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Dell Technologies Inc (DELL) Q4 2023 Earnings Call Transcript

Dell Technologies Inc Earnings Call - Final Transcript

Dell Technologies Inc (NYSE:DELL) Q4 2023 Earnings Call dated Mar. 02, 2023.

Corporate Participants:

Rob Williams — Head of Investor Relationss

Chuck Whitten — Co-Chief Operating Officer

Tom Sweet — Executive Vice President and Chief Financial Officer

Tyler Johnson — Senior Vice President and Treasurer

Jeffrey Clarke — Co-Chief Operating Officer and Vice Chairman

Michael Dell — Chairman and Chief Executive Officer

Analysts:

Aaron Rakers — Wells Fargo — Analyst

David Vogt — UBS — Analyst

Toni Sacconaghi — Bernstein — Analyst

Jim Suva — Citigroup — Analyst

Erik Woodring — Morgan Stanley — Analyst

Samik Chatterjee — JP Morgan — Analyst

Wamsi Mohan — Bank of America — Analyst

Amit Daryanani — Evercore — Analyst

Simon Leopold — Raymond James — Analyst

Sidney Ho — Deutsche Bank — Analyst

Krish Sankar — TD Cowen — Analyst

Kyle McNeely — Jefferies — Analyst

Presentation:

Operator

Good afternoon, and welcome to the fiscal year 2023 Fourth-Quarter and Year-End Financial Results Conference Call for Dell Technologies, Inc. I’d like to inform all participants this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies, Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question-and-answer session. [Operator Instructions]

I’d like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin.

Rob Williams — Head of Investor Relationss

Thanks 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 our materials and presentation, which includes additional content to complement our discussion this afternoon. Guidance will be covered on today’s call. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income and diluted earnings per share. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our press release.

Growth percentages refer to year-over-year change unless otherwise specified. Statements made during this call that relate to future events and results 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 our SEC filings. We assume no obligation to update our forward-looking statements.

Now, I will turn it over to Chuck.

Chuck Whitten — Co-Chief Operating Officer

Thanks, Rob. We are pleased with our FY23 execution and financial results given the macroeconomic backdrop. FY23 was ultimately a tale of two halves, with 12% growth in the first-half and revenue down 9% in the second-half as the demand environment weakened over the course of the year. Net, we delivered record FY23 revenue of $102.3 billion, up 1% on the back of 17% growth in FY22. Record op income of $8.6 billion, up 11%. And record EPS of $7.61, up 22%. ISG in particular had a strong year with record revenue of $38.4 billion, including record revenue in both servers and networking and storage and record operating income of over $5 billion.

Importantly, we are structural share gainers and continue to outperform the industry. We expect to gain over a point of share in mainstream server and storage revenue when the IDC calendar results come out later this month. In servers, we remain number-one in the market and have gained nine points of mainstream server revenue-share over the last 10 years. In storage, we are far and away the industry-leader, bigger than number two, three and four players combined, and have gained four points of share in the key midrange portion of the market over the last five years. And in PCs, we gained over 140 basis-points of commercial PC unit share in calendar ’22. Our tenth consecutive year of share gains.

Focusing on Q4. We again proved our ability to deliver against our commitments and execute no matter the market environment. We delivered Q4 revenue of $25 billion, down 11% with operating income of $2.2 billion and diluted EPS of $1.80, driven by strong ISG performance and disciplined cost management. ISG revenue was $9.9 billion, up 7% with record profitability. ISG has now grown eight consecutive quarters and our end-to-end business model has proven to be a demonstrable competitive advantage in this changing environment. We’ve enhanced our relevancy with customers as spending priorities shifted from CSG to ISG over the course of the year, and we positioned our business to capture growth where it materialized in the IT market.

