What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-09-12 compared with 2023-06-12 · 222 added, 177 removed, 526 unchanged (43% of the section changed)

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Dell Technologies helps organizations build their digital futures and individuals transform how they work, live, and play.

We provide customers with one of the industry’s broadest and most innovative solutions portfolio for the data era, including traditional infrastructure and extending to multi-cloud environments.

Our differentiated and holistic IT solutions benefit our results and enable us to capture growth as customer spending priorities evolve.

We provide customers with one of the industry’s broadest and most innovative solutions portfolio for the data era, including traditional infrastructure and extending to multicloud environments.

Our differentiated and holistic IT solutions enable us to capture growth as customer spending priorities evolve.

Dell Technologies’ integrated solutions help customers modernize their IT infrastructure, manage and operate in a multicloud world, address workforce transformation, and provide critical solutions that keep people and organizations connected.

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Our go-to-market model includes a 29,000-person direct sales force and a global network of approximately 240,000 channel partners.

We employ approximately 35,000 full-time service and support professionals and maintain approximately 2,200 vendor-managed service centers.

We employ approximately 34,000 service and support professionals and maintain approximately 2,200 vendor-managed service centers.

We also manage a world-class supply chain at significant scale with approximately $77 billion in annual procurement expenditures and over 725 parts distribution centers.

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We help customers address their evolving IT needs and their broader digital transformation objectives as they embrace today’s multicloud world.

We intend to execute our vision by focusing on two strategic priorities:

• Grow and modernize our core offerings in the markets in which we predominantly compete

• Pursue attractive new growth opportunities such as Edge, Telecom, data management, and as-a-Service consumption models

We intend to execute our vision by growing our core offerings, including opportunities such as artificial intelligence (“AI”), edge, telecom, data management, and as-a-Service consumption models.

We believe we are uniquely positioned in the data and multicloud era and that our results will continue to benefit from our durable competitive advantages.

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We are organized into two business units, referred to as Infrastructure Solutions Group and Client Solutions Group, which are our reportable segments.

• Infrastructure Solutions Group (“ISG”) — ISG enables our customers’ digital transformation with solutions that address the fundamental shift to multicloud environments, machine learning, artificial intelligence (“AI”), and data analytics.

• Infrastructure Solutions Group (“ISG”) — ISG enables our customers’ digital transformations with solutions that address the fundamental shift to multicloud environments, machine learning, AI, and data analytics.

ISG helps customers simplify, streamline, and automate cloud operations.

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Our server portfolio includes high-performance rack, blade, and tower servers.

Our servers are designed with the capability to run high value workloads across customers’ IT environments, including AI, machine learning, and edge workloads.

Our servers are designed with the capability to run high value workloads across customers’ IT on premises, multicloud, and edge environments, including the training, fine-tuning, and operationalization of AI models.

Our networking portfolio helps our business customers transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes.

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For additional information about our financing arrangements, see Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this report.

Product Backlog

Product backlog represents the value of unfulfilled manufacturing orders and is included as a component of remaining performance obligations to the extent we determine that the manufacturing orders are non-cancelable.

Our business model generally gives us the ability to optimize product backlog at any point in time, such as by expediting shipping or prioritizing customer orders for products that have shorter lead times.

Relationship with VMware

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The technologies or products these companies have under development are typically in the early stages and may never have commercial value, which could result in a loss of a substantial part of our investment in the companies.

As of both May 5, 2023 and February 3, 2023, we held strategic investments in non-marketable securities of $1.3 billion.

As of August 4, 2023 and February 3, 2023, we held strategic investments in non-marketable securities of $1.2 billion and $1.3 billion, respectively.

See Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information.

In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives and accelerate our innovation agenda.

Product Backlog

During Fiscal 2023, we lowered our backlog across both CSG and ISG from previously elevated levels as constraints in limited-source components began to diminish as a result of improving supply positions and overall declines in the demand environment.

