Earnings Call Transcript - DELL Q4 2023

Operator, Operator

Good afternoon, and welcome to the Fiscal Year 2023 Fourth Quarter and Year-end 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 the prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question-and-answer session. I would like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Rob Williams, Head of Investor Relations

Thanks for joining us. With me today are Jeff Clarke, Chuck Whitten, Tom Sweet and Tyler Johnson. Our earnings materials are available on our IR website, and I encourage you to review our materials and presentation which includes additional content to complement our discussion this afternoon. Guidance will be covered on today's call. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income and diluted earnings per share. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our press release. Growth percentages refer to year-over-year change unless otherwise specified. Statements made during this call that relate to future events and results 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 and our SEC filings. We assume no obligation to update our forward-looking statements. Now I'll turn it over to Chuck.

Chuck Whitten, COO

Thanks, Rob. We are pleased with our FY '23 execution and financial results given the macroeconomic backdrop. FY '23 was ultimately a tale of two halves with 12% growth in the first half and revenue down 9% in the second half as the demand environment weakened over the course of the year. Net, we delivered record FY '23 revenue of $102.3 billion, up 1% on the back of 17% growth in FY '22, record operating income of $8.6 billion, up 11% and record EPS of $7.61, up 22%. ISG, in particular, had a strong year with record revenue of $38.4 billion, including record revenue in both servers and networking and storage, and record operating income of over $5 billion. Importantly, we are structural share gainers and continue to outperform the industry. We expect to gain over a point of share in mainstream server and storage revenue when the IDC calendar results come out later this month. In servers, we remain number one in the market and have gained 9 points of mainstream server revenue share over the last 10 years. In storage, we are far and away the industry leader, larger than number two, three, and four players combined and have gained 4 points of share in the key midrange portion of the market over the last five years. And in PCs, we gained over 140 basis points of commercial PC unit share in calendar '22, marking our tenth consecutive year of share gains. Focusing on Q4, we again proved our ability to deliver against our commitments and execute no matter the market environment. We delivered Q4 revenue of $25 billion, down 11% with operating income of $2.2 billion and diluted EPS of $1.80 driven by strong ISG performance and disciplined cost management. ISG revenue was $9.9 billion, up 7% with record profitability. ISG has now grown 8 consecutive quarters, and our end-to-end business model has proven to be a demonstrable competitive advantage in this changing environment. We've enhanced our relevance with customers as spending priorities shifted from CSG to ISG over the course of the year, and we positioned our business to capture growth where it materialized in the IT market. Specifically in ISG, we delivered record storage revenue of $5 billion, up 10% including demand growth in PowerFlex, VxRail, Data Protection and PowerStore. We are pleased with our momentum in storage, the investments we made over the years, strengthening our portfolio are paying off and have allowed us to drive growth and share gain in what was a resilient storage market in 2022. We grew servers and networking 5% in a challenging server demand environment by optimizing server shipments, along with strong attach and growing average selling prices, a clear indication that we continue to sell deeper into customers' digital agendas. Turning to CSG, the PC market remains challenged. From a historic 2021, the PC market slowed markedly in June and experienced a sharp decline in calendar Q4. Consequently, our fiscal Q4 CSG revenue declined 23% to $13.4 billion. It was a continuation of trends we've seen in recent quarters. Commercial revenue fared better than Consumer, down 17% as customers delayed PC purchases in the face of macroeconomic and hiring uncertainty. Consumer revenue declined 40%. Given the decline in revenue, CSG operating income was $671 million or 5% of revenue, primarily driven by descaling with revenue decreasing faster than