Earnings Call Transcript - DELL Q1 2023

Operator, Operator

Good afternoon, and welcome to the Fiscal Year 2023 First Quarter Financial Results Conference Call for Dell Technologies Incorporated. I want to let everyone know that this call is being recorded at Dell Technologies' request. This broadcast is the copyrighted property of Dell Technologies Incorporated. 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. Now, I will turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Rob Williams, Head of Investor Relations

Thanks, Jermiria, and thanks, everyone, 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 these presentation materials, which include rich content to complement our discussion this afternoon. Guidance will also be covered on today's call. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, which include non-GAAP revenue gross margin, operating expenses, operating income, net income, earnings per share and adjusted free cash flow. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our web deck and press release. Growth percentages refer to year-over-year change unless otherwise noted. 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 filings. We assume no obligation to update our forward-looking statements. During the call today, Jeff will recap Q1 and innovation highlights from Dell Technologies World, along with the current demand and supply chain environments. Chuck will cover detailed Q1 CSG and ISG operating performance. And Tom will cover our Q1 financial results, capital allocation and guidance. Now I'll turn it over to Jeff.

Jeff Clarke, CEO

Hello, everybody. Thanks for joining us. Following a record FY '22, we continue to execute quite well in a complex macro environment. We are focused on our long-term strategy while continuing to innovate, enhancing existing solutions and creating new ones for our customers. For Q1, we delivered record revenue of $26.1 billion, up 16%, with strong, balanced growth across CSG and ISG. We also improved our profitability in the quarter, and we will continue to focus on disciplined cost management. As a result, diluted EPS was $1.84, a record, up 36%. Over the last 12 months, we have generated $5.8 billion of cash flow from operations. We are grateful to succeed alongside our customers. At Dell Technologies World, customers like CVS Health, USAA, General Motors and Boeing talked about reinventing their processes and their industries while unleashing innovation, productivity and sustainability with Dell as a key technology partner. We highlighted our role in the multi-cloud future, announcing a steady stream of innovation that places us at the center of our customers' multi-cloud world. Specifically, we made a series of announcements that demonstrate the work we are doing to build a multi-cloud ecosystem that includes all major public clouds. We shared Project Alpine, which brings enterprise-class data services into the public cloud for cloud bursting, test and development, cloud-based analytics, data and container mobility. We are also unlocking the power of data through our partnership with Snowflake, the first of its kind that provides direct access to Dell object storage on-prem, and we are including cybersecurity throughout. In addition, we also announced over 500 software enhancements to our industry-leading storage portfolio. For PowerMax, the world's most secure, mission-critical storage, we introduced a new intelligent NVMe multi-node, scaled-out architecture with isolated cyber-vaults, 65 million immutable snapshots in the industry's first data compression for mainframes. For PowerStore, we added ease of integration, significantly boosted mixed workload performance, deepened VMware integration and added native metro sync replication. And with PowerFlex, we have the only software-defined infrastructure that scales almost limitlessly, for compute and storage while supporting bare metal, all hypervisors and file and block storage services on a single platform with increased cyber resiliency and multi-cloud extensions. These software-driven innovations enable a continuously modern storage experience with highly-adaptable storage architectures, comprehensive cyber resiliency and multi-cloud ecosystem flexibility. And lastly, we announced a range of APEX offers that further expand our subscription and as-a-service capabilities. To date, the transition towards multi-cloud and a highly-distributed architecture is playing out much like we thought. It's clear our strategy is resonating across our customers and partner ecosystem. Turning to the supply chain. We experienced a wide range of semiconductor shortages that impacted CSG and ISG in Q1. In addition, the COVID lockdowns in China caused temporary supply chain interruptions in the quarter. As a result, backlog levels were elevated across CSG and ISG exiting the quarter. We expect backlog to remain elevated through at least Q2 due to current demand and industry-wide supply chain challenges. Q1 component costs were deflationary across key commodities, but logistics spend remained elevated due to higher rates and a mix of expedited parts. Turning to Q2. We expect component costs to turn inflationary and logistics costs to remain at elevated levels. That said, Dell Technologies is well positioned to navigate these supply chain challenges just as we have over the past three-plus years. The big picture. As we previously noted, we are seeing a shift in spend from consumer and PCs to data center infrastructure. IT demand is currently healthy. However, there are a number of uncertainties out in the broader macro environment that we continue to monitor: geopolitical issues, inflation, ongoing supply chain challenges, chip constraints and COVID shutdowns. What we've shown over the years is that regardless of the environment, we are agile and built to outperform. We are able to quickly lean into opportunities and focus on what we can control, executing our strategy for growth, innovating for our customers, motivating our teams, building better communities and delivering for our stakeholders. And with that, I'd like to turn it over to Chuck for a deeper dive into our segment results.

