Good afternoon, and welcome to the Fiscal Year 2020 Second Quarter Financial Results Conference Call for Dell Technologies Inc. I would like to inform all participants that 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 prior written permission from Dell Technologies is prohibited. After the prepared remarks, we will have a question-and-answer session. I will now turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Thanks, Erika, and thanks for joining us. With me today are Vice Chairman, Jeff Clarke; our CFO, Tom Sweet; and our Treasurer, Tyler Johnson. During this call, we will reference non-GAAP financial measures, including non-GAAP revenues, gross margins, operating expenses, operating income, net income, EPS, EBITDA, adjusted EBITDA, and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release. Please also note that all growth percentages refer to year-over-year change, unless otherwise specified. I want to mention that we will not be taking questions related to the Pivotal or Carbon Black transactions that VMware announced on August 22. 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 our web deck. We assume no obligation to update our forward-looking statements. Now I'll turn it over to Jeff.

Thanks, Rob, and thanks to all of you for joining us. Since we launched Dell Technologies, we’ve been consistent about our long-term view on global technology investment and what we have to do to realize this unprecedented opportunity. We have to innovate and integrate across the full Dell Technologies portfolio. Doing this creates the next generation of technology infrastructure that enables digital organizations operating from the data economy. We have to continue innovating within our business units to win the consolidation and generate cash. And of course, we have to do this with an eye towards the inevitable fluctuations in near-term demand. Today, I would like to touch on each of these areas and share some of the progress we’ve made executing against our strategic priorities. To begin, let me emphasize that the long-term drivers for our business remain intact. We are in the early stages of a technology-led investment cycle that is accelerating digital transformation. That investment cycle is fueled by the exponential increase in data and data-centric workloads that drive better business outcomes alongside an increasingly diverse and mobile workforce. But to realize these outcomes, customers are grappling with increasing complexity across their operating environments and infrastructure, including data proliferation, multi-cloud management, security, new architectures, applications, artificial intelligence, and machine learning, all the while defining their approach to cloud and increasingly the Edge and IoT. Take hybrid cloud as an example. Companies deploying hybrid cloud strategies want seamless compatibility, consistent infrastructure, and operations across private clouds, public clouds, and the Edge. We are optimistic about IT spending because customers need a partner to help them address these challenges, one who is innovating and delivering a comprehensive end-to-end IT strategy. In fact, the latest IDC forecast for IT spending through 2023, excluding telco, backs up our optimistic view. IDC projects growth will be more than twice world GDP or about 4.3% per year on average. So as I said, we believe the long-term drivers of our business are intact. This brings me to my second point. Dell Technologies is uniquely positioned to capitalize on this enormous opportunity. We’ve been hard at work innovating and integrating across the portfolio to deliver the future of technology infrastructure with solutions that dramatically simplify IT management. Last quarter we made major progress with the announcement of Dell Technologies Cloud and Unified Workspace. Interest remains high in our Dell Technologies cloud platform, the easiest and fastest way to a consistent hybrid cloud experience that brings together Dell EMC's VxRail hyperconverged infrastructure with VMware's cloud foundation software stack, offering customers a single consistent platform for both traditional and cloud-native workloads with full automation and integration for hybrid and multi-cloud environments with consistent SLAs, tools, services, and management from VMware and Dell/EMC. The customer pays subscription fees for as long as they use it, the same way they pay for public cloud infrastructure. CapEx becomes OpEx. Earlier this week at VMworld, we announced several other enhancements to our Dell Technologies Cloud offerings, including new validated designs for storage arrays and servers. We saw the initial availability of the industry's first fully managed on-premises data center-as-a-service offering, and general availability of new pay-for-what-you-use flexible consumption models. In addition, we announced Dell Technologies Cloud platforms now support VMware Pivotal Container Service. With VMware's recent announcement of its intent to acquire Pivotal, our solutions and speed to market get even stronger. Pivotal further extends VMware's Kubernetes capabilities for building, running, and managing modern applications on any cloud. Another powerful example of how we are innovating across Dell Technologies is Unified Workspace. This solution integrates capabilities across Dell devices and services, VMware and SecureWorks, and now includes Dell ProManage, managed services that integrate Dell's highly skilled experts as part of the customer's IT teams. Think about the IT investment cycle I mentioned earlier and the needs of the growing diverse and mobile workforce. Unified Workspace is an intelligent solution that tells you the specific devices and applications your workforce needs based on their specific usage. Then it delivers those personalized devices directly to the end user, pre-configured and preloaded with all the applications and security features they need. IT never has to touch the device. With VMware's acquisition of