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

Franklin Jarman - Goldman Sachs Jeff Harlib - Barclays David Ehrlich - Wells Fargo Thomas Eagan - J.P. Morgan David Phipps - Citi Adam Willinger - Bank of America Shannon Cross - Cross Research.

Good morning and welcome to the Third 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 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 Chief Financial Officer, Tom Sweet; our Vice Chairman Products and Operations, Jeff Clarke. Jeff has primary responsibility for Client Solutions Group and Infrastructure Solutions Group segments in addition to leading our supply chain function.

Also joining us from Europe for Q&A is our Treasurer, Tyler Johnson. We've posted our third quarter press releases and web deck on our website where this call is also being webcast. Q3 financial results will be filed on Form 10Q on Tuesday, December 12th. I encourage you to review these documents for additional perspective.

Consistent with prior periods our Q3 non-GAAP operating income includes approximately $2.5 billion of adjustments. The majority of these are non-cash and relates to purchase accounting and amortization of intangible assets.

As a reminder due to the EMC merger and to a lesser extent the Dell Go [ph] 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.

Please note that our third quarter fiscal 2017 historical results include only a portion of EMCs results and unless otherwise specified all growth percentages refer to fiscal year-over-year change which may not be comparable due to the merger. Beginning in Q4 we will get to fully comparable year-over-year quarterly results.

During this call we will generally refer or we will generally 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 on Form 10Q and in the supplemental material of 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. Overall I was pleased with the third quarter results and the momentum we're seeing in the business. We continue to see growth on the top line and we're seeing increasing customer acceptance of our broad solutions portfolio. We also had solid cash flow generation and improved profitability.

GAAP revenue for the third quarter was 19.6 billion with a GAAP operating loss of approximately 530 million. Non-GAAP revenue was 19.9 billion with strong results for client, servers, and VMware. Overall we were generally pleased with the balance of top line growth and better profitability.

As we've highlighted over the last few quarters we are working to improve our storage business velocity and while we have begun to see some progress we believe this will be a gradual recovery over the coming quarters as we ramp go to market resources and introduce new and innovative product features.

Gross margin was 6.4 billion or 32.2% of revenue which was a 110 basis point improvement over the second quarter driven by pricing discipline and improved overall cost of goods sold.

OPEX was 4.4 billion or 22.3% of revenue which was down 90 basis points sequentially as we continue to drive OPEX discipline across the business as we focus on optimizing our cost structure. Operating income was $2 billion or 10% of revenue up 210 basis points from the prior quarter.

Adjusted EBITDA for the quarter was up 24% sequentially to 2.3 billion or 11.6% of non-GAAP revenue. Please see slide 19 in the web deck for more details on our EBITDA adjustments.

Now let me give you a summary view of the financial performance of the business segments and then I will turn it over to Jeff who will go into more detail on the segment operational highlights. Revenue for the Infrastructure Solutions Group was 7.5 billion up 2% quarter-on-quarter.

The sequential increase was driven by servers and networking with revenue of 3.9 billion up 32% year-over-year. Servers delivered at second consecutive quarter of record revenue with double-digit growth from both PowerEdge and Cloud Servers on strong demand. We delivered solid unit performance while also seeing expansion of server ASPs.

Our storage revenue was 3.7 billion and was roughly flat quarter-on-quarter as growth all-flash and newer solutions like hyperconverged infrastructure was offset by softness in traditional storage.

Operating income for ISG was 678 million or 9% of revenue which is a 320 basis point increase over the prior quarter driven by better profitability for servers and storage as well as OPEX discipline. ISG operating income is moving in the right direction but we still have more work to do to improve the overall profitability profile of the business.

We are working on balancing velocity and profitability within servers and building momentum in storage and data protection going forward. Revenue for the Client Solutions Group was 10 billion up 8%. Commercial revenue grew 8% due to strength in commercial notebooks, workstations, displays and attached services.

Consumer revenue was up 10% driven by growth in notebooks and the benefits of our investments in gaming and our consumer and small business key country expansion program.

CSG operating income was up 6% to 672 million which was 6.7% of revenue as the team continues to execute on profitable growth despite ongoing challenges from the component cost and competitive environments. Going forward we're focused on continuing to drive profitable growth especially in commercial client.

VMware had another strong quarter as revenue from the VMware segment was up 2% sequentially to approximately $2 billion and operating income was 639 million or 32.7% of revenue. Standalone VMware reported a strong Q3 which included the enterprise agreement with DXC Technology announced on VMware's Q2 earnings call.

It's growth rate for license revenue plus the sequential change in total unearned license revenue was up double-digits year-over-year. License bookings for NFX grew over 100% year-over-year in Q3. The DXC enterprise agreement included a large commitment to NSX underscoring the strategic importance of NSX to customers.

vSAN license bookings were once again up over 150 year-over-year. I also want to congratulate VMware for being named to the Fortune Future 50 list of companies best positioned for breakout growth. VMware ranked number six in the leaders category which is a testament to the company's forward-looking and innovative company culture.