operating expenses. We are seeing increasing competitive pressure and elevated industry channel inventories, but we continue to maintain pricing discipline, execute our direct attach motion and focus on our relative performance in the most profitable segments of the PC market. In this challenged and uncertain environment, we've stuck to a playbook that has served us well across multiple cycles, staying customer-focused, driving differentiated relative performance, delivering against our innovation agenda, managing our cost position, maintaining pricing discipline and sustaining our unique and winning culture. In short, we have focused on what we can control. And in Q4, we continued to take decisive action, extending our existing cost controls, causing external hiring, limiting travel and reducing outside services spend. We reduced our operating expenses, excluding compensation and benefits by 5% versus last year, normalized for the extra week in the quarter. We also made the difficult decision to reduce our workforce by an additional 5% as announced in February. We will continue to stay disciplined in our expense management as we navigate the current IT spending environment. In Q4, we also advanced our innovation agenda. We launched our next generation of PowerEdge servers with significantly enhanced AI and machine learning capabilities and improved energy and cost efficiency for data center, cloud and edge environments, including new purpose-built XR servers for telecom, open RAN and mobile edge use cases. At Mobile World Congress this week, we announced new solutions and partnerships that will enable the telecommunications industry to accelerate the adoption of open network architecture, including Dell Telecom Infrastructure Blocks for Red Hat, an integrated solution, specifically engineered, validated and supported by Dell to help network operators run their telecom workloads more efficiently. And we continue to lead in defining the next era of hybrid work solutions. At CES, we made announcements in a number of areas, including high-margin peripherals that improve the employee experience like our premier collaboration keyboard with dedicated touch controls to easily manage Zoom calls and a series of new monitors, including a 32-inch Ultrasharp display with 6K resolution. We're proud of the substantial innovation that we've driven in all of our businesses in FY '23, and we have more exciting announcements coming in May at Dell Technologies World. Let me conclude by offering some brief observations on the demand environment. The broad caution in the IT spending environment that we started calling out in Q2 persists as customers continue to scrutinize every dollar in the current macro environment. Exiting FY '23, we saw select growth in verticals like financial services, transportation and construction and real estate. However, we've continued to see demand softness across most other verticals, customer types, and regions. Underlying demand in PCs and servers remains weak, and we are seeing signs of changing customer behavior in storage. Though Q4 was a very good storage demand quarter, we saw lengthening sales cycles and more cautious storage spending, with strength in very large customers offset by declines in medium and small business. Given that backdrop, we expect at least the early part of FY '24 to remain challenging. That said, our fundamental belief in both the long-term health of our markets and the advantage of our business model haven't changed. Data continues to increase exponentially in both quantity and value, and customers continue to see us as trusted partners, helping them navigate the complexities of hybrid work, multi-cloud and the edge. Unlike in prior cycles, customers are not outright stopping digital investments. They continue to plan projects even as they scrutinize spend. This gives us confidence that we will see a rebound in spending and a return to sequential growth later this year. We're industry leaders in our categories, we are central to the technology agendas of our customers, and we have a track record of meeting our commitments and improving our strategic position no matter the environment. We plan to stick to the playbook that served us well in FY '23 in prior cycles. Control what we can control, stay disciplined and agile, invest for the long term and meet our commitments to customers, team members and other stakeholders. We've positioned the business to navigate the current uncertainty and for the inevitable rebound. Now over to Tom for the detailed financials and guidance.