Carbon Black, Unified Workspace will only improve with a comprehensive intrinsic security portfolio for the multi-cloud world and modern applications and devices. As you can see, we are delivering on our promise to innovate across Dell Technologies to create the future of technology infrastructure from the cloud to the edge while dramatically simplifying the customer experience. And this brings me to our next strategic priority, which is all about what we're creating in our business units to drive and win in the consolidation, generate cash flow, and fuel innovation. We have the strongest solution set in our history, with businesses that are consistently outperforming their competitors. In the data center, we're seeing significant traction from our new Unity XT midrange storage solution. The strong acceptance of XT in the market gives us confidence as we ramp the solution and prepare to bring our next-generation midrange storage offering to market. We are also seeing strong receptivity to our PowerProtect X400 and PowerProtect Software. The X400 delivers next-generation data management and protection in a software-defined scale-out appliance. It is highly complemented by our PowerProtect Software offering that delivers data protection, deduplication, operational agility, self-service, and IT governance. In Q2, VxRail orders grew 77% as organizations continue to benefit from a simple integration with VMware Cloud Foundation to enable hybrid cloud environments. It's just another example of how we are collaborating with VMware to bring another first and best solution to the marketplace. In Client Solutions, we introduced new XPS products with leading design and user experience, including more powerful processing and applications matched with thinner and lighter designs like our new XPS 13 2-in-1. Our Dell Latitude 7400 2-in-1 continues to receive incredible praise from the media and customers alike, with PC World deeming it a nearly perfect combination of power and battery life. It is the first commercial laptop with built-in sensing technology. Our teams are delivering the industry's best products and solutions, executing our priority to win the consolidation and generate cash flow, which brings me to my final point. As we invest and innovate to capture the enormous opportunity in front of us, we must remain disciplined and mindful of the near-term environment in which we operate. Before I turn it over to Tom, let me shift gears to the current demand environment and our view on component cost. Our core Dell orders were up 4% excluding China, and we're seeing a clear split between enterprise infrastructure and PC spending globally. In enterprise infrastructure, the market is softer than we and the industry anticipated. We expect it to remain soft through the balance of the year, particularly in China. We feel really good about our ISG execution in Q2 given the market context. In the first half, we acquired approximately 21,000 ISG customers, up 11% from the prior year. Moreover, ISG customers are purchasing multiple lines of business. Our storage business remains healthy in Q2 with orders up 1% and first half orders up 4%. Our sales team remains optimistic about our portfolio and positioning as we head into the second half of the year. Turning to servers, the industry saw unprecedented growth last year, and many customers are still digesting their CapEx investments. We're balancing revenue and profitability as we navigate through the current server dynamics. Our Q2 server revenue declined, but we realized higher margin dollars as we were consciously more selective on large low-margin deals in all geographies. Outside of China, our server orders were up 1%, and we expect to gain share this quarter in North America and EMEA when IDC publishes its results next week. Our server ASPs remain strong, up high single digits as customers are increasingly buying higher-end systems to support their high-value workloads. In Q2, CSG delivered record performance driven by strong execution, the Windows 10 refresh, and a declining component cost environment. Longer-term, we expect to continue to drive share gains through innovation and execution as the industry continues to consolidate among the top vendors. We'll continue to focus on commercial, high-end consumer, and gaming, as well as increasing our attach of services, financing, software, and peripherals. In the supply chain, we expect the component cost environment to remain deflationary and aggregate through at least the end of the year. It's important to note we expect the decline to significantly slow down in the second half compared to the first half. This quarter, we clearly benefited from the strength of our broad IT solutions portfolio, which helped us deliver strong results amid short-term market volatility. While we saw soft spending in pockets of the marketplace, our overall performance in Q2 reflected our competitive advantage. In the second half, you should expect us to continue to balance growth and profitability, but with a slightly higher bias towards maintaining growth at the portfolio level. We have built a business to be successful in any environment. We're differentiated by our broad portfolio in the industry with leading solutions, our direct model, including services and financing, and our world-class supply chain with its size and scale. Whether the market expands or declines, we expect to outperform the industry. To recap, we believe strongly that our long-term growth drivers are intact. We are innovating across the portfolio to create infrastructure for the digital future. We're investing and innovating to lead the consolidation, and we are mindful of the near-term environment, confident we can outperform. Ultimately, it's all about the customer, and no one is better positioned than Dell Technologies to be our customers' best, most trusted partner on their digital transformation journey. With that, I will turn it over to Tom to talk about our Q2 results.