Chuck Whitten, CFO

Thanks, Jeff. Great to be here with all of you and excited to share the details of our Q1 business unit performance. Starting with ISG, we delivered another record Q1 with 16% growth and $9.3 billion of revenue. It's our fifth consecutive quarter of growth as widespread digital transformation continues to support growth and infrastructure spend. ISG profitability was up with operating income growing 39% and operating margins expanding 200 basis points to 11.7%. Servers and networking revenue grew 22%, and storage revenue grew 9% as four consecutive quarters of demand growth has now made its way into the P&L. We were particularly pleased with the breadth of strength in storage. In Q1, we saw storage demand growth across our portfolio, including data protection, HCI, unstructured, entry, high end and power store, our marquee mid-range solution and still the fastest-growing storage architecture in company history. Turning to Client Solutions. CSG also delivered a record Q1 with revenue of $15.6 billion, up 17% on top of a strong prior year comp of 20% growth. This was outstanding absolute and relative performance. We gained 190 basis points of PC unit share in calendar Q1 based on IDC results, the most among the top four industry vendors. We have now gained unit share in 33 of the last 37 quarters. But as we've highlighted, not all PC units are created equal. Our focus on the commercial segment paid off in Q1 as commercial demand was solid and we saw softness in Consumer and Chrome as expected. Commercial CSG revenue grew 22%, while Consumer grew 3%. We also saw continued strength in software and peripherals as customers continue to seek exceptional PC experiences in the do-anything-from-anywhere world. Our market-leading display business, for example, grew 20% and gained 370 basis points in calendar Q1 according to preliminary IDC data. The net of strong commercial performance, peripheral growth and disciplined cost management with strong profitability, the business delivered an operating income margin of 7.2%, and we have delivered roughly $1 billion of operating income or better over the last seven quarters. Looking ahead, we are seeing a rotation in IT spending from CSG to ISG. Despite economic uncertainty, digital transformation and automation efforts are being used to solve the pressing challenges at the moment as technology and business strategies emerge, benefiting our infrastructure business. We expect ISG growth for the full fiscal year. And PCs are now a C-suite issue. In the world of hybrid work and in a fiercely competitive talent market, the PC is the gateway to the employee experience and a visible symbol of a company's commitment to technology. We do, however, expect CSG growth to moderate over the course of the year as the Consumer portion of the market slows. Q1 is proof of the benefits of having a strong geographically and sector diverse business covering the end user to the edge to the core data center to the cloud. We are central to our customers' technology agendas, creating predictability, durability and flexibility in our business to pursue growth wherever it materializes in the IT market. As Jeff stated, there is some macro uncertainty right now, but we have shown time and time again the ability to navigate any market environment by focusing on our customers, our employees, our long-term strategy and our stakeholders. With that, let me turn it over to Tom.

