Earnings Call Transcript - DELL Q4 2020

Operator, Operator

Good afternoon, and welcome to the Fiscal Year 2020 Fourth Quarter and Year-end Financial Results Conference Call for Dell Technologies, Inc. I want 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. I would now like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Robert Williams, Head of Investor Relations

Thanks, everyone, for joining us. With me today is our Vice Chairman and Chief Operating Officer, Jeff Clarke; our CFO, Tom Sweet; and our Treasurer, Tyler Johnson. During this call, unless we indicate otherwise, all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, 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, and that VMware historical segment results have been recast to include pivotal results. 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 and SEC reports. We assume no obligation to update our forward-looking statements. Now I'll turn it over to Jeff.

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

Thanks, Rob. As Dell Technologies begins our fourth year as a combined company, we've never been better positioned to help our customers unlock the potential of all of the data coming their way. No one stores, processes, moves and protects more data than we do across any environment. No competitor enjoys our advantaged positions across physical and virtual infrastructure. Our investment in talent, innovation and breadth of capabilities gives us an advantaged starting position as we head into the data decade. I am optimistic, yet I know we have some hills to climb; that is evident in our FY '20 results. In FY '20, we delivered revenue of $92.5 billion and EPS of $7.35. Revenue grew modestly at 1%. We delivered strong profitability with operating income up 15%. I know you want to understand what is going on with Infrastructure Solutions Group results. So let's start there. In ISG, our FY '20 revenue was down 7% to $34 billion, but up 10% versus FY '18 as our large enterprise customers digested FY '19 CapEx investments in China slowed. Server and networking revenue declined in FY '20, but profitability was up as we didn't chase unprofitable server deals in a down market. Our long-term server share trajectory remains strong. We are winning in the consolidation, gaining approximately 590 basis points of share over the last 3 years, and we have been #1 in mainstream server revenue for 7 quarters according to IDC. In FY '21, we're planning for both the overall server market and our server revenue to return to growth, driven by higher value workload servers, increasingly more robust AI and machine-learning solutions and distributed IT requirements at the edge. According to IDC, mainstream server revenue is expected to grow at 3.3% in calendar year 2020, and we plan to grow at a premium to the IDC forecast. Shifting to storage, roughly 2.5 years ago, we began to take actions to stabilize the business and lay the foundation for growth. We have reclaimed over 300 basis points of share since 2017. One action, we have invested approximately $1 billion on a run rate basis into sales, coverage, capacity and marketing, including critical investment in storage specialists. This year, these specialists will reach full productivity. Earlier this month, we combined into one sales organization, and we will realize the next level of synergies and cross-sell opportunities, like selling more storage and data protection to our server customers. We have made considerable progress simplifying our storage portfolio, moving from over 80 products 2 years ago to roughly 20 today, including our new mid-range storage solution being evaluated now by dozens of customers. And by Dell Technology World in May, we will have refreshed our entire storage product lineup under the Power brand, completing a 2.5-year journey of modernizing our entire ISG portfolio. We have never been more competitive from top to bottom. We are planning to grow FY '21 storage revenue at a premium to the market, with growth strongest in HCI, followed by core storage and data protection. Our team is tenured and ready to sell, the business is simplified and stabilized, and the portfolio is the best it's ever been. FY '21 is the year of ISG. FY '20 was an outstanding year for the Client Solutions Group with a record revenue of $45.8 billion, up 6%, with commercial up 11%. We shipped a record 46.5 million units during the calendar year. We executed well, taking advantage of tailwinds from the Windows 10 refresh cycle, declining component cost while navigating through CPU shortages and a dynamic tariff environment. What's more, we're winning in the consolidation, taking share and growing at a premium to the market. We have gained share for 7 years in a row according to IDC, and the plan is to continue this momentum as the market consolidates further. In FY '21, we expect the PC market to remain solid through the first part of the year before declining in the second half. This means we're facing a tougher compare as the Windows 10 refresh wanes. IDC, PC units are expected to be down 7.1% this year. The result is a slowing CSG revenue, making growth in ISG that much more important, but that's the advantage of our diversified business, including VMware. Our VMware business unit had another strong year with FY '20 revenue of $10.9 billion, up 12%, another year of double-digit revenue growth. And the business is well positioned going forward. For example, we have hundreds of thousands of VMware customers today, and the combined workloads running on the VMware installed base are bigger than all of the public clouds combined. And more customers have decided multi-cloud is the answer. Couple VMware Cloud Foundation and NSX with our leading Dell EMC infrastructure, and we have the industry's best multi-cloud solution. The advantage of the Dell Technology Cloud as an operating model is that provides consistency across the entire ecosystem. In application development, we strengthened and simplified our approach with VMware's acquisition of Pivotal, combining critical IP and go-to-market capabilities. With Project Pacific, VMware is integrating and embedding Kubernetes into vSphere. And with Tanzu, they are building an enterprise-grade container-based development platform, and it runs anywhere. In security, Carbon Black is integrated into our commercial PC security offering, and we are seeing promising attach rates already. Going forward, expect us to continue to innovate across the portfolio. We put together a model that allows us to work across Dell Technologies to do joint product planning and development, collaborative innovation and integration to deliver better end-to-end solutions for our customers. We are also seeing increasing customer traction with our co-engineered first and best solutions, including Dell Technology Cloud, Unified Workspace, VxRail with VCF and Smart Fabric Director with NSX. This is especially true when we collaboratively go to market as one unified Dell Technologies sales team to help our customers on their digital transformation journey. We do this with our largest customers today, and it is a unique customer experience that only Dell Technologies can provide. Customers love it, and it's driving differentiated growth. For this set of customers, we saw FY '20 revenue grow in every major line of business and 9% in total. Looking at the rest of our customer segment performance, Enterprise Preferred accounts, orders revenue grew 6%. Our commercial business orders revenue, excluding China, grew 9% in FY '20. The investments we have made in small and medium business have both delivered strong double-digit orders revenue growth in FY '20. This segment is especially valuable to VMware as we work together to reach downstream and growth of VMware customer base with Dell's direct reach in the mid-market. The good news is the volume of VMware deals going through Dell is increasing across the board as we simplify and streamline our go-to-market. For example, in DFS, VMware originations grew 15% to $1.4 billion in FY '20. And when a VMware transaction includes a DFS payment solution, the transaction is more profitable, it's significantly larger in size, longer in duration, and includes more services. We are still in the early innings of realizing our full go-to-market synergies with significant cross-sell opportunities. For example, we have approximately 30,000 server customers every quarter, and only half of them buy storage from Dell Technologies. To address this opportunity, we've rolled out our new global power-up program across all segments to enable selling across our lines of businesses, providing additional incentives and marketing programs to sell new lines of business to existing customers who do not purchase them today. While there is more work ahead, I am confident in our strategy, and we are increasingly well positioned for the long term. Our job is clear, ignite ISG growth, manage the Windows 10 transition and drive Dell Technologies' synergies. Dell Technologies has no ceiling on the potential in the data era. We remain focused on maximizing value for our aligned shareholders. And now I'll turn it over to Tom.