Thanks, Jeff. Our model is focused on long-term profitable growth with the ability to adjust as needed based on market conditions. We're focused on growing faster than competitors in the industry, growing operating income and EPS faster than revenue, and generating strong cash flow over time. We executed well against these priorities again in Q2 as we balanced revenue and profitability with market conditions. While we saw a softer enterprise IT market this quarter, we continue to benefit from having the industry's broadest portfolio of solutions. Revenue was $23.5 billion, up 1% with core orders revenue up 4% excluding China. Our deferred revenue balance increased to $25.3 billion, up 17%. FX remained a headwind this quarter, impacting year-over-year growth rates by approximately 150 basis points. Gross margin was up 13% to $8 billion, which was 34% of revenue, up 340 basis points driven by lower component costs and pricing discipline. Operating expenses were $5.2 billion, up 6% due in part to investments we have made in sales coverage to expand our buyer base. In the quarter, new enterprise and commercial customer acquisitions were up over 10% from the prior year. Over the last six quarters, approximately 80% of our top 30,000 customers have purchased four or more lines of business from us. We're pleased with our operating income, which was up 30% to $2.7 billion or 11.7% of revenue. Our EPS was $2.15 benefiting from strong operating profitability and a lower tax rate in the quarter due to revenue mix. Adjusted EBITDA was $3.2 billion or 13.5% of revenue and $11.2 billion on a trailing 12-month basis. We had a record cash flow quarter, generating $3.4 billion of adjusted free cash flow driven by strong profitability and working capital discipline. Some of our working capital benefit came from reduced inventory, as we are working through supply chain dynamics that impacted cash flow last year. We also saw deferred revenue increase 17% to $25.3 billion, with recurring revenue now making up 20% to 25% of our revenue each quarter. Our services and software businesses continue to grow as we expand the portfolios, adding revenue and cash flow stability and predictability. We repaid approximately $2 billion of gross debt in the quarter and $2.4 billion year-to-date. We are well positioned to repay approximately $5 billion of gross debt in total in fiscal year '20. We have now paid down $17 billion of gross debt since the EMC merger. Shifting to our business unit results, ISG revenue was $8.6 billion, down 7%. Storage revenue was flat at $4.2 billion. As Jeff mentioned, orders were up 1% driven by strength in Isilon and our industry-leading HCI solutions. We're seeing strong receptivity for new Unity XT solutions in the mid-range, and we continue to press on growth levers within the broadest and most diverse portfolio in the industry. Servers and networking revenue was $4.4 billion, down 12%. The global server market remains softer than anticipated coming into the year and has affected our server growth. The impact on our business was most pronounced in China, again this quarter, where we were more selective on larger deals and focused on building sustainable long-term customer relationships. ISG operating income was $1.1 billion, or 12.2% of revenue. Operating income percentage was up 120 basis points, largely due to our business and geography mix, as well as pricing discipline. Our VMware business unit had another good quarter with revenue of $2.5 billion, up 12%. Operating income was $762 million, or 30.9% of revenue. Based on VMware standalone results reported last week, VMware's growth in total revenue plus the sequential change in total unearned revenue was 17%. Core software defined data center license bookings grew in the high single digits. NSX license bookings were up over 30%, and vSAN license bookings grew over 45%. CSG delivered record revenue in units with strong profitability in Q2. Revenue was $11.7 billion, up 6%. Within CSG, commercial revenue was $9.1 billion, up 12% driven by double-digit growth in commercial notebooks, desktops, and workstations. Consumer revenue was $2.7 billion, down 12% as we continue to prioritize commercial mix in the higher end of consumer PCs. We saw strong profitability in CSG this quarter due to component cost declines, commercial-consumer mix, and pricing discipline. CSG operating income was $982 million, or 8.4% of revenue. Going forward, you will continue to see us balance revenue and profitability against market dynamics. Dell Financial Services originations were $2 billion, up 3%. We did record a non-cash charge of $619 million, or $524 million net of tax benefits after a strategic review of our Virtustream business. We remain committed to serving our customers as we reposition the business. Turning to our balance sheet and capital structure, we grew cash and investments in the quarter to approximately $10 billion, even after the Q2 debt pay down of $2 billion. Our core debt balance ended the quarter at $36.4 billion, down over $12 billion since the EMC acquisition. Net core debt ended Q2 at $30.5 billion. Please see Slide 14 in our web deck for more details. We're focused on maximizing free cash flow, and our capital allocation strategy remains unchanged. We're committed to reducing leverage and achieving investment-grade ratings. Given our recent debt pay down and refinancing activity, we have only $2.3 billion due in the next 18 months, excluding VMware. We will continue to look for additional opportunities to smooth our debt maturity profile and optimize our capital structure. We will maintain pricing discipline as we move into the back half of the year, while adjusting as appropriate given market and competitive dynamics. We're still monitoring the macroeconomic and IT spending environment, as well as ongoing trade discussions between the U.S. and China. Moving to guidance, based on Q2 results and our current expectations for the balance of the year and excluding the impact of VMware's Pivotal and Carbon Black acquisitions, we now expect fiscal year '20 GAAP revenue of $92.7 billion to $94.2 billion, operating income of $2.9 billion to $3.3 billion, and EPS of $5.45 to $5.90. We're narrowing our non-GAAP revenue range for the current fiscal year to $93 billion to $94.5 billion. Due to our strong profitability in the first half of the year, we're increasing our non-GAAP operating income guidance range to $9.8 billion to $10.2 billion, and increasing our non-GAAP EPS guidance range to $6.95 to $7.40. We expect our non-GAAP tax rate to be 16%, plus or minus 100 basis points. In closing, we are well positioned. We're innovating to drive growth and future value, and we're driving the core for share gain and cash flow. We have one of the industry's strongest and most comprehensive portfolios, its largest direct sales force, and a world-class supply chain with size and scale, and we're focused on enabling our customers' digital future. With that, I will 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 to allow us to get to as many of you as possible. Erika, could you please introduce the first participant?