Revenue from our other businesses which include Secureworks, RSA, Pivotal, Boomi was 475 million. Pivotal again delivered strong top line results.

The team is also seeing nice momentum across its platform partner Ecosystem having recently announced over 100 global and regional system integrators and consultancies as part of its Pivotal ready partner program.

Additionally in November Pivotal and Accenture announced that they formed a new business group, the Accenture Pivotal business group to help enterprises accelerate cloud migration and software innovation.

Secureworks released its standalone earnings yesterday where it reported approximately 10% revenue growth to 118 million and continued gross margin expansion. RSA had solid orders growth in the quarter. Customers are embracing our RSA security solutions as evidenced by the positive year-to-date growth for all of its four product suites.

Before I jump to the balance sheet I want to mention the flexible consumption model that we offer customers. We continue to see strong demand for these solutions as we remain focused on providing customers with flexibility and building a larger recurring revenue stream for Dell Technologies.

We saw a lower level of these frameworks in Q3 versus last quarter as the multi-year strategic nature of these offerings resulted in variability quarter-to-quarter. Now turning to the balance sheet and capital allocation, in Q3 cash from operations was 1.6 billion predominantly due to improved profitability and working capital benefits.

Our cash and investments balance was 18 billion up approximately 2.7 billion versus the prior quarter and includes debt proceeds from VMware's recent debt issuance. Also as a reminder you will see our cash balance grow as we position our balance sheet for approximately $3 billion of debt maturities coming due in the first half of fiscal 2019.

As we did last quarter we discussed our debt consistent with how we discuss it with the rating agencies which is total debt including subsidiary debt, total debt excluding subsidiary debt, and total core debt which excludes subsidiary debt, DFS related debt and the margin loan.

For additional detail on what's included or excluded in these balances please see slide 7 of the web deck. During Q3 we paid down 1.7 billion in debt including 1.2 billion from VMware's repayment of legacy in her company notes as well as approximately 500 million from cash on the balance sheet.

We ended the third quarter with 52.5 billion in total debt up 2.6 billion from the prior quarter. Our total debt balance increased as a result of VMware's $4 billion bond issuance mentioned above as well as an increase of approximately 300 million in structured financing debt that funds Dell Financial Services.

During the quarter we re-priced 14.2 billion of term loan debt and revolving credit facility and also took the opportunity to reposition the traunches. The combined effect of this result and approximately $60 million of annualized interest rate savings and enhanced liquidity management.

Our core debt ended the quarter at 40.3 billion down from 40.5 billion at the end of Q2 and 48.8 billion as of September 2016 which is when we close the EMC transaction. Since closing the transaction we've paid down 9.7 billion of gross debt excluding DFS related debt and remain fully committed to paying down debt levering the balance sheet.

In Q3 DFS originations were approximately 1.6 billion up 48% and financing receivables now stand at another record high of $7 billion up 28% driving an increase of DFS related debt by approximately $200 million in the quarter.

Demand for DFS remained strong and continues to grow across our business segments as customers respond to our innovative financing offerings. As we see the financing receivable balance grow so will our DFS related as we continue to fund the business.

Jumping to our DVMT share repurchase program, we recently completed our latest $300 million program which was announced in August and was solely funded through a Class A stock purchase agreement with VMware. To date we have repurchased approximately 23.4 million shares of Class B common stock.

This includes 16.8 million shares under the Class B group repurchase program. We are generally pleased with our continued cash flow generation and remain focused on balance sheet management and debt repayment. Let me now turn it over to Jeff to walk you through the operational highlights of CSG and ISG..

Thanks Tom and hello everyone. It's great to be here to discuss CSG, ISG and our supply chain. As Rob mentioned I now lead a combined products and operations organization, the only one of its kind.

As one product and operations organization we will be able to drive a more holistic set of integrated, innovative solutions for our customers from the Edge to the Core to the Cloud. I've been in the new ISG part of my role for a little less than three months. I thought it might be helpful if I share some of my initial observations.

First, our strategy to be the essential infrastructure provider is resonating well with our customers who are looking to us to transform and digitize their environments. Second, our portfolio is second to none across the breadth of the IT spectrum from the Edge to the Core to the Cloud.

Third, we have more complexity in our offering than is needed and simplification is required.

And lastly we need to continue to enhance feature, functionality, and add new capabilities to our storage and data protection offerings, sharpen our engineering and product execution focus to ensure we are meeting customer's needs and expectations, and execute to our go to market initiatives.

Now let me provide some third quarter highlights for ISG and CSG. As Tom mentioned ISG's revenue for the third quarter was $7.5 billion and operating income was $678 million. Both saw positive growth from the prior quarter.

As a reminder due to the fact that the EMC transaction closed during Q3 last year, I will be making reference where mandated or appropriate to facilitate a more meaningful year-over-year discussion. ISG demand continued to grow trajectory in Q3 with orders up in high single-digits on year-over-year basis.