Business Trends and Challenges

Throughout the first quarter of Fiscal 2024, challenging global macroeconomic conditions continued to impact the demand for our offerings.

Within CSG, our net revenue performance was impacted by industry-wide declines in demand which began in the first half of Fiscal 2023.

Within ISG, our net revenue performance was impacted as we experienced declines in demand for both our servers and networking and storage offerings as customers exercised caution in response to the macroeconomic environment.

We expect that the macroeconomic environment will continue to impact our consolidated financial results for the remainder of Fiscal 2024.

We currently anticipate a decline in net revenue for the full fiscal year, notably in the first half of the year, which may put pressure on operating margins.

While we anticipate that the macroeconomic environment will continue to be challenging, we expect that demand declines will moderate through the remainder of Fiscal 2024.

We will continue to actively monitor global events and make prudent decisions to navigate this environment.

We believe our durable competitive advantages continue to position us for long-term success.

During the first half of Fiscal 2024, the effects of the evolving macroeconomic environment continued to impact our net revenue performance when compared to the first half of Fiscal 2023.

Within CSG, our first half Fiscal 2024 net revenue performance was impacted by industry-wide declines in demand that began in the second quarter of Fiscal 2023.

Within ISG, our first half Fiscal 2024 net revenue performance was impacted as certain customers remained cautious and were measured in their IT spending.

During the second quarter of Fiscal 2024, while net revenue declined, we experienced sequential growth in the demand for our offerings as certain customers responded to early signs of macroeconomic stabilization.

Despite some indicators of a stabilizing environment, we currently anticipate a decline in net revenue for the second half of Fiscal 2024 relative to the net revenue we achieved in the second half of Fiscal 2023, driven primarily by net revenue attributable to ISG.

We anticipate the decline in net revenue will, in part, be attributable to the continued impact of macroeconomic conditions on demand and increasing competitive pricing pressure.

We expect that the decline in net revenue will be partially offset by disciplined cost management measures as we continue to make prudent decisions to navigate this environment.

Despite continued near-term challenges, we believe our durable competitive advantages continue to position us for long-term success.

Supply Chain — Dell Technologies maintains single-source and limited-source supplier relationships for certain components because the relationships are advantageous in the areas of performance, quality, support, delivery, capacity, and price considerations.

During the first quarter of Fiscal 2024, our supply chain operated efficiently at standard lead times for our customers as we saw further improvement in the previously constrained supply of limited-source components.

We also benefited from declines in both logistics and component costs, which we refer to as input costs.

We expect that component cost deflation will continue at a more moderate rate during the second quarter of Fiscal 2024.

During the second quarter of Fiscal 2024, our supply chain continued to operate efficiently at standard lead times for our customers and we experienced declines in both component and logistics costs, which we refer to as input costs.

We expect component cost deflation to moderate during the second half of Fiscal 2024.

Component cost trends are dependent on the strength or weakness of actual end-user demand and supply dynamics, which will continue to evolve and ultimately impact the translation of the cost environment to pricing and operating results.

Logistics costs continued to decrease from previously elevated levels as a result of declines in both expedited shipments and overall rate costs in the freight network.

Logistics costs, which we believe have now normalized, continued to decrease from previously elevated levels as a result of declines in both expedited shipments and overall rate costs in the freight network.

Foreign Currency Exposure — We manage our business on a U.S.

dollar basis.

However, we have a large global presence, generating approximately half of our net revenue from sales to customers outside of the United States during the first quarter of Fiscal 2024 and Fiscal 2023.

However, we have a large global presence, generating approximately half of our net revenue from sales to customers outside of the United States during the second quarter of Fiscal 2024 and Fiscal 2023.

As a result, our operating results can be, and particularly in recent periods have been, impacted by fluctuations in foreign currency exchange rates.

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We continue to focus on customer base expansion and lifetime value of customer relationships.

Our customer base includes a growing number of service providers, such as cloud service providers, Software-as-a-Service companies, consumer webtech providers, and telecommunications companies.

