 From the SiliconANGLE Media office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Hi buddy, welcome to this CUBE Insights powered by ETR. In this breaking analysis, I want to talk to you about what I learned this week at Dell's, Dell Technologies Financial Analyst Meeting in New York. They had, they gathered all the financial analysts. Rob Williams hosted it, he's the head of IR. Michael Dell, of course, was there. They had Dennis Hoffman, who is the head of strategic planning, Jeff Clark, who basically runs the business, and Tom Sweet, of course, who was the star of the show, the CFO, all the analysts want to see him. And they laid out, Dell laid out its long-term goals. It provided much clearer understanding of its strategic direction, basically focused on three areas. Dell believes that IT is getting more complex. We know that, they want to capitalize on that by simplifying IT, we'll talk about that. And then they want a position for the wave of digital transformations that are coming. And they also believe, Dell believes that it can capitalize on the consolidation trend, consolidating vendors. So I'll talk about each of those. And so, let me bring up the first slide, Alex, if you would, the takeaways from the Dell Financial Analysts Meeting. Kind of let me share with you the overall framework that Tom Sweet laid out. And I have to say, the messaging was very consistent. These guys were very well-prepared. I think Dell, from a management perspective, very well-run company. They're targeting three to 5% growth on what they're saying is a 4% GDP forecast. Or, sorry, 4%, I have this GDP here, it's really 4% industry growth. GDP's a little lower than that, obviously. So there's IDC data, Gartner data, 4% industry growth. So that's an error on my part, I apologize. The strategy is to grow relative to their competition. So grow, share on a relative basis. So whatever the market does, again, not GDP, but whatever the market does, Dell wants to grow faster than the market. So once they gain share, that's its primary metric. From there, they want to grow operating income and they want to grow that faster than revenue, that's going to throw off cash. And then they're going to also continue to delever the balance sheet. They would like to, they think they paid down 17 billion in debt since the EMC acquisition. They want to get to a 2x debt to EBITDA ratio within 18 months. And what they're saying is they talked about, Tom Sweet talked about this consistent march toward investment grade rating. They've been talking about that for a while. He made the comment, we don't need to have a triple A rating, but we want to get to the point where we can reduce our interest expense. And that will drop right into the bottom line. So they talked about these various levers that they can turn, some of them under the P&L, gaining share, some of them are operating structure and their organizational structure. And one big one is obviously their debt structure. The key issue here is will this cut the liquidity discount that Dell faces? What do I mean by that? Well, VMware has about a $60 billion valuation. Dell owns about 80% of VMware, which would equate to 48 billion. But if you look at Dell's market cap, it's only 37 billion. So it essentially says that Dell's core business is worth minus 11 billion. We used to talk about this when EMC owned VMware. It's core business only comprised about 40% of the overall value of the company. In this case, because of the high debt, Dell has a negative value. And it's not just the high debt. Michael Dell has control over the voting shares. It's essentially a conglomerate structure. There's very high debt. And it's a relatively low margin business, not withstanding VMware. And so as a result, Dell trades at a discount relative to what you would think it should trade at, given its prominence in the market, a $92 billion company, the leader, and every category under the sun. So that's the big question is can Dell turn these levers, drop EBITDA or cash to the bottom line, affect operating income, and then ultimately pay down its debt and affect that discount that it trades at. Okay, bring up, if you would, Alex, the next slide. Now I want to share with you the takeaways from the Dell line of business focus. This really was Jeff Clark's presentations that I'm going to draw from. Servers we know, they're softer demand, but the key there is they're really faced tough compares. Last year, Dell's server business grew like crazy. So this year, the comparisons are lessen, but there's less spending on servers. I'll share with you some of the ETR data. You know, storage, I call it holding serve. You saw last quarter, I did an analysis. I took the ETR data and the income statement. It showed pure was gaining share at the 22% growth from the income statement standpoint. Dell was 0% growth, but it's actually growing faster than its competitors. So you're not with the