Dell Technologies Inc. (NYSE:DVMT) Q3 2019 Earnings Conference Call November 29, 2018 6:00 PM ET
Rob Williams - SVP, IR
Tom Sweet - CFO
Jeff Clarke - Vice Chairman, Products and Operations
Tyler Johnson - Treasurer
David Eller - Wells Fargo
Amit Daryanani - RBC Capital Markets
Jeff Harlib - Barclays
Thomas Eagan - JPMorgan
Shannon Cross - Cross Research
Ana Goshko - Bank of America Merrill Lynch
Good afternoon and welcome to the Fiscal Year 2019 Third Quarter 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 part or whole without 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, Victoria. Good afternoon and evening 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 posted our third quarter press release and web deck on our website. I encourage you to review these documents for additional perspective. Our third quarter 10-Q will be filed on Monday, December 10.
Let me take a moment to address the pending Class V transaction. Following extensive outreach and engagement, on November the 15, we announced amendments to the proposed Class V common stock transaction. We filed a supplemental to our definitive form S-4 on November 26th and we are scheduled to hold the special meeting and stockholder vote on Tuesday, December 11 at 8 AM Central Time. We expect to announce stockholder approval of the transaction on December 11.
So today, November the 29 would be the first day of the 17-day measurement period for the determination of the volume weighted average price of the Class V common stock. This volume weighted average price will be used to determine the final exchange ratio to be used in connection with the Class V transaction. In this scenario, we expect the transaction to close in this calendar year with the projected close date and first day of trading for the Class C common stock on the NYSE under the ticker symbol DELL on December the 28.
Before I turn it over to Tom, I'd like to remind you of a few items. 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. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release.
Our Q3 non-GAAP operating income includes $2.4 billion of adjustments. A large portion of these are non-cash and relate to purchase accounting and amortization of intangibles assets. Please refer to the supplemental slides beginning on slide 22 for details of our non-GAAP adjustments. Please also note that all growth percentages refer to year-over-year unless otherwise specified.
Finally, I would 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 Statements section in our web deck. We assume no obligation to update our forward-looking statements.
With that, I'll turn it over to Tom.
Thanks, Rob. Today, Dell Technologies has assembled a broad set of capabilities that are differentiated within the industry and drive an attractive financial model. We are running the business in a disciplined way for the long-term with our primary focus on relative growth and share gain and the optimization of cash flow. Our capital structure is efficient, drives flexibility and we continue to focus our capital allocation framework on debt reduction. We are in the midst of a technology-led investment cycle, driven by digital transformation in the enormous amount of data that is getting created every day.
Our focus and investments are centered on data and the enablement through our technologies to help our customers digitally transform and drive their businesses forward. We are investing for long-term growth. We believe we have a differentiated portfolio in its breadth and capability and our customers increasingly see us as a key partner to meet their needs from the edge to the core to the cloud, which is showing up in our results. We delivered another strong quarter of top line velocity as all three of our reportable segments delivered double digit revenue growth for the third consecutive quarter.
GAAP revenue for the quarter was 22.5 billion, up 15% with a GAAP operating loss of approximately 356 million. As Rob mentioned in his introductory comments, there are many adjustments between GAAP and non-GAAP results. I do want to call out a $190 million goodwill impairment related to Virtustream due to a reset of the long-term business model, as we streamline the product portfolio. Non-GAAP revenue was 22.7 billion, up 14%, driven primarily by double digit growth in servers, commercial client and VMware.
Gross margin was up 8% to 7 billion and was 30.9% of revenue, which was down 170 basis points due to mix dynamics within ISG, as server results continued to be strong and foreign exchange impacts and supply chain headwinds within CSG. Operating expense was 4.9 billion, up 13% and was 21.8% of revenue as our investments layered in, which is consistent with our comments on the Q2 call regarding the back half of this year. As a reminder, these investments are principally focused on go to market coverage expansion. Operating income was down 2% to 2.1 billion or 9.1% of revenue. Adjusted EBITDA for the quarter was 2.4 billion or 10.7% of revenue. On a trailing 12-months basis, adjusted EBITDA was 10 billion.
Turning to the business segments, revenue for the infrastructure solutions group was 8.9 billion, up 19%. The increase was driven by a 30% growth in servers and networking to 5.1 billion and 6% growth in storage to 3.9 billion. This marked the third consecutive quarter of revenue growth for storage, as we continue to make progress. Quite frankly, we would have liked to have seen higher growth in storage this quarter, but we do believe we have taken the right actions to drive meaningful long-term improvements in the storage business. We are pleased with the overall server velocity.