Our customer base includes service providers, such as cloud service providers, Software-as-a-Service companies, consumer webtech providers, and telecommunications companies.

These service providers turn to Dell Technologies for our advanced solutions that enable efficient infrastructure and service delivery at cloud scale.

While we are anticipating challenges in the demand environment as customers re-prioritize and exercise caution in response to macroeconomic conditions, we expect that data growth will continue to generate long-term demand for our storage solutions and services.

While we anticipate challenges in the demand environment as customers re-prioritize and exercise caution in response to macroeconomic conditions, we expect that data growth will continue to generate long-term demand for our storage solutions and services.

Cloud native applications are expected to continue to be a key trend in the infrastructure market.

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We anticipate that ISG will benefit from the continued expansion of, and advances in, AI.

Through our server and storage offerings, as well as our AI validated design solutions, we are well positioned to capture growth and support our customers needs.

We continue to optimize and enhance our offerings to run high value and transformational workloads, such as AI.

Through our server and storage offerings, as well as our Dell-validated AI solutions, we are well positioned to capture growth and support our customers needs.

As demonstrated by our PowerEdge XE servers, we continue to optimize and enhance our offerings to run high value and transformational workloads, such as AI.

CSG — Our CSG offerings are an important element of our strategy, generating strong cash flow and opportunities for cross-selling of complementary solutions.

Within CSG, while we participate in all segments of the PC market, we are focused on commercial and high-end consumer computing devices, as we believe they are the most stable and profitable.

Within CSG, while we participate in all segments of the PC market, we are focused on commercial and high-end consumer computing devices, as we believe they are the most stable and profitable markets.

Competitive dynamics continue to be a factor in our CSG business and continue to impact pricing and operating results.

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Recurring Revenue and Consumption Models — Our customers are seeking new and innovative models that address how they consume our solutions.

In part, customers are looking for predictable cost models and to reduce complexity, align solution offerings to their business needs, and provide consistent operations throughout their IT enterprise.

We offer options including as-a-Service, subscription, utility, leases, loans, and immediate pay models designed to match customers' consumption and financing preferences.

In part, customers are looking for predictable cost models and to reduce complexity, align solutions offerings to their business needs, and provide consistent operations throughout their IT enterprise.

We offer options including leases, loans, immediate pay, as-a-Service, subscription, and utility models designed to match customers' consumption and financing preferences.

We believe these options are particularly advantageous for our customers during times of economic uncertainty as they provide customers with financial flexibility to further enable them to procure our solutions.

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We expect that these offerings will further strengthen our customer relationships and provide a foundation for growth in recurring revenue.

We define recurring revenue as revenue recognized that is primarily related to hardware and software maintenance as well as subscription, as-a-Service, usage-based offerings, and operating leases.

We define recurring revenue as revenue recognized that is primarily related to hardware and software maintenance as well as operating leases, subscription, as-a-Service, and usage-based offerings.

Ukraine War — We are monitoring and responding to effects of the ongoing war in Ukraine.

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We are focused on providing products and support to Ukrainian customers as they rebuild infrastructure and restore businesses and the financial sector.

The war and the related economic sanctions are impacting markets worldwide.

Our business may be adversely affected by effects of the war and such sanctions, including supply chain disruptions, product shipping delays, macroeconomic impacts resulting from the exclusion of Russian financial institutions from the global banking system, volatility in foreign exchange rates and interest rates, inflationary pressures, and heightened cybersecurity and data theft threats.

The full impact of the war on our business operations and financial performance will depend on future developments.

We will continue to monitor and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business.

COVID-19 Pandemic and Response — We continue to monitor the COVID-19 pandemic and variants of the coronavirus, as well as the impact of the pandemic on our employees, customers, business partners, and communities.

Other Macroeconomic Risks and Uncertainties — The impacts of trade protection measures, including increases in tariffs and trade barriers, changes in government policies and international trade arrangements, and geopolitical issues may affect our ability to conduct business in some non-U.S.

