solutions Group (CSG) − comprising Dell's Client Solutions business, selling PCs, Notebooks, tablets, monitors and peripherals.
Infrastructure Solutions Group (ISG) − comprising EMC's Information Storage Segment and Dell's Enterprise Solutions Group, selling servers, storage products, and converged and hyperconverged solutions.
VMware − comprising VMware, Inc, selling a range of virtualization software solutions.
These three reportable segments account for nearly 98% of Dell Technologies' revenue and generate its GAAP revenue. As such, the remaining holdings are non-material not considered a reportable segment. We will size all of these businesses in the following discussion of fourth quarter results.
Fourth Quarter Results
Based on its fiscal fourth quarter results, the first to fully reflect the acquisition of EMC, the company has an annualized revenue run rate of over $80 billion. (Fiscal years end with January.) For the fourth quarter, Dell Technologies reported total revenues of $20,587 million, representing growth of 63.0% over the prior year with the inclusion of EMC's results. The company has three reportable Business Segments, the Client Solutions Group, the Infrastructure Solutions Group and VMware. Together these segments contribute GAAP revenue of $20,107 million. An additional segment of "Other" businesses is comprised of RSA, SecureWorks, Pivotal, and Boomi, which together generated $480 million in revenue in the January quarter. By an accounting happenstance, these businesses are excluded from GAAP revenues because they are non-material and do not count as reportable segments in this tech behemoth. Including this other segment, total non-GAAP revenues for the quarter were $20,587 million. Though accounting for just 2.3% of total non-GAAP revenues, these four businesses together are sizable, with an annual revenue run rate of $1,920 million. While still part of EMC, RSA generated $988 million in revenue in 2015 and Pivotal $267 million. And in the fiscal year ended February 3rd, 2017, SecureWorks generated revenues of $429.5 million.
Each of the largest two segments has sizable business units. Comprising Dell's PCs and peripherals business, the Client Solutions Group reported revenues of $9,776 million (47.5% of non-GAAP total revenue), up 10.6% over the prior year level. Within the group, Commercial PCs accounted for 68.2% of the segment total, and Consumer PCs the remaining 31.8%. Operating profit of $342 million generated a margin of 3.5%, which is a bit light, even for a PC company.
The Infrastructure Solutions Group, in turn, includes Dell's Server business and EMC's VCE and Storage businesses. It posted revenue for the quarter of $8,395 million (41.8% of non-GAAP total revenue), well above the prior year level, which excludes EMC. Within the segment, Servers and Networking contributed 43.0% of the segment total and storage products the remaining 57.0%. Generating operating profit of $1,007 million, the segment produced an operating margin of 12.0%, which is in line with Enterprise Hardware.
VMware is the company's third operating segment. It posted fourth quarter revenues of $3,612 million, with no prior year figure available. It posted its fourth-quarter results as a publicly-traded company, however. For the three months ended December 31st, 2016, VMware reported revenues of $2,032 million, 9% over the prior year level. (VMware reports on a calendar year basis.) Operating income for the January quarter was $565 million, generating a margin of 29.2%, a characteristically high margin for a software company.
We include a fourth segment in our analysis comprising the revenues from RSA, SecureWorks, Pivotal and Boomi, which the company considers non-reportable. Together, they generated revenue of $480 million and a slight loss of $3 million. This brings the non-GAAP revenue for the company to $20,587 million, as we noted above. Against this revenue, Dell Technologies generated operating profit of $1,911 million, or 9.3% of revenue.
Dell Technologies' results are complicated by extensive items reflecting not only the EMC transaction, which closed last September 7th, 2016, but by the transaction through which Michael Dell, MSD Partners, and Silver Lake Partners took Dell Inc. private in October 2013. Indeed, the circumstances are fairly complex. That said, a number of trends are clear. The Client Solutions Group is competing aggressively on price, strongly outgrowing the industry. Sales of Dell's Consumer and Commercial PCs are up almost 12% and 9%, respectively. In contrast, IDC reported that fourth quarter PC shipments were down by 1.5%. Moreover, the company ceded 200 basis points in its operating margin. On a unit basis, the company outgrew the market by 9.9 percentage points, gaining market share for the 16th straight quarter as the market consolidates.
