UPDATED 19:17 EDT / MAY 28 2020

INFRA

What recession? Dell, VMware vaporize Wall Street earnings estimates

In an economy that some are calling the worst since the Great Depression, tech giants continue to thrive, demonstrated once again today by two tech stalwarts.

Dell Technologies Inc. and its publicly traded VMware Inc. subsidiary today both posted financial results that beat Wall Street expectations on profit and revenue, sending their stocks soaring in after-hours trading.

Both companies enjoyed tailwinds from the impact of the pandemic. For VMware, it was in licenses for its growing line of end-user computing products such as virtual desktop infrastructure. Dell enjoyed strong personal computer sales as home-working employees beefed up their desktop horsepower. However, the company continues to struggle to find a path to growth in enterprise systems and storage.

Investors celebrated, sending VMware shares up nearly 9% and Dell shares up more than 7% in after-hours trading.

Dell’s performance “is proof of the value of a well-managed supply chain and the company having products people need and want during the pandemic,” said Patrick Moorhead, principal analyst at Moor Insights & Strategy. “VMware has quietly become a security and cloud company, two things needed during COVID-19 and beyond.”

Moreover, VMware’s “focus on helping customers capture additional performance and value from their IT hardware investments speaks loudly during uncertain times,” said Charles King, principal analyst at Pund-IT Inc.

In its fiscal first quarter Dell posted revenue of $21.9 billion, up 1.7% on a constant-currency basis and well ahead of analysts’ consensus estimates of $20.8 billion. Operating income grew 28% to $702 million. Profit of $1.34 per share soundly beat the Wall Street consensus of $1.01.

VMware’s fiscal first-quarter revenue rose 12% from a year ago, to $2.73 billion, more than $100 million better than consensus estimates of $2.62 billion. Profit of $1.52 per share beat estimates by 34 cents.

Importantly for VMware’s transition to a predictable revenue model, subscription and software-as-a-service revenue grew 39% to $572 million. “VMware’s shift toward subscription and SaaS business models is playing particularly well among organizations that are carefully watching their purse strings,” King said.

Bullish for the long term

“Although there is a level of economic uncertainty now, we remain confident in our long-term prospects,” said Chief Executive Pat Gelsinger. He said revenue from VMware’s partnership with Amazon Web services Inc. saw a” triple-digit revenue growth rate” and that the company is sitting on $9.2 billion in unearned revenue and $5.2 billion in cash.

Acknowledging that forecasting in the current environment is difficult, VMware nevertheless predicted total second-quarter revenues of $2.8 billion, up from last year’s $2.17 billion, and earnings per share of $1.44. “We believe it’s reasonable to expect revenue growth in the mid-single digits for full-year,” said Chief Financial Officer Zane Rowe. “We think it will be a challenging second and third quarter and we’ll see progress after that.”

VMware doesn’t break out its revenues by product line but said performance of the Carbon Black security unit it acquired last summer and its end-user computing division performed particularly well. “The COVID-19 environment was clearly a tailwind for our EUC business,” Gelsinger said. “Literally tens of millions of people are able to work this quarter because of solutions like Workplace One,” which is a VDI platform.

Dell said it saw strong demand in sectors affected most by the pandemic, including financial services, government, healthcare and life sciences. All were up between 15% to 20%. Those gains were offset somewhat by weakness in retail, travel and hospitality.

Revenue for the Infrastructure Solutions Group, which includes high-end servers and storage, fell 8%, to $7.6 billion, continuing a steady decline that began when the company acquired EMC Corp. nearly four years ago.

Enterprise rebound ahead?

However, Chief Operating Officer Jeff Clarke (pictured) maintains that better times are ahead. “We saw improved server performance and expect to gain unit and revenue share for mainstream servers when [International Data Corp.] x86 server results come out next month,” he said. “And though we expect our external storage share to be roughly flat in calendar Q1, we expect share growth in high-end, purpose-built back-up appliances and unstructured arrays.”

Dell clearly benefited more than most companies from the shift to wide-scale work-at-home arrangements. It was the only one of the top five PC vendors to show unit growth in the first quarter and its worldwide PC market share grew to 19.4% as measured by IDC, Clarke said.

Dell benefited in particular from its hybrid retail/direct sales approach, which enabled it to pivot quickly to fielding orders online when retail stores shut down. Visits to the DellTechnologies.com website shot up 77% in April, driven by remote work and learning offerings, VDI and software-defined networking, the company said.

Dell’s performance “underscores the importance of its longstanding focus on delivering desktop-to-data-center solutions,” said Pund-IT’s King. “Among IT vendors, the current situation is far more challenging for those that largely focus on IT infrastructure solutions and services. The value of Dell’s end-to-end focus is clear.”

David Vellante, chief analyst at the SiliconANGLE’s sister market research company Wikibon, agreed. “By maintaining its laptop-to-data center strategy with the industry’s biggest supply chain, Dell was able to manage through lean times without any glitches and that’s pretty impressive,” he said.

Dell is skillfully managing the transition from a PC and server company to a multifaceted IT infrastructure provider with remarkable success, Vellante added. “This is one of the most, if not the most, extraordinary transformations of any tech company that I’ve ever seen,” he said.

Both Gelsinger and Clarke reflected on the changes they envision from the massive shift to work-at-home arrangements and reduced travel that COVID-19 has affected, but Clarke’s was the most personal. Looking back on 78 days of home isolation, he noted that “I’m remote, yet more connected than ever, with a deeper sense of unity.”

“I’m not traveling, but I’m visiting with more customers, partners, suppliers and team members,” he said. “And I’m busier than ever, yet I have more time for my family than I have had in years.”

Photo: SiliconANGLE

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