Tom Sweet, CFO

Thanks, Chuck. As Jeff highlighted earlier, we delivered record Q1 revenue of $26.1 billion, up 16%, driven by strong growth in both CSG and ISG. We have previously highlighted that we thought fiscal year '23 would see a more robust infrastructure investment cycle while PC growth would shift back towards historical patterns. To date, this appears to be how fiscal year '23 is shaping. Gross margin was $5.9 billion, up 9% at 22.7% of revenue. Gross margin as a percentage of revenue was 150 basis points lower, primarily due to increased component and logistics costs. However, it was up 190 basis points sequentially due to improvement in both CSG and ISG gross margin percentages as more of our prior pricing actions took effect. We also saw a richer PC and server configurations and stronger storage performance in the quarter. Operating expense was $3.8 billion, up 3% at 14.5% of revenue as a result of investments in our team members and targeted investments in our growth areas, including capabilities to support our evolving business model. We will balance these investments with prudent cost discipline given the uncertainties in the current environment. Operating income was a Q1 record of $2.1 billion, up 21% at 8.2% of revenue. Net income was $1.4 billion, up 36%, primarily driven by growth in operating income and a decline in interest expense due to our lower debt balances. Our tax rate was 19.3%. Fully diluted earnings per share was $1.84, up 36% with diluted share count decreasing sequentially to 780 million shares as a result of repurchases. Our recurring revenue was approximately $5.3 billion a quarter, up 15%. Our remaining performance obligations, or RPO, is approximately $42 billion, up 14% and includes deferred revenue plus committed contract value not included in deferred revenue. Dell Financial Services originations were $2.1 billion, up 9% and DFS ended the quarter with $13.2 billion in total managed assets. Turning to our cash flow and balance sheet. Our use of cash from operations was $300 million in Q1, primarily driven by our annual bonus payout and seasonal revenue decline. As a reminder, Q1 is often a use of cash given the seasonality in our business and the timing of our annual incentive compensation payments. The team did a nice job on working capital management in the quarter, minimizing the increase in inventory due to supply chain challenges and reducing receivables. Our core debt balance is $16.5 billion, and we ended the quarter with $8.5 billion in cash and investments, down $2.8 billion sequentially principally due to seasonally low free cash flow and $1.75 billion in shareholder capital returns. We repurchased 28.8 million shares of stock in Q1 for $1.5 billion and issued $250 million in dividends. Going forward, we will continue our balanced capital allocation approach, repurchasing shares programmatically to manage dilution while maintaining flexibility to be opportunistic like we were in Q1. Turning to Q2 and fiscal year '23. Digital transformation is a top priority for our customers, and it's fueling our growth as our customers look for a partner in their multi-cloud journey. Global IT spend is projected in the mid-single digits. And with what we see today, the current demand environment supports this. Against that backdrop, we expect Q2 revenue between $26.1 billion and $27.1 billion, up 10% at the midpoint with both CSG and ISG growing. We expect foreign currency to be a headwind for both Q2 and for the full year. We do expect gross margin rates to decrease sequentially as CSG mix increases and we managed through inflation and currency dynamics with an elevated backlog. OpEx will remain roughly flat to Q1 as a percentage of revenue. For our non-GAAP tax rate, you should assume 20%, plus or minus 100 basis points. We expect diluted share count to be roughly 760 million to 765 million shares. Netting this out, we expect diluted earnings per share of $1 to $1.15 and non-GAAP diluted earnings per share in the range of $1.55 to $1.70, up 10% at the midpoint. As you know, we are coming off a record fiscal year '22 and a good start to fiscal year '23. Last quarter, we talked about our long-term value creation framework of 3% to 4% of revenue growth and EPS growth of 6% or better as a starting point for the year. As we look at the balance of fiscal year '23, we're watching a few macroeconomic dynamics, including the geopolitical environment, inflation, interest rates, slowing economic growth, currency and continued COVID impacts disrupting supply chains and business activity. While we believe these macro dynamics will have some impact on overall IT investment spending, with what we know today, our updated framework has revenue growth of approximately 6% with both CSG and ISG growing for the year and earnings per share growth faster than revenue in the range of 12% or better. In closing, we delivered a strong quarter with record Q1 revenue, operating income and diluted earnings per share. We remain focused on executing our strategy to consolidate and modernize our core and build new growth engines that enable our customers' multi-cloud future while delivering revenue and EPS growth with strong free cash flow to our shareholders over time. 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 segment. Jermiria, could you please introduce the first question?

Operator, Operator

We will take our first question from Krish Sankar with Cowen and Company.

Krish Sankar, Analyst

I just had a clarification on the question. Just want to make sure you said a 5.3% revenue growth of 6% and EPS, 12-plus percent. And then the question is either for Jeff or Chuck, the CSG slowing makes sense due to the consumer and you said you're monitoring macro data points, but you're confident on the strength in ISG, especially at the time when tech companies are slowing hiring. I'm kind of curious, when you talk to your customers, your CEOs and CIOs, what gives us confidence in continuing this IT spending into the back half? Or is this more a soft trending project that could change as the macro type?

Tom Sweet, CFO

Krish, it's Tom. I can confirm that I mentioned fiscal year '23 revenue growth of approximately 6%, along with EPS growth of 12% or better. So yes, you heard that correctly. Jeff, Chuck, do you want to address the ISG question?

Jeff Clarke, CEO

Sure. The macro question was about CSG's slowdown and its implications for ISG. In CSG, we anticipated a slowdown in growth heading into this year, and that is indeed what we're seeing, particularly in areas where we have less participation, like Chrome, which has decreased significantly, and the low to mid-range price segments in Consumer. However, we are experiencing strong growth in commercial or enterprise PCs, although this growth rate is much lower than last year's. There are reasons for this, such as the return to office trends and the hybrid work model that requires more capable and powerful machines. Additionally, many hybrid workers need more portable options, meaning more notebooks. It's important to note that not all PCs are the same; commercial and enterprise PCs typically have higher average selling prices, richer features, and more opportunities for additional sales. On the ISG side, we saw 22% growth in servers and 9% in storage, marking the sixth straight quarter of server growth and the fourth quarter in a row of orders growth for storage. We predicted this shift, and it's reflected in our P&L with 9% growth in storage following four quarters of orders growth. This is driven by the ongoing digital transformation, where the demand for more compute and storage assets continues to rise. The current demand environment suggests that this trend will persist. I hope that clarifies things, Krish.

Operator, Operator

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

Aaron Rakers, Analyst

Congratulations on the really solid results and guide. I guess what really stands out to me is the growth that you're seeing in servers. And especially given some of the recent concerns that we've heard from, I think, one of your peers actually this morning talking about supply chain constraints. So I guess maybe you can help us appreciate what you're seeing, particularly around the server piece of the business. And how the company has managed kind of the pass-through? How much of the growth is driven by pricing versus maybe unit growth?