Tom Sweet, CFO

Thanks, Chuck. We're pleased with the full year and Q4 P&L performances given the macro environment. As Chuck highlighted, we set new records this year and have continued to build on our industry-leading positions. Turning to our Q4 results, which, as a reminder, included a 14th week, we delivered revenue of $25 billion, down 11% with strong ISG performance, particularly in storage. Currency remained a headwind and impacted revenue by approximately 410 basis points. Gross margin was $6 billion, up 3% and 23.8% of revenue. Gross margin rate was up 3 points due to a mix shift to ISG, component and logistics cost deflation and pricing discipline. The pricing environment in ISG was generally consistent with what we have seen in recent quarters, while in CSG, we saw areas of pressure, particularly in consumer and in some commercial markets where, in some cases, our competitors were working to reduce their channel inventory. We continue to be disciplined in our pricing execution and within CSG, driving our direct model with a focus on attaching services, software, peripherals and financing. Operating expense was $3.8 billion, up 5%, driven by an extra week in our quarter and 15.1% of revenue. In Q4, we recorded a $281 million charge to our GAAP operating expense for our previously announced workforce reduction. Operating income was $2.2 billion, down 1% and 8.7% of revenue with the extra week of operating expenses roughly offsetting an extra week of gross margin. Our quarterly tax rate was 26% and 20% for the full year. Q4 net income was $1.3 billion, down 5% and primarily driven by slightly higher interest expense, including a 14th week in the quarter and a slight decrease in operating income. Fully diluted earnings per share were $1.80, up 5% due to a lower share count. Our recurring revenue is approximately $5.6 billion a quarter, up 12% and our remaining performance obligations, or RPO, is approximately $40 billion, down due to a reduction in backlog, partially offset by an increase in deferred revenue. Deferred revenue was up primarily due to an increase in service and software maintenance agreements. Now turning to our business units. In ISG, we delivered our eighth consecutive quarter of growth. Revenue was $9.9 billion, up 7%, driven by strong storage and server and networking performance. Storage revenue was a record $5 billion, up 10% and Servers and networking revenue was $4.9 billion, up 5%. ISG operating income came in at a record $1.5 billion or 15.6% of revenue, up 360 basis points as we benefited from cost favorability, pricing discipline and revenue growth, including a higher mix of storage software. Our Client Solutions Group revenue was down 23% to $13.4 billion primarily due to continued softness in both the commercial and consumer PC markets. Commercial revenue was $10.7 billion, down 17% and consumer revenue was $2.7 billion, down 40%, though average selling prices continue to trend higher in both businesses. CSG operating income was $700 million, or 5% of revenue. As we have historically seen when the macro environment has slowed, customers' interest in consumption and financing models that provide both payment flexibility and predictability has increased. Our Q4 Dell Financial Services originations were $3 billion, up 12%, with strength across all geographies. DFS ending managed assets reached $14.7 billion, up 9%, while credit losses remained at historically low levels, given the strength of our portfolio, which is over 60% investment grade. We more than doubled the number of active APEX customers that have subscribed to our as-a-Service solutions over the course of the year. Turning to our cash flow and balance sheet. Our cash flow from operations was $2.7 billion in Q4 and $3.6 billion for the full year. Our strong Q4 cash flow was driven by profitability, partially offset by use in working capital. Within working capital, inventory was down $1.4 billion sequentially due to disciplined management and strong shipments at the end of the quarter. However, the inventory improvement was offset by a temporary increase in receivables, driven by linearity of revenue in the quarter and a decline in payables given reduced inventory purchases and timing of disbursements. Our commitment to improving working capital efficiency remains a priority as we continue to focus on unlocking capital within the balance sheet. We ended the quarter with $10.2 billion in cash and investments, up $3.7 billion sequentially and driven by free cash flow generation and a $2 billion debt issuance, partially offset by $400 million in capital returns. Our core debt balance ended the year at $18.1 billion, up due to the debt issuance. We intend to use part of the issuance proceeds to pay down the $1 billion maturity coming due in June and we'll consider using the remaining proceeds to prepay other debt in the capital structure over time. Turning to capital allocation. We will continue our balanced approach, repurchasing shares programmatically to manage dilution while maintaining the flexibility to be opportunistic. In Q4, we repurchased 3.7 million shares of stock for $150 million and paid $236 million in dividends. And for the full year, we repurchased 62.4 million shares for $2.8 billion and paid approximately $1 billion in dividends. As we highlighted in our press release earlier today and as part of our commitment to capital returns, we are raising our annual dividend from $1.32 to $1.48 per share, an increase of 12%, reflecting our confidence in our long-term business model and our ability to generate and grow cash flow over time. Turning to guidance, given the demand trends we saw last quarter, we expect Q1 revenue to be seasonally lower than average, down sequentially between 17% and 21%, 19% at the midpoint. Currency continues to be a headwind, and we are expecting a roughly 300 basis point impact to Q1 revenue. We expect the ISG business to be down sequentially in the mid-20s as we come off a seasonally strong storage quarter to Q1, which is typically a seasonally weaker storage quarter, and we expect CSG revenue down sequentially in the mid-teens. While we remain disciplined in our pricing and expect gross margin rates to be relatively flat sequentially. For our tax rate, you should assume a 24% plus or minus 100 basis points for Q1 and for fiscal year '24. We expect our Q1 diluted share count to be between 737 million and 742 million shares and our diluted EPS to be $0.80, plus or minus $0.15, down sequentially, primarily driven by lower revenue. For the full year, we continue to see a wide range of outcomes. We expect revenue to be down between 12% and 18%, and down 15% at the midpoint of the range. Given Q1 guidance, this implies a return to sequential growth as we move through the year. We'll continue to be mindful of our pricing discipline and our cost structure, making adjustments as appropriate, depending on the environment while also continuing to invest in innovation. Interest and others will be up approximately $200 million as we fund DFS originations in a higher interest rate environment. Netting this out, we expect diluted earnings per share of $5.30 plus or minus $0.30. In closing, we delivered solid fiscal year '23 financial results. And over the last three years, we have now grown our revenue at a 6% CAGR, and our EPS at an 18% CAGR. While there is near-term uncertainty, particularly in the first half of fiscal year '24, we have strong conviction in the growth of our total addressable market over the long term, and we remain committed to delivering our value creation framework with a revenue CAGR of 3% to 4%, a diluted earnings per share CAGR of 6% plus and a net income to adjusted free cash flow conversion of 100% or better over time. We have returned approximately $3.8 billion of capital to our shareholders in fiscal year '23 through share repurchase and dividends and expect to return 40% to 60% of our adjusted free cash flow to our shareholders over time. Expect us to continue to be disciplined in how we manage the business in the current macro environment, focusing on what we can control and delivering for our customers. Now I'll turn it back to Rob to begin Q&A.