Specifically in ISG, we delivered record storage revenue of $5 billion, up 10%, including demand growth in PowerFlex, VxRail, Data Protection and PowerStore. We are pleased with our momentum in storage. The investments we’ve made over the years, strengthening our portfolio are paying-off and have allowed us to drive growth and share gain in what was a resilient storage market in 2022. We grew servers and networking 5% in a challenging server demand environment by optimizing server shipments, along with strong attach and growing ASP’s. A clear indication that we continue to sell deeper into customers’ digital agendas.

Turning to CSG. The PC market remains challenged. From a historic 2021, the PC market slowed markedly in June and experienced a sharp decline in calendar Q4. Consequently, our fiscal Q4 CSG revenue declined 23% to $13.4 billion. It was a continuation of trends we’ve seen in recent quarters. Commercial revenue fared better than consumer, down 17%, as customers delayed PC purchases in the face of macroeconomic and hiring uncertainty. Consumer was down 40%.

Given the decline in revenue, CSG operating income was $671 million or 5% of revenue, primarily driven by descaling, with revenue decreasing faster than opex. We are seeing increasing competitive pressure and elevated industry channel inventories, but we continue to maintain pricing discipline, execute our direct attach motion and focus on our relative performance in the most profitable segments of the PC market.

In this challenged and uncertain environment, we’ve stuck to a playbook that has served us well across multiple cycles; staying customer focused, driving differentiated relative performance, delivering against our innovation agenda, managing our cost position, maintaining pricing discipline, and sustaining our unique and winning culture. In short, we have focused on what we can control.

And in Q4, we continue to take decisive action, extending our existing cost controls, pausing external hiring, limiting travel, and reducing outside services spend. We reduced our operating expenses, excluding compensation and benefits, by 5% versus last year, normalized for the extra week in the quarter. We also made the difficult decision to reduce our workforce by an additional 5% as announced in February. We will continue to stay disciplined in our expense management as we navigate the current IT spending environment.

In Q4, we also advanced our innovation agenda. We launched our next-generation of PowerEdge servers with significantly enhanced AI and machine-learning capabilities and improved energy and cost-efficiency for datacenter, cloud and edge environments, including new purpose-built XR servers for telecom, Open RAN and mobile edge use cases.

At Mobile World Congress this week, we announced new solutions and partnerships that will enable the telecommunications industry to accelerate the adoption of open network architecture, including Dell Telecom infrastructure blocks for Red Hat, an integrated solution, specifically engineered, validated and supported by Dell to help network operators run their telecom workloads more efficiently.

And we continue to lead-in defining the next era of hybrid work solutions. At CES, we made announcements in a number of areas, including high-margin peripherals that improve the employee experience like our premier collaboration keyboard with dedicated touch controls to easily manage Zoom calls, and a series of new monitors, including a 32 inch ultra sharp display with 6K resolution. We’re proud of the substantial innovation that we’ve driven in all of our businesses in FY23 and we have more exciting announcements coming in May at Dell Technologies World.

Let me conclude by offering some brief observations on the demand environment. The broad caution in the IT spending environment that we started calling out in Q2 persists, as customers continue to scrutinize every dollar in the current macro-environment. Exiting FY23, we saw select growth in verticals like financial services, transportation and construction and real-estate. However, we’ve continued to see demand softness across most other verticals, customer types and regions. Underlying demand in PCs and servers remains weak and we are seeing signs of changing customer behavior in storage.

Though Q4 was a very good storage demand quarter, we saw lengthening sales cycles and more cautious storage spending with strength in very large customers, offset by declines in medium and small-business. Given that backdrop, we expect at least the early part of FY24 to remain challenging. That said, our fundamental belief in both the long-term health of our markets and the advantage of our business model hasn’t changed. Data continues to increase exponentially in both quantity and value and customers continue to see us as trusted partners, helping them navigate the complexities of hybrid work, multi-cloud and the edge. Unlike in prior cycles, customers are not outright stopping digital investments. They continue to plan projects even as they scrutinize spend. This gives us confidence that we will see a rebound in spending and a return to sequential growth later this year.