Jeff Clarke, CEO

Sure. Maybe Chuck and I will ham and egg this together. But if you take a look at that 22% server growth that I just alluded to and mentioned sixth consecutive quarter, if you look at where some of that growth is coming from, it's coming from content expansion. It's coming from average selling price expansion. It's coming from mix of the portfolio, which are all good signs, one that we're penetrating deeper into the enterprise. We're taking on more high-value workloads, our GPU or AI accelerator of growth rate was very strong in the quarter, and that's continued to bolster the performance of our server business. I think that leads to some of that. Chuck, anything to add?

Chuck Whitten, CFO

No. I mean, I think building off of the prior question, we just see continued strength in the infrastructure markets right now. We said it in our prepared remarks and you mentioned it in your first answer, Jeff. There's a rotation right now of budgets from client to infrastructure, and that's across the board in our portfolio, whether it's our fifth consecutive overall growth in ISG, our sixth consecutive quarter of server growth for this question, 9% storage revenue growth after four consecutive quarters of demand growth. And so despite the macro uncertainty that is out there right now, what we don't see is an immediate move to go after a reduction in IT budgets. I mean, right now, it is a very healthy infrastructure environment.

Jeff Clarke, CEO

And I think maybe to put a point on it, I think our supply chain team has done a very good job of positioning our company with the available parts that are out there, which there is a shortage of parts for servers, and we've been able to work our way through that and be able to deliver for our customers. Ultimately, that's the name of the game, and I think our supply chain continues to distinguish itself in being able to fulfill and meet the commitments we give to our customers.

Operator, Operator

We'll take our next question from Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

Congratulations on the strong results. I wanted to ask about the margins. You achieved very strong margins in both segments. How should we view the sustainability of these margins? I know you mentioned that component costs are rising, but I can also see how pricing may impact the P&L more significantly throughout the year. Could you help us understand the sustainability of these margins on a segment basis and what different factors we should consider?

Tom Sweet, CFO

Samik, it's Tom. I want to explain our approach to margin frameworks as we look ahead. We're pleased with our margin performance in Q1, and if you recall our discussion in Q4 at the end of February, we anticipated an increase in margins coming out of Q4. We saw this improvement thanks to strong performance in the client business, especially in the commercial sector, along with significant storage growth and a 9% revenue increase. The pricing strategies we previously mentioned started to take effect in Q1, contributing positively to our margins. Looking into Q2, we expect a greater mix of Commercial Solutions Group (CSG) activity. However, we will continue to face inflation, leading to higher input costs in Q2 that we need to account for in our pricing. Additionally, with an elevated backlog, it will take time to implement these pricing adjustments. We also anticipate that currency fluctuations will negatively impact us by around 400 basis points this quarter, which we have to factor into our pricing strategies. The macroeconomic environment presents challenges that we must navigate effectively. At the business unit level, we expect to see more commercial clients this quarter due to the elevated backlog, but this will also bring cost pressures, particularly in pricing. The server and storage mix remains crucial, and we foresee sustained elevated backlogs in Q2, especially within the Infrastructure Solutions Group (ISG). As Jeff pointed out, the server supply chain remains tough, facing shortages in components like NICs and power supplies. Overall, we're cautiously optimistic about storage after a strong quarter, but we must continue executing effectively. For the rest of the year, if margins dip in Q2, we expect them to remain relatively stable in Q3 and then improve slightly in Q4 as the business mix shifts towards ISG due to seasonal factors. In summary, we acknowledge that navigating inflation will be key this year, and we’ll price accordingly while keeping an eye on market dynamics. Currency will pose a headwind of approximately 300 to 400 basis points throughout the year, adding to the challenges we face.

Operator, Operator

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

Sidney Ho, Analyst

Congrats on the great quarter. I have a bigger-picture question on customer behavior. Well, there has been a lot of cross currents in terms of supply constrained environment but also in terms of macro uncertainties. Have you seen any change in customer order behavior in terms of volume and commitment because of supply constraints, but at the same time, maybe shifting away from on-prem to the cloud? Then how do you manage those trends from supply chain and R&D or maybe? Just generally speaking OpEx perspective for the year.

Chuck Whitten, CFO

Well, maybe I'll start and just say, look, the environment that we've been in, in the last six months, we have not seen a fundamental change in customer behavior in terms of order patterns. So despite long lead times, we haven't seen material differences in our cancellation rates, whether that's across our CSG business or our ISG business. And the long-term trend of where am I choosing to put a workload, per our conversations that we had at Dell Technologies World most recently is almost entirely with customers around the multi-cloud opportunities. So while there are certainly workloads that continue to go to the public cloud, increasingly, the conversation that we have with customers is about operating in a multi-cloud environment. They see the right workload in the right place at the right cost is the objective of their environment. And so broadly, that's the trends that we're seeing in infrastructure. In terms of how we manage it from a supply chain standpoint, obviously, I'll defer to Jeff on that portion.