Thomas Sweet, CFO

Thanks, Jeff. We are focused on maximizing value for all aligned shareholders across 5 levers: current operations, synergies, new opportunities in our corporate and capital structures, and we have made significant progress in each of these areas. Since 2017, our first full year as a combined company, we have grown revenue at a roughly 77% compound annual growth rate. We have reinvested between $4 billion and $5 billion per year in R&D. And since the EMC transaction, roughly $5.5 billion in M&A, primarily through VMware. At the same time, we are simplifying our solutions portfolio and corporate structure. Including the RSA transaction announced last week, we will have divested approximately $9 billion of nonstrategic assets on a gross basis, and we have paid down $19.5 billion gross debt since the EMC transaction while continuing to optimize the amount of debt due in any one given calendar year. Today, we are increasing our previously announced fiscal '21 debt paydown target from $4 billion to approximately $5.5 billion, using the proceeds from the RSA divestiture. We remain committed to achieving investment-grade ratings and are confident in reaching a 3x core debt leverage ratio by the end of the fiscal year. We are also announcing a share repurchase program of up to $1 billion over the next 24 months, effective immediately. Share repurchase provides an additional lever to help maximize value for shareholders as we opportunistically take advantage of what we believe is a significant discount in our stock price. Our overall capital allocation framework and financial policy remains unchanged, and we'll continue to principally focus on debt pay down. Turning to Q4, we continue to balance revenue and profitability through challenging market conditions, particularly in large enterprise and in China. Q4 revenue was $24.1 billion, up 1%. FX remained a headwind this quarter, impacting growth by approximately 100 basis points. Our deferred revenue balance grew 16% to $27.8 billion, driven by the sales of software maintenance and services. Our recurring revenue, which is the combination of deferred revenue amortization, utility, and as-a-service model, is now approximately $6 billion or 24% of our quarterly revenue, and we will continue to focus on growing these offerings. Gross margin was up 4% to $8.4 billion and was 34.7% of revenue, up 120 basis points, driven by lower component costs, pricing discipline and mix shift to software. Operating expenses were $5.6 billion, up 4% due in part to investments we have made in sales coverage to broaden solution sales capabilities and target specific customer segments, including small and medium business. Operating income was up 4% to $2.8 billion or 11.5% of revenue. Our consolidated net income was $1.7 billion, up 6%, benefiting primarily from operating improvements and a reduction in interest expense. Our EPS was $2 for the quarter. Adjusted EBITDA was $3.2 billion or 13.3% of revenue and a record $11.8 billion for the year. Over the last 2 years, we have generated over $22 billion of adjusted EBITDA. We generated $3.8 billion of adjusted free cash flow in Q4, up 49%, driven by strong profitability and working capital discipline. And our full year adjusted free cash flow was a record $8.9 billion, up 31%. We repaid approximately $1.5 billion of gross debt in the quarter or $5 billion for the year, in line with our fiscal '20 commitment. Shifting to our business unit results, Client Solutions group delivered strong Q4 revenue growth and profitability. Revenue was $11.8 billion, up 8%, as the team did a nice job working through CPU shortages. Commercial revenue was $8.6 billion, up 10%, including double-digit growth in commercial desktops and workstations. Consumer revenue was $3.2 billion, up 4%, as we continued to prioritize CPUs to our commercial business. CSG operating income was $624 million or 5.3% of revenue. Profitability was driven primarily by component cost declines, pricing discipline and our commercial consumer mix. As Jeff said, we have work to do in the Infrastructure Solutions Group. ISG revenue was $8.8 billion, down 11%. Storage revenue was $4.5 billion, down 3%, with strong double-digit demand growth in HCI, offset by softness in core storage. Servers and networking revenue was $4.3 billion, down 19%, due in large part to a soft market, particularly in China and in certain large