Rob Williams, Head of Investor Relations

Thanks, Tom. Let's move on to the question and answer session. We'll start with the first question.

Operator, Operator

We'll take our first question from Aaron Rakers with Wells Fargo.

Aaron Rakers, Analyst

Yeah. Thanks for taking the question. Congratulations on the good execution in a tough environment. Thinking about the guidance into the April quarter, I'm curious if you could help me unpack particularly the server business. What you're seeing as far as the demand environment thus far in the April quarter? And how do we kind of triangulate what you've seen from a pricing perspective, sustainability of that as we look at the deflationary elements of component pricing. Thank you.

Chuck Whitten, COO

Yeah, Aaron, let me start. As we highlighted in the prepared remarks, we saw a continuation of the trends that we started calling out in Q2 and accelerated in Q3 in the server business. With weak underlying demand, frankly, it deteriorated over the course of the quarter. The texture we would add would be that the slowdown is probably most pronounced in the largest customers. Ultimately, our transactional business performed a bit better but was still declining. The texture was that we saw customers still digesting inventory, tightening budgets, and stretching decision timelines. Our win-loss ratio didn't change, and it was in line with historical performance. As we said, we expect to gain share in Q4. So ultimately, this is the market going through a digestion cycle, not our performance. As you said, our performance of 5% was driven by a couple of things. One was optimizing shipments in quarter, but the other was higher year-over-year revenue per unit performance. That was higher content rate of memory and SSD, higher services, and good attach of our enterprise peripherals, sort of our direct sales motion in action. Look, ultimately, we are seeing pricing pressure in all our business, and the server is not immune. I'd just say we've expected that. We've factored that into both our operational and financial plans and we've factored it into the guidance going forward. So we anticipate in this environment continuing to see pricing pressure but obviously, we're pleased with the content rate performance and ultimately, the performance of our attached business.

Rob Williams, Head of Investor Relations

Next question?

Operator, Operator

Your next question will come from David Vogt with UBS.

David Vogt, Analyst

Thanks, guys. Maybe just a clarification on CSG. I know obviously, it's a difficult backdrop, and you talked about the pressure that you saw throughout the quarter and into the beginning part of this quarter. But I think I also thought you mentioned that it sounded as if average selling prices were trending higher. Can you kind of discuss what's driving that and where sort of inventory is for you guys? And how do you think the market inventory looks as we move through the balance of this fiscal year? When do you think we can get to a more normalized inventory position from an industry perspective? Thanks.

Chuck Whitten, COO

The CSG business faced challenges during the quarter. While I won’t go into all the market data, Q4 was one of the toughest volume periods we’ve experienced. The consumer market is under significant pressure with high inventory levels, and the China market is growing slowly. The commercial sector also remains tough, as customers are postponing purchases, focusing on immediate needs, and redirecting IT spending. We are noticing elevated inventory levels, which is not ideal since our business benefits from lower inventory. Both the consumer and commercial segments are experiencing this inventory issue. Looking ahead, we have projected that the business will return to sequential growth throughout the year. However, it’s hard to specify when inventory levels will normalize, though we expect it to be later in the year, particularly as we enter Q1, where inventory is still high.

Tom Sweet, CFO

And maybe, David, I'll just make a couple of other points around average selling price, and we continue to benefit from our unique operating model, the direct model where we can attach peripherals, software, and services, which I think continues to help us. And those businesses are very strong for us. And then if you look inside commercial, our precision workstation business had a very good quarter on a relative basis, which carries substantially higher average selling prices.

David Vogt, Analyst

Can I make a quick follow-up?

Chuck Whitten, COO

Let's just keep going, David. If we have time, you can come back. Thanks, appreciate it.

David Vogt, Analyst

Sure.

Chuck Whitten, COO

Next question, operator?

Operator, Operator

That will be from Toni Sacconaghi with Bernstein.

Toni Sacconaghi, Analyst

Yes. Thank you. I was wondering if you could just help with the bridge for particularly Q1 guidance since that sets the foundation for the full year. Historically, you're down about 7% sequentially. You're guiding for down 19%. How much was the extra week? How much was backlog drawdown in the quarter that you don't think replicates? And how much is your assumption for kind of incremental macro weakness? Because there's still a really big gap between being down 7% and being down 19%. And then you're calling for potentially normal seasonality thereafter? And then can you also just address free cash flow? I think you're guiding for net income of $3.7 billion to $3.8 billion. Do you expect free cash flow realization to be better or worse than that number? Thank you.