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• Impact of Purchase Accounting — The impact of purchase accounting includes purchase accounting adjustments primarily related to the EMC merger transaction recorded under the acquisition method of accounting in accordance with the accounting guidance for business combinations.

Accordingly, all of the assets and liabilities acquired in such transactions were accounted for and recognized at fair value as of the respective transaction dates, and the fair value adjustments continue to amortize over the estimated useful lives in the periods following the transactions.

In accordance with such guidance, all of the assets and liabilities acquired were accounted for and recognized at fair value as of the respective transaction dates, and the fair value adjustments continue to amortize over the estimated useful lives in the periods following the transactions.

The fair value adjustments that are still amortizing primarily relate to property, plant, and equipment.

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Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives.

During the second quarter of Fiscal 2024, we recognized $364 million of severance expense related to workforce reduction activities.

During the second quarter of Fiscal 2023, we recognized $189 million in costs associated with exiting our business in Russia, primarily related to asset impairments and other exit related costs.

Other corporate expenses vary from period to period and are significantly impacted by the timing and nature of these events.

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The following table presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for the periods indicated:

Three Months Ended

2023 % Change April 29,

Three Months Ended Six Months Ended

2023 % Change July 29,

2022 August 4,

2023 % Change July 29,

(in millions, except percentages)

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Non-GAAP operating expenses $ 3,559 (4) % $ 3,698 $ 7,125 (5) % $ 7,504

Three Months Ended

2023 % Change April 29,

Three Months Ended Six Months Ended

2023 % Change July 29,

2022 August 4,

2023 % Change July 29,

(in millions, except percentages)

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As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance.

EBITDA and adjusted EBITDA do not purport to be alternatives to net income as measures of operating performance or to cash flows from operating activities as a measure of liquidity.

In particular, EBITDA and adjusted EBITDA are not intended to be a measure of free cash flow available for management’s discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.

EBITDA and adjusted EBITDA do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.

In particular, EBITDA and adjusted EBITDA are not intended to be a measure of cash flow available for management’s discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.

The following table presents a reconciliation of EBITDA and adjusted EBITDA to net income for the periods indicated:

Three Months Ended

2023 % Change April 29,

Three Months Ended Six Months Ended

2023 % Change July 29,

2022 August 4,

2023 % Change July 29,

(in millions, except percentages)

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Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.

Three Months Ended

May 5, 2023 April 29, 2022

Three Months Ended Six Months Ended

August 4, 2023 July 29, 2022 August 4, 2023 July 29, 2022

Net Revenue %

Change Dollars % of

Net Revenue Dollars % of

Net Revenue %

Change Dollars % of

(in millions, except percentages)

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Non-GAAP Financial Information

Three Months Ended

May 5, 2023 April 29, 2022

Three Months Ended Six Months Ended

August 4, 2023 July 29, 2022 August 4, 2023 July 29, 2022

Net Revenue %

Change Dollars % of

Net Revenue Dollars % of

Net Revenue %

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See “Non‑GAAP Financial Measures” for additional information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

During the first quarter of Fiscal 2024, our net revenue decreased 20% driven by declines in both CSG and ISG net revenue which were impacted by challenging global macroeconomic conditions that continued to affect the demand for our offerings.

CSG net revenue declined primarily as a result of a decrease in units sold, partially offset by an increase in average selling prices.

ISG net revenue decreased primarily as a result of a decline in net revenue attributable to servers and networking and, to a lesser extent, a decline in storage net revenue.

During the first quarter of Fiscal 2024, our operating income and non-GAAP operating income decreased 31% to $1.1 billion and 25% to $1.6 billion, respectively.

The decreases were driven by both ISG and CSG operating income which declined as a result of a decrease in net revenue, partially offset by a reduction in operating expenses as a result of disciplined cost management.