enterprise customers in the U.S. and Europe. ISG operating income was $1.1 billion or 12.7% of revenue. Our VMware business unit had another solid quarter. Revenue was $3.1 billion, up 12%, with operating income of $1 billion or 32.8% of revenue. And NSX, vSAN and EUC product bookings grew over 20%, mid-teens and over 30%, respectively. Dell Financial Services originations were a record $2.8 billion, up 30%, with record managed assets of $11.6 billion, up 19%. With DFS, we facilitate solution sales across Dell Technologies, driving incremental recurring revenue and operating income. Across the portfolio, we are offering our customers choice with industry-leading as-a-service and flexible consumption solutions through Dell Financial Services. With our data center utility, Flex On Demand and PC as a Service offerings, we now have approximately $3.5 billion in flexible consumption model assets under management, and our FY '20 flexible consumption billings totaled nearly $900 million. Turning to our balance sheet and capital structure, we ended the quarter with $10.2 billion of cash and investments. Our total debt ended the year at $52.7 billion. Because our total debt includes VMware's debt obligations, DFS funding where the majority is non-recourse to Dell and the over-collateralized margin loan, we feel core debt is more representative of the core Dell debt service obligations. Our core debt ended the year at $33.8 billion, down $5.5 billion in fiscal '20. Our core leverage ratio ended FY '20 at 3.2x, down a full turn from 4.2x at the beginning of the year. Core debt excludes our DFS-related debt, which has grown with the increase in our financing originations. The majority of our $9.3 billion of DFS-related debt is nonrecourse to the company and is backed by high-quality receivable streams; it's important to note that it does not require cash flow from operations to pay down. Moving to guidance. We continue to monitor the macroeconomic and IT spending environments, including current softness in large enterprise in China. We also monitor the impact of COVID-19 on our sales and supply chain. We expect the Windows 10 refresh to continue into the first half of fiscal '21. While CPU shortages have improved, we expect them to continue through at least the first half of the year. As discussed in our Q3 earnings call, we expect the component cost environment to be inflationary in fiscal '21, a headwind to margins. We also talked about our operating income percentage trending closer to fiscal '19 levels on the Q3 call. Because of these factors, and assuming the RSA sale closes in Q3, we expect fiscal '21 GAAP revenue of $91.8 billion to $94.8 billion; operating income of $3.4 billion to $4 billion; and EPS of $0.37 to $1.07. We expect our non-GAAP revenue range for the current fiscal year to be $92 billion to $95 billion; our non-GAAP operating income range to be $8.9 billion to $9.5 billion; and our non-GAAP EPS guidance range is $5.90 to $6.60; our non-GAAP tax rate is expected to be 18.5%, plus or minus 100 basis points. This full year guidance does not factor in any potential COVID-19 impact. Like our customers, our top priority is ensuring the health and safety of our employees and communities. We do anticipate a negative impact on our normal Q1 seasonality driven by softness in China, our second largest market. We will manage the supply chain-related dynamics with extended lead times for certain products, particularly in client. In closing, last year, we leaned on CSG growth with PC demand driven by Windows 10 refresh and CSG margin expansion given the favorable component cost environment. This year, we will lean on ISG growth and share gains. As Jeff said, fiscal '21 is the year of ISG. We see great potential and possibilities at Dell Technologies as we enter the data decade. We will continue to focus on winning in the consolidation in our core hardware markets and delivering differentiated value by innovating and integrating across the business for our customers, our investors and our employees. Our model is focused on long-term profitable growth, and is advantaged given our ability to adjust as needed based on market conditions. We are focused on growing faster than competitors in the industry, growing operating income and EPS faster than revenue over the long term and generating strong cash flow. With that, I'll turn it back to Rob to begin Q&A.