We continue to see strong demand for our PowerEdge server products and significant increases in server average selling prices, driven by increased acceptance of our 14th generation products and increases in memory and storage content. Operating income for ISG was 935 million or 10.5% of revenue, which is down 100 basis points. Similar to the past few quarters, we continue to see a mix shift within ISG to the strength in servers that impacted our overall ISG operating margin percentage.
Revenue for the client solutions group was up 11% to 10.9 billion. Commercial revenue grew 12% to 7.6 billion, driven by balanced double digit growth in commercial notebooks, desktops and workstations. Consumer revenue was 3.3 billion, up 8%, primarily due to strength in notebooks. CSG operating income was 447 million or 4.1% of revenue. Operating income was down 29% against a stronger prior period and though an improvement from Q2, it was still lower than our expectations as the team navigated through foreign exchange and supply chain headwinds.
Overall, we continue to be pleased with the business trajectory and relative performance and we'll continue to focus on relative growth and improving profitability through pricing and go to market execution around product mix and attach.
The VMware segment had another strong quarter, delivering 2.2 billion of revenue, which was up 15%. Operating income was 768 million or 34.5% of revenue. Based on VMware standalone results reported earlier today, the company had license revenue growth of 17%, driven by broad portfolio of strength with license bookings growth up double digits for NSX and VSAN and VxRail and up high single digits for [Technical Difficulty] end user computing and core software defined datacenter. Revenue from our other businesses, which includes Pivotal, SecureWorks, RSA Security, Virtustream and Boomi was 583 million, up 5%.
Now, let me turn it over to Tyler to walk you through our capital structure.
Thanks, Tom. In the third quarter, we generated cash flow from operations of $833 million. It is typical that cash flow is lower in Q3 due to the seasonal decline in revenue and this follows the strong cash performance we saw in Q2. In addition, Q3 cash flow was impacted by higher inventory as a result of overall business growth, holiday seasonality and supply chain dynamics. We expect these working capital dynamics to be temporary, but the impacts could last a few more quarters.
On a trailing 12 months basis, cash flow from operations was 7.7 billion and we ended Q3 with a cash and investments balance of approximately 20.4 billion. Deferred revenue was 22.1 billion, up approximately 3.3 billion year-over-year and growing slightly faster than top line revenue. Deferred revenue growth reflects higher hardware and software maintenance from growth in the business. During Q3, we repaid $1.2 billion of debt, which included prepaying the outstanding balance of our term loan A3, scheduled to mature in December of this year plus another approximately 100 million of amortization. Our core debt balance ended the quarter at 36.2 billion.
Net core debt, which is core debt less cash and investments, excluding unrestricted subsidiaries, ended the quarter at 30.2 billion. Total debt decreased to 49.4 billion, down approximately 940 million compared to the prior quarter due to our debt repayment, partially offset by an increase of approximately 350 million in DFS debt. Dell financial services originations were 1.6 billion, essentially flat year-over-year as the business begins to normalize after the EMC integration. We finished the third quarter with financing receivables of 8.1 billion, which was up 1.1 billion or 16% compared to Q3 of last year. These receivables are funded by 7.1 billion of non-core debt, mainly through securitization.
Before I turn the call over to Jeff, let me touch on a couple of points related to the Class V transaction and capital allocation. Assuming investors elect the maximum cash option, our overall cash and investments balance will decline approximately 11 billion in Q4 due to the VMware special dividend paid to stockholders. In addition, as disclosed in our November 15 press release, announcing the revised Class V transaction, we have received commitments for up to $5 billion of bridge financing, so our debt balance will increase when we close the transaction, assuming investors elect the maximum cash option.
Regarding the permanent financing, related to the bridge, we will pick a prudent approach, minimizing our cost of capital, while maintaining a manageable maturity profile. We remain committed to de-leveraging and achieving investment grade ratings from the rating agencies, though we acknowledge that timing may now be delayed. We believe the incremental debt associated with this unique transaction is appropriate, helping to further align economic and equity interest within Dell Technologies, as we look at the long-term framework of the company. We will continue to run the same financial model, built around free cash flow generation, which has enabled a significant amount to de-leveraging to date.
Our capital allocation strategy remains unchanged with the majority being used to reduce debt. Since closing the EMC transaction, we've paid down approximately 14.4 billion of gross debt, excluding DFS related and subsidiary debt, while continuing to make appropriate and timely business investments. As we look forward to FY20, our intent is to pay down the full 4.8 billion coming due using a combination of free cash flow generation, balance sheet cash and short-term revolver draw. We will also continue to evaluate refinancing opportunities as we optimize our capital structure.
With that, let me turn it over to Jeff to discuss the operational highlights for ISG and CSG.