We will take our first question from Katy Huberty with JPMorgan.

Thank you. Good afternoon. You mentioned a bias towards growth in the second half of the year. Does that imply that you expect a pass-through of more of the lower memory prices into the next couple of quarters? And if so, which segments of your business would you expect to see the most price elasticity?

Hey, Katy, it's Tom. What we were trying to communicate is that as we evaluate the business and its growth rate, which we appreciated during the quarter, we are starting to consider cost trends and the slowing deflationary cycle we are observing. We expect to pass along some of the cost declines, particularly in the server segment. We're actually noticing a bit more competitiveness in some of the large enterprise deals we mentioned earlier. Our focus on growth is aimed at ensuring we build a company based on scale. While we plan to remain balanced in the second half of the year, I anticipate we will exhibit more pricing competitiveness then, especially in the server space. We feel good about the pricing in the client and storage businesses, but servers may encounter some challenges.

Thank you. That’s very helpful.

I would add to that. We certainly spent much of the first half of the year in servers, keeping our product line in our traditional price position, and we are going to continue to price the product lines going forward to do that. As Tom said, that's going to be our bias towards growth. The other thing that we're signaling, and we've mentioned a couple of times, is the fuel of that, the commodity deflation that substantially slows in the second half, so we have to watch that. We are going to have a slight bias towards growth, keeping our eye on profitability in both of the businesses.

Thanks, Katy.

Our next question is from Rod Hall with Goldman Sachs.

Yes. Hi, guys. Thank you for the question. I wanted to ask about the trajectory of demand and where you guys are seeing weakness or strength? When we look at other companies that have reported enterprise, we’ve seen a pattern of weakness in large enterprises that seems to have developed in, let's say, the June timeframe. I'm wondering whether that has been the same for you and whether you’ve seen that continue to weaken or if you think it's stabilized? And then I would love to get a comment on small and medium businesses. Those seem to have been more stable, and I'm wondering if you could just confirm that that’s also what you're seeing. Thanks.

Sure, Rod. Jeff here. When I look at the server business in particular, the softness that we’ve seen, we actually talked about it last quarter as well, is in large bids and in China. So those large enterprise businesses that you mentioned, we continue to see softness there, as well as in China. In fact, if you were to look at our server business excluding China, we actually had growth; our business is up 1% in orders. We continue to see that pressure in the second half of the year. Tom alluded to just moments ago about the price aggressiveness that we think is turning up in the second half in those large orders, those large enterprise accounts. So I think that’s consistent with what you’ve seen. On SMB, we continue to see that business perform. We don’t break out the segment performance of the businesses, but it's been an area of growth for us, and we will continue to see that going forward.

Great. Thanks, Jeff.

Our next question is from Toni Sacconaghi with Alliance Bernstein.

Yes. Thank you. I'm wondering, given your significant overage in operating profit year-to-date, why wouldn't you look to pay down more debt this year? I think your target was $4.8 billion. You mentioned close to $5 billion, which sounds pretty similar. Perhaps you can give us an updated view on what you think operating income will be for the year and why you wouldn't want to more aggressively pay down debt?

Hey, Toni, it's Tom. Let me start, and then I will let Tyler talk a little bit about our debt plan. The guidance we gave clearly raises the range around operating income, given the overperformance in the first half. In the quarter, we did have $10 billion of cash, of which $6 billion of that you should think about as core. So, look, I think we have some flexibility to take a look at that as we go through the year. Right now, as we look at the maturity stacks that we are managing, I think we feel good about the $5 billion. We will see how the rest of the year unfolds and whether we would consider doing even more than that. Tyler, I don’t know if you would add anything.

No, I think you said it. The debt pay down remains the priority. We continue to focus on that. We will see as cash continues to come in for the remainder of the year, but we feel very confident about the $5 billion we talked about. We're making really good progress. If you look at our leverage ratios, we improved about half a turn from the end of last year to where we are now. So, making great progress.

Okay. And if I could just sneak in another one. I missed a couple of minutes because I got disconnected on the call, so I apologize if you addressed this during that period. But you seem to suggest that you see more incremental price aggression in servers, but are pretty confident on the PC side. Are you suggesting that sort of the more normalized PC operating margin, which is more than 300 basis points above your prior indicated range, that we should be thinking about sustainability in mid to high single digits or high single digits for PC operating margin at least for a few more quarters, or how much do you think following component prices has boosted PC op margins above a normalized rate?