Jeff Clarke, CEO

Sure, I can provide a different perspective. The order pattern has changed a bit, but not as you described. Customers are turning to Dell because they trust our supply chain to deliver. We've seen six consecutive quarters of server growth despite a shortage of parts, as customers expand their on-premises infrastructure and pursue digital transformation and multi-cloud strategies. Our commitment to delivery dates remains strong, and while we may not always meet the exact timing customers prefer due to extended lead times, we ensure that the date we provide is reliable. Customers can depend on their technology integration and project development. While this may not directly address your concerns about order patterns, it highlights ongoing positive trends in our business. We utilize demand signals effectively through our direct model, enabling us to respond promptly in our supply chain. We have digitized our supply chain with advanced planning, data transparency, and predictive analytics to anticipate our needs. This allows us to react faster than many competitors, positioning us better to meet customer supply needs. Our business model's strength lies in the connection between demand and supply signals, as well as design considerations. This tightly integrated system differentiates our approach, and even during supply challenges, we can adjust our plans based on early demand indicators and adapt by requalifying or adding different parts in our product designs quickly.

Operator, Operator

We'll take our next question from David Vogt with UBS.

David Vogt, Analyst

I have a clarification question and a bigger picture question. So clearly, 90 days ago, you guys were really optimistic about the outlook. A lot has changed since then, and it appears that you guys have handled sort of the disruptions in April better than most companies that we've talked to over the last couple of weeks. Can you kind of share with us kind of what you saw in April, kind of what set you apart, where the component issues were and how you guys navigated that better than most? And then on a clarification issue, I think last quarter, you talked about a potential make-whole payment in the fiscal fourth quarter of $150 million to $200 million. Do you still expect that in the fourth quarter? And is that sort of factored into the guidance that's Hank gave for the full year?

Jeff Clarke, CEO

Sure. Maybe I step into the supply chain component of that. Look, it's very important for us. I think we've consistently communicated this. We are encountering what everybody else is encountering in this industry. There is a wide-scale semiconductor shortage across a vast number of components. I think I rattled off all sorts of components on previous earnings calls, live the same. The most stressed networks tend to be the trailing nodes, 40-nanometer, 55, 60 nanometer, the 8-inch network. What's increasingly interesting is now the new factories are being delayed in their deployment because they can't get the equipment needed. This cascades itself into categories of servers or automotive that's growing very fast. That's taking the very same components that we all need, which tend to be around the microcontrollers, the power subsystems, which are needed to build certainly the devices we have. That's for everybody. We are encountering that. I think we've talked about our long-term relationships. I just mentioned in the previous answer our ability to plan and anticipate and do predictive modeling, and we act with speed. I think one of the things that separates our ability in the supply chain is to see this earlier and decide quicker and adapt and provide and overcome with what is thrown at us. In terms of what happened in April, we all read about lockdowns. By the way, they started in March, mid-March with Shenzhen. They can make their way into Shanghai with various stages of lockdown. We had our own challenges here in the state of Texas with some border crossing issues. So we continue to adapt and improvise along the journey. It's what we do. Fortunately or unfortunately, depending on your perspective, we've had three-plus years of practice at this or getting good at our game. And our team is nimble. It's flexible. We're able to move material. We're able to use our vast network of 25 factories, 50 different fulfillment centers around the globe that allow us essentially to move any order to any factory to be able to build it. Now we can't do that instantaneously overnight. You got to get material. You got to move orders. But our ability to use our global network and to see it, I think, quicker than others is why I think we're able to continually deliver. And again, I'd be remiss to say, I didn't do my job, but we built backlog. We did not build more than we sold.

Chuck Whitten, CFO

I think you did a great job, Jeff. I want to emphasize, as you mentioned earlier, that it's also our business model paired with our impressive supply chain performance. Our sales engine not only captures demand signals to inform the supply chain but also adapts to availability, which we've been doing for the past few years, particularly since March. Our product teams are focused on modular designs and responding to the parts that are accessible. So, we often say it's a combination of factors; it's our integrated business model.

Tom Sweet, CFO

Let me address your question about the make-whole payment. As we mentioned last quarter, we have been considering our capital allocation strategy for the year, including the possibility of reducing debt. If we decide to do that, some of the debt may entail a make-whole payment. Currently, we have our forecast and outlook for the year projected at approximately $1.5 billion. In the first quarter, we have it at 3.48 times, and we've included a $100 million make-whole consideration in our forecast for the year. As we progress through the year, we will continue to assess whether that makes sense and if it's the appropriate capital use at that time. That provides some context for you.

Operator, Operator

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

Simon Leopold, Analyst

This morning on the call Broadcom hosted, they talked about a strategy to take more of the VMware sales direct, a focus on the top 1,500 customers. Now you've got a meaningful chunk of VMware revenue that flows through your business. I just want to get a better understanding of how you see the potential for VMware being part of Broadcom affecting your top line, and I assume it doesn't do much to the bottom line, but just want to understand what you're expecting.