The performance of the Infrastructure Solutions Group is clouded somewhat by the absence of EMC results in the prior year data. That said, sales of server and networking products (up nearly 12%) are outgrowing the market as well. IDC's Server Tracker for the fourth quarter reported a unit decline for the market of 4.6% year to year. Growth of the Storage business is distorted by the absence of EMC in the prior year number, but it may well have been more modest. EMC Product revenues in the fourth quarter of 2015 were $4,111 million, just a bit less than the difference between the current and prior years, as reported for the January quarter. The leading edge businesses are growing the fastest. All Flash Storage Arrays grew about 100% to achieve a run rate of $4 billion. VBlock Converged Systems achieved record sales and greater than 50% market share, growing at a high single-digit rate. Hyperconverged Systems displayed even stronger growth, combining the offerings of both Dell and EMC. The Dell EMC XC, made by Nutanix, grew at a triple digit rate, while the VxRail achieved a $400 million run rate after just 10 months in the market. The latter product is optimized for VMware environments and is now offered with PowerEdge servers in place of Cisco servers.
We noted above that VMware revenues in the December quarter were up 9%. NSX, VMware's software defined network virtualization and security platform, had a booking rate of $1 billion and now has over 2,400 customers. In turn, its hyperconverged offering vSAN had a booking rate of $300 million with over 8,000 customers. SecureWorks, the other publicly-traded subsidiary, reported January quarter revenues of $118.9 million, up 26.4% over the prior year. And Pivotal Cloud Foundry achieved calendar 2016 bookings of $270 million, up over 130%.
Debt
We noted above that Dell Technologies paid down $7.0 billion in debt with proceeds from divested businesses. Total debt at quarter end remains substantial, at $50.4 billion, or 5.7x annualized EBITDA of $8.8 billion. This includes Core secured debt of $30 billion, Core unsecured debt of $13.7 billion, and Dell Financial Services (DFS) associated debt of 6.7 billion. Interest expense for the fourth quarter is not reported, though on an annual basis it is roughly $2.1 billion, or about 4.25x annualized EBITDA. Due to the terms of many indentures, interest payments are concentrated in the first and third quarters, skewing pretax profitability from quarter to quarter. At quarter end, the company had $11.5 billion in cash and short term investments and an additional $3.8 billion in long-term investments. It also had net total financing receivables of $5.9 billion. So the company, though heavily leveraged, is well capitalized. Moreover, because Days Payables On Hand (at 108) exceeds the sum of Days Receivables and Days Inventory on Hand (56 and 19, respectively), it has a negative cash conversion cycle of 33 days. The low inventory days reflects the fact that the company outsources much manufacturing, as is customary in the industry. And it is notably slow in paying its suppliers, a reflection of its size, we believe. Either way, money comes in faster than it goes out.
Conclusion
Thus concludes our analysis of the new Dell Technologies. This privately held company is indeed very large, with annualized revenues of $81.9 billion, total assets of $118.2 billion, $50.4 billion in debt, and cash, equivalents and investments of $15.3 billion. The company maintains leadership positions across the spectrum of standard data center technologies, including PCs, Servers, Storage and Virtualization software. Yet is equally strong in fast growing emergent technologies that are defining the data center of the future, These include Converged and Hyperconverged Infrastructure, On- and Off-Premise computing, and the Private, Public and Hybrid Cloud. As Dell Technologies gains the visibility and mindshare afforded public companies, the performance of these strong businesses will be even more worthy of note.
https://seekingalpha.com/article/4066888-dell-technologies-largest-private-tech-company-opens-books
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