Tom Sweet, CFO

Toni, I'll address the first part of your question regarding the transition from Q4 to Q1 revenue. We reported $25 billion, and you're correct that we usually see a sequential decline in the range of about 7% to 9%. In our guidance, the 14th week contributed approximately $700 million to $800 million in additional revenue. When you adjust for that and consider the deferred revenue calculations we provided, you arrive at a backlog adjustment of about $2 billion to $2.2 billion. The remaining part reflects the additional seasonality or weakness we're experiencing. This brings us down to 20.2%. As Chuck mentioned in his opening remarks, we are noticing ongoing softness. Our outlook for the year anticipates a recovery, but we expect Q1 to stay within that range for now. Regarding free cash flow, we do not provide specific guidance, but we anticipate improvement in cash generation throughout the year as we implement our plan. Tyler, would you like to add anything?

Tyler Johnson, Analyst

Yeah. No, no, I think that's right. And I guess the one thing I would add, recognizing we don't provide guidance, if you think about some of the dynamics that we had in FY '23, as we're thinking about next year, I do think that we should expect that free cash flow conversion to be better than we saw in FY '23.

Chuck Whitten, COO

Thanks, Toni. Next question, please.

Operator, Operator

That question will be from Jim Suva with Citigroup.

Jim Suva, Analyst

Thank you so much, and great results, and thank you for being clear on the outlook. When we think about a softening demand environment in the year 2023 and your cautionary below normal seasonal for Q1, how should we think about capital deployment? Would you all be doing more stock buyback? You just increased your dividend, which is great, but how should we think about deploying capital in a year that's starting off more challenged? And of course, you're going through restructuring. So I'm conscious of that. Thank you.

Tom Sweet, CFO

Jim, I think you should approach capital allocation for the year with this perspective. We remain dedicated to our long-term strategy of returning 40% to 60% of capital to shareholders over time. We had a heightened return in fiscal year '23 due to significant share buybacks. I see it this way: we increased the dividend by 12% to $1.48 annually, which reflects our confidence in the long-term business model and cash flow generation. While we don’t specifically forecast share buybacks, I have stated that we will manage dilution from this perspective, and we will continue to be opportunistic regarding our capital in relation to the share price compared to other uses.

Jim Suva, Analyst

Thank you, Tom. And we're going to miss you. Thank you.

Tom Sweet, CFO

Thank you.

Chuck Whitten, COO

Next question, please.

Operator, Operator

Yes, sir. Our next question will come from Erik Woodring with Morgan Stanley.

Erik Woodring, Analyst

Good afternoon, guys. Thank you for taking my question. I just want to touch on operating margins for each segment. We saw each of them trend kind of into opposing directions, CSG lower than normal, ISG higher than normal. As we think about looking forward, is there any structural change that we should be thinking about, particularly on the CSG side? Should we be thinking about operating margin for this business now closer to 5% to 6% or 6% to 8%, given what you've been doing over the last few years, more likely, again, as we look past this near-term dislocation to more normalized times? Thanks.

Tom Sweet, CFO

I believe you're on the right track regarding the operating margin for the year. We experienced higher operating margins during the pandemic, but we anticipate a more typical range as you've mentioned. We'll do our best to enhance profitability while ensuring we manage our performance and share appropriately. Regarding the ISG margins, we had a strong fourth quarter, largely due to the robust storage performance, which positively impacted our margins. Notably, our own storage software intellectual property contributed significantly to profitability, and we expect this trend to continue. I think we are heading back to a more normalized margin, potentially a couple of points lower than what we ended with in Q4, estimating around 200 to 250 basis points. However, we anticipate stronger storage performance next year, while ISG's server segment may see slight softness, and the CSG business will generate the margins we've discussed.

Erik Woodring, Analyst

Thanks for the color. And congrats on retirement.

Chuck Whitten, COO

Thanks, Eric. Next question please.

Operator, Operator

That question will come from Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

Thank you for taking my question. I would like to ask about your full year guidance, which indicates a revenue decline of approximately 12% to 18%. Could you provide your insights on how this decline is expected to be divided between CSG and ISG for the full year? I understand you provided some directional commentary for Q1, but I am curious if you could clarify your thoughts on CSG and ISG. When you mention that wide range for the full year guidance, where do you see the larger variable? Is it primarily related to the recovery in CSG or more dependent on the performance of ISG? Thank you.