We’re industry leaders in our categories, we’re central to the technology agenda of our customers, and we have a track-record of meeting our commitments and improving our strategic position, no matter the environment. We plan to stick to the playbook that served us well in FY23 and prior cycles. Control what we can control, stay disciplined and agile, invest for the long-term and meet our commitments to customers, team members and other stakeholders. We’ve positioned the business to navigate the current uncertainty and for the inevitable rebound.

Now over to Tom for the detailed financials and guidance.

Tom Sweet — Executive Vice President and Chief Financial Officer

Thanks, Chuck. We’re pleased with the full-year and Q4 P&L performances given the macro-environment. As Chuck highlighted, we set new records this year and have continued to build-on our industry-leading positions.

Turning to our Q4 results, which, as a reminder, included a 14th week. We delivered revenue of $25 billion, down 11%, with strong ISG performance particularly in storage. Currency remained a headwind and impacted revenue by approximately 410 basis-points. Gross margin was $6 billion, up 3% in 23.8% of revenue. Gross margin rate was up three points due to a mix-shift to ISG, component and logistics cost deflation and pricing discipline.

The pricing environment in ISG was generally consistent with what we have seen in recent quarters, while in CSG, we saw areas of pressure, particularly in consumer, and in some commercial markets where in some cases our competitors were working to reduce their channel inventory. We continue to be disciplined in our pricing execution, and within CSG, driving our direct model with a focus on attaching services, software, peripherals and financing. Operating expense was $3.8 billion, up 5%, driven by an extra week in our quarter and 15.1% of revenue.

In Q4, we recorded a $281 million charge to our GAAP operating expense for our previously announced workforce reduction. Operating income was $2.2 billion, down 1% and 8.7% of revenue with the extra week of operating expenses roughly offsetting an extra week of gross margin. Our quarterly tax-rate was 26% and 20% for the full-year. Q4 net income was $1.3 billion, down 5%, primarily driven by a slightly higher interest expense, including a 14th week in the quarter and a slight decrease in operating income. Fully-diluted earnings per share was $1.80, up 5% due to a lower share count. Our recurring revenue was approximately $5.6 billion a quarter, up 12%. And our remaining performance obligations or RPO is approximately $40 billion, down due to a reduction in backlog, partially offset by an increase in deferred revenue. Deferred revenue was up primarily due to an increase in service and software maintenance agreements.

Now, turning to our business units. In ISG, we delivered our eighth consecutive quarter of growth. Revenue was $9.9 billion, up 7%, driven by a strong storage and server and networking performance. Storage revenue was a record $5 billion, up 10%. And servers and networking revenue was $4.9 billion, up 5%. ISG operating income came in at a record $1.5 billion, or 15.6% of revenue, up 360 basis-points as we benefited from cost favorability, pricing discipline and revenue growth, including a higher mix of storage software. Our Client Solutions Group revenue was down 23% to $13.4 billion, primarily due to continued softness in both the commercial and consumer PC markets. Commercial revenue was $10.7 billion, down 17%. And consumer revenue was $2.7 billion, down 40%, though average selling prices continue to trend higher in both businesses. CSG operating income was $700 million and 5% of revenue.

As we have historically seen when the macro-environment has slowed, customers interest in consumption and financing models, that provide both payment flexibility and predictability, has increased. Our Q4 Dell Financial Services originations were $3 billion, up 12%, with strength across all geographies. DFS ending managed assets reached $14.7 billion, up 9%, while credit losses remained at historically low levels, given the strength of our portfolio, which is over 60% investment-grade. And we more than doubled the number of active Apex customers that have subscribed to our as a service solutions over the course of the year.