exception of pure. It's growing faster than the market. So Dell actually gained share with 0% growth. Dell's really focused on consolidating the portfolio. They've cut the portfolio down from 80, I think it was actually the right numbers, 88 products down to 20 by May of 2020. They've got some new mid range coming. They've just refreshed their data protection portfolio. So again, by May of next year, by Dell Technologies World, they'll have a much, much more simplified portfolio. And they're gaining back share. They've refocused on the storage business. You might recall after the acquisition, EMC was kind of a mess. It was losing share before the acquisition was so distracted with all the Elliott management stuff going on. And it kind of took its eye off the ball. And then after the acquisition, it took a while for them to get their act together. They've gained back about 375 basis points in the last 18 months. Remember a basis point is 100th of 1%. So gaining share and their consistent focus on trying to do that. Their PC business, which is actually doing quite well, is focused on the commercial segment and focused on higher margins. They made the statement that the PCs are kind of under supply right now. So that's helping margins. It's a big focus in Jeff Clark's organization on VMware integration. To me, this makes a lot of sense. To the extent that you can take the VMware platform and make Dell hardware, run VMware better, that's something that is an advantage for Dell, obviously. At the same time, VMware has to walk the fine line with the ecosystem. But certainly it's earned the presence in the market now that it can basically do what I just said and tightly integrate with Dell and at the same time serve the ecosystem. Because frankly, the ecosystem has no choice. It must serve VMware customers. The strategy essentially is to, as I say, capitalize on vendor consolidation, leverage value across the portfolio. So whether it's Pivotal, VMware integration, the security portfolio, try to leverage that and then differentiate with scale. And Dell really has the number one supply chain in the tech business. Something that Dave Donatelli at HP, when he was at HP, used to talk about, HPE doesn't really talk about that supply chain advantage anymore, because essentially it doesn't have it, Dell does. So Jeff Clark's reorganization, he came in, he streamlined the organization really from the focus of R&D to product, the collaboration across the organization and the VMware integration. I actually was quite impressed with when I first met Jeff Clark last, I guess two years ago now, what he and the organization have accomplished since then, no BS kind of person. And you can see it starting to take effect. So we'll keep an eye on that. The next slide I want to show you, I want to bring in the ETR data. We've been sharing with you the ETR spending intention surveys for the last couple of weeks and months, ETR enterprise technology research. They have a data platform that comprises 4,500 practitioners that share spending data with them, CIOs, IT managers, et cetera. What I'm showing here is a cut off of the server sector. So I'm going to drill down into server and storage. So these are spending intentions from the July survey, asking about the second half of 2019 relative to the first half of 2019. And this is a drill down into the giant public and private firms, why do I do that? Because in meeting with ETR, this is the best indicator. So it's big, big public companies and big private companies, think Uber. Private companies that spend a ton of dough on IT, UPS before it went public, for example. So those companies are in here and according to the ETR, the best indicators. What this chart shows, so the bars show, and I've shared this with you a number of times, the lime green is we're adding, we're new to this platform, we're new adoption. The evergreen is we're spending more, the gray is we're spending the same, the light red or pink is we're spending less and the dark red is we're leaving the platform. So if you subtract the red from the green, you get what's called a net score and that's that blue line. And this is the overall server spending intentions from that July survey, the end is about 525 respondents out of the 4,500. And this is again, those that just answered the question on service. So you can see the net score on server spend is dropping and you can see the market share on server is dropping. What this, the takeaway here is that servers as a percentage of overall IT spend are on a downward slope and have been for quite some time back to the January 16 survey. Okay, so that's kind of servers. Let's take a look at the same data for storage. So Alex, if you bring up the storage sector slide, you can see kind of a similar trend. And I would argue what's happening here, a couple of things. You've got the cloud effect. I'll talk about that some more. And you've also got in this