Hey, Toni, it's Tom. Let me start and then Jeff can chime in here as well. As we think about our guidance which was $9.8 billion to $10.2 billion, which was a raise of roughly about $700 million midpoint to midpoint. As we think about the back half of the year, it's clear that PC operating margins benefited from a couple of key factors. One being the significant cost decline, of which we have probably priced through about 60% of that cost, and we've also let some of that cost fall through the bottom. The other piece of the dynamic there has been the commercial client mix, and we are up about 4% year-on-year from 69% to 73% of mix. That’s been beneficial as we navigated through the first half. I think as we get through the back half, I think we are going to see PC margins gradually normalize back towards the historic norms. We will have to see how that unfolds, but the rate of cost decline is significantly less in the second half than it was in the first half. As you think about pricing normalizing and prices in the market beginning to reflect a lot of that cost decline already, we are thinking that PC margins will gradually come back to more historical norms. Not in any sort of dramatic fashion, but I just think we're going to see those things gradually migrate back. Jeff, I don’t know what you would add.

A couple of things. Part of our improvement or our performance in the first half you talked about were two of them being the commercial mix and pricing through about 60% of the cost decline. Our direct commercial PC business grew double digits, which drove higher attach rates of services, peripherals, and financing as well. We’ve seen an SRU improvement in there as well. That led to the performance that you just spoke about, Toni. Conversely, when I look at the second half, the second half is tilting toward consumer, which has a lower margin structure than our commercial business. We certainly have the uncertainty with trade and the associated costs that go along with trade as we head into the second half. I would point to some of the publicly available data, such as DRAM. If I look at the DRAM exchange, if I look at where we started the first of the year to where we are today, DRAM has fallen nearly 60%. If I look at what they say about the projection for the remainder of the year, we see a 3% cost decline. The rate of deflation is changing, and we think the pricing environment will reflect that toward the end of the year.

Thanks, Toni.

Our next question is from Paul Coster with JP Morgan.

Yes. Thanks for taking my question. I will sneak in two quick ones if I may. First up, to what extent do you think Windows 10 is fueling the CSG growth this year and does that kind of set you up to tough comps next year? And on the China front, the business that you’re kind of foregoing at the moment, is that business that you think you will come back to at some future point, or are you kind of moving on from that very competitive segment of the market? Thank you.

Hey, Paul. Jeff, you can handle the Windows 10 comment, and I will address China.

Yes, Paul. I mean, the industry data there is roughly 60%-ish plus through the Windows 10 migration. That has clearly been a source of growth for the commercial PCs business for the past year and a half. So we see that continuing to be a source of growth for the remaining part of the year, and probably into the very early part of next calendar year. Tough comparisons, of course, if you look at what the commercial PC business has performed for the past six quarters and what’s in front of us. It will be tougher comparisons next year. You see that and the industry forecast for PC growth next year, which is going to be down. The latest forecast I believe has PCs down 4% next year. This year, it's roughly flat, heavily biased towards commercial, with consumer being down, and that will be a headwind as we go into the business next year. I would also tell you the things that we’ve done in the business to prepare us for that I think are pretty encouraging. We are going to focus on the consolidation that’s underway as the PC industry continues to consolidate toward the top three manufacturers. We’ve made investments and coverage and capacity across all sorts of customers from the smallest businesses to the largest businesses in the world. We think that expansion of coverage and capacity helps us in the long-term. We have new technologies that we think help us with our Unified Workspace driving a differentiated solution into the marketplace, and that will be a source of growth for the business. Our focus will clearly be on our direct commercial business, as well as the high-end consumer and gaming business as we head into next year.

And, Paul, as it relates to China, the business that we've essentially chosen to not participate in this year has generally been in the hyperscale server space where the pricing dynamics have not made a lot of sense to us. The other thing that we look at when we evaluate large bids or large opportunities is to what extent is that business strategic to us and sticky, meaning is it a long-term customer acquisition play where they're going to buy multiple lines of business and have the opportunity to sell them multiple different types of solutions and service capabilities? What we have generally seen with that hyperscale business in China is that it tends to be very transactional. Where you're getting that business is rebid every quarter or every half year. Given that pattern and what we’ve seen, we have chosen not to participate in that. If that pattern continues, you will see us continue to not participate in it. Instead, we're very focused on growing the customer base in China, focusing on building lasting sustainable customer relationships. So we have shifted the focus of the China business to expanding from the mid and small enterprise to larger enterprise spaces, absent the hyperscale, and not participate in that hyperscale space, just given the purchasing behavior and the buying behaviors that we're seeing. I don't think that it was — what we know right now, that piece of that market is well, it will still be there, but it's not a lot of interest to us at this point in time.