Turning to our cash flow and balance sheet. Our cash flow from operations was $2.7 billion in Q4 and $3.6 billion for the full-year. Our strong Q4 cash flow was driven by profitability, partially offset by use in working capital. Within working capital, inventory was down $1.4 billion sequentially due to disciplined management and strong shipments at the end of the quarter. However, the inventory improvement was offset by a temporary increase in receivables, driven by linearity of revenue in the quarter and a decline in payables, given reduced inventory purchases and timing of disbursements. Our commitment to improving working capital efficiency remains a priority as we continue to focus on unlocking capital within the balance sheet. We ended the quarter with $10.2 billion in cash and investments, up $3.7 billion sequentially, driven by free cash flow generation and $2 billion debt issuance, partially offset by a $400 million in capital returns. Our core debt balance ended the year at $18.1 billion, up due to the debt issuance. We intend to use part of their issuance proceeds to pay down the $1 billion maturity coming due in June and we’ll consider using the remaining proceeds to prepay other debt in the capital structure over-time.

Turning to capital allocation. We will continue our balanced approach repurchasing shares programmatically to manage dilution, while maintaining the flexibility to be opportunistic. In Q4, we repurchased 3.7 million shares of stock for $150 million and paid $236 million in dividends. And for the full-year, we repurchased 62.4 million shares for $2.8 billion and paid approximately $1 billion in dividends. As we highlighted in our press release earlier today and as part of our commitment to capital returns, we are raising our annual dividend from $1.32 to $1.48 per share, an increase of 12%. Reflecting our confidence in our long-term business model and our ability to generate and grow cash flow over-time.

Turning to guidance. Given the demand trends we saw last quarter, we expect Q1 revenue to be seasonally lower-than-average, down sequentially between 17% and 21%, 19% at the midpoint. Currency continues to be a headwind and we are expecting a roughly 300 basis-point impact to Q1 revenue. We expect the ISG business to be down sequentially in the mid 20s as we come off a seasonally strong storage quarter to Q1, which is typically a seasonally weaker storage quarter and we expect CSG revenue down sequentially in the mid-teens, while we remain disciplined in our pricing and expect gross margin rates to be relatively flat sequentially. For our tax-rate, you should assume a 24%, plus or minus a 100 basis-points, for Q1 and for fiscal year ’24. We expect our Q1 diluted share count to be between 737 million and 742 million shares, and our diluted EPS to be $0.80, plus or minus $0.15, down sequentially, primarily driven by lower revenue.

For the full-year, we continue to see a wide range of outcomes. We expect revenue to be down between 12% and 18%, and down 15% at the midpoint of the range. Given Q1 guidance, this implies a return to sequential growth as we move through the year. We’ll continue to be mindful of our pricing discipline and our cost structure, making adjustments as appropriate, depending on the environment, while also continuing to invest in innovation. Interest and other will be up approximately $200 million as we fund DFS originations in a higher interest-rate environment. Netting this out, we expect diluted earnings per share of $5.30, plus or minus $0.30.

In closing, we delivered solid fiscal year ’23 financial results. And over the last three years, we have now grown our revenue at a 6% CAGR and our EPS at an 18% CAGR. While there is near-term uncertainty, particularly in the first-half of fiscal year ’24, we have strong conviction in the growth of our TAM over the long-term and we remain committed to delivering our value-creation framework, with a revenue CAGR of 3% to 4%, a diluted earnings per share CAGR of 6% plus, and a net income to adjusted free cash flow conversion of 100% or better over-time. We have returned approximately $3.8 billion of capital to our shareholders in fiscal year ’23 through share repurchase and dividends, and expect to return 40% to 60% of our adjusted free cash flow to our shareholders over-time. Expect us to continue to be disciplined in how we manage the business in the current macro-environment, focusing on what we can control and delivering for our customers.

Now, I will turn it back to Rob to begin Q&A.

Rob Williams — Head of Investor Relationss

Thanks, Tom. Let’s get to Q&A. We ask that each participant ask one question to allow us to get to as many analysts as possible. Let’s go to the first question.

Questions and Answers:

Operator

We’ll take our first question from Aaron Rakers with Wells Fargo.