Thanks, Tyler and good evening, everyone. At our Analyst Day in September, you heard us talk about the data era and that -- and how that data is creating new opportunities and trends in artificial intelligence, machine learning, 5G and edge computing. The data era is creating a new set of IT requirements in how that data is managed, stored, analyzed, secured and protected, presenting an exciting opportunity for Dell Technologies. We are seeing this opportunity translate into our businesses, adding more than 75,000 new buyers year-to-date across our commercial and enterprise sales organizations.
Moving to the businesses, we are pleased with the results for the ISG segment, which delivered its third consecutive quarter of double-digit revenue growth. Storage had its third straight quarter of positive growth and servers and networking delivered its eighth consecutive quarter of growth. ISG operating income grew 7% to $935 million, which was slower than the revenue growth, but consistent with the server’s storage and mix dynamics within ISG. Storage revenue was up 6% in the quarter. We saw double digit growth in demand for high end, file based and all flash storage.
As Tom said, we would have liked to have seen our storage business grow faster. We continue to focus on accelerating the velocity in mid-range storage through significant investments in our go to market engine to increase capacity and coverage, focused innovation to increase the competitiveness of the portfolio and working towards a new mid-range product that is expected to be available by the end of next year. We continue to see strong demand for our market leading hyper-converged portfolio and other software defined offers. Our VxRail offerings saw triple digit growth again this quarter and -- this quarter on a demand basis and now is well above $1 billion run rate.
For servers, we are pleased with the continued strength of our business. We saw double digit growth in both server units and the average selling prices. IDC is forecasting continued growth and TAM expansion, as their expected revenue growth of 24% for mainstream servers for calendar year 2018. We are advancing our multi-cloud strategy with a broad portfolio of solutions and services, supporting hybrid on and off premise private and public cloud offerings and Dell is -- Dell EMC is the number one IT infrastructure provider in the world, offering a wide variety of cloud platforms, cloud enabled infrastructure, consumption models and services, all from one place.
Shifting to CSG, we had another strong quarter with double digit revenue growth in our commercial notebooks, desktops, workstations and our high end consumer notebooks. Client software and peripherals continued to be a highlight with double digit revenue growth in displays and high single digit growth in client peripherals. Operating income from CSG continues to be a focus area, as we focus or as we focus on balanced growth and profitability, while managing through a few external headwinds, including foreign exchange fluctuation and supply chain challenges.
We are pleased to see CSG profitability improve quarter-over-quarter and we were able to -- excuse me, as we were able to successfully manage some of the macro headwinds already discussed through repricing, and we saw a slight deflationary cost environment that helped us. Looking at the broader PC industry, unit growth was 0.2% for calendar Q3 according to IDC. Dell significantly outperformed the worldwide industry growing units 5.8% in calendar Q3, delivering above industry growth in desktops, notebooks and in total commercial PCs.
We increased our global PC share on a year-over-year basis for the 23rd consecutive quarter as we gained 90 basis points of unit share gain or unit share worldwide. We continue to believe the industry is in a Windows 10 refresh cycle. We are the industry leader in workstations and displays worldwide. In calendar Q3, according to IDC, Dell outgrew the industry in workstation units with 13% growth. We saw positive year-over-year growth in every region and double digit growth in both fixed and mobile workstation form factors. For displays, Dell outgrew the industry in calendar Q3 based on display search data to maintain its number one ranking for the 22nd consecutive quarter.
We are focused on modernizing IT through innovation to drive better business outcomes using data driven artificial intelligence and machine learning technologies. We offer massively scalable, easily managed, high performance systems that can support both traditional and data intensive emerging workflows for multiple use cases and verticals, including automotive, financial services, manufacturing and healthcare and we do this in a landscape that continues to evolve with more and more data being generated at the edge. Our end-to-end portfolio positions us and our customers well to take on these opportunities in the data era. We continue to collaborate with VMware and have aligned our development teams around six key innovation areas to bring higher value software to our customers.
The areas include compute, software defined storage, software defined networking, hyper-converge, cloud and workspace one. Earlier this month, at VMworld Europe, we announce enhancements to the VxRail and the VxBlock System 1000 designed to help customers further automate their operations -- of their operations in the modern data center in their hybrid cloud environments. This collaboration along with the work that we are doing with Secureworks, Boomi and RSA is a clear example of how we are truly better together deliver best in class solutions for our customers.
In closing, earlier this month, we met with industry analysts in Chicago and their response to our strategy and customer positioning was very positive. We are pleased with the performance in the business so far this year and remain focused on executing our strategy as we finish out FY19 and look ahead to FY20. We've made the right decisions for long term growth and are confident we have the broadest and most advanced portfolio to help customers with their digital transformations.
With that, let me turn it back over to Tom.
