On the strength of best-in-class supply chain performance, Dell Technologies reported Q3 2023 revenue that exceeded consensus revenue expectations and blew away earnings expectations. The company did, however, lower Q4 guidance in the face of continuing uncertainty.
But the company’s report was really about how supply chain strategy and tactics powered its results. About half of the outperformance — adjusted earnings of $2.30 per share vs. Wall Street consensus of $1.60 — came from lower costs for components and logistics in the quarter.
“Logistics costs have come down. As supply now is ahead of demand, we’re able to put things on the ocean. We don’t have to expedite as much. We’re not using as much expedited air freight,” vice chairman and co-COO Jeff Clarke said on the company’s earnings call. “Those all go into our input cost equation, which obviously helped us in the bottom line and the performance of this quarter.”
The company drove operating expenses down 5% sequentially and 12% from the year-ago quarter; those numbers were also helped by slowed hiring.
At the same time, executives reinforced Dell’s focus on, and commitment to, driving product innovation. It delivered these results “without compromising our innovation agenda with 30 infrastructure launches in the last 13 weeks, including six new Dell APEX offerings, in strategic areas like multi-cloud, edge, and subscription and as-a-service,” co-COO Chuck Whitten said. The latest innovations include:
- Project Frontier, an initiative to deliver a software platform that unifies edge operations across infrastructure and applications
- PowerFlex, software-defined storage for Amazon AWS — the first deliverable under the strategy to support multi-cloud data mobility in storage products.
For its quarter ended Oct. 31, Dell reported revenue of $24.7 billion, down 6% from a year ago but beating the consensus expectation of $24.4 billion among Wall Street analysts.
In a particular bright spot, Dell’s Infrastructure Solutions Group (ISG) delivered record third-quarter revenue of $9.6 billion, up 12% year-over-year and its seventh consecutive quarter of year-over-year growth. Servers and networking revenue was $5.2 billion, an increase of 14%. Storage revenue was $4.4 billion, also up double digits at 11%. Operating income was a record $1.4 billion, up 54% and approximately 14.3% of Infrastructure Solutions Group revenue.
In its Client Solutions Group (desktop PCs), revenue was down 17% to $13.8 billion; the commercial business in this segment declined 13% and the consumer declined 29%.
For the quarter ending Jan. 31, 2023, the company updated its revenue guidance to be between $23 billion to $24 billion, below previous Wall Street forecasts of $24.9 billion.
Executives cited continued uncertainty surrounding the demand environment.
“On one hand, we are seeing some customers delay IT purchases. Other customers continue to move ahead with Dell given the criticality of technology to their long-term competitiveness and a growing need to drive near-term productivity through IT,” Whitten said in his prepared remarks, adding later: “And the customer feedback is very similar to what we described in Q2, very cautious and deliberate behavior in the face of what’s a lot of economic — macroeconomic — dynamics out there.”
Vertical industries that remain bright spots include energy, the federal government, and medium business globally, all of which are performing better than the business overall.
Returning to the theme of supply chains, component costs, and profitability, executives cited gross margin increases (up two percentage points in the quarter) primarily due to a favorable mix of customers shifting to ISG products, a decrease in cost of goods sold due to some components turning deflationary, along with declining logistics costs.
“The company continues to chip away at inventory,” Clarke said. As it converted backlogs, it was able to take advantage of lower freight rates, reductions in expedited shipments, and lower supplier premiums. Now, “supply is ahead of demand across consumer PCs, commercial PCs, displays, docs, to the point that we’re now able to readjust our freight networks to take advantage of that. We’re in a good position.”
The company continues to deal with component constraints in power supplies, integrated circuits, and high-performance network interfaces in servers, while custom ASICs for storage products are constrained.
Another bright spot: Dell Financial Services, which reported originations up 17%, and officials cited increasing interest in subscription services as the macroeconomic environment slows.
On balance, Dell continues to deliver lessons on how proactive supply chain management, and the efficiency it yields, drives direct top- and bottom-line impact. That, in turn, enables the company to retain focus on innovation in its core business.
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