case, the flash all flash array effect. What happened was you had all flash arrays and flash come into the data center and that gave performance a huge headroom. Remember, spinning disk was the last bastion of mechanical movement and was the main bottleneck in terms of overall application performance. IO was the problem. Well, you put a bunch of flash into the system and it gives a lot of headroom. People used to over provision capacity just for performance reasons. So flash has had the effect of customers saying, hey, my performance is good. I don't need to over provision anyone. I don't need to buy so much. So that combined with cloud, I think it's put downward pressure on the storage business as well. Now, the next slide, Alex, that I want you to bring up is the vendor net scores, the server spending intentions. And what I've done is I've highlighted Dell EMC. Now, what's happening here in this slide, I realize it's an eye chart, but basically what you want to be in this chart is in the left hand side. What it shows is the spending intentions in the momentum from the October 18, which is the gray, the April 19, which is the blue, and then the July 19, which is the most recent one. Again, the end is 525 in the servers for the July 19 survey. And you can see Dell's kind of in the middle of the pack. You'd love to be in the left-hand side, Docker, Microsoft, VMware, Intel, Ubuntu, and you don't want to be in the right-hand side. Fujitsu, IBM is sort of below the line. Dell's kind of in the middle there, Dell EMC. The next slide I want to show you is that same slide for storage. And again, you can see here that on, so this is vendor net scores, the storage spending intentions. On the left-hand side, it's all the high-growth companies, Rubrik, Cohesity, Nutanix, Pure, VMware with vSAN, Veeam, you see Dell EMC's VxRail. On the right-hand side, you see the guys that are losing momentum, Veritas, Iron Mountain, Barracuda, Hitachi, HDS, Fusion IO still comes up in the survey after the acquisition by Western Digital. Again, you see Dell EMC kind of holding serve in the middle there. Not great, not bad. Okay, so that's kind of just some other ETR data that I wanted to share. All right, next thing I want to talk about is the Macros Market Summary. And Alex, I've got some bullet points on this, so if you bring up that slide, let me talk about that a bit. So, five points here. First, cloud continues to eat away at on-prem despite all this talk about repatriation, which I know does happen. People try to throw everything into the cloud and they go, whoa, look at my Amazon bill, yeah. I get that. That's at the margin. The main trend is that cloud continues to grow. That whole repatriation thing is not moving, the on-prem market, it's just kind of, on-prem is kind of steady eddy. Storage is still working through that AFA injection. Got a lot of headroom from performance standpoint, so people don't need to buy as much as they used to. Because you had that step function in performance. Now, eventually, the market will catch up, all this digital transformation is happening, all this data is flowing through the system and it will catch up. And the storage market is elastic as NAND prices fall, people, I predict, will buy more storage, but there's been somewhat of a lull in the overall storage market. It's not a great market right now, frankly, at the macro level. Now, ETR does these surveys on a quarterly basis. They're just about to release the October survey and they put out a little glimpse on Friday about this survey. And I'll share some bullet points there. Overall IT spending clearly is softening, we kind of know that, everybody kind of realizes that. Here's the nuance, new adoptions are reverting to pre-2018 levels and the replacements are rising. What does this mean? So the number of respondents that said, oh yes, we're adopting this platform for the first time is declining and the replacements are actually accelerating. Why is that? Well, I was at ETR last weekend, we're talking about this and one of the theories, and I think it's a good one, is that 2016, 2017 was kind of experimentation around digital transformation. 2018, people started to put things into production or closer to production and they were running systems in parallel and now they're making their bets. They're saying, hey, this test worked, let's put this heavy into production in 2019 and now we're going to start replacing. So we're not going to adopt as much stuff because we're not doing as much experimentation, we're going to now focus and narrow in on those things that are going to drive our business and we're going to replace those things that aren't going to drive our business. We're going to start unplugging those. So that's some of what's happening. Another big trend is Microsoft. Microsoft is extending its presence throughout. They're going after collaboration. You saw the impact that they had on Slack and Slack