Server revenue and unit growth were strong for both PowerEdge and Cloud Servers. We are seeing higher memory and storage content in servers as customers look for more computing power to run big data and software defined solutions. We have effectively managed pricing to mitigate ongoing memory cost inflation resulting in higher selling prices.

Additionally we've also seen higher ASPs as we ramp our 14th generation of PowerEdge servers demonstrating we are capturing value of our industry leading R&D capabilities and innovation. In calendar Q3 the overall X86 server industry grew in both units and revenue.

We outgrew the markets and units and revenue for both the mainstream and hyper scale markets and we are a worldwide leader for servers based on both units and revenue. Looking at revenue share we gained 250 basis points of share on a year-over-year basis for the total X86 revenue and 400 basis points of share in mainstream revenue.

Moving to storage, orders declined in the mid single-digits with solid growth in our new storage solutions. Our market leading hyper converged portfolio continues to grow triple-digits with strength in VxRail. Demand for Isilon scale-out NAS and our all-flash arrays continued to grow in double-digits.

As discussed on last quarter's earnings call we have implemented actions to improve storage growth particularly in the mid range and expect benefits of these actions to materialize through the next year.

We increased our go to market capacity by adding storage specialists and we are ensuring our sales compensation plan spurs the appropriate behavior to drive long-term strength in our results. In addition we continue to evaluate our portfolio and our focus on developing world class products to solve our customer's needs.

For example in our mid-range portfolio we recently introduced two Dell EMC SC all-flash appliances along with key application upgrades -- along with key software upgrades for our Dell EMC Unity that include in-line data duplication, synchronous file replication, and the ability to perform online data in place storage controller upgrades.

The Dell EMC SC all-flash products will be available this month and the Unity upgrades will be available later this quarter. At the same time we introduced our Future-Proof Storage Loyalty Program offering storage customers investment protection and multiple cost saving benefits. The early feedback from customers and partners has been very positive.

We continue to drive hard against our operational improvements in ISG targeting our go to market, product portfolio, and cost-out initiatives. Moving on to CSG we have another strong quarter as we maintained our focus on profitable growth, balancing velocity and share gain with margin improvement.

CSG revenue in Q3 was $10 billion which was up 8% while operating income was $672 million up 6%. The overall PC market moved back to positive year-over-year unit growth in calendar Q3 2017 according to IDC.

Dell outperformed the worldwide market growing units 1% in calendar Q3 and delivering above market growth in desktops and in the commercial segment. We increased our global PC share on a year-over-year basis for the 19th consecutive quarter. We continue to be the leading provider of workstations worldwide.

In calendar Q3 Dell outgrew the industry for workstation units and had a positive year-over-year growth in every region. Our investments in gaming were evident at PAX West where we announced a new mainstream gaming laptop and gaming desk top featuring a new clear panel with polar blue LED lighting and Alienware 34 inch curved gaming display.

These new products demonstrate our commitment to deliver world class gaming products for every player at every level in the marketplace. We're also seeing success in CSG S&P and attached services. Displays were a highlight in Q3 and Dell continues to be the number one display provider in the world.

We saw higher attach rates for our premium client service offerings ProSupport Plus for both commercial and consumer client. During Q3 we announced a new top tier Premium Support Plus to deliver the most comprehensive support services available for consumers in gaming PC's.

Powered by Dell's exclusive support assist technology it is the first and only consumer service to proactively find issues, predict problems before they start, and automatically remove viruses and optimize performance for consumer PC's.

Dell continued investment and innovation -- Dell's continued investment and innovation is helping Dell drive across CSG -- drive growth across CSG. We expect to continue to take share while maintaining our focus in balancing growth and profitability.

From a global operations standpoint we've made good progress over the past 14 months integrating our supply chain, reducing cycle times and inventory and we continue to look for areas of improvement working closely with the various teams and multiple working capital initiatives.

It's been an unprecedented year of inflationary memory pricing and we believe memory will continue to be a slowly moderating headwind through the first half of next year.

Overall we have a number of areas that we're working to improve including storage, sales velocity, storage product performance and positioning, and ramping up sales productivity but I want to be clear that we've also made significant progress over the last year. World leader in servers, storage, displays, workstations, and gaming.

We continue to see strong demand for hyper converged infrastructure and software defined data center solutions and the client business continues to gain profitable share.

I believe we offer a more holistic view and set of solutions for our customers allowing us a higher level of innovation and integration across the Edge to the Core to the Cloud and it's unmatched in the industry. I like our hand and I'm optimistic about our future. With that let me turn it back over to Tom..

Thanks Jeff. In closing I echo Jeff's sentiment that it is an exciting time to be part of Dell Technologies. We have made good progress across the family of businesses including strong velocity in client, servers, and hyper converged infrastructure, growth from VMware and our other businesses, and steady expansion of our DFS portfolio.