With the same characteristics we see globally occurring in China. It's the second largest market in the world. We are entering a data economy. There's a big opportunity in the world of hybrid cloud which is important, and data analytics has long-term attributes. The marketplace remains strong, and we're very optimistic about that over the long-term, which is why we want the business build in the customer base, right? Because we want foundationally to improve the scale.

Thank you.

Our next question is from Aaron Rakers with Wells Fargo.

Yes. Thanks for taking the questions. I wanted to ask about the storage business. As you look at storage demand being healthy, but the revenue was only about flat this past quarter. We’ve seen bookings growth, orders growth kind of interplay here, up 4% from the first half. How do you think about the progression or growth as you think about the product cycle dynamics? What’s your expectation for the back half of the year in terms of storage growth specifically?

When I look at the storage performance through the quarter, I would point to areas that I think are positive. We see our HCI business continuing to grow. I think we made reference earlier that our HCI business, specifically the VxRail component of that, grew 77%. Our converged infrastructure business grew this past quarter, and the broad category of unstructured data grew, and we saw actually good performance in our Unity and the new Unity XT mid-range product, which had year-over-year growth as well. In addition to the PowerMax 2000 that we introduced early last call for the high price bands in the mid-range, all grew. I think we positioned the product line in a great rate, and you will see some more announcements through the remainder of the year that will continue to refresh it and keep it competitive. I expect this to grow the marketplace. The marketplace is expected to grow in the last forecast, I think just under 3%. I would expect this to outperform the market. The investments we made in capacity and coverage, the tenure of that sales force continues to grow by the date. We are pretty optimistic about our prospects to outperform the marketplace in the second half of the year.

One thing I would add to that, and Jeff possibly highlighted a lot of that, how we are thinking about it is. One of the things we’ve been very focused on with the investment we made in the selling capacity has been around customer base expansion, which is why we highlighted the fact that in ISG, we had year-over-year growth of 21,000 new buyers. I mean, ISG is about whether they’re buying one or two lines of business, but the point is we are expanding the customer base to give this a broader feel or a broader base to sell them into. We are encouraged by that, and obviously we need to go out and execute and do this and make sure the sales motion is right on the coverage model. But one of the investment paybacks we’ve been looking for from this go-to-market investment that we’ve made over the last two years has been around are we expanding by the trends we’re seeing that clearly indicate positive outcomes.

The marketplace we are certainly in the early stages in an area that we’ve referenced. There is more data being created. There will be more data created on the edge. We have a leadership position across HCI, CI, and external storage, and we've improved investment in coverage that we talked about in the market.

Thank you.

Our next question is from Shannon Cross with Cross Research.

Thank you very much. Jeff, can you talk a bit about what you’re seeing from customers with initial response to Dell Technologies Cloud? And maybe in more general, just commentary from clients about cloud adoption, both hybrid and public? Thank you.

I would be happy to. We had a good week this week. At VMworld, we talked about our Dell Technologies cloud platform. We actually made several announcements to extend that platform from what we announced at Dell Technologies World, the last week of April. The interest this week has been very high, specifically we extended the platform of validated designs to support our PowerMax storage arrays and our Unity and Unity XT storage arrays and our PowerEdge MX compute. The thing I'm most excited about is that Pat and the team did a great job on stage earlier in the week as we announced the initial availability of the first on-prem data center-as-a-service. It is a managed service for data centers, which is pretty exciting for us. On top of that, acknowledging or building upon what we announced back in that last week of April, we talked about new consumption models that allow us to pay in any form of consumption. So very similar to how public cloud operates today, we can actually bill the customer by usage, and that's been received quite well. We're pretty excited about that capability. Think about how we added VMware Pivotal container service support on top of that. We have a very comprehensive multi-cloud hybrid cloud in the marketplace. In fact, the only one that allows you to move data workloads across the edge to on-prem private data centers to the public clouds. That's what our customers are asking for: the ability to do that in an automated way, to manage it in a consistent way. Our Dell VMware cloud enables us to do that, so I'm pretty bullish on the opportunities going forward. Does that make sense?

Yes, thank you.

Our next question comes from Matt Cabral with Credit Suisse.

Yes. Thank you. On ISG margins, I’m wondering if you could bridge the strength you saw in the quarter between mix, the commodity tailwinds, and maybe other factors, and in particular just if you can touch a little bit on what margins for servers versus storage did for you on a year-over-year basis?

Well, hey Matt, it's Tom. We don’t typically parse. We give you a revenue and an operating income number. Let me sort of try to give you some color around it. If we looked at the margin, gross margin or operating margin performance, let me start there. What I would tell you is that it's up 190 basis points. I’m talking about Q-on-Q now, from 10.3% to 12.2%. If you were to think your way through that, most of that goodness was principally OpEx goodness. The actual gross margins were actually flat to slightly down. If you parse that margin, what you would see is storage margins were stable, and we saw some server margins declining slightly. The factors contributing to server margin decline really were the things that we just previously talked about: we observed some pricing aggressiveness in large enterprise deals, and we saw some mixed dynamics within China, which drove some margin pressure downward. That’s the environment we saw, and that’s also why we are essentially blasting the headlights on the fact that we do think that we will see some more server pricing aggressiveness here in the back half. So that’s our current thinking. I don't know if Jeff would add anything to that. I think that's how we thought about it right now.