Robert Williams, Head of Investor Relations

Thanks, Tom. Let's go to Q&A. (Operator Instructions) Erica, can you please introduce the first question.

Operator, Operator

Thank you, Tom. Let's move on to the Q&A session. Erica, could you please introduce the first question?

Roderick Hall, Analyst

I guess, I wanted to focus on the DFS expansion and just see if you could give us a little bit more color in terms of why that expanded faster this quarter. And is that a signal that you guys intend to use DFS more aggressively as we look forward into the next fiscal year.

Thomas Sweet, CFO

Rod, it's Tom. So hey, look, I think we've been very pleased with the DFS growth and their ability to facilitate the selling of our solutions across our customer base and provide the necessary financing capabilities, and we've seen great receptivity of the Flex On Demand and the flexible consumption models and the utility models that we've been driving through the business. We were very pleased with what we saw in Q4 in terms of the family of Dell Technologies, principally VMware utilizing the financing capabilities to help drive sales. Obviously, you saw that in the origination numbers. And so I think we're ending the year with roughly over $11.8 billion in managed assets. We're pleased with that. You know, Rod, obviously, that we've financed the DFS business using the securitized debt, for the most part, securitized by the financing receivables. So that structure works very efficiently; it has a relatively inexpensive cost of capital. And we're going to continue to drive it. It's proven to be a facilitator of our selling team members, and we think that we can continue to grow originations and continue to drive solutions. With the demand that we're seeing around flexible consumption models and as-a-service models, I think we're excited by that economic framework and the ability of our DFS to continue to provide that type of capability.

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

Rod, I would add to that. I mean, so much so that we launched a program called Dell Technologies On Demand last November, which packages our consumption, our various as-a-service, our metering usage capabilities and looks at some modern way customers want to digest or ingest IT. I think you're going to see us continue to build upon the programs that allow us to give our customers the flexibility they need to consume IT in a variety of ways, whether it's pay as you grow, Flex On Demand, some of the data center utility that Tom mentioned. We think it is the wave of the future. We think we have a very differentiated offering that allows customers to consume IT from us without being forced to use our managed services or various services. You can pick and choose as you please. And we offer this capability across the entire portfolio from our PCs to our servers, all the way to our infrastructure gear. And then earlier this week, you might have seen on the Dell Technology Cloud, our VxRail plus VMware Cloud Foundation, we added a subscription service capability along with that. Look, I think, as Tom said, this is a key component; it's sticky with our customers, and it's how they want to increasingly consume IT.