The decline in ISG operating income was driven primarily by storage and the decline in CSG operating income was driven by both commercial and consumer.

During the first quarter of Fiscal 2024, operating income as a percentage of net revenue and non-GAAP operating income as a percentage of net revenue decreased 80 basis points to 5.1% and 60 basis points to 7.6%, respectively.

The decreases were primarily driven by an increase in operating expenses as a percentage of net revenue which was partially offset by an increase in gross margin as a percentage of net revenue.

The increase in operating expense as a percentage of net revenue was driven by a decline in net revenue that outpaced the impacts of cost management measures.

Gross margin as a percentage of net revenue increased primarily due to the impacts of an overall decrease in input costs coupled with an increase in average selling prices across our offerings as we maintained strong pricing discipline.

Cash provided by operating activities was $1.8 billion during the first quarter of Fiscal 2024 which primarily reflected strong working capital performance as we reduced inventory and accounts receivable.

The impact of strong working capital performance was partially offset by the effect of a decline in net revenue.

During the first quarter of Fiscal 2023, cash used by operating activities was $0.3 billion driven by seasonal sales trends affecting parts of our business and annual incentive-based personnel-related payments.

During the second quarter and first six months of Fiscal 2024, net revenue decreased by 13% and 17%, respectively, driven by declines in both CSG and ISG net revenue, which reflected the impact of challenging global macroeconomic conditions.

The decline in CSG net revenue was primarily attributable to a decrease in units sold, partially offset by an increase in average selling prices.

ISG net revenue decreased primarily as a result of a reduction in net revenue attributable to servers and networking and, to a lesser extent, a decline in storage net revenue.

During the second quarter of Fiscal 2024, operating income and non-GAAP operating income decreased by 8% to $1.2 billion and increased 1% to $2.0 billion, respectively.

The decline in operating income was driven by a decrease in net revenue coupled with an increase in other corporate expenses.

Non-GAAP operating income remained effectively flat as the impact of a decrease in net revenue was largely offset by a decline in input costs and by the impact of cost management measures.

During the first six months of Fiscal 2024, operating income and non-GAAP operating income decreased by 21% to $2.2 billion and 13% to $3.6 billion, respectively.

The declines were primarily attributable to a reduction in both ISG and CSG operating income as a result of a decrease in net revenue which was partially offset by the impact of disciplined cost management measures.

The decline in ISG operating income was primarily attributable to decreases in storage and, to a lesser extent, servers and networking.

The decline in CSG operating income was driven by decreases in both commercial and consumer.

The decrease in operating income was also impacted by an increase in other corporate expenses.

During the second quarter and first six months of Fiscal 2024, operating income as a percentage of net revenue increased 30 basis points to 5.1% and decreased 30 basis points to 5.1%, respectively.

Non-GAAP operating income as a percentage of net revenue increased 120 basis points to 8.6% and 40 basis points to 8.2% during the second quarter and first six months of Fiscal 2024, respectively.

Operating income and non-GAAP operating income as a percentage of net revenue during both the second quarter and first six months of Fiscal 2024 benefited from growth in gross margin as a percentage of net revenue, which increased primarily due to the impacts of an overall decrease in input costs coupled with an increase in average selling prices.

The impact of increases in gross margin as a percentage of net revenue was offset by increases in operating expense as a percentage of net revenue that were driven by a decline in net revenue which outpaced the impact of continued cost management measures.

Operating income as a percentage of net revenue during both periods was further impacted by an increase in other corporate expenses.

Cash provided by operating activities was $5.0 billion and $0.5 billion during the first six months of Fiscal 2024 and Fiscal 2023, respectively.

Cash provided by operating activities during the first six months of Fiscal 2024 was primarily driven by profitability and working capital management as we reduced inventory, demonstrated strong cash collections performance, and benefited from the timing of purchases and payments to vendors.

Cash provided by operating activities during the first six months of Fiscal 2023 reflected profitability, partially offset by the impact of working capital dynamics.