Tom Sweet, CFO

Sure. I would expect that as we consider the performance of the business units for next year, they are generally projected to have growth rates in the negative mid-teens for the year. We guided to a midpoint of minus 15, which translates to around $87 billion. Their growth rates are quite similar. Regarding variability, we recognize the current macroeconomic environment and the present customer hesitancy that Chuck mentioned. We've established a plan anticipating improvements as the year progresses. Specifically for PCs, if we look back at past recessions, such as the dotcom bust in 2000 or the financial crisis from 2008 to 2009, typically, there is about four to six quarters of decline in both client and server segments. Considering our current position against that metric, we believe we're nearing the end of that decline. Hence, we're optimistic about seeing some recovery as the year unfolds. While I won't assign probabilities to the risks we're facing, I believe we have a strong plan that emphasizes execution, and you can rely on us to navigate through the challenges while remaining disciplined in our approach.

Samik Chatterjee, Analyst

Got it. Thank you.

Operator, Operator

We'll take our next question from Wamsi Mohan with Bank of America.

Wamsi Mohan, Analyst

Yes, thank you. I was wondering if you could clarify a little bit on the linearity of demand. It sounds like you had a pretty back-end loaded quarter given your comments on the receivables, but you're also talking about weakness here more than normal seasonal in Q1. Can you talk about maybe what you saw happen to orders a little bit more granularly? What do you see in January? What do you see in February? And are you expecting order patterns to trend here in the near term?

Chuck Whitten, COO

Let me start by sharing what we observed in the fourth quarter. We noticed that, as is often the case, our storage performance showed a linearity trend towards the end of the quarter, which is typical for this season, especially given the heavy storage mix in the fourth quarter. Compared to historical patterns, the server business also appeared to be a bit more back-end loaded. As I mentioned earlier, we experienced a decline in server demand throughout the quarter. When large bids or deals were closed, they tended to occur towards the latter part of the quarter more than usual, indicating some uneven seasonality. I don't anticipate any significant changes as we move into the next quarter, and I won't attempt to forecast linearity for that period. Storage bookings usually happen in the final part of the quarter, which is very common, while the server situation was somewhat unusual and reflects the cautious demand environment we are facing.

Tom Sweet, CFO

Chuck, I want to add that as we wrapped up January, we finished a sales compensation cycle, which often leads to increased activity towards the end of the quarter. This is typical for a six-month quota period, highlighting that it skewed a bit towards the end. Regarding the demand trend and our linearity pattern for the first quarter, it's different. Typically, companies tend to increase spending coming off year-end budgets in the fourth quarter, making the first quarter somewhat softer. It usually results in being less back-end loaded, but predicting that in the current environment is quite challenging.

Chuck Whitten, COO

Thanks, Tom. Thanks, Wamsi.

Operator, Operator

Our next question will come from Amit Daryanani with Evercore.

Amit Daryanani, Analyst

Thanks for taking my question. I guess I was hoping to talk a bit more about the ISG segment with the full year guide being down 15%. That seems to be more severe than I think what your storage or server peers are talking about. I think NetApp said flat storage environment, HPE, I think raised the full year guide actually right now. So I'm just trying to understand what are you seeing that's driving a much more tempered outlook versus your peers? And if you think about this down 15% expectation in ISG. Can you just slide the servers versus storage? Or are you seeing share gains reverse some there? Just any clarity that would be helpful because it seems a bit more severe than what IDC Gartner or your peers are saying.

Tom Sweet, CFO

Yeah. Amit, I would say I can't speak to what others have said about their businesses. All I would tell you is that as we think about the trends and what we expect is that we would expect servers to be softer than storage as we go through the full year with probably more pressure on the front half on servers than on the back as we go through the year. We do expect storage to hold up better. Yes, I'm not going to do the split, but that's our general thinking. That's what we see. It's stronger than that, great. But that's our expectation right now about how we plan the business is on that sort of framework.

Amit Daryanani, Analyst

Sorry, you don't expect any reversal in share gain or anything like that to be reflected in these expectations, right?

Chuck Whitten, COO

No, we don't. We build our plans to gain share. So this is what's reflected in our core guide is to gain share in all of our core business as we have consistently. Again, I think the customer texture is what we're reflecting in the guide in Q1, which is that as we enter the year, it's a challenging demand backdrop. It weakened as the quarter progressed. As we look forward for the rest of the year, as Tom said, we do expect a return to sequential growth driven by really a couple of factors. One is just a belief that when you compare this cycle to prior macro cycles in our industry, that four to six quarters of demand decline that Tom referenced as being the historic level. We're deep into that now. And then customers, what I would say is that just the cycle feels different right now. There's less outright company financial distress. There are fewer outright cancellations of projects. We're seeing some evidence of budget stabilizing and even increasing given inflation. So look, in infrastructure, customers are continuing to plan projects, but they're also behaving cautiously right now, and that's what's sort of reflected in our commentary.