Operator, Operator

We'll take our next question from Amit Daryanani with Evercore.

Amit Daryanani, Analyst

To begin with, can you clarify what you meant by saying that fiscal '21 would be the year of the infrastructure segment? What does that imply for Dell? Is there a specific growth or revenue target associated with that statement? Additionally, how do you manage operating margins in this context? I'm trying to grasp the significance of the infrastructure segment for the company.

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

I believe Tom and I will work together on this. If we look at our business, especially considering the Windows 10 transition on the CSG side last year, we will face tougher comparisons going forward. For us to meet the revenue guidance that Tom mentioned, our ISG needs to perform better than it did in FY '20. It’s straightforward. A key part of our strategy is to excel in the consolidation of both the core server and core storage markets. We need to outperform the market, which means we have to grow. We do have growth objectives for our business, and while I won't share specific numbers, those are reflected in the guidance Tom provided. We need to see significant year-over-year improvement in ISG. You heard that our overall business declined last year, and our Q4 performance wasn’t up to our expectations. As for what will change this year, and why it could be the year of ISG, we should consider two aspects: the server side and the storage side. Starting with storage, we have heavily invested in capacity and coverage, which is becoming more experienced. Heading into FY '21, we have the most seasoned productive capacity among our storage sellers. This, combined with a complete and modernized product portfolio that we’ve been working on for the last two and a half years, will set us up well. We believe that a modern competitive portfolio, which is best-in-class in several areas and supported by the most experienced sales team in storage, will drive our growth.

Thomas Sweet, CFO

Jeff, I would add on the storage comment. Just that as we look at the opportunity to cross-sell and the synergy opportunity there between our server buyers and those buyers that buy storage, it's roughly a 3:1 ratio or something like that of servers to storage. There's an opportunity there to cross-sell with the more tenured sales organization with the coverage expansion that we're driving. I think we feel good about the opportunity to go mine that customer base and expand the customer base for storage. I think that's the other thing that, as we think our way through what's different about fiscal '20 versus fiscal '21, that's going to be important for the folks on the phone to think about. You want to talk about servers real quick?

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

I'm pleased to discuss our server performance this year. Over the past three years, we've gained roughly 590 basis points in market share and added $4 billion in server revenue. The years 2019 and 2020 were focused on absorbing the large capital investments made in the preceding years. Customer surveys and IDC forecasts show a much improved demand outlook for 2020 compared to last year. We're optimistic that demand will return. Historically, we have operated at a premium, which has allowed us to capture a significant amount of market share during that three-year span. We have become the leading server provider in the market, and we believe this positions us well for growth, shaping our plan for this year.

Thomas Sweet, CFO

Yes. Throughout most of the year, we've discussed the challenges faced in the server market, particularly regarding China and the North American Enterprise large bid business. Server revenue has decreased by approximately 14% year-over-year. If we break it down, demand in China is down about 35%, while the rest of the world has seen a decline of around 5%. Despite this, we've experienced above-market growth in sectors such as commercial medium and small businesses in North America, and market growth in APJ and EMEA. The primary weaknesses have been in China and the North American Enterprise sector, which has seen a significant drop. We recognize these soft spots and will continue to adapt in China by expanding our buyer base and modifying our business model to enhance lifetime value for new customers. Although the ongoing coronavirus situation presents challenges, we are committed to refining our business model in China and focusing on increasing our business velocity while maintaining profitability.

Operator, Operator

We'll take our next question from Toni Sacconaghi with Bernstein.

Toni Sacconaghi, Analyst

I was curious if you could share your longer-term outlook. Before going public, you mentioned a revenue growth target of 4% to 6%. At the Analyst Day in the fall, you revised that to 4%, plus or minus 1%, indicating top line growth of 3% to 5%. Looking at your revenue growth over the last four years, it has been 1, 1, 2, 3, and then a significant increase to 13. For three of those four years, you've seen growth of only 1 or 2. Excluding VMware, there hasn't been much growth in three out of the last four years. It seems like you are becoming more cautious about your long-term outlook. Can you explain the reasoning behind this? Should we anticipate that core Dell, excluding VMware, will have flat growth moving forward, considering the historical trends and the somewhat unclear commentary regarding long-term growth shared in your presentation?