Spot on.

Our next question is from Amit Daryanani with Evercore ISI.

Thanks a lot, guys. I guess I’m going to have a broader question, but when I think about getting into the fiscal year, the expectation was down, and you guys would essentially miss revenues and EPS, given what all your peers have talked about in terms of the negative commentary. Your numbers are really much better than that fear was. I’m curious, what do you think is driving the delta of the better performance at Dell, while your peers have been talking about weakness? Importantly, do you think this performance is sustainable as you go forward?

Hey, Amit, it's Tom. Look, I won't comment on our peers. What I would tell you is that if you think about the broad set of capabilities and solutions we have, we think we have more growth levers and more levers that we can address and build upon with our customers. We have the most comprehensive portfolio in the IT infrastructure industry from our perspective. You think about the work that we've done on go-to-market over the last two years, with 1 billion customers. We highlighted this quarter that we acquired 21,000 new buyers in ISG year-over-year or seeing 11%, and a 10% growth in new acquisitions. We have been very focused on building our customer base as well. We have been aided by some deflationary costs in the first half of the year. We are signaling through my guidance that we have said that, that cost decline or that cost deflation will substantially slow in the second half of the year. Our job and our model that’s built to grow at a premium to the market is to take share, achieve relative share, and generate cash flow, which is the model we built and think that sustains in all the different types of economic environments. We are doing our best to execute the model, and I think we had a pretty good execution quarter from my perspective. I think it gets back to the broadness of the portfolio. If you look at the results, obviously we are aided by a strong CSG business this quarter. If we were solely an infrastructure data center business, that would have been a quite different story. But having a broad portfolio allows us to play the growth drivers that are available in the marketplace, and I think the team did a pretty good job on that.

Thank you.

Our next question is from Wamsi Mohan with Bank of America.

Yes, thank you. Can you comment on the ability to absorb the higher tariffs coming here shortly, particularly around notebooks and displays? Your message is very clear around server pricing. But how should we think about pricing as a lever for share gains in storage? If you intend to use pricing as a lever there, can you be a little more specific around ATI and all flash? Thank you.

Sure. Why don't I take the tariff question. Wamsi, that is Jeff. Clearly we have spent a lot of time planning and working through the very dynamic situation we are living in today with tariffs. Our global supply chain of 25 manufacturing sites around the globe allows us to have the agility and flexibility we need to minimize the impact. We are focused on continuity of supply and delivery to our customers in managing that. We are working through the challenges of List 4, which is what you are specifically talking about. We had previously mentioned Lists 1 through 3 in the previous calls. We have successfully mitigated that cost impact to the vast majority of our product. There have been cases where we have not and we’ve raised prices, and we will continue to work to mitigate the impact to our customers with List 4, which has a timeline from September 1, followed by December 15 for monitors and notebooks. In some cases, our costs are going to go up, and we will have to pass that along to our customers in the form of price in various ways. How we do that? We're still working our way through. We spend a lot of time making sure that we have our manufacturing capabilities in place and that our manufacturing processes are prepared for the changes, including sourcing operations for our notebooks and all-in-ones. So that's where we are. I think that's the best answer I can give today. More to come. It is pretty dynamic. It has changed a couple of times, and it will probably continue to change, but that’s our guess.

Hey, Wamsi, regarding pricing, we have indicated that we are noticing increased pricing aggressiveness in the server market. However, concerning our approach to pricing for storage and various product lines, we are not making any significant changes to our pricing strategy in our other business areas. We need to ensure we remain competitive with market pricing, but at this moment, we do not plan to use pricing as a tactic in those other areas.

Okay. Thanks a lot.

Our next question is from Simon Leopold with Raymond James.

Great. Thanks for taking the question. I wonder if maybe you could talk a little bit more about trending from a geography and market vertical beyond what you’ve mentioned. China has been mentioned a number of times, but I guess I'd like to hear a little bit more detail, maybe versus Europe. You also talked about sort of the large enterprise weakness. Could you maybe touch on some other verticals such as government-led tight markets and maybe some of the dynamics, because it sounds to me like maybe Europe is a little bit better, and government is a little bit better. Can I get some color beyond what we’ve talked about already? Thank you.