Aaron Rakers — Wells Fargo — Analyst

Yes, thanks. Thanks for taking the question. Congratulations on the good execution in a tough environment. Thinking about the guidance into the April quarter, I’m curious if you could help me unpack particularly the server business, what you’re seeing as far as the demand environment thus far into the April quarter? And how do we kind of triangulate what you’ve seen from a pricing perspective, sustainability of that as we look at the deflationary elements of component pricing? Thank you.

Chuck Whitten — Co-Chief Operating Officer

Yes, Aaron, let me start. Look, as we highlighted in the prepared remarks, we saw a continuation of the trends that we started calling out in Q2 and accelerated in Q3 in the server business. It was weak underlying demand, and frankly, it deteriorated over the course of the quarter. The texture, we would add would be — the slowdown is probably most pronounced in the largest customers. Ultimately, our transactional business performed a bit better, but was still declining. And the texture was we saw customer still digesting inventory, tightening budgets, stretching decision timelines. Our win-loss ratio didn’t change and was in line with historical performance. And as we said, we expect to gain share in Q4.

So ultimately, this is the market going through a digestion cycle, not our performance. As you said, our performance of 5% was driven by a couple of things. One was optimizing shipments in quarter, but the other was, higher year-over-year revenue per unit performance. That was higher content rate of memory and SSD, higher services, good attach of our enterprise, peripherals, sort of our direct sales motion in action.

Look, ultimately, we are seeing pricing pressure in all our business and server is not immune. I’d just say, we expected that, we’ve factored that into both our operational and financial plans, and we’ve factored it into the guidance going-forward. So we anticipate, in this environment, continuing to see pricing pressure, but obviously we’re pleased with the content rate performance, and ultimately the performance of our attached business.

Aaron Rakers — Wells Fargo — Analyst

Thank you.

Rob Williams — Head of Investor Relationss

Thank you. Next question.

Operator

Our next question will come from David Vogt with UBS.

David Vogt — UBS — Analyst

Great. Thanks, guys. Maybe just a clarification on CSG. I know, obviously it’s a difficult backdrop, and you talked about sort of the pressure that you saw throughout the quarter into the beginning part of this quarter, but I think I also thought you mentioned that — it sounded as if ASP’s were trending higher. Can you kind of discuss kind of what’s driving that and where sort of inventory is for you guys? And how do you think the market inventory looks as we move through the balance of this fiscal year? When do you think we can get to a more normalized inventory position from an industry perspective? Thanks.

Chuck Whitten — Co-Chief Operating Officer

Yes, sure. So, look, the CSG business, as you said, it continued to be challenged in the quarter. We won’t repeat all the market data. But obviously, Q4 was one of the more challenging volume quarters in history. And it’s both across the consumer market, which continues to be under real pressure, where we’re seeing significant amounts of inventory in the channel, a much slower China market, and the commercial business continues to remain challenged as the customers are delaying purchases, buying for immediate needs, and it’s tilting IT spending elsewhere. We are seeing from an inventory standpoint, elevated inventory levels. We obviously benefit in our business from much lower inventory levels, which you have seen consistently in our performance, but there is inventory in both the consumer business and the commercial business now.

Look, ultimately, the guidance that we’ve given in our comments on the year, we expect the business to return to sequential growth over the course of the year. But without calling specifically right now when inventory will get back in profile. It will be later in the year. Certainly as we enter Q1, inventory is elevated.

Tom Sweet — Executive Vice President and Chief Financial Officer

I mean, David, I’ll just make a couple of other points around ASPs. Look, we benefited from a higher commercial mix in Q4. We benefited from more notebooks than desktops, which carry a higher ASP. And we continue to benefit from our unique operating model, the direct model, where we can attach peripherals, software and services, which I think continues to help us, and those businesses are very strong for us. And then if you look inside commercial, our precision workstations business had a very good quarter on a relative basis, which carries substantially higher ASPs.