Thomas Sweet, CFO

Toni, it's Tom. Let's think about it this way. Over the last three years, we've experienced a compound growth rate of approximately 7% at the top line, although there has been variability year to year due to market conditions. In a down market, even with premium growth, we have seen some pressure on growth rates. However, our model focuses on long-term growth and market consolidation, as well as gaining market share. We've successfully navigated the current environment. Fiscal '18 and fiscal '19 were strong years for revenue, adding about $11 billion to our business. Fiscal '20 has been challenging due to infrastructure spending, but we've pushed into the client business and generated solid profitability and cash flow. While your concerns are valid, we believe our growth will align with GDP in the long term. The guidance we provided for next year reflects the current GDP range at the upper end. We are mindful of environmental dynamics, although our forecast does not specifically account for coronavirus. Looking into fiscal '21, IDC forecasts negative growth in the client business, while mainstream server revenue is expected to have low single-digit growth, and external storage is predicted to remain flat. Even with the growth premiums we are pursuing, we face challenges that we will need to navigate. Nevertheless, we remain optimistic about the overall business in the long term, especially with VMware contributing positively to our growth story. We have managed to create many synergies with VMware to enhance its performance and will continue to do so. We're being careful in how we guide our business amid current circumstances, and while we are confident about the long-term outlook, we will have to manage the short-term challenges we encounter.

Operator, Operator

We'll take our next question from Shannon Cross with Cross Research.

Shannon Cross, Analyst

Tom, can you talk a bit about the comfort level with cash generation, given some of the puts and takes with the weakness in TCs that's coming theoretically because of coronavirus, but they may be getting back toward the end of the year. And then also just in terms of the amount of investment you need to make. And then just a below-the-line question: think you can talk a little bit about some of the puts and takes, interest in the equity line and all of that, just so we can make sure we're all in the same camp in terms of where we should be for fiscal 2021?

Thomas Sweet, CFO

Thanks, Shannon. I'll begin with the cash situation, and then I'd like Tyler to provide any additional insights. We feel positive about our cash flow forecast based on the information we have today. We have increased our debt repayment in light of the RSA transaction, which we anticipate closing in the third quarter. While the coronavirus has introduced some uncertainty, we indicated in our guidance that we expect our sequential performance from the fourth quarter to the first quarter to be softer due to its impact. However, we do not foresee it affecting the full year. We're considering two main impacts of the coronavirus. One is on our domestic business in China, which is facing challenges due to the softening economy and efforts to manage the virus. We expect to see an impact in the first quarter for our China operations. Another aspect to consider is how supply chain or lead time issues might affect demand. Currently, we believe only consumer demand is perishable, meaning that if customers want to buy a product now and we can't deliver due to supply issues, they may choose alternatives. As we gather more information about these impacts, we'll continue to refine our outlook. For the full year, we're optimistic about our cash forecast. We have an efficient working capital model and find the amount of debt due this year to be manageable. Our aim has been to proactively manage our future debt maturities. Tyler, would you like to add to that?

Tyler Johnson, Treasurer

Shannon, I would like to add a few points. First, if you examine our balance sheet, you'll see that we ended with a strong cash position, which makes me feel optimistic. Additionally, Tom mentioned some factors related to China. It's important to note that while we generate cash there, it's not always readily available for our operations. Thus, from a liquidity standpoint, it doesn't affect my day-to-day cash flow.

Robert Williams, Head of Investor Relations

And then the below-the-line question?

Thomas Sweet, CFO

Oh, yes. If I refer you to the slide deck, specifically around Page 26, we discuss the F&O impact. This year, you'll notice approximately $2.8 billion below the line, primarily consisting of interest expense and some foreign exchange costs. To put it in perspective, for FY '21, we expect to reduce interest expense at the Dell and Dell EMC level by around a couple of hundred million dollars. However, VMware carries additional debt and has lower interest income, which offsets that reduction by roughly $100 million. Additionally, we do not anticipate gains from the venture portfolio; those will occur as they do, if at all. We believe the appropriate number to consider for the F&O line is between approximately $2.6 billion and $2.7 billion. Regarding the share count, it should be in the ballpark of $760 million, in light of the dilution from the equity program. This is a rough estimate, and the share count may vary depending on share price and the timing of exercises, but that’s the number we've been modeling.

Operator, Operator

We'll take our next question from Katy Huberty of Morgan Stanley.