See “Liquidity, Cash Requirements, and Market Conditions” for additional information about our cash flow metrics.

Despite the near-term challenges driven by uncertainty in the macroeconomic environment, we continue to see opportunities to create value and grow as we respond to long-term demand for our IT solutions driven by a technology-enabled world.

We have demonstrated our ability to adjust to changing market conditions with complementary solutions and innovation across both segments of our business, an agile workforce, and the strength of our global supply chain.

As we continue to innovate and modernize our core offerings, we believe that Dell Technologies is well-positioned for long-term profitable growth.

During the first quarter of Fiscal 2024, our net revenue decreased 20%, primarily driven by declines within CSG and ISG net revenue.

During the second quarter and first six months of Fiscal 2024, net revenue decreased 13% and 17%, respectively, primarily driven by declines in both CSG and ISG net revenue.

See “Business Unit Results” for further information.

• Product Net Revenue — Product net revenue includes revenue from the sale of hardware products and software licenses.

During the first quarter of Fiscal 2024, our product net revenue decreased 27% due to declines in both CSG and ISG product net revenue.

CSG product net revenue decreased primarily as a result of a decrease in units sold, which impacted both our commercial and consumer offerings, partially offset by an increase in average selling prices.

ISG product net revenue decreased primarily due to a decline in product net revenue for servers and networking, driven by a decrease in units sold, and, to a lesser extent, a decline in our product net revenue for storage offerings.

During the second quarter and first six months of Fiscal 2024, product net revenue decreased 19% and 23%, respectively, due to declines in both CSG and ISG product net revenue.

CSG product net revenue decreased primarily as a result of a decline in units sold, which impacted both our commercial and consumer offerings, partially offset by an increase in average selling prices.

The decline in ISG product net revenue was primarily attributable to a decrease in product net revenue for servers and networking, driven by a decrease in units sold, and, to a lesser extent, a decline in our product net revenue for storage offerings.

• Services Net Revenue — Services net revenue includes revenue from our services offerings and support services related to hardware products and software licenses.

During the first quarter of Fiscal 2024, services net revenue increased 4% driven primarily by growth within other businesses that was principally attributable to VMware Resale software maintenance sold in prior periods.

During the second quarter and first six months of Fiscal 2024, services net revenue increased 7% and 5%, respectively, driven primarily by growth within other businesses, which was principally attributable to VMware Resale, as well as third-party software support and maintenance within CSG and strength in hardware support and maintenance in both CSG and ISG.

A substantial portion of services net revenue is derived from offerings that have been deferred over a period of time, and, as a result, reported growth rates for services net revenue will be different than reported growth rates for product net revenue.

From a geographical perspective, net revenue decreased in the Americas, EMEA, and APJ regions during the first quarter of Fiscal 2024.

During the first quarter of Fiscal 2024, gross margin and non-GAAP gross margin both decreased 13% to $5.0 billion and $5.2 billion, respectively, driven by declines in CSG and ISG gross margin which were primarily attributable to decreases in net revenue.

During the first quarter of Fiscal 2024, our gross margin and non-GAAP gross margin percentages increased 190 basis points to 24.0% and 200 basis points to 24.7%, respectively, primarily due to the impacts of an overall decline in input costs coupled with an increase in average selling price across our offerings as we maintained strong pricing discipline.

• Product Gross Margin — During the first quarter of Fiscal 2024, product gross margin and non-GAAP product gross margin both decreased 23% to $2.7 billion and $2.8 billion, respectively.

The decreases were primarily driven by declines in both ISG and CSG product gross margin.

The decrease in ISG product gross margin was principally attributable to decline in product gross margin within our storage offerings.

CSG product gross margin declined due to a decrease in product net revenue for both our commercial and consumer offerings.

During the first quarter of Fiscal 2024, product gross margin percentage and non-GAAP product gross margin percentage increased 80 basis points to 17.7% and 90 basis points to 18.4%, respectively, primarily driven by the impacts of an overall decline in input costs coupled with an increase in average selling price across our offerings as we maintained strong pricing discipline.