David Vogt — UBS — Analyst

All right. Can I ask a quick follow up?

Rob Williams — Head of Investor Relationss

Let’s just keep going, David. If we have time, you can come back.

David Vogt — UBS — Analyst

Yes, thanks.

Chuck Whitten — Co-Chief Operating Officer

Thanks. I appreciate it.

Rob Williams — Head of Investor Relationss

Sure, no problem. Hey, next question, operator.

Operator

Yes, that will be from Toni Sacconaghi with Bernstein.

Toni Sacconaghi — Bernstein — Analyst

Yes, thank you. I was wondering if you could just help with the bridge for particularly Q1 guidance, since that sets the foundation for the full-year. Historically, you’re down about 7% sequentially, you’re guiding for down 19, how much was the extra week? How much was backlog draw down in the quarter that you don’t think replicates? And how much is your assumption for kind of incremental macro weakness because there is still a really big gap between being down 7 and being down 19? And then, you’re calling for potentially normal seasonality thereafter. And then, can you also just address free cash flow. I think you’re guiding for net income of $3.7 billion to $3.8 billion. Do you expect free cash flow realization would be better or worse than that number? Thank you.

Tom Sweet — Executive Vice President and Chief Financial Officer

Hey, Tony, let me sort of take the first part of that question on the go walk from Q4 to-Q1 revenue. So, we printed 25 in Q4, and you’re right, typically we do see sequential sort of in that minus seven to minus nine range roughly. So, how we think about it in the guide sort of works like this. So the 14th week provided roughly $700 million to $800 million of incremental revenue. So back that off. If you do the RPO deferred revenue math that we provided for you, you sort of get to a backlog adjustment, roughly about $2 billion to $2.2 billion. And then the incremental seasonality or the incremental weakness that we’re seeing is sort of the remainder of that. Okay. So that walks you down to the 20.2. So, look, I mean, as Chuck mentioned in his opening comments, we are seeing that continued softness. Our expectation and how we have built our plan for the year says we recover throughout the year, but we do expect Q1 to sort of have — to be in that sort of zip code at this point in time. And then on free cash flow, as you know, we don’t guide free cash flow. But I think we would expect cash generation given the plan that we have with sequential improvement as you go through the year to improve cash flow.,Tyler, I don’t know if you’d add anything to that?

Tyler Johnson — Senior Vice President and Treasurer

Yes, no, look, I think that’s right. I mean, I guess the one thing I would add, recognizing we don’t provide guidance. If you think about some of the dynamics that we had in FY23, as we’re thinking about next year, I do think that we should expect that free cash flow conversion to be better than what we saw in FY23.

Toni Sacconaghi — Bernstein — Analyst

All right. Thanks, Tyler. Thanks, Toni. Next question please.

Operator

Yes, that question will be from Jim Suva with Citigroup.

Jim Suva — Citigroup — Analyst

Thank you so much. And great results. And thank you for being clear on the outlook. When we think about a softening demand environment in the year 2023 and your cautionary below normal seasonal for Q1, how should we think about capital deployment? Would you all be doing more stock buyback? You just increased your dividend, which is great, but how should we think about deploying capital in a year that’s starting off more challenged? And of course, you’re go through restructuring. So I’m conscious of that. Thank you.

Tom Sweet — Executive Vice President and Chief Financial Officer

Hey, Jim, look. I think you should think about capital allocation like this for the year. We’re committed to our long-term framework of 40% to 60% shareholder capital return over-time. Obviously, we were — we had an accelerated return in fiscal year ’23, given the amount of share buyback we get. I would think about it like this. We’ve raised the dividend 12% to $1.48 per — on an annual basis for the year. I think that provides a foundation as we think about our confidence in the long-term business model and long-term cash flow generation of the company. From a share buyback, we don’t forecast that, but I’m on the record as saying that we’ll manage dilution, from a share buyback perspective, and obviously, we’ll continue to be opportunistic as we look at the — where the share price is relative to other uses of our capital.