Amit Daryanani, Analyst

Thanks, guys.

Chuck Whitten, COO

Thanks, Amit. Appreciate the question. Next question?

Operator, Operator

We'll now move to Simon Leopold with Raymond James.

Simon Leopold, Analyst

I guess what I want to try to follow up on is, in particular, the relationship between storage and servers. In that last earnings call, you did sound cautious on servers, but were more optimistic on your storage business, and now we're seeing you more cautious on storage. And I guess I'm a little bit surprised; I would think that the two should be correlated and be driven by many of the same trends. So I'm trying to understand better what changed in the last 90 days or so to change that view on storage?

Chuck Whitten, COO

Yeah. Thanks for the question. Look, we're just seeing underlying evidence of moderating growth as we came through the quarter. So look, as we said in the prepared remarks, we had a good quarter. Specifically, we saw strength in our very large customers. But that large strength was offsetting declines that we saw in medium and small businesses. So our medium and small business performance in storage did moderate quarter-on-quarter. That's typically a leading indicator for us for a slowdown in the business. Texturally, I would tell you the caution that we saw in the server market is starting to appear in the storage market as well. Cycle times on deals have stretched, the number of opportunities we see has declined and we see customers resizing budgets, increasing the number of approvals, all of the things that we saw in the server market. So as you referenced, we've long cautioned that the storage market is not immune to the broader trends in IT but it often lags the server business. It also shows less amplitude than servers but it's ultimately not immune. And so that's the caution you're hearing us reflect; that's what we saw in Q4. We think we're seeing the early signs of a little bit of slowing in the storage market.

Simon Leopold, Analyst

Thank you.

Chuck Whitten, COO

Thanks, Simon.

Operator, Operator

We'll take our next question from Sidney Ho with Deutsche Bank.

Sidney Ho, Analyst

Thanks for taking question. I also want to ask about the full year guidance. Obviously, things seem to have deteriorated throughout the quarter and the correction, like you said, could be four to six quarters. But I'm curious, are you seeing any of your businesses reaching a trough sooner than others because of your customers so aggressively cutting back on inventory? I'm thinking about server, storage, and PC, maybe within PC, consumer versus commercial, which one will help you come back to resume growth later in the year? Thanks.

Tom Sweet, CFO

Yeah, Sidney. Look, I think if you look at the pattern, we saw the softness if you go all the way back early last year, we saw the softness first manifest itself in the PC space. And then the server base followed as we got through Q2 to Q3, Q4. So logically, one would think that PCs come back, as we think about a pattern that and how we plan the business, we would expect to see some level of PC recovery as a leading indicator. And then I think servers would follow. I will highlight Chuck's comment on storage, which is, look, it's not immune to some of the softness, but the amplitude of the variation there is going to be, we think, less just given the data creation activity that's out there in the market and the underlying trends. So I think our perspective is how past patterns have been, I would expect PCs first and servers, and then storage to be sort of relatively stable but a little bit of pressure on that.

Rob Williams, Head of Investor Relations

Okay. Great. Thanks for the question, Sidney. Operator, let's take two more questions. Then I wanted to let everyone know that we're going to turn the call over to Michael for a short close.

Operator, Operator

We'll take our next question from Krish Sankar with TD Cowen.

Krish Sankar, Analyst

Yeah. Congrats on the good results. I just wanted to check, Chuck, on pricing and cost, how to think about the commodity and logistical cost environment in both CSG and ISG, specifically how to think about it over the next few quarters relative to the past due. Are the biggest rate of cost decline behind us?

Jeff Clarke, Vice Chairman

Chris, this is Jeff. I'll discuss commodities and then pass it to Chuck for the pricing details. Considering the current environment and the inventory landscape, along with declining demand, we experienced deflation in Q4 and anticipate deflation in component costs for Q1 and Q2, primarily driven by RAM, NAND, and LCDs across our businesses. Additionally, freight costs, which we have previously covered extensively, have also begun to decline. We are paying less in supplier premiums, fewer parts are being expedited, and our freight costs for those parts have decreased. We are now utilizing our ocean network more extensively than our air network, with ocean costs approaching pre-COVID levels. Although air costs haven't quite returned to pre-COVID levels, they are also trending downward. Therefore, our input costs for the first half of the year will be lower.