We also recognize that there is still work to do to improve our storage and data protection business and to improve the overall profitability of the ISG business. I'm generally pleased with the overall state of the business 14 months into the integration and believe we're tracking in the right direction.

We are the best positioned company to win in today's IT environment and meet customer's needs in their digital transformation journey. We are gaining broader acceptance as the only provider that has the flexibility and portfolio breadth that can offer a single integrated set of solutions.

This was on display in New York in October when we unveiled a new IoT strategy division and solutions to accelerate IoT adoption for customers.

The new Dell Technologies IoT division led by VMware CTO, Ray O'Farrell is designed to help customers navigate and implement flexible architectures and provide tailored solutions and services across our entire family of businesses.

As we move forward we will continue to focus on growing faster than the market and gaining share in consolidating markets, generating strong cash flow to enable additional de-levering of the balance sheet, balancing cost actions with investments to position the company for long-term success, and bringing the full capabilities of Dell Technologies to our customers in a comprehensive and seamless experience.

Finally, let me remind you that when we report our results for the fourth quarter of fiscal 2018 we will be comparing those results against our first full quarter as a combined company. In addition note that Q4 of fiscal 2017 our previous Q4 was a 14 week quarter as compared to this year's 13 week fourth quarter.

So year-over-year growth rates need to consider this. With that I'll turn it back to Rob to begin Q&A..

Thanks Tom. Let's go to 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 Frank Jarman with Goldman Sachs. Please go ahead. .

Great, thanks guys and congrats on the quarter.

I guess I wanted to start off just seeing if you can give us an update on the memory and input costs that you're continuing to see, there's been some market discussion about NAND prices potentially peaking over the next few months so, just as you guys worked through your negotiations with the supply chain what are you guys seeing in terms of availability and how should we think about your ability to push on some of those costs as we move further into 2018? Thank you.

.

Sure, hey Frank, Jeff Clarke here. A couple of things why I suspect given the basis of the question you've seen what we've gone through which is the longest inflationary period that I can recall in memory in a decade plus.

And that's a byproduct of two things; one, there hasn’t been any new DRAM capacity been brought online and then the consumption of DRAM is at the highest rates we've seen. In fact our own server group we've seen our memory density that we will ship per server go up tremendously on a year-over-year basis and sequentially as well.

So putting tremendous pressure on supply. As a result our outlook is DRAM pricing while moderating units of inflation it still continues to go up through the first half of next year. And we think NAND is moderately inflationary as well through the first half of next year.

We see all-flash arrays just driving tremendous demand for more NAND and we are pressuring the capacity that's available, does that help. .

Yup, that's super helpful and then I guess just as a follow-up I wanted to ask a question about tax reform since it looks like you guys have been focused on it with the build coalition announcement that was made last week and I guess specifically I wanted to better understand how you're thinking about the 7.5% proposed tax on illiquid repatriated or unrepatriated foreign earnings, do you know what that taxable foreign earnings amount would be for you?.

Look I'm not going to get in to this, it saves time by the way Frank so I'm not going to get into specifics about where the proposed legislation is right now. Clearly as we have been, we are a supporter of tax reform. We do believe that the U.S. system which hasn’t been reformed in over 30 years does need some updating.

And we're big fans of territorial tax and those types of policy changes that they're contemplating.

So, obviously there are some headwinds in that tax proposed legislation that we're looking at and that we are making sure that our voice is heard whether that's around the repatriation which we're generally -- we've sort of reconciled ourselves to the fact that repatriation is going to be part of this.

And also the things like the interest deductibility which is a potential -- as a headwind for us that we're talking to our representatives about how we might -- how they should think through some of the impacts given that it's effectively an anti-growth strategy as you think about that has funded job growth and capital growth, our company growth here in the U.S.

So, again I'm not going to get into the specifics about what our specific aspects of the builds and how we would navigate through that. I will tell you that we will see where this lands at the end of the day and then we'll take the appropriate actions to ensure that we are as best positioned as we can moving forward..

Got it, I guess just so I understand if I were to look at your 10-K it looks like the undistributed book earnings to your foreign subs was about 79 billion at the end of last year, we shouldn’t be applying a 7.5% tax rate to that basis should we?.

No, look I mean I think that there is other factors that you have to think your way doing that from that number. So I don't think that the appropriate calculation you should be doing at this point. .

Okay, great. Thanks very much guys..

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

Hi, good morning. My question is on margins, both it was very solid in CSG and ISG and I'm wondering if you could just talk about the margin profile in both of those businesses. You're well above your 4% to 5% prior target in CSG.

In ISG we have had DRAM continue to increase recently and your mix seems like it would be negative with the storage lagging growth in server business which is a lower margin business.

So if you can go through that in terms of the margins?.

Hey Jeff, it's Tom. Let me do that and then Jeff can add some color commentary if he would like. But look I think overall there's a couple of things affecting our margins as you look at it quarter to quarter. Clearly as Jeff highlighted component cost have been inflationary and so it has been a bit of a headwind clearly.