Thanks, Jeff. Looking forward, we are confident in the business with customer receptivity to the Dell Technologies set of solutions is strong and the global macroeconomic environment is still positive, albeit with headwinds as we look around the globe. Overall, we're optimistic about the market opportunity and we will continue executing our strategic areas of focus. As a reminder, these include growing above the market and driving share gains, generating strong cash flow and de-levering the balance sheet, executing in ISG and driving profitability by balancing growth and margins and being a trusted partner for our customers by listening and addressing their needs with our full range of capabilities.
As we look to close out fiscal ’19, our guidance for the full year is unchanged. We expect non-GAAP revenue of between 90.5 billion and 92 billion, non-GAAP operating income between 8.4 billion and 8.8 billion and non-GAAP net income between 4.9 billion and 5.3 billion. While still very early in the quarter, for the full year, we are trending slightly below the midpoint of the range for revenue and slightly above the midpoint of the range for operating income. Given the pending class V transaction, I want to touch on fiscal ‘20 and beyond. The long term financial framework that we provided at the September Analyst Meeting remains the same. We expect to update our fiscal ‘20 framework during our earnings call in March. However, here are some early thoughts that I'd like you to consider.
First, we will have an accounting change related to the new leasing standard, beginning in Q1. The standard will result in more of the leases Dell originates being accounted for as operating leases with the associated hardware revenue recognized over time versus upfront in a capital lease transaction. The leasing standard is prospective, not retroactive for this change and the impacts will depend upon the mix of the business and other factors. Our current FY20 estimate for this new standard will reduce revenue by between 500 million and 1.5 billion and reduce operating income by between 150 million to 250 million. There is no impact on cash and EBITDA is expected to be marginally higher, given the new depreciation will be slightly more than the gross margin reduction in fiscal ‘20. The P&L impact should normalize over a 3-year period.
Second, we continue to invest in the business in areas such as sales, R&D and our strategically aligned businesses with these investments layering in during the second half of the current fiscal year and the first part of fiscal ‘20. We are making these decisions with a disciplined approach and for the long -- and for long term growth of the company and we expect to start seeing the return on these investments, particularly in sales productivity as the year progresses.
Third, given the size of our Dell Technologies Capital Ventures portfolio, we could experience variability quarter-to-quarter in financing and other due to the mark-to-market accounting rules that went into effect this year. Lastly, pending the continued issuance of regulatory guidance on tax reform, we expect our non-GAAP tax rate to be between 19% and 21%.
In closing, we look forward to the stockholder vote on December 11. We believe that the Class V transaction will afford Class V stockholders the opportunity to participate in the future value creation of Dell Technologies through ownership of the Class C common stock. We have made significant investments to position our company to achieve sustainable long-term growth by creating a leading global end to end technology provider with significant scale and a comprehensive portfolio of IT, hardware, software and service solutions. As we have communicated in the past, we are managing and running the business for the long term and will make the appropriate investments to ensure we are well positioned for future growth, as we enable our customers to meet their business needs of tomorrow.
With that, I'll turn it back to Rob to begin Q&A.
Thanks, Tom. Let's get to Q&A. We ask that each participant ask one question with one short follow-up if you have one. Victoria, can you please introduce the first question?
We will take our first question from David Eller with Wells Fargo.
Good evening. Thank you for taking the question. On slide 17, you've kind of put back out the operating income margin expectations you've got over the long term, but I think the -- I think this is the first time we've seen the 14% operating margin guidance for the ISG segment. Could you talk a little bit about expectations for, I know, growing storage is probably your primary growth objective at this point, but how much does it have to outgrow servers and networking to get to that 14% margin over time?
Look, hey, David. This is Tom. Good question. Look, the way we think about it is we have P&L frameworks as we think about the various pieces of our business and the various aspects of our business. And so long term, we have a North Star P&L construct through the ISG business that migrates profitability up, as we've highlighted in that guidance. And the two key drivers around that guidance are going to be the continued growth of storage that we've had three straight quarters now of year-over-year growth in storage and the longer term framework is such that we have to roughly recapture about 60% to 70% of the share loss that we experienced over the previous, I guess, almost 4 years before we started turning the corner this year. And so there is a growth dynamic there within the storage space. The other dynamic around that quite frankly is around continuing to migrate up server profitability over time, as we've talked about in the past and the actions that we have underway around that as we continue to make sure that our server business is positioned, not only for today, but for the 2021, 2023 timeframe.
And then maybe a couple of other data points, David. So, as Tom said, the lost share in the business had been declining 15 of the 16 previous quarters. We now have three quarters in a row of revenue growth, 10% in Q1, 13% in Q2, 6% in Q3. We took 330 basis points of share in Q1, 100 basis points of share in Q2. We expect based on what we know to be able to take share in Q3. We have a trend, in my words and Tom and I often have this conversation, we've stabilized a business that was in decline. We have work to do to continue to grow. And we've talked about this the last several calls, part of the growth plan is investing in sales capacity and coverage to grow the buyer base.