Tom Sweet, CFO

Simon, I want to clarify that we are not involved in the transaction between VMware and Broadcom, should it happen. We have maintained a 20-year relationship with VMware. Over the past five years, we've worked closely with them, emphasizing our belief that VMware is our top partner. We expect this relationship to continue. We established a commercial framework agreement with VMware during our spin last year, and we anticipate that this arrangement will persist. The mutual benefits from this agreement, including our market reach and their technological solutions, should remain intact. That is our outlook as we assess the current situation.

Operator, Operator

We'll take our next question from Rod Hall with Goldman Sachs.

Rod Hall, Analyst

I just wanted to clarify that last response, Tom. So the commercial framework, the legal framework, does it have any kind of an M&A clause in it that would cause it to need to be renegotiated assuming the deal closes? And then I had a question on PCs as well.

Tom Sweet, CFO

I won’t go into the specific commercial terms, but there is a change in control provision that ensures the commercial frameworks remain in place following the change in control.

Jeff Clarke, CEO

Sure. I'll address this, and Chuck can add to my comments. We have been discussing a marketplace that is experiencing a slowdown, and it is indeed slowing down. We observed this in the IDC Q1 results, where we significantly outperformed the market during that calendar Q1 period. Our internal modeling, which was updated last night with new IDC projections, shows a more optimistic outlook. Specifically, we estimate the market to be around 330 million units. We see a rapid decline in Chromebooks, consumer sales are in the high single digits, while commercial sales remain stable on a unit basis. This is how we arrive at the 330 million units figure. Looking at our business composition, the strongest market areas align with our highest exposure. In Q1, commercial sales accounted for 77%, an increase of three points year-over-year, indicating that we are more attuned to the segments performing well. This is how we have developed our product portfolio and customer relationships, and it shapes our perspective on the market.

Chuck Whitten, CFO

Yes, Jeff, I think net the forecast, the IDC forecast, our forecast, they do reflect the structural reset of the PC market to a higher level that we've talked about. And as you said, given our focus on the commercial segment, which we think fares better than Chrome and consumer the rest of the year, we feel well positioned no matter the sort of unit market environment. Obviously, part of our view that we would see moderating growth this year coming off a 27% growth in CSG last year is we're lapping some pretty strong compares in second half performance. But again, to just underscore our commentary, we expect CSG to grow for the year. We expect CSG to grow at a multiple to our long-term growth framework, and we expect to keep gaining share.

Operator, Operator

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

Ruplu Bhattacharya, Analyst

It's Ruplu filling in for Wamsi today. Can you quantify the negative impact of supply chain issues, including component shortages and logistics costs, on your revenues and margins in the first fiscal quarter? Also, do you have an estimate for the impact on total revenue for the full year? Tom, you're now guiding for a 6% year-on-year growth in fiscal '23 revenues. Does that imply higher working capital needs? Additionally, do you anticipate that free cash flow for fiscal '23 will be higher than what you expected 90 days ago?

Tom Sweet, CFO

Ruplu, we're probably not going to answer your first question. Maybe we'll focus on the second question.

Jeff Clarke, CEO

Yes, I was going to answer the first question. Look, we have a backlog. It's elevated. We're going to continue to work through it as we always do. We won't disclose or parse it down into the impact of this quarter or any future period in time. They are elevated. You can see that in our RPO level when you look at that versus previous periods, and it's our job on the supply chain to get supply matched up with demand and actually catch up a little bit. That's what we're going to try to do.

Tom Sweet, CFO

I was going to address your working capital question. We have adjusted our framework upward and communicated that we would keep evaluating it throughout the year. Currently, we anticipate a total year growth of 6%, with both CSG and ISG increasing at mid-single digits. Calculating that suggests the second half will be slower than the first, especially since we are facing tough comparisons in Q3 and Q4 from last year in CSG. From a CSG standpoint, we expect average selling prices to remain flat or slightly decrease as we progress through the year due to inflationary pressures, and we will need to keep monitoring the pricing environment. We are optimistic about the ISG area, as infrastructure spending seems stable at the moment. Although we project some growth in ISG in the second half of the year, it will be at low to mid-single digits from Q3 to Q4, which is a cautious approach considering the current market uncertainty. We will keep you updated as the year progresses. Regarding working capital, we currently have a significant amount of inventory, which has increased by $2.4 billion year-over-year. Jeff and I were just discussing that.

Jeff Clarke, CEO

You remind me.

Tom Sweet, CFO

I mentioned that it needs to decrease. I don't see a specific need for additional working capital. I'm actually encouraging the organization to start reducing inventory, which will depend on how the supply chain performs in the second half. I believe there's an opportunity to reduce that further. Overall, I'm not worried about working capital in the second half.

Tyler Johnson, CFO

No, I think that's exactly right. That's how we're thinking about it Tom.