I think as you step back and think about it though it is pretty consistent with what we've talked about in prior quarters which is that we have been adjusting our pricing to ensure that we are capturing the increasing cost coming from this component cost increases.

So as we look quarter-on-quarter we have seen the effect -- our pricing effectiveness and the stickiness of that pricing effectiveness. It has been helpful for us.

We also have been helped by things like mix in the sense of the mix of the business has been helpful for us and so we've also been helped and we've got a little bit of excess FX as well from as you look at what's happened with currency across the globe.

So, those three have been helpful I guess and then the down side of that we've also had continued impact on our component cost which has been a bit of a headwind for us in Q3. So particularly on the ISG side it relates to your comment around warranties [ph] given the fact that storage is soft and you drove servers.

We got a pretty good boost on server velocity and the related pricing actions that we've done out of that. And then mix within the configurations from within the family has been helpful. So because of that I mean you've seen our ISG margins, they roughly went up almost 200 basis points.

And then the CSG margins quarter-on-quarter were obviously less than that in terms of absolute movement. But still movement in right direction..

Okay, great and….

Excuse me Jeff -- kind of other thoughts to build on what Tom said, one would be I mentioned earlier that our average server going out the doors is going out with DRAM, they are going out with excuse me more NAND, bigger SSD. And that's a direct result of us selling higher up in the value stack.

We're selling higher value workloads, we are selling a higher value solutions and are extracting value for that. Our 14G servers that we just launched are selling at a premium to their predecessors. So we are seeing our ability to sell the value of our products in the marketplace and servers continue to I think perform quite well.

The other part is I think the global supply chain that we have and its size. We have DRAM so as much as I have said DRAM is going up in cost we have it. And we're getting a value for having it.

And whether that's in our PC business, on our server business I think that is something customers are coming to us for knowing we have supply and they're obviously paying for it. So we're seeing our margins continue to improve and our prices improve there. And then Tom mentioned the element of mix in the PC business that's very true.

If you look at our relative performance of commercial PC's to consumer PC's that's a strong contributor to margin improvement in the PC business..

Great, that's very helpful.

My follow up just would be, any general commentary you can provide on the 4Q outlook, even this is the first full pro forma quarter with respect to revenues, margins in each of the segments?.

Oh, hey Jeff, it is Tom. Look you know we don't do forward guidance right. So let me just start with that comment. I would tell you that if you looked at historical seasonal patterns you would expect to see roughly a 6% to 7% sequential bump in revenue if history were to be consistent with what we've seen this quarter.

So, that's something you should think about and then remember that seasonally we turned down Q1 after that right in terms of just the nature of how the business grows.

So, look I mean absent that I would tell you that the only other thing I would put in your thinking as we've talked about it and we have talked a lot about this in Q2 on the Q2 call around these flexible consumption models and we had a fairly healthy dose of flexible consumption models in Q2.

In Q3 they were less and remember these are models where we're typically offering the customer more flexibility and therefore deferring the revenue. And therefore well I'm getting in some cases getting the cash up front, I am not recognizing the revenue upfront now.

We could -- you have to see how Q4 plays out in terms of those flexible consumption models but seasonally it's a pretty big quarter for us and from a revenue perspective so we'll have to watch that dynamic in mixes as we go through the quarter.

Also remember and I said it in my talking points that last year was a 14 week quarter for Q4 and this week we will be a 13 week quarter. So, just keep that in mind too as you think about the year-over-year comparison. .

Great, thank you..

Your next question comes from the line of David Ehrlich with Wells Fargo. Please go ahead. .

Good morning, thank you for taking the questions.

You talked a little bit about expectations for memory in 2018 but I wondered if you could provide some more color around your kind of whole basket of inputs, so maybe panels, displays, and kind of maybe the whole basket for 2018?.

Yeah, we see the other commodities set showing slight signs of deflation, not enough to offset the inflation of the memory devices. Look at batteries, LCD's, metal, circuit boards, discrete components we see a slight deflationary market place for us next year. That's helping us offset what's happening in DRAM and NAND..

Great and then can you talk maybe also about the ability to take out non-commodity related costs?.

Well we clearly are doing that across a vast number of the synergy activities in the organization. I can speak specifically to the product on the supply chain side and I'm sure Tom will jump in. Excuse me on the rest of the portfolio or the business. We have a plan, we are executing to that plan. I mean quite honestly we are on that plan.

We have applied our Dell pricing terms across the broader purchase of our entire portfolio which you would have expected us to do. Last year we had that done certainly on day one. We're reaping benefits of that throughout this year.

We've seen tremendous efficiency in the supply chain particularly through cycle time improvement, lead time improvement to our customer base and managing our working capital initiatives through our facilities most notably in the form of inventory.

So I think we are well along the path of managing our other cost outside the commodity and the supply chain on the product side. .

Yeah, that's fair Jeff. On the overall cost synergy, we obviously have put that $2 billion target out there. We also had told you that we had made some incremental investments back in the go to market in the business that we are going to probably delay the full cycle of how those cost synergies would flow through.