Hey, Simon. This is Tom. Let me start and maybe Jeff can jump in. We would tell you that in general we've seen North America demand generally quite healthy, and we are pleased with that. We're pleased with our Latin America demand. I think we have seen some softening in Europe, and whether that’s Brexit-related or just general economic dynamics, it's hard to parse that. But I think we’re seeing some softening there. If we look to Asia, we are pleased with what we're seeing in Japan. We are starting to see better velocity coming out of Australia and New Zealand. I think in general that’s how I would frame it for you. On a vertical basis, our customer segment perspective, Q2 was generally a strong education state and local government market in the U.S. That spending seems to be holding up fine. We are optimistic about the federal business going into Q3 in the U.S. Across the globe, I think government procurements continue to remain on track. That’s what we’re seeing right now. Jeff, I don’t know if you would add anything to that.

No, not at all. That's very good.

Our next question is from Jeriel Ong with Deutsche Bank.

Thanks, guys, for letting me ask the question. I’m trying to reconcile the storage. You mentioned storage is going to grow more than 3% year-on-year teams, but yet enterprise IT spends continue to remain weak throughout the rest of the year. It seems like I modeled your top-line guidance that at least on a year-on-year basis between 3Q and 4Q. I’m actually seeing that year-on-year revenue should accelerate. Could you clarify if that’s true and kind of help me reconcile some of these statements and how that impacts your full-year guidance? Thanks.

Well, I’m not sure. It's Tom, Jeriel. I’m not sure how you’re modeling that, so maybe the team can help you with that offline. I would tell you that as we think about storage, the market is sort of low single digits, and that’s the forecast from IDC. Jeff talked about the fact we saw storage demand at 1% in Q2. The broader ISG comment, which I think you’re referring to, is that we continue to see softness in servers. So you got to think about that mix dynamic. IDC is forecasting negative growth in servers for mainstream servers for the rest of the year. There are some interplay between those two lines of business as you model ISG. Maybe the team can take that offline and take a look at how you’re thinking about it. As we look at the business, we expect to see server revenue continue to be challenging for the remainder of the year, but we are more optimistic about the storage market, which is not a double-digit growth market, but it is a growing market.

Appreciate it. Thanks.

Our next question is from Andrew Vadheim with Wolfe Research.

Hi. Thank you. To start the year, you discussed the expectation that investments in sales capacity and coverage would add OpEx. Then you begin to see the benefit of these investments ramp as you moved into the second half of the year. But it seems like today's commentary was that the second half will balance growth and profitability, but maybe leaning towards growth. Can you just kind of level set where we are with regards to sales productivity?

We look ahead. It's Tom. We don’t sort of talk about those numbers publicly. I would tell you that we are seeing the capacity we’ve added ramping on the sort of the normal productivity curves that we would expect. You have to balance that against it being a bit tougher market than it was a year ago. There are macro dynamics that you’re managing as you think about productivity. Although we don’t tend to give the sales orders a lot of brakes on, we will just have to simply drive to the productivity levels that gets committed to. But it's a bit choppier market out there, particularly around server. We are biasing ourselves towards growth. What we’re trying to signal is that, we do want to make sure that the growth engine stays intact, and we’re committed to customer base expansion, revenue base expansion, even in a tougher market. The benefits of scale for us are quite significant, and we want to make sure that scale advantage continues. So as we think about the fact that the year that was what we were trying to signal, we are still investing in sales capacity, particularly as we think about some of the market opportunity as we set up for next year.

Great. I think we had one more question.

Yes. We will take our final question from John Roy with UBS.

Hey, maybe as a final, you were talking a lot about enterprise weakness and the balance of the back of the year. If you could give us some color on why you think that enterprise is doing that? Is it macro, trade, cloud, is it really just digestion, or something else? Maybe if you could just kind of order what you're seeing out there and why enterprises seem to be softer.

I think we’ve talked about it before, and I think even made a reference in our talking points earlier. Coming off the best server year in time and the best storage year in times in calendar 2018. If memory serves me, we roughly had the storage market growing 12% last year and the server market 30% at least. There’s been a digestion of that, but it's taken longer than I think all of the industry expected. Combined with the softness that we talked about, and what has been one of the fastest growing markets in the world, China was a problem.

Yes, I would add that we don’t have enough visibility to answer your question fully. However, those of us managing large enterprises typically dislike uncertainty. The macro environment, including factors like tariffs, Brexit, and fluctuations in interest rates and GDP, creates uncertainty, which has likely had a dampening effect on the market. Nonetheless, we remain optimistic about the second half of the year and believe we are positioned to continue executing effectively. Companies are still investing and progressing in their digital transformation, viewing IT investments as crucial for their business model evolution. We will continue to move forward and grow the business.

Great. Thank you.

Great. Thank you.

Thanks, Jon. As a reminder, we will be at the Citi Global Technology Conference in New York on September 4 and 5. We will also be hosting our business update for the investment community in New York on September 26. We look forward to continuing the dialogue. Thanks for joining us today.

This concludes today’s conference call. We appreciate your participation. You may now disconnect.