Operator, Operator

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

Amit Daryanani, Analyst

I have two questions as well. First, looking at your full-year guidance, it appears you're expecting strong growth in the first half, but it seems like you're suggesting that growth in the second half will be relatively flat. Could you explain why you believe the second half might be flat? That would be quite unusual if it occurs. Additionally, do you expect to finish the year with a higher backlog than what you currently have, or are you planning to reduce the backlog? I'd like to gain some insight into your assumptions for the second half. Also, Jeff, I'm interested in the storage side. There was a significant change in April. What do you think is the sustainability of the growth you've experienced in storage? How much of this increase do you attribute to gaining market share versus favorable conditions in the end markets?

Tom Sweet, CFO

Let me start with the full year guidance. If we break it down, CSG was at 17% in Q1, and we anticipate growth again in Q2. However, we must acknowledge that the environment is slowing, and we face tougher comparisons in the latter half of the year regarding year-over-year growth. It seems wise to exercise caution as we look to the latter half of the year. Should opportunities arise for faster growth, we will pursue them carefully. As for ISG, we are looking at mid-single-digit growth. The forecast for IT spending in the infrastructure space also points to mid-single digits to upper single digits this year. We need to assess how this will develop as the year progresses before determining any potential for additional strength. Currently, I estimate the year's growth at 6%, indicating that ISG may be a bit weaker in the second half. We will monitor this and provide updates during our Q2 call. There are simply too many uncertainties at this point to be precise.

Jeff Clarke, CEO

Yes and maybe to build on that with storage. Look, we've talked about four quarters in a row now of storage orders growth. Now 9% P&L growth in Q1. Our orders growth in Q1 was in excess of the P&L growth. Let's call it debt. All geographies grew storage. We grew storage on our high-end price bands, our mid-range price bands, our low-end price bands. We grew in HCI. We grew in data protection, most notably in data protection in the area of cybersecurity, where we have a very advantaged position with our cyber-based products. Customers continue to look for us to help them in this world that we live in today with cyber and cyber resiliency. PowerStore Group. PowerStore continues to be our fastest-growing, new architecture we put in the marketplace. Just got 500 new features into the marketplace across our portfolio. We have a mainframe refresh that it will come throughout the year, and our PowerMax is unmatched in its capability. One of my favorite features there is the first time we have mainframe compression in the industry on our product waiting for the mainframe update. I like a lot of what's going on. It's four quarters in the demand of Chuck and I's team. We modeled this. Tom just mentioned it, mid- to high single-digit market growth. Obviously, we want to take share. We're taking share with the performance that we just delivered, midrange in particular, which is where the largest swath of the market is. Our unstructured product continues to do well. It's hard for me to tell you if that's going to continue. I like all of the signs, four quarters of growth. I think of the strategy that we have, which is continue to drive the consolidation and the high-end innovate and disrupt in the mid-range, which we're doing, and take our leadership position in software-defined storage and continue to drive our leadership position even further there, whether that's our VxRail asset or our own PowerFlex asset. Both grew nicely in orders in Q1. So I hope that answered the question. It's hard for me to have a crystal ball what that means in Q4. But certainly, what we've performed to date and as we look at the market as a whole, we're positioned nicely.

Operator, Operator

We'll take our next question from Steven Fox with Fox Advisors.

Steven Fox, Analyst

Just one question for me. To the extent you can sort of talk about your own pricing into your customers, where do you think you're able to continue to get price and pass on inflation? And where maybe does it get more difficult, especially if some verticals are facing their own end market challenges going forward? Any help on pricing recently and what you're thinking about in the future would be helpful.

Jeff Clarke, CEO

Sure. Maybe I'll take a stab, and Chuck and Tom can come over the top. We'll start with PC. So if you look at the pricing environment in PC that's back to what I mentioned earlier, this is kind of three-tails. In Chrome, pricing is largely back to pre-COVID normal levels. It's aggressive. There's lots of inventory out there. It's an aggressive pricing market. In those price bands in consumer, the low end or at the low price points, the midrange price points, there's a fair amount of inventory out there. You saw promos being run through the holidays. They continued into Q1. The pricing towards the burst deals towards the second half of the year are already underway in those price bands, and they're quite aggressive. In the higher end part of consumer, whether that'd be our XPS area or Alienware, things are a little more stable. Commercial, it's a more favorable pricing environment. There's still a lot of mismatch sets out there, meaning that there aren't enough components. Everybody doesn't have the right set of components to build a finished system. So pricing is more stable, more favorable. And we're taking the inflation that we see, and we're certainly trying to pass it through. I think Chuck talked a little bit about this earlier, but if you look at broadly across our PC space, ASPs are boosted by the fact that we have a configuration dynamic, those buying PCs need a more capable PC to work in a hybrid modern world. We have content going up, and we're attaching more things with them. If I look at storage, storage is a favorable pricing place where we can take the rising input costs and we are passing that through. And that's not unique to us, the industry is. The same is true on servers, which makes a lot of sense given there are not enough parts to match the server demand today, hence our growing backlog, and that's a favorable environment where we can pass along the cost increase. Our ASP performance, I think we mentioned earlier, we set up by the fact that we have pricing and inflation and then we have this content dynamic. We're selling servers deeper into the enterprise, higher-value workloads, more GPUs, more DRAM, more NAND per server. That adds up to a higher ASP. Our teams are making adjustments as we speak. Tom referenced this earlier, foreign exchange rates. They're changing when we have to price. Pricing is underway to do that. We'll try to capture as much as we can along the journey. He called that out as a perhaps challenge in the quarter. And then we have a variety of metrics that look at our relative position to our competitors. And we largely say with everything that I just said, we are in price position in the marketplace.