• Services Gross Margin — During the first quarter of Fiscal 2024, services gross margin and non-GAAP services gross margin increased 1% to $2.4 billion and 2% to $2.4 billion, respectively.

From a geographical perspective, net revenue decreased in the Americas, EMEA, and APJ regions during both the second quarter and first six months of Fiscal 2024.

During the second quarter of Fiscal 2024, gross margin and non-GAAP gross margin decreased 1% to $5.4 billion and 2% to $5.5 billion, respectively.

During the first six months of Fiscal 2024, gross margin and non-GAAP gross margin decreased 7% to $10.4 billion and 8% to $10.7 billion, respectively.

The declines were by driven by decreases in CSG and, to a lesser extent, ISG gross margin that were primarily attributable to decreases in net revenue, the effect of which was partially offset by lower input costs.

During the second quarter of Fiscal 2024, gross margin and non-GAAP gross margin percentage increased 290 basis points to 23.5% and 270 basis points to 24.1%, respectively.

During the first six months of Fiscal 2024, both gross margin and non-GAAP gross margin percentage increased 230 basis points to 23.7% and 24.4%, respectively.

The increases were primarily attributable to the impacts of an overall decline in input costs coupled with an increase in average selling price across many of our offerings as we maintained strong pricing discipline.

• Product Gross Margin — During the second quarter of Fiscal 2024, product gross margin and non-GAAP product gross margin both decreased 7% to $2.9 billion and $3.0 billion, respectively.

During the first six months of Fiscal 2024, product gross margin and non-GAAP product gross margin both decreased 15% to $5.6 billion and $5.8 billion, respectively.

The decreases were primarily driven by declines in both CSG and ISG product gross margin, which were largely attributable to declines in product net revenue.

During the second quarter of Fiscal 2024, both product gross margin percentage and non-GAAP product gross margin percentage increased 220 basis points to 17.3% and 17.9%, respectively, while during the first six months of Fiscal 2024, both product gross margin percentage and non-GAAP product gross margin percentage increased 150 basis points to 17.5% and 18.1%, respectively.

The increases were driven primarily by the impacts of an overall decline in input costs coupled with an increase in average selling price across many of our offerings as we maintained strong pricing discipline.

• Services Gross Margin — During the second quarter of Fiscal 2024, services gross margin and non-GAAP services gross margin increased 7% to $2.5 billion and 5% to $2.5 billion, respectively.

During the first six months of Fiscal 2024, services gross margin and non-GAAP services gross margin increased 4% to $4.8 billion and 3% to $4.9 billion, respectively.

The increases were primarily attributable to growth within ISG services gross margin driven by support and maintenance associated with products sold in prior periods.

During the first quarter of Fiscal 2024, services gross margin percentage and non-GAAP services gross margin percentage decreased 120 basis points to 40.0% and 100 basis points to 40.8%, respectively.

The decreases were driven by a decline in services gross margin percentage for CSG, due to a shift in mix of CSG services delivered, coupled with a shift in mix towards other businesses services net revenue.

These impacts were partially offset by an increase in ISG services gross margin percentage.

During the second quarter and first six months of Fiscal 2024, services gross margin percentage decreased 10 basis points to 40.9% and 60 basis points to 40.5%, respectively.

The decreases were driven by a decline in services gross margin percentage for CSG, due to a shift in mix of CSG services delivered, partially offset by an increase in ISG services gross margin percentage coupled with the impact of asset impairment costs associated with exiting our Russia business in Fiscal 2023.

During the second quarter and first six months of Fiscal 2024, non-GAAP services gross margin percentage decreased 70 basis points to 41.7% and 90 basis points to 41.2%, respectively.

Vendor Programs

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We monitor our component costs and seek to address the effects of any changes to terms that might arise under our vendor rebate programs.