I think we've been pretty upfront about that. We remain on track on our cost activities even with -- considering the investments that we've been making and we'll continue to evaluate the business. So the goal here is to drive the right level of profitability across the combined entity.

And we'll do that through pulling various levers to ensure that we overtime delivered the right EBITDA generation that we're targeting. But I also tell you that we're also in this for the long-term, right. So we are making appropriate investments to position the company as we think about where we want to be in three to five year range as well..

Okay Tom and then some -- a lot of times I do get questions from investors around maybe the amount of incremental investments that have been investing back into the business, is there any way you can kind of scale that for us or help us understand maybe when that 2 billion target might be achieved?.

Well, look I mean I'm -- I think we've told you that the incremental investments have been in the hundreds of millions of dollars but we haven't quantified it specifically and I'm not really -- don't really want to go there.

With the dynamic that you have though obviously is that from -- the business continues to evolve and the environment continues to evolve. And so we're continuously looking for cost opportunities and efficiency opportunities such as part of the G&A of the company.

And so what we had said earlier in the year that we would probably delay a year or so in terms of realization of those synergies as we move forward giving the investments back in the business. I still think that's a reasonable position to be in. .

Thanks David, this is a reminder to everyone as we move forward to have one question with one follow-up so we can get to as many people as possible. So Regina next question. .

Your next question comes from the line of Thomas Eagan with J.P. Morgan. Please go ahead. .

Hi, good morning. I just wanted to follow-up on the margin question.

I appreciate all the qualitative stuff that you've given us but I was wondering out of the 320 basis point sequential improvement in ISG margins if you could help us understand how much of that was service and networking and how much of that was storage because you pointed out that you had better profitability for both?.

Yeah, hey look I'm not going to get down to that level of detail. I mean we did see benefit from both the velocity in servers and the price expansion I will say in servers given the configuration mix that we're seeing in the business.

So I would tell you that servers and then we got better pricing and better mix in storage even as we drove -- even as volume wasn't quite where we wanted it. And then we've got Jeff highlighted the fact that we are loading a heavier mix of memory and NAND on some of these products and therefore that is helping us as well.

Also I would point out remember that as you look at that we also got benefit from OPEX right, in the quarter. So, our team did a reasonable job of managing OPEX and very generally pretty pleased with what we saw in terms of profitability expansion. It's not where we want it yet so I want to be really clear about that.

Yes, we made some progress, we had a lighter mix of flexible consumption models in the quarter so therefore I you know I didn’t defer as much revenue and profitability as perhaps that you saw on Q2. That's going to vary quarter-by-quarter so you got to keep that in mind.

But I think overall I'm pleased with the progress this quarter but clearly more work to do. .

Yeah, and just a reminder when we talked about this before there does tend to be a bit of a lag effect on pricing particularly with our larger customers where we have committed to a certain level of pricing.

This impacts ISG and more certain CSG, so as we get a couple of quarters into some of these -- we tend to be able to catch up a little bit better..

And you saw a couple of our premium products are extreme [indiscernible] grew quarter-over-quarter are all-flash array business across the portfolio grew, they generally carry higher margins. And 14G went from we're not going to give the percentage but 14G increased pretty significantly as we went to the 14th generation of servers. .

Okay, and then for my follow-up maybe since I couldn’t get a breakdown of the 320 maybe if Rob would let me just to sort of a two parter.

You talked about retaining a debt and you talked about doing it with cash so maybe, you've got a 11.7 billion of cash on the balance sheet as of this quarter, could you talk about how much of that is in the U.S., remind us historically is the current quarter bigger than usual average or less than usual cash generator? And then the EMC bond, the 2.5 billion that come due beginning in June, are you expecting to pay all of that down with cash or there's any chance that you look to refinance?.

Hey, why don’t we let -- hey Tyler, why don’t you take that question since this is right down your power alley. .

Yeah, hey Thomas. I hope you guys can hear me okay. So first just a reminder, right when you're looking at that cash balance that's also including the VMware cash. So remember that Dell Technologies ex-VMware which is how I think about it when I'm looking at debt pay down with a smaller number, right.

So it's call it somewhere around little over $6 billion, $6.3 billion. The geography of that cash obviously moves around kind of depending on what's happening in the business and different intercompany flows. But I think in any given time we have probably 35% to 45% of that sitting in the U.S.

And just like we said, we try to keep the balances low taking into account that we do have places where maybe the cash is restricted or tied up. We've got investments on the books and that type of thing.

But the focus is going to be taking that excess and paying down debt and just like Tom mentioned in the talking points we're going to probably conserve cash. You asked about Q4, season in Q4 tends to be a stronger cash quarter so that would be my expectation.

But then it is followed by Q1 which typically tends to be a weaker cash quarter as we pay out things like certain cash payments and bonus and compensation that type of thing, right. So I've got to prepare for that.

