Dell earnings top estimates on strong demand

Yahoo Finance’s Brian Sozzi and Alexis Christoforous break down Dell’s latest earnings report with Daniel Newman of Futurum Research.

Video Transcript

ALEXIS CHRISTOFOROUS: Dell Technologies posted better than expected results for its fiscal first quarter as demand for its Notebooks heated up as more of us work from home and learn from home. Joining us now is Daniel Newman. He is Principal Analyst at Futurum Research. Dan, looking over this report-- similar story here that we saw with HP, right? Because we saw that strength in PCs was partially offset by weak demand for enterprise software as offices. Those commercial clients are shut down right now. Do you think that that's going to be enough to offset things at Dell going forward?

DANIEL NEWMAN: Yeah, I was optimistic listening to the earnings call, reading the overall notes. I mean, Dell versus HP is interesting because Dell has the significant compute client business, like HP. But their enterprise business is much bigger in terms of data center, cloud, the type of hardware.

And I felt like Dell would be a real bellwether for what's going to happen for enterprise, IT, data center storage, servers-- a lot of those sort of tracking numbers to see how are we coming back. Because I think we all knew the work-from-home stuff was going to be positive. I think we knew, you know, cloud services, collaboration, you, know, the Zoom boom, computers for enterprises to work from home-- that stuff was all going to do well this quarter, anything that you could consume from home without a lot of extra lift.

But what we're really looking for now is what's going to happen as we start to come back to work? Will companies be buying datacenter equipment? Are they going to be putting storage back in their data centers? Or are they going to look to do everything in the Cloud? And so companies like Dell are really going to be the types of companies we're going to have to watch and say, is big tech, big iron, going to make a comeback in the next few quarters? And the fact that Dell hold up so well-- even their infrastructure numbers weren't bad-- is an indicator that people are still spending, and IT has a promising future.

BRIAN SOZZI: Daniel, you hooked me in, or you lured me and with the Zoom boom mention. What does life after COVID look like for Zoom? Do they go back to pre-COVID conditions as people go back to the office? Listen, you follow the company closely. We are all on this platform. So many folks are using Zoom.

DANIEL NEWMAN: Yeah, oops! I hooked us off Dell and on to Zoom. You know what? I think we will find that some of the work, some of the meetings that we felt we had to fly in for, Brian, we won't have to anymore. I think people have realized-- turn on the camera. We can do this. We don't have to always get together live. But I also think there's a pent up demand for in-person. So I think Microsoft Teams, Zoom, Cisco Webex-- they will all continue to see a boom and an uptick as businesses have become stable and comfortable using these technologies.

But if I had to make a prediction, I think over time, we will see it settle somewhere in between. It's not going to be all Zoom. I think all of us miss having dinner with our clients, or traveling to a conference and getting to see a speaker live, or even some of the social get-togethers. So I think it's a nice fit, but I think over time, I think we'll see a little bit of a pullback, and we'll find more balance.

BRIAN SOZZI: Yeah, yeah, I feel that Daniel. I'm looking forward to go out and getting a steak with a source. But, you know, going back to old tech-- what we've seen over the past couple weeks, IBM swinging the axe at its corporate headquarters, laying off a lot of people. I think Dell maybe signaled some cost cutting on their earnings call. I'll leave that up to you for you to decide. Do you think big tech is ready to announce some fresh layoffs here, just given where the revenue trajectories are in the business?

DANIEL NEWMAN: Yeah, I think every company is taking caution. I think each case is different. I mean, you look at Dell-- there was no strong layoff signal, but they did make a small adjustment. It was reported in their 401(k). They stopped matching, which was something that was a very lucrative program within the company. But the suggestion is that's only going to last through the end of the year. I think companies right now are making small decisions.

As long as they've stopped their buybacks, and they make some small concessions that try to keep a large number of people employed, it's positive. I think some of the pullbacks are going to happen, Brian, because I think companies have to say, for the long term, how do we take care of 80% and 90% of our employees? It's never a good thing. It's never positive. But right now, it's about stability. It's about confidence in the investors. And it's about showing that the business is going to bounce back. Dell didn't give a lot of indication in their numbers that they're going to have to make big pullbacks. But, you know, and even on IBM, Brian, we had a new CEO.

So some of that pullback may have been related to what's going on with COVID and the pandemic. But some of that pullback may have just been Arvind Krishna saying, this is my new tenure as CEO. I'm going to make some changes. I'm going to make some decisions to run the company a little different. That might mean some new leadership and some new people. So I'm not convinced it was all COVID. I'm thinking Arvind wanted to really put his stake in the ground and say, you know, I'm the CEO. This is how I plan to run IBM, which meant some big changes.

ALEXIS CHRISTOFOROUS: Yeah, good point on IBM. But back to Dell for a moment-- so like a lot of companies, they're not able to give any guidance right now. They also suspended therefore all 401(k) match. What does the business environment look like to you for Dell for the second half of the year?

DANIEL NEWMAN: I think you have to look at-- there's two parts of the business I'm really excited by and one that I want to watch more closely. So the enterprise client business, we're seeing it grow if the work-from-home boom continues. And I expect it to at least through the end of the year. I think they're going to be selling through as fast as they can create inventory for their client business.

VMware is the other really exciting part of the business. Multicloud, which is really where enterprises will land. It's a hybrid Multicloud, and VMware has the number one software in this space. So these companies are trying to hybridized what their infrastructure-- they're existing with where they need to go, so moving to Azure, moving to AWS, moving to Google Cloud. VMware as a platform that's one of the most in-demand for CIOs and for executives in terms of leveraging multiple clouds.

So the company is basically seeing growth there. I think it was still 12% growth this last quarter, Alexis, that came into that particular category. So that's driving more software revenue, more recurring revenue. And recurring revenue is one of those really important data points. Now in terms of concerns, I want to watch what happens with their infrastructure group. So ISG is what Dell refers to it as. That was off about 8%, but it was also off a little bit the last quarter before 'cause of pressure from China. So it wasn't doing great even in the quarter before COVID became such a big challenge for the global economy.

So I want to see that number prop back up in the next couple of quarters to say our company's buying on-premises enterprise equipment, because Dell is one of the biggest leads in a lot of categories. So they're still gaining market share, but the tam is shrinking, and that's something we need to keep an eye on.

BRIAN SOZZI: All right, well said. We'll leave it there-- Daniel Newman, Principal Analyst at Futurum Research. Have a good weekend. I'll talk to you on Twitter.

DANIEL NEWMAN: Hey, Brian. See you soon.