Chuck Whitten, COO

We have certainly experienced increased pricing pressure, particularly acute in the consumer business where there was significant discounting and rebates to clear channel inventory. Similar pressure was observed in the commercial PC sector, especially in large bids and our channel stock and sell operations, where industry inventory remains high and pricing competition has intensified in the server market as well, particularly for major bids and customers. As Jeff mentioned, in a weak demand and deflationary commodity environment, we anticipate downward pricing pressure. We have incorporated this forecast into our financial and operational plans and the guidance we provided today. Additionally, we strive to maintain discipline in our pricing, recognizing that there is limited elasticity in the market, especially in the commercial PC and server sectors. Therefore, we are exercising caution in our pricing strategies given the current conditions.

Krish Sankar, Analyst

Thanks, Chuck. Thanks, Jeff.

Chuck Whitten, COO

Thanks, Krish.

Operator, Operator

We'll now take our final question from Kyle McNealy with Jefferies.

Kyle McNealy, Analyst

Thank you for the question. You mentioned that there will be sequential growth throughout the year, suggesting that we might be moving beyond the peak challenges of reduced demand and high channel inventories in PCs, or at least expect to do so in the first quarter. Can you share what gives you confidence that we could be moving past those peak challenges, whether it's a decline in channel inventories or year-over-year trends showing less negativity in recent weeks? Additionally, when do you anticipate seeing refreshes of early pandemic PC purchases incorporated into the model? Will we see some of that later this year, or is it more likely to happen in fiscal 2025 and beyond? Thank you.

Chuck Whitten, COO

It is challenging to determine the precise moment when the rebound will occur. Historically, we have observed four to six quarters of demand decline, and we are currently deep into that period in the PC sector. In the commercial PC market, customers continue to emphasize the importance of these devices. In the first nine months of 2020, there were 62 million core commercial notebooks shipped, indicating that a refresh cycle is on the horizon. We are contemplating when exactly this will begin. However, based on past cycles and customer feedback, we anticipate that sequential growth will resume later this year.

Tom Sweet, CFO

Well, maybe a little bit of texture there. As Chuck talked about the range. Consumer PCs in the industry went negative in Q1 of last year and commercial PCs went negative in Q2 of last year. So we are in quarter four and quarter five, I should say, quarter five and quarter four, respectively, consumer and commercial. And we've talked about ranges of four to six.

Rob Williams, Head of Investor Relations

Thanks, everyone. Let's turn it over to Michael for a close.

Michael Dell, CEO

Thanks, Rob. As you are all aware now, Tom has decided that it's time for him to retire from Dell. He will be leaving us at the end of Q2 after an incredible 26 years with the company and as our longest-serving CFO in company history. Since joining Dell in 1997, Tom has overseen every aspect of finance, guiding us through tremendous growth and through some extraordinary milestones. From the merger with EMC to returning to the public markets, to the spinning off Dell's stake in VMware. Tom, thank you for everything. And most of all, thank you for your friendship. With Tom's retirement, I'd like to welcome Yvonne McGill, currently our Corporate Controller, as our new CFO effective day one of Q3 FY '24. Many of you already know Yvonne. She also joined Dell in 1997. Among other roles, Yvonne has been SG CFO, Chief Accounting Officer and led our finance functions for our APJ and China business, and as our Corporate Controller, she has been responsible for a number of functions, including ISG, tax, treasury, accounting and Investor Relations since 2020. She is a proven finance leader, and we are all thrilled to have her as our next CFO. Tom, Yvonne, and the team will work closely to ensure a smooth transition. And I know you will all join me in congratulating them both. To close the call, let me reiterate what you've heard from Tom, Jeff, and Chuck. We have delivered strong performance over the last few years, and we did so again in FY '23. We delivered for our customers, drove share gains, generated strong profitability, accelerated our innovation agenda and executed against our capital return commitments. While the near-term demand environment is challenging, we expect it to improve as we move through the fiscal year. The quantity and value of data continue to explode, and the long-term trends are in our favor. Thank you for letting me join you today, and we look forward to seeing you all soon.

Rob Williams, Head of Investor Relations

I'm just going to close off to thank everyone for joining us today. We've got a pretty active schedule over the course of the next six weeks with management and the investment community. And that begins with Morgan Stanley next week in San Francisco with both Chuck Whitten and Sam Burg. So we look forward to seeing everyone out there. Thanks a lot.

Operator, Operator

This concludes today's conference call. We appreciate your participation. You may disconnect at this time.