Kathryn Huberty, Analyst

Tom, first to you. Should we think about the share repurchase that was announced today as potentially the start of a bigger capital return program once you get to investment-grade? And then just wanted to ask a follow-up for Jeff, given the importance of storage, the ISG business, can you just talk about what happened to delay the midrange storage launch, whether you think there's a revenue impact from that delay?

Thomas Sweet, CFO

Katy, it's Tom. I want to discuss the share repurchase. We have always viewed this as a shareholder value and return program to be implemented at the right time. Considering our current debt repayment schedule and our capacity to pay down debt, we believe now is an appropriate and timely moment to introduce a share repurchase plan. The plan involves $1 billion over two years, and we will approach this with thoughtfulness and some opportunism. We feel our stock is trading at an inexplicably low valuation, and we aim to capitalize on that. Regarding your second question, we have previously indicated that once we achieve investment-grade status, our capital allocation strategy would shift to generate shareholder value opportunities. Therefore, we see this as the initial step in that direction. We remain committed to fulfilling our debt repayment obligations, which is currently our main focus for capital, as we strive to return to investment-grade status. However, we believe a framework for shareholder returns makes sense as we advance.

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

Midrange.

Thomas Sweet, CFO

Katy, let me update you on our current status and what we've accomplished, and feel free to ask a follow-up question if anything is unclear. First, we delivered several arrays for our beta program, which is the largest beta program we've ever conducted in our company's history in Q4. We have numerous customers currently using the product, and we are very pleased with the overwhelmingly positive feedback, particularly regarding the platform's flexibility and performance. We are excited about the responses we've received so far. Although I had committed to completing this by the end of the year, we didn't meet that deadline, and that falls on me. The delay was due to my commitment to ensure we lead in quality and reliability in the marketplace, as I pushed for an enhanced customer experience based on what we learned from our previous large launches in storage. During our evaluation, we aimed to conduct the most extensive system test we've ever done at scale. I honestly underestimated how long this would take, which resulted in our delay, a consequence of my decision to pursue a more comprehensive testing process. However, this approach allowed us to address insights gained from the beta program and ensured our sales force remained focused during the year's end. Two weeks ago, we presented to the entire sales team and trained them on the Midrange.NEXT platform, which they're excited about. We plan to start selling the product before this fiscal quarter ends in Q1. There will be no significant impact on our revenue plans for storage or the midrange. In fact, we are quite optimistic. Regarding the midrange, Tom mentioned that the storage forecast for calendar year 2020 is slightly down, but we expect midrange growth of approximately 4.5%. This is the segment where we have faced the most challenges. With this new product, we have refined the mid to high end of our midrange portfolio, and with our Unity XT platform performing well, we're well-positioned in the midrange storage market, which is the largest segment, and we have great prospects there. We need to finalize the product, and we will complete it, taking orders and delivering before the end of the quarter.

Operator, Operator

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

Wamsi Mohan, Analyst

I was wondering if you can talk a little bit about where you are with portfolio reorganization. Clearly, you had a decision to sell RSA. Wondering what sort of prompted that from a timing perspective? Historically, EMC had done a ton of acquisitions. There's a lot that's buried in there that I don't know how core Dell used that or not. Any color on where you think the portfolio changes, if there are more to go and magnitude of those and the uses potentially of that; would that be more towards capital return if they were to happen.

Thomas Sweet, CFO

Wamsi, it's Tom. Over the last year or two, we've consistently discussed our review of the corporate structure, capabilities, and assets we have within the family. After we merged the companies, we sold the legacy Dell Services business, the software business, and the ECD business. We are still assessing our situation. The RSA decision was primarily driven by our evolving security strategy, focusing on intrinsic security and integrating security into our core products. Although RSA is a valuable asset, we determined that if it wasn’t essential to our security platform and strategy, it would be best to transfer it to an ownership structure that could optimize it. The team managed the sale process effectively. We will keep assessing the remainder of our portfolio, considering how our assets and capabilities align with our strategic priorities, especially in security, data management, and data services, which remain important to us. I want to be cautious in my statements, but our commitment is to thoughtfully consider which capabilities we need to own, which ones we should partner on, and which should be excluded from the family. We aim to simplify our corporate structure, responding to feedback about the complexity of the Dell Technologies portfolio. It's important for us to determine which capabilities truly belong within the family and which are better suited outside of it.