We are committed to grow the buyer base. We need more storage buyers and we are putting in the capacity in both our enterprise and commercial sales organizations to do so. The second lynchpin of that was to improve the overall competitiveness of the product. We have done that over the last 14 months, increasingly improving the wide -- broad portfolio, starting with the refresh of the PowerMax product, the high end highest performance storage array in the marketplace today and a number of performance improvements along -- over the years. That is the foundation for us to grow, as we move through this framework.
The other part of our ISG operating income improvement needs to be continued server improvement. We've talked about this as well, moving up to the higher workloads where there are higher margins. We have an internal program that we call server business transformation, which is fundamentally getting us to fight making our business model more competitive and allowing us to move into the higher value workloads that are emerging today that carry better margins. That's what we're working on.
Great. And then a follow-up question on client solutions, it looks like one of your large competitors in a call just a little while ago talked about CPU shortages constraining growth in the first half of ’19, tariff expectations, foreign exchange headwinds and all that kind of driving lower cash flow for their computer business. So, could you just talk about what you've got embedded for the first half of ‘19 when it comes to -- or calendar ‘19 when it comes to tariffs, FX and demand impacts there?
Well, okay, it’s Tom again. We don't give guidance, but perhaps maybe Jeff can give you some thoughts around how we think about the framework about how we're running the PC business.
Sure. I think there are several questions in there. If you think about the framework of we've communicated publicly about our PC business is a framework of outperforming the relative -- on a relative basis, outperforming the industry, roughly 115 basis points. We look at that as fundamentally how do we perform relative to the rest of the industry. We put that framework in place. You know we're driving this business in the consolidation that is occurring in the PC industry that we are driving it for profit, driving it for scale and driving it for cash flow. Those are the strategic tenets of the business with a strong influence of innovation to drive differentiation across our various platforms.
We do have some headwinds. You named the three of them that certainly I called out as some supply chain headwinds in the quarter, some foreign currency headwinds in the quarter and clearly, we didn't call out tariffs. There is certainly uncertainty with the tariff picture, but we've successfully, with our supply chain, the optionality that we have, have navigated the current list for tariffs quite successfully. You may not know most of our desktops are already built in North America anyway, so we didn't have a bunch of hurdles to jump through and where we have incurred in higher costs with tariffs, we have passed that through to end users. Interestingly, we haven't seen an impact or no apparent impact to demand, as we have done that.
Does that help?
We'll take our next question from Amit Daryanani from RBC Capital Markets.
I guess most of -- you guys made comments couple of times in the prepared statements that you wish your storage business grew faster than the 6% number it had. I’m curious what were the impediments that led to the deceleration versus the 13% and 10% growth you’ve had the last two quarters, what led to the downtick and does that kind of revert back as you go into calendar ‘19.
Well, I think I called out specifically, Tom may even as well, it's the performance in the mid-range of our portfolio. I believe I called out we had double digit performance in high end in our [unstructured] [ph] portfolio and our all flash portfolio. It is the mid-range portfolio that didn't grow to the degree that we would have liked. It's where we've put the most effort in innovation to close the competitive gaps that we would have had over the past year. We feel very good where the portfolio is today as we head into next year and we think that combined with this increased capacity and coverage and a focus on increasing the buyer base is how we're going to drive and grow the storage business into next year. Mind you, it still grew 6% and given our relative compares over the last four years, I'd put this into the pleased, but certainly not satisfied category that again we've stabilized the business with three consecutive quarters of growth.
And if I could just follow-up, when we think about this 14% margin target on the ISG side as you were talking about, is there a revenue run rate that you need to achieve to get there and secondarily are any cost containment efforts that you have ongoing that could get some delta from 9% to 14% if the revenue base doesn't grow, [indiscernible] is the big focus here, but just trying to understand how much margin expansion can be done with cost containment versus revenue growth?
Look, the overall revenue growth framework for the long term guidance is out there, right, and we provided that framework. So there is anticipated revenue growth, and as Jeff said, we run the business to take share and grow at a premium to the market.
And we have a framework by each of the two large businesses in ISG that's -- it's relative performance.
So, and we structured the guidance that way and you would appreciate this, Amit, just because look, I'm not smart enough or we're not smart enough to call the market what it looks like in FY20 or ‘21 or ‘22 per se. We use IDC and some other third-party industry analysts to help us frame the market opportunity, but then -- but our vision is whatever the market is, we want to grow at a premium to that. Having said that, look, I mean, we continue to think there's continued efficiency and the cost structure that needs to happen and I think I've been -- I've talked about that in the past in the context of, one, we've made significant investment back into the business, particularly around go to market selling capacity and so that capacity needs to come up the productivity curve that was in the business case that were presented to us that we approved, which drove the investment.
