Dell Is Feeling Impact Of Supply Chain Shortages As It Surpasses $100B
‘So one of our biggest challenges that we’ve been working through is chasing those costs that are associated with the volatility, the uncertainty, of when parts show up at a factory that we can move them to our subassembly facilities to turn them into finished products. And it’s that volatility or uncertainty that‘s certainly is catching us a little bit, maybe, by surprise,’ says Jeff Clarke, Dell Technologies’ vice chairman and co-chief operating officer.
Dell Technologies is continuing to grapple with component shortages even as it posted a 17 percent increase in annual sales to a record $101.2 billion.
“We are still experiencing shortages of integrated circuits across a wide range of devices, including network controllers and microcontrollers, that go into our products and solutions,” said Dell Technologies Vice Chairman and Co-Chief Operating Officer Jeff Clarke Thursday during the Round Rock, Texas-based tech giant’s fourth quarter 2022 earnings call. “The result: we are seeing an impact across client systems, servers, and storage.”
Dell experienced a record backlog in its Infrastructure Solutions Group (ISG) in the fourth quarter as a result of a shortage of components, and that backlog will likely remain high through the first half of this year, Clarke said.
“As we head into Q1, we do expect component costs to improve with modest deflation while freight costs remain elevated,” he said. “We are awaiting information from the recent NAND contamination announcement from Kioxia/WD to evaluate the impact on Dell. Our supply chain speed, agility, and flexibility has enabled us to meet customer needs in this environment though challenges remain. And our supply chain continues to be a durable competitive advantage as we navigate the unprecedented supply uncertainty.”
Tom Sweet, Dell Technologies’ chief financial officer, said during his prepared remarks that the company’s fourth fiscal quarter 2022 gross margin as a percentage of revenue took a hit in the fourth fiscal quarter.
“Gross margin as a percentage of revenue was 320 basis points lower, primarily due to higher than anticipated component and logistics costs and higher CSG mix,” Sweet said. “We continue to take pricing actions to manage the impact of commodity and logistics cost variability. Part shortages and supply chain risks remain across the economy, and we expect ISG backlog to remain elevated through at least the first half of fiscal 2023.”
It’s not just a supply issue, Clarke said.
“In addition, freight costs have continued to rise due to increased logistics rates, a higher mix of air [shipments] due to ocean network congestion, and an increase in part expedites to meet customer needs,” he said.
Dell has reduced its PC backlog over the last two quarters to close to the high end of its normal range, but expects that backlog to grow during the first fiscal quarter of 2023, he said.
Dell also experienced a record backlog in its ISG, or Infrastructure Solutions Group, in the fourth quarter thanks to high demand and a shortage of components, and that backlog will likely remain high through the first half of this year, Clarke said.
“As we head into Q1, we do expect component costs to improve with modest deflation while freight costs remain elevated,” he said. “We are awaiting information from the recent NAND contamination announcement from Kioxia/WD to evaluate the impact on Dell. Our supply chain speed, agility, and flexibility has enabled us to meet customer needs in this environment though challenges remain. And our supply chain continues to be a durable competitive advantage as we navigate the unprecedented supply uncertainty.”
Sweet, when asked about how Dell is managing price increases during the supply chain constraints, said the company has been adjusting prices as appropriate as component costs, particularly in the semiconductor space, are rising.
An increased backlog because of supply constraints has not had a major impact on Dell’s profit and loss as price increases have to flow back through the backlog, he said.
“But our perspective is, to adjust prices as appropriate, we‘re always mindful of the market dynamic to your point around elasticity,” he said. “But we’re also in an inflationary environment, and we see that across multiple industries. It‘s appropriate that we adjust pricing and make sure that we’re getting appropriate value for our solutions.”
Clarke said the industry went through an inflationary period in the fourth fiscal quarter because of component costs. However, he said, as component costs decline slightly in the first fiscal quarter, they will be offset by a flat to probably slightly increasing logistics costs related to moving the component to where they are needed.
“So one of our biggest challenges that we’ve been working through is chasing those costs that are associated with the volatility, the uncertainty, of when parts show up at a factory that we can move them to our subassembly facilities to turn them into finished products,” he said. “And it’s that volatility or uncertainty that‘s certainly is catching us a little bit, maybe, by surprise.”
As costs go up, it’s being transferred into increased prices, Clarke said.
“Whether that’s commercial PCs, whether that’s the premium consumer side of our business, we’re seeing the same thing broadly across the server space, and the same is true in our storage space,” he said.
Dell’s stock was down 5.34 percent as of Friday afternoon after company reported earnings below Wall Street expecations.
For the fourth quarter of its fiscal year 2022, which ended January 28, Dell Technologies reported total revenue of $27.99 billion, up 16 percent over the $24.15 billion the company reported for its fourth fiscal quarter 2021.
Dell reported a GAAP net loss of $29 million, or 4 cents per share, well below the net income of $695 million, or 90 cents a share from the same period last year.
On a non-GAAP basis, Dell reported quarterly net income of $1.39 billion, or $1.72 per share, up from last year’s $1.36 billion, or $1.76 per share. Analysts had predicted the company to report earnings of $1.95 a share on sales of $27.5 billion, according to FactSet.
For all of fiscal year 2022, Dell reported revenue of $101.20 billion, up 17 percent over the $86.67 billion the company reported for fiscal 2021.
Dell reported GAAP net income of $4.94 billion, or $6.26 per share, up from last year’s $3.69 billion, or $2.93 per share. On a non-GAAP basis, Dell reported net income of $4.92 billion, or $6.22 per share, up from last year’s $3.75 billion, or $4.88 per share.