Our gross margins for the first quarter of Fiscal 2024 were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost.

Our gross margins for the second quarter and first six months of Fiscal 2024 were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost.

We are not aware of any significant changes to our vendor rebate programs that will materially impact our results in the near term.

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The following table presents information regarding our operating expenses for the periods indicated:

Three Months Ended

May 5, 2023 April 29, 2022

Three Months Ended Six Months Ended

August 4, 2023 July 29, 2022 August 4, 2023 July 29, 2022

Dollars % of Net Revenue %

Change Dollars % of Net Revenue Dollars % of Net Revenue %

Change Dollars % of Net Revenue

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Total operating expenses $ 4,222 18.4 % 1 % $ 4,169 15.8 % $ 8,171 18.6 % (3) % $ 8,403 16.0 %

Three Months Ended

May 5, 2023 April 29, 2022

Three Months Ended Six Months Ended

August 4, 2023 July 29, 2022 August 4, 2023 July 29, 2022

Dollars % of Net Revenue %

Change Dollars % of Net Revenue Dollars % of Net Revenue %

Change Dollars % of Net Revenue

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Non-GAAP operating expenses $ 3,559 15.5 % (4) % $ 3,698 14.0 % $ 7,125 16.2 % (5) % $ 7,504 14.3 %

During the first quarter of Fiscal 2024, total operating expenses decreased 7% due to a decrease in selling, general, and administrative expenses.

• Selling, General, and Administrative — Selling, general, and administrative (“SG&A”) expenses decreased 8% during the first quarter of Fiscal 2024, primarily due to decreases in employee compensation and benefits and advertising expenses as a result of disciplined cost management coupled with a reduction in our overall headcount.

During the second quarter of Fiscal 2024, total operating expenses increased 1%, driven by growth in research and development expenses.

During the first six months of Fiscal 2024, total operating expenses decreased 3% due to a decline in selling, general, and administrative expenses.

• Selling, General, and Administrative — Selling, general, and administrative (“SG&A”) expenses decreased 1% and 4%, respectively, during the second quarter and first six months of Fiscal 2024.

These decreases were attributable to continued disciplined cost management which resulted in a reduction in outside services and advertising expenses, among other items, partially offset by an increase in employee compensation and benefits expense.

Employee compensation and benefits expense increased primarily as a result of costs incurred in connection with workforce reductions.

• Research and Development — Research and development (“R&D”) expenses are primarily composed of personnel-related expenses incurred in connection with product development.

R&D expenses increased 1% during the first quarter of Fiscal 2024.

As a percentage of net revenue, R&D expenses for the first quarter of Fiscal 2024 and Fiscal 2023 were 3.3% and 2.6%, respectively.

We intend to continue supporting R&D initiatives to innovate and introduce new and enhanced solutions into the market.

During the first quarter of Fiscal 2024, non-GAAP operating expenses decreased 6% principally due to a decline in employee compensation and benefits as a result of a reduction in headcount coupled with continued disciplined cost management.

R&D expenses increased 13% and 7%, respectively, during the second quarter and first six months of Fiscal 2024 driven by an increase in employee compensation and benefits expense.

As a percentage of net revenue, R&D expenses for the second quarter of Fiscal 2024 and Fiscal 2023 were 3.1% and 2.4%, respectively, and for the first six months of Fiscal 2024 and Fiscal 2023 were 3.2% and 2.5%, respectively.

The increases in R&D expenses as a percentage of net revenue were attributable to continued R&D investments as we support R&D initiatives to innovate and introduce new and enhanced solutions into the market.

During the second quarter and first six months of Fiscal 2024, non-GAAP operating expenses decreased 4% and 5%, respectively, principally due to continued disciplined cost management which resulted in a decline in outside services and advertising expenses, among other items.

We continue to make selective investments designed to enable growth, marketing, and R&D, while balancing our efforts to drive cost efficiencies in the business.

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Operating Income