Now to date, as we track that – those cohorts that have come in from a sales capacity perspective, they are on that productivity curve, but it's early and that's why you heard me talk about in my framework around FY20, some thoughts around, hey, look we knew the back half of this year and early next year was going to be -- we have some cost dynamics there as that investment ramps and we expect that to improve as we go through the year. So we will continue to look for cost efficiencies and drive cost efficiencies and if you know our history, we have a history of taking out appropriate costs when we need to and making sure the P&L works the way we want it to work and we'll continue to look for those opportunities as we move forward.
But we do believe, by and large, as it relates to storage in particular that the opportunity there is growth. And that we need to get back on a consistent premium to market growth trajectory that will allow us to recapture some -- a fair amount of the share loss that we experienced over the last number of years. So that's the playbook that we're running right now.
You called it out Tom, it’s relative performance. We’ve publicly communicated an 8 to 9 point premium to industry growth. That lever over a 5-year period claws back just as you said, roughly two-thirds of the share loss that we've had over the previous four years and that's the catalyst for growth in our storage business.
We'll take our next question from Jeff Harlib with Barclays.
Tom, you talked about the global macroeconomic headwinds. Can you just say if you've seen, particularly in your storage server business, any indications of a slowdown with your customer base and I also just want to know if the pressure on NAND prices, how that's affecting margins in your storage business.
Look, Jeff, let me take the first one and then maybe Jeff and I will tag team the second part of that question. The first part on global economic environment and headwinds, the reality is that to date, not really other than in a few concentrated spots where perhaps there's been a slight investment pause in certain classes of customers and a good example of that is UK public, given the Brexit dynamic. But in general, not yet, why I said it the way I said it though was because as we look into next year, one, if you’ve flashed back nine months ago, the environment was uniformly positive, right, and there wasn’t a lot of chatter around interest rate dynamics, Brexit, although Brexit was clearly there, but given the booming timeline, it's become more prominent. Some of the macroeconomics or global tariff conversation wasn't in swing then.
So there is more noise in the environment is the way I would say it. And what we're concerned about, although we haven't seen it yet, is does that have a cumulative effect on business confidence, right. And we haven't seen it yet, but it's just something we're keeping our eye on as we plan next year and as we think about where we want to position the business. So, look, I was trying to be relatively transparent with you guys just about as we think about the macro, it’s still positive. Global growth is forecasted to be mid to upper 2.5, 2.8, something in that range depending upon which forecast you believe. Now, that's down from this year, but still positive and still healthy in a relative sense, but it's just something we're keeping our eye on.
Well, then you have underneath that, what we believe is a technology led investment cycle, where this data era that we've referenced in our discussions since September is taking a life on its own where companies are having to invest in modernizing their infrastructure. You asked about, are we seeing this on our server business? Our server networking business over the last four quarters is around 32%, 27%, 41%, 34% and 30%. We are seeing mainstream server and on-prem deployment continuing to be strong in the business.
And then Jeff, what was the second part of that question?
Just if there was any -- with the NAND price pressure, how that impacts the flash, the solid state part of your storage business?
Yeah. I'm not sure what price pressure is, we think NAND is deflationary right now, SSD sort of.
I’m sorry, that's what I meant, deflationary. Yeah. If there's any benefit or how that's affecting your margins?
It is benefiting margins. In our model, we do well in deflationary cost environments from our largest products and most advanced products and storage arrays that use a lot of SSDs all the way down to our PC business. We think there is a deflationary environment for commodities like DRAM, NAND and displays through the first half of next year.
And then my follow-up, just the transaction costs and other corporate in EBITDA, adjusted EBITDA calculations have gone up this quarter. I assume some of that is the DVMT transaction, but are there any unusual items there and how should we look at those line items?
Well, Jeff, remember that I highlighted in my talk track, the goodwill impairment charge that we took on Virtustream of 190 million. So that took a big part of that change. Bon-cash, but we needed to reset that business model and some of the solution capability there relative to where we think the market is moving. So that's principally the biggest change.
We'll take our next question from Thomas Eagan with JPMorgan.
Good evening. Thanks for taking the question. My first question is, I know you guys don't give guidance, but I wondered Tom, if you could talk sort of qualitatively about the announcement that Amazon made the other day regarding it's looking to get into the hardware business for private cloud. I think on the VMware call, they talked about 2020 revenues being -- growing 12% and that included the additional revenue in bookings they expect to get, because of that. I know, Dell has sort of – it’s sort of a mixed thing for you. You get the upside of VMware and potentially get another competitor in servers and networking, so maybe you could just talk a little bit about how you're viewing that going into next year? Is that a plus for Dell on the whole? Is it a push? Is it potentially a negative?