stock recently, so Slack, Box, Dropbox are kind of exposed there. They're going after security, they just announced a SIM product. So Splunk and IBM, they're kind of going after that base, the application performance management vendors, for instance, New Relic, Microsoft going after them. Obviously, they got a huge presence in cloud. Their Windows 10 cycle is a little slower this time around but they've got other businesses that are really starting to click. So Microsoft is one of the few vendors that really is showing accelerated spending momentum in the ETR data. Financial services in telcos, which are always leading spender indicators are actually very weak right now. That's having a spill over effect into Europe, which is overbanked, if I can use that term, banking heavy, if you will. So right now, it's not a pretty picture but it's not a disaster. I don't want to necessarily suggest this as like going back to 2007, 2008, it's not. It's really just a matter of things are softening and it's maybe taking a little breath. Okay, so let me summarize the meeting overall. Again, it was a very well run meeting. Started at nine o'clock, ended at 12 o'clock. Bag lunch, go home, nice and crisp. So these guys are very well prepared. I think again, Dell is a extremely well managed company. They laid out a much clearer vision for Wall Street, of its strategy, where it's headed. As I say, they're going after IT complexity. I want to make a comment on this. You know, you think about legacy EMC. Legacy EMC was not the company that you would expect to deal with complexity. In fact, they were the culprit of complexity. One of the things that Jeff Clark did when he came in, he said, this portfolio is too complex, needs to be simplified. Joe Tucci used to say, overlap is better than gaps. You know, Jeff Clark said, we got too much overlap. We don't have a lot of gaps. So let's streamline that portfolio. Taking advantage of vendor consolidation, this is an interesting one. Ever since I've been in this business, which has been quite a long time now, I've been hearing that buyers want to consolidate the number of vendors that they have. They've really not succeeded in doing that. Now, can they do that now? Because there are less vendors? Well, in a sense, yes. There are less sort of on-prem big vendors. You know, EMC's no longer in the market. You know, you don't have companies like San and Digital, you know, anymore. Compact is gone. HP split in two, but still, you know, it's, you're not seeing a huge number of new vendors at scale coming to the market. Except you've got AWS and Google as new players there. So I think that injects sort of a new dynamic that a lot of people like to put cloud aside and kind of ignore it and talk about the old on-prem business. But I think that you're going to see a lot of experimentations and workload ins and outs, particularly with AWS and Google and of course Azure, which is, you know, in itself, their cloud is almost a separate force. So, you know, we'll see how that shakes out. As I say, servers right now, Dell's got a very tough compare. I think Dell will be fine in the service space storage. It's all about simplifying the portfolio. They've got a refreshed portfolio focused on regaining share. They've rebranded everything power. So their whole line is going to be power by, if it's not already, by May of next year, Dell Technologies World. It's a much more scalable portfolio. And I think Dell's got a lot of valuation levers. They're a $92 billion company. They've got their current operations, their current P&L, their share gains, their cross company synergies, particularly with VMware. They can expand their TAM into cloud with partnerships like they're doing with AWS and others, Google, Microsoft. The Edge is a TAM expansion opportunity to them. And also corporate structure. You've seen them, they're acquired, you know, VMware acquired Pivotal. They're cleaning that up. I'm sure they could potentially make some other moves. You know, SecureWorks is out there, for example. Maybe they'll do some things with RSA. So they got that knob to turn and they can delever. Paying down the debt to the extent that they can get back to investment grade that will lower their interest rates that will drop right to the bottom line and they'll be able to reinvest that. And Tom Sweet said, within 18 months, we'll be able to get there with that 2x ratio relative to EBITDA. And that's when they're going to start having conversations with the rating agencies to talk about, you know, hey, maybe we can get a better rating and lower our interest expense. Bottom line, did Wall Street buy the story? Yes, but I don't think it's going to necessarily change anything in the near term. This is a show me from Missouri, prove it, execute. And then I think Dell will get rewarded. Okay, so this is Dave Vellante. Thanks for watching this Cube Insights powered by ETR. We'll see you next time.