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

I think, Tom, to add to that, maybe more from a product and offer and IP point of view, we've made a tremendous amount of progress simplifying the portfolio, consolidating IP, changing the way that we build integrated products across the Dell Technologies companies. So if you think about the work we've done now with Carbon Black, Unified Workspace, VMware, Dell PCs, Dell services and building an integrated platform that we can sell a modern PC experience by, you're going to see us consolidate more of our technology that way, where I point to Dell Technology Cloud, the work that we've done with VMware, being more cloud foundation, VxRail, now a series of offers that we're building around that and the multi-hybrid cloud world that we operate in, yet another form of a consolidation of portfolio and simplifying our offers to our customers. Remember, the second component of our strategy, I mentioned the first one was all about win in the consolidation, the other one is to go build deeply integrated solutions that drive incremental value for our customers, which is really about simplifying the individual products across the portfolio and building integrated solutions. We spent a great deal of time there. You'll see us do more of that going forward.

Operator, Operator

We'll take our next question from Jeriel Ong with Deutsche Bank.

Kanghui Ong, Analyst

It seems I want to paint a picture of ISG; there's increased optimism for the year. I understand your perspective on storage with products in the mid-range, but it appears that the year-on-year growth in server networking has been declining with each quarter. What gives you confidence that this will turn around and contribute to growth for the entire year?

Jeffrey Clarke, Vice Chairman and Chief Operating Officer

I would refer back to the earlier remarks made by Tom and myself. You are correct; in the fourth quarter, we observed a slowdown in the server business, coming in at minus 9, minus 12, minus 16, and minus 19, with an annual figure of minus 14 as mentioned by Tom. This decline is primarily concentrated in Greater China, which saw a 35% drop in orders over the year, while the rest of the world decreased by about 5%. Within that 5%, our North America enterprise business was the main area that slowed. In contrast, we saw growth in small and medium businesses in North America, as well as in commercial sectors and Latin America. We experienced market growth in APJ and EMEA, but the main challenges have been in China and the North American enterprise segment, which dropped by approximately double digits. We recognize the weak points in our performance. In China, we will continue to adapt our strategy, focusing on expanding our buyer base and adjusting our business model to ensure we increase the server buyer base over time and provide lifetime value for our customers. There are certainly external factors at play due to the ongoing coronavirus situation, but we are committed to refining our business model in China and driving growth while maintaining a focus on profitability.

Operator, Operator

We'll take our next question from Simon Leopold with Raymond James.

Simon Leopold, Analyst

Thank you for your insights regarding the vision for ISG for 2021. I appreciate that information. However, my question is about the investments you've made in capacity and coverage, as well as comments from competitors suggesting greater competition from Dell. I would have anticipated that the fourth quarter results would have been more stable to reflect that. Could you clarify if there were any specific factors unique to this quarter? Were the challenges you experienced in North America additional to what you have previously encountered? It would be helpful to get more detail on this.

Thomas Sweet, CFO

Our approach this year has been to aggressively pursue customer business that offers long-term value, and we are prepared to adjust our acquisition pricing to secure that business. When it does not make sense or lacks long-term potential, especially in a competitive pricing landscape, we have stepped back, which has resulted in some softness in the North America Enterprise market. In terms of Q4, the trends we previously discussed have continued, characterized by aggressive pricing and longer cycles for opportunities. Looking ahead to fiscal '21, the market is expected to improve, and we have better coverage and opportunities for cross-selling that should positively impact us. While we've experienced some softness in the core array and the infrastructure space overall, we have gained a significant share over the past three years. As we move into FY '21, we feel more positioned to tackle the challenges with our coverage model and solutions. Although we faced some revenue pressure in the ISG space, we achieved strong profitability and cash flow while balancing our model in the current market environment.

Robert Williams, Head of Investor Relations

All right. Well, good. Well, thanks, Simon. We're going to wrap up there. Just as a reminder, we'll be at Morgan Stanley next week in San Francisco. We will be hosting an IR track at Dell Technologies World. We'll begin that the evening of May 3 and continue on May 4. Hopefully, we'll see many of you there, and there'll be additional information in the coming weeks on that event. Thanks for joining us today.

Operator, Operator

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