Look, hey, Tom, great question. Look, I’ll let Jeff chime in since it's really his business. But since I get the first answer…
And I'm not the boss.
So, look, I think overall, what we think is that it validates our view of the world, which is it's a multi-cloud hybrid world, right and you see the positioning that's happening in the industry around that framework. So, look, obviously, it's a competitor, but I do think that we've been in that world and I think it just reinforces our view of where technology and how computer is being used in migrating to – is migrating to and then Jeff…
I don't know how to forecast what the revenues and the impacts are or what they're going to do. What I can tell you from our side, it wasn't unexpected. I think from my point of view, it really is a validation of what we've been saying is the world is really a multi-cloud hybrid world, not everything's going to go to a handful of public clouds. We think this multi-cloud hybrid world is certainly where business is going. We are seeing workloads repatriate to on-prem for cost reasons, security reasons and performance reasons and we think Dell Technologies is positioned quite nicely in this world.
If you think about it with Pivotal and our ability to be sort of the tip of the spear of this platform with cloud native application and container methodologies allow our customers to modernize their software stack, you think about Boomi and data integration and our ability to bring back to the platform all around VMware that we view as a control plane and a operational hub and this operational hub can expand and extend into the private, into public, into bare metal deployment.
And then if you think about the solutions that we've built today around VxRail, VxBlock and VxRack, and our ability to take VMware’s VCF platform, VMC and the broader VCP ecosystem, we think we are already doing this work, we can help customers work in a hybrid cloud, a multi-cloud world and you can have this operational hub extend from the edge to the core to the cloud all for one platform from Dell Technologies. So we think we're in a pretty good position of where the technology is moving to.
Did that help?
Yes. It did. Thank you. And then for my follow up, Tyler, I think that the Dell was looking to pay down $4.8 billion coming due in the coming year and I think you gave a whole bunch of ways you could do it free cash flow, refinancing, the revolver. I guess the question I have is how much of that do you think would be free cash flow, in other words, how much would truly be a pay down of debt, set of refinancing somehow and would you use free cash flow from VMware to take some of that down, kind of like you use free cash flow from VMware to take down DVMT?
Yeah. Hey, this is Tyler. So I apologize, maybe it wasn't clear in terms of my talking points. But really I guess the way we're thinking about that is look, our intent is to pay that down and not refinance it now. So, a portion of that will come from -- majority of that will come from free cash flow generation, a portion with the cash that we have on our balance sheet and if you remember last year, you'll see the same trend where in Q4, we’ll start to build cash and we'll keep that cash and hold it for those June maturities. And then look, because of the timing of cash flow, my expectation is we'll use a little bit of our revolver and so there's probably -- my suggestion is that we'll have some of that revolver outstanding at the end of Q2.
Now, it really depends on where our cash does come in over the course of the next few quarters. But then over the course of Q3 and Q4, we'll pay that revolver back. So I really wouldn't view that or think about that as a refinancing. We're going to pay that debt down. And as it relates to VMware, I mean, look, nothing has really changed in terms of how we operate with VMware and we want to make sure that they're growing their business appropriately and so there's no intent or plans or I'm not modeling getting any cash from VMware.
We'll take our next question from Shannon Cross with Cross Research.
My first is regarding the accounting change you expect in Q1, just to make sure that that we understand exactly as you're hopefully at least going to be publicly traded after December. The first quarter, I believe, Tom, you said 500 million to 1.5 billion impact or was that annual and is there any seasonality that we should think about, as we look at that?
Hey, Shannon, the numbers I gave you were for a full year estimate, right? So for all of fiscal ’20, the seasonality will follow the seasonality of the business because it will depend upon within the revenue streams that are coming in and what part of that is financed through DFS and then what part of those would fall into a lease construct that was previously a capital lease, but will now be -- have to be accounted for as an operating lease. Let me do highlight though that there is no impact on cash.
This is a financial statement presentation perspective and that EBITDA will actually be slightly higher as we think about the full year, but I was trying to make sure that you guys, as you begin to think about building models for what will we assume will be at some point a publicly traded Class C that the guidance framework that we put out earlier in the year which gave you those sort of long-term frameworks did not have in it the impact of the leasing standard change. And so that’s -- we're trying to give you some air cover to help you think your way through that.
And just to be clear, you're not -- there's no -- you said it's prospective, not retrospective? So it'll just change going forward?
That's correct. It's prospective if I get those words out properly.