And then we've got those two maturities, the one in April is a little bit smaller and with the June maturity I mean my expectation is that it's going to be funded through a combination of cash currently on the balance sheet, cash flow generation between now and then.

And I do have the untapped revolver so if I need to dip into that to fund a portion of that I have that available and I will keep in mind if I do, do that that is purely temporary. So we use that to kind of fund some of these inner quarter gas typically and so if I did that it would only be for a short period of time.

I mean my expectation is once again we've got about $5.5 billion worth of debt coming due when I include the amortization payments for next year on the term loans and I'm looking to pay that down with cash over time..

Great, thanks..

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

Hi, thanks.

Tyler just following up on the last question, the next two maturities just happened to be investment grade -- non investment grade bonds and is there -- is that just -- when you're thinking about paying down things in cash or just if there happen to be non investment grade bonds that you're paying down and maybe thinking about in the future paying down other non investment grade bonds, maybe refinancing some of the investment grade bonds and how is Dell thinking about that as they go forward?.

Well, I mean obviously I would love to be able to pay down the most expensive debt first but as you know it's not all retail. So I think we will pay things down as they come due.

If it makes sense for whatever reason or if there is a good opportunity to refinance I mean, I'm not saying that's off the table and that's always a consideration as I'm trying to optimize the balance sheet and capital structure and we will pick a part of the term loans, right. I mean that is the stuff that is prepaid and is easy to take out.

I've got the 81 is gone now so it is nice to see that no longer my capital structure. I've got 83 which is due at the end of the years so that is embedded in that 5.5 billion number I threw out earlier.

And then we've got the 82 and term loan B down the line and so I think we will continue to do what we're doing, deleveraging, paying down debt will be the focus but I don't want to say that refinancing opportunities are non-existent or something I wouldn’t consider. .

And just to tag onto that then I wanted to ask another one for Tyler. [Multiple Speaker].

I will then Tyler, just tell me about the that we had a generally richer mix for servers and storage in the fourth quarter now that we look at the new Dell?.

Let me take that, that is more of a Tom question than Tyler question although Tyler's welcome to jump in on that. [Multiple Speaker].

Look again we don't get into projecting future results but I will tell you if you just look at the dynamics of the business right now clearly we are seeing extraordinarily strong server velocity and demand for lots of reasons, right. More compute centric solutions being driven.

ASPs are up as Jeff mentioned in this talking point because of the richer mix the pricing actions, the component cost inputs that have gone up. So it's really about Q4, if you look at seasonally historically this would be an extraordinarily strong storage quarter.

And I do think that with that we do think that we will see some of those seasonal patterns hold. The question is how strong our server is going to be.

And so we expect you'll have to see how that plays out but historical seasonal patterns would tell you that storage should be -- this is typically the strongest quarter of the year from a storage perspective.

And you do see at times into the year budget flush from some of the corporate customers as there are good finishing their projects and their budget cycles and therefore you should perhaps see how that plays on the server activity as well. .

But to be really clear we're not slowing down servers our job is to speed up so storage. .

Yeah, so I mean I told Jeff to go past on both, now that is not really very helpful from Jeff's perspective which is what he is trying to do anyway.

But our job is to get this business where we want it and we've got work to do on storage as we all have talked about and I'm pretty happy with the server performance and we just want to keep going on that..

Thank you, that's my question and a follow up. .

Thank you. .

I would have given you another one Dave but….

Your next question comes from the line of Adam Willinger with Bank of America. Please go ahead. .

Hey, thanks for taking the question. So I had another question on the flexible consumption model.

So just first do you think that the overall portion of these deals in the third quarter versus the second quarter is like an anomaly to kind of long-term trends and do you have any visibility into how these types of deals are trending in fourth quarter?.

Yeah, look I do think that you shouldn’t read anything into the fact that Q3 was little bit softer than Q2 in terms of flexible consumption models. I think that things are going to vary.

They are complex, they're multi-year, they take time to negotiate with and typically the larger customers, the global customers that are negotiating these types of arrangements and so I think we are going to see some variability.

I think all things being equal it's entirely conceivable that we'll see an uptick in a flexible consumption models in Q4 just given natural end of year sort of activity both from a customer and from a Dell Technologies perspective. But we will have to see how that plays out..

Okay and then still kind of on that topic, I think you touched on it briefly on one of the prior questions but the presence of these kind of flexible consumption model does it impact kind of how you recognize margin for the business both kind of on a short-term and over the life of the relationship.

And I am trying to think about if it is still fair to kind of think about incremental margin for storage in kind of a 50% area?.

Well look I mean we like these flexible consumption models. They do have the effect as you guys all know of deferring recognition of revenue and amortizing that revenue and associated margin over a contract cycle that might be two to five years depending upon the terms of the agreement.

So historically what we are seeing is over time these tend to be over the course of the contract period they tend to be a better profit if they tend to have a better profitability profile but it ramps so it starts a little lower and ramps over the course of the contract.