Operator, Operator

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

Toni Sacconaghi, Analyst

I just have a couple of follow-up clarifications. You explicitly noted that order growth was stronger than revenue growth in storage. Was that also the case this quarter in servers and PCs? Secondly, you noted that you were opportunistic in your share repurchases this quarter and bought back $1.5 billion. Your share price, even with the strength in the aftermarket, is well below the average price that it was during Q1. Why shouldn't we expect you to be just as opportunistic in terms of buybacks in Q2? And then finally, just on free cash flow, do you expect free cash flow to be higher than net income, consistent with your long-term model for fiscal '23?

Rob Williams, Head of Investor Relations

Yes. We'll take the first two, Toni. We don't forecast cash flow, so we'll lay out the last one. We'll take the first two relatively quick, please.

Jeff Clarke, CEO

Sure. We mentioned that storage orders were ahead. They were. Server orders and server P&L performance were largely the same. And CSG, P&L revenue performance was ahead of orders performance.

Tom Sweet, CFO

In the fourth and first quarters, we experienced considerable dilution due to the VMware spin transaction. Since we did not participate in the market last year because of our spending, we felt it was necessary to implement a share buyback strategy to manage dilution. This focus, along with the evolution of our share price throughout the quarter, encouraged us to remain active in the market. As we progress through the year, we are aware that our cash balance has decreased due to our significant spending on share buybacks in the first quarter. Moving forward, we plan to be systematic and opportunistic when it makes sense. However, I don't believe the pace observed in the first quarter should be used to model the entire year, which reflects our current outlook.

Operator, Operator

We'll now take our final question from Jim Suva with Citigroup.

Jim Suva, Analyst

A clarification question for Tom and more of a strategy question probably. I guess it would probably be for Jeff or Chuck, but Tom, a clarification. You talked about pricing in a deflationary environment turning to inflationary for your components. I guess everywhere around the world for the past three months, I haven't seen pricing going up, and you talked about favorable deflationary. Was that like some longer-term contracts you had or agreements that are now kind of being right-sized to market? Or was it like displays or memories? I'm kind of scratching my head here about what really helped you. And then more of the strategy question either for Jeff or Chuck. It seems like on storage, which you touched on earlier, you had a couple of past quarters of kind of flattish growth. And now storage was up 9%, and you talked about we're in a bit of a high-performance compute/mainframe pause before it starts. Am I right we're at a new chapter of after several quarters of flattish storage growth actually kicking it into high gear for storage?

Tom Sweet, CFO

Jim, it's Tom. Let me take the first part of your question. Let me tell you what I believe I said, which was we expect input costs to be inflationary as we end Q2, right? And that's the entire basket of component plus logistics costs. So we do expect that to be an inflationary pressure in Q2, somewhat into the back half of the year depending upon some of the demand signals.

Chuck Whitten, CFO

Yes and then to wrap up on storage. Look, as we said in the last few quarters, we've seen healthy storage demand growth. Translating that to the P&L takes time because we have a significant amount of our storage content that is deferred software and services. And so as we said, the key performance indicator we've been watching is the consecutive quarters of demand growth. And so after posting four, we are now seeing that start to translate into the P&L at 9% storage revenue growth. On the mainframe refresh question or the high end, look, we did see demand growth in the high end in Q1. And if you'll recall, we saw high-end growth in Q4 as well. We would not attribute that right now to the mainframe refresh. We're number one in high end and have a number of customers that refresh from time to time, and that's really what we've seen over the last couple of quarters. But that said, as Jeff called out, we are incredibly well positioned for mainframe refresh that is sort of starting right now, and we tend to see the benefit a quarter or two later in our business. And as Jeff called out, the new PowerMax that adds the industry's first data compression for mainframes positions us really well for that demand cycle. So that's where we are in storage. Obviously, incredibly pleased with both our P&L performance, but more importantly, as Jeff called out, the strong demand we saw in all parts of the portfolio.

Rob Williams, Head of Investor Relations

All right. Well, as a quick reminder, we'll be at the Bernstein Strategic Decisions Conference in New York, the Bank of America Global Technology Conference in San Francisco, and the JPMorgan Global Leaders Forum in Toronto in June. We'll have other events during the quarter. Check the website. Thanks for joining us today.

Operator, Operator

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