And then Jeff, can you talk a bit about what's going on with Intel. We just got off HP's call and clearly they're expecting both in the high and the low end to see some pressure related to CPU shortages. So from your standpoint, did you start to see it this quarter? Can you give us some idea of magnitude, just what can you tell us about what's going on there?
Well, they are probably better able to tell you what's going on at Intel. Let’s see. Look, I’m sure you've heard from my competitors or I should say, our competitors, there are supply constraints. There's no doubt. There's no denial that there is tightness in CPUs. And we have seen that and we've seen that across a range of SKUs. We are working at real time as you'd expect us to do. We believe with our direct model, we have a lot of ability to be able to shape demand. We haven't built this stuff months in advance and we're stuck with what was coming, so we have the ability to dynamically shape with our direct model and sell configurations that we can build. We are doing that, we are changing the lead time, we are adjusting price to throttle demand in areas where we're short and certainly pricing where we have parts, so we can create demand there.
We have incurred costs to do that, particularly what happens as we are having to air freight and expedite in the supply chain, which was the reference I made about the added cost in our model or in our business of being able to build flexibility. We see that, I see it today, I see it through Q4, it will be a challenge throughout the quarter. We believe we have positioned ourselves appropriately. I don't see any apparent impact to demand and we're going to continue to help with our customer or help deliver to our customers and they give us the luxury of taking their orders, so we're working through it. As a challenge, of course is we again are literally dynamically working this every single day. If you go to the website, we are changing lead time, we are changing price, we're changing configuration based on what we're expecting to have come and we're going to continue to do that.
I don’t know if that helps answer your question.
We'll take our next question from Ana Goshko with Bank of America Merrill Lynch.
Wanted to focus on free cash flow a little bit, I guess, this is for Tyler. So in the quarter, you mentioned the pressures aside from seasonal, it sounds like the biggest one was really inventory as you grapple with and try to deal with these supply chain issues. And if we do exclude VMware, kind of deconsolidate that, then the Dell mothership free cash flow, I think that was negative in the quarter. And then you talked about some continued kind of inventory buildup expectation for the next several quarters. So wondering what the expectation is to have that kind of as the Dell Classic free cash flow turn positive? I guess that’s the first question.
Yeah. Look, I think, I mean, you're a 100% correct. I mean, this is a little bit atypical, although cash flow in Q3, as you know is, it does tend to trend lower. But the inventory clearly had an impact and look we’re through it. I mean, so, I think what you'll see is, it'll probably take us a few quarters, I mean, to build an inventory which for good reason and we want to make sure we're in the right position for our customers and I would expect probably over the course of the first half of the year, next year, we will have those down to the normal levels that we typically see.
Yeah. Hi, Tyler. I just want to make sure they understand, so, we don't think -- this is not the new normal where we're going to. There are specific business reasons why we thought it was prudent to add inventory into the balance sheet in order to, highlighted some supply chain dynamics, we’ve highlighted the fact that we have to have a strong Q4 seasonally strong, we need to be positioned for our customers, so -- but this is not the new normal where we're going to run inventory.
And then just to follow up on that then, so I’m having a little bit of trouble sort of reconciling the answer that you gave to Tom Eagan on the ability to repay over $4 billion of debt from free cash flow, because without VMware, I mean that's not where you guys are tracking. I think last year, the Dell classic business had low $2 billion of free cash flow. That's kind of where you're tracking on a pro rata basis this year, so I’m just you, it seems like you're de-leveraging plans due to some degree depending on being able to access via more free cash flow and wonder why that's off the table?
Well, look, without giving guidance about what we see next year’s cash flow, as we've modeled this out and forecasted this out, I mean, we're going to throw off good cash and obviously Q4 is always an up-quarter for cash. Q1 tends to be a weaker quarter and then that's followed by a good Q2. And as I mentioned, we've got over $3 billion, $3.3 billion revolver, which is undrawn and my expectation is we will dip on that, dip into that, it's purely bridging, right. So it's bridging me into that part of the year, next year where we do start to generate good cash flow and we typically generate a bit more in the second half of the year, but no, I mean, once again, based on what I know now and my expectations, we’ll be in a good position to pay that down.
All right. This is Rob. I'm going to go ahead and take that as an opportunity to make that the last call. Thank you, Ana. Appreciate everyone joining tonight. I wish everyone a happy holiday season and hope you get to spend time with your family and friends. We look forward to an expected close of the transaction in December and expected trading as a Class C common on the 28th under the current scenario that I described and we will be out at the Citi Conference in Las Vegas in conjunction with CES with Jeff Clarke. So look forward to seeing some of you there then. Have a great evening.
This concludes today’s conference call. We appreciate your participation. You may disconnect at this time.