So, kind of all in basis margin dollars generally have shown to be higher over the entire length of the contract but it does -- it does change the timing pattern and pattern of when those are recognized.

And so remember we like these constructs in the context of building a more intimate customer relationship, ensuring that we are a more strategic partner for these customers and that builds into sort of a more of an as a service or a stream or recurring revenue stream that's helpful for us.

And we've got the flexibility of being privately controlled to do these types of structures and not be as focused on short-term quarter-to-quarter profitability although clearly we are trying to drive the probability of the business. But we do have some incremental flexibility here..

Okay, thanks so much..

Our next question comes from the line of Shannon Cross with Cross Research. Please go ahead. .

Thank you very much for taking my question.

Jeff can you talk a bit about the competitive landscape on the storage side both in terms of some of the newer technologies as well as what you're seeing in sort of legacy?.

Sure, hi Shannon, how are you doing? Well I think a couple of things that I look at the marketplace and as I'm learning through my first three months it's a big market that we get confused that we think is shrinking. This external storage market grew last quarter. It is a $24 billion market, it's a big opportunity.

We have a big, big opportunity with our 30% share to grow in this market and that's all we need to do. Clearly the competition is net up and share most notably. What I see about them as they have extreme focus and they have clarity in their product line and I think they're reaping a benefit from that.

Some of my remarks are about pivoting our organization too. I think we mentioned last quarter that we're going to invest in more sales specialists capacity. We hired more sales specialists in Q3, we're going to hire more sales specialists in Q4. We're going to build out that investment. Tom actually talked about investments.

One of the areas we consciously have decided to do is build out more capacity for more coverage in the mid-market commercial segment. And that's not at the exclusion of the enterprise segment either. We're building out more sales capacity in the enterprise.

We are moving sales leadership between the organizations so we can get more storage knowledge base in our commercial organization. We're making adjustments and continuing to tweak our sales compensation towards a more biased storage. We just made two significant updates to the product portfolio.

We added D duplication in Unity and we added an all-flash offers to our SC product line in the mid range. Our extreme IO which is I think a very differentiated asset in the marketplace particularly against the two competitors that I mentioned earlier with its in-line data services and its performance attributes is a great product.

Another thing we just launched in the last I think it's week or 10 days is a new customer loyalty program which if you compare it against the competitive landscape is absolutely unmatched. Our competitors basically guarantee their product or program for 30 days.

We guarantee ours for three years, it's got seven key components and it basically is an investment protection with a set of guarantees for our customers that quite honestly the industry analysts and our customers have responded quite well to which I think is upping our competitive nature.

So I think we're in a big market, it's a big opportunity, we clearly have lost share it's undeniable, the public results are out. We are not satisfied with that or investing in sales capacity in coverage and expertise. We continue to add to the product portfolio and its competitiveness. We need the D Duplications and Unity.

We needed all-flash and the SC. We need to continue to drive the performance advantage we have in extreme IO. We now have a set of loyalty programs that again I believe puts us in a position to walk in to customers and say there is no risk, picking us for pulling out the competition and here's our guarantee behind it.

I don’t know if that answers your question, I am happy, if I didn't, to go into more detail. .

No, I think that does. I just -- I'm curious versus prior leadership in ISG any changes that you see in terms of how you're going to approach maybe the integration between the two businesses, clearly you're investing in certain areas, it sounds like a lot of that maybe was already underway.

So I'm just curious how you are working with the EMC assets?.

Well our Dell family of assets either we try not to refer them as EMC assets, it is the Dell family assets. I'm absolutely going to integrate top to bottom one team. You may be aware of some of the more styled orientation of the previous organization that's not going to be the case going forward.

We're going to look at the storage portfolio, we're going to make decisions across the portfolio in the best interests of our customers.

When I look at the high end storage deck, the mid range storage deck, the low end across data protection in ACI we are going to work more seamlessly across the organization and build the right number of products positioned appropriately in the marketplace. I mentioned in my remarks we have a better complexity in the portfolio.

We're going to make it clear for our sales force and clear for our customers what products to buy for what applications or environments. That is something we can do and we will do and it's going to be an across the entire portfolio. I don't know if that answers your question. .

But Jeff that is a multi quarter journey, right. .

Given the cycle time of product development, given commitments we've made to customers we will work through this. But you know complexity doesn't mean less products, complexity can mean the number of offers per product, how many countries we offer our product in.

Interestingly we treat the 180th country the same way we treat the largest country in the world. It's not clear to me the 180th country in the world needs all of the entire storage breadth of our portfolio and we can make that less complex, easier for our sales and marketing teams to communicate and much easier for our customers to buy.

So you'll see us work on that over the next handful of quarters.

Great, thank you so much. It's nice to talk. .

Great, thanks Jeff, thanks Shannon. Thanks to everyone for joining. Quick reminder, in early January we will be at CES with the full suite of consumer and gaming products and invite anyone that's out there to reach out to us, we would be happy to speak with you. Come by our show. So, thanks and have a great holiday season everyone. .

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