Jim Suva — Citigroup — Analyst

Thank you, Tom. And we’re going to miss you. Thank you.

Tom Sweet — Executive Vice President and Chief Financial Officer

Thank you.

Rob Williams — Head of Investor Relationss

Next question please.

Operator

Our next question will come from Erik Woodring with Morgan Stanley.

Erik Woodring — Morgan Stanley — Analyst

Hey, good afternoon, guys. Thank you for taking my question. I just wanted to touch on operating margins, kind of for each segment. We saw each of them trend kind of in the opposing direction; CSG, lower-than-normal; ISG, higher-than-normal. As we think about looking-forward, is there any structural change that we should be thinking about, particularly on the CSG side? Should we be thinking about operating margin for this business, now closer to 5% to 6%? Or 6% to 8%, what you’ve been doing over the last few years, more likely, again, as we look past this near-term dislocation to more normalized times? Thanks.

Tom Sweet — Executive Vice President and Chief Financial Officer

Yes. Hey, Eric. I would say that I think you’re in the ballpark on op margin over how we’re thinking about it for the year to be blunt, right? I mean, we did enjoy higher op margins over the pandemic period. But I think a more normalized view of in the range that we’ve talked about is how we’re thinking about the business for the year. Obviously, we’re going to do all we can to maximize profitability, while making sure that we drive relative performance and share, it’s appropriate. But I think you’re in the ballpark on how you’re thinking about it.

The ISG margins, look, we had a strong Q4, if you think about the impact of all of the storage strength that we saw, clearly was very beneficial to the margin. I would highlight the fact that within that storage mix, we had a really strong mix-up of our own storage software IP, which is very helpful from a profitability perspective and we expect that mix to continue to be helpful on a go-forward basis. So, look, I tend to think that we’re probably back in sort of more normalized, a little bit — couple of points less than perhaps we finished in Q4, as you think through the year, 200 basis points to 250 basis-points, something like that. But that’s the chemistry of the P&L. We expect storage to be stronger next year, servers to be slightly softer in ISG, and the CSG business to sort of generate the margins we talked about.

Erik Woodring — Morgan Stanley — Analyst

Thanks for the color and congrats on the retirement.

Tom Sweet — Executive Vice President and Chief Financial Officer

Hey, thanks, Eric.

Rob Williams — Head of Investor Relationss

Next question please.

Operator

Yes, that question will come from Samik Chatterjee with JP Morgan.

Samik Chatterjee — JP Morgan — Analyst

Yes, hi, thanks for taking my question. I guess, if I can just ask you for, on the full-year guide, you’re guiding to about 12% to 18% decline in revenues. Can you share your thoughts about how you’re thinking about that split between CSG and ISG for the full-year guide? I know you gave some directional commentary on 1Q itself, but just wondering if you can sort of right-size as how to think about CSG and ISG? And when you talk about that wide range for the full-year guide for the year, where’s the bigger variable? Is it more on the CSG recovery? Or in your mind, is this more sort of contingent on how ISG pans out? Thank you.

Tom Sweet — Executive Vice President and Chief Financial Officer

Yes, hey, Samik, I would say it like this. I would expect that as we look at the performance of the business units next year from a growth perspective, they’re generally sort of both in the mid, sort of negative mid-teens in terms of growth rates for the year. Obviously, we guided to a midpoint of minus 15 or you can do the math, 87 billion. So, they’re generally on top of each other in terms of growth rates. In terms of the variability, look, I mean, we’re cognizant of the state of the macro, the uncertainty in the environment. And as Chuck highlighted in his talking points, there is a level of customer hesitancy out there at this point.

So, yes, I do think that we built a plan that says that, hey, we expect the sequentials to improve as we go through the year. That’s how we’ve thought about the business. One data point to think about, particularly with PCs, is that if you go back and look over-time at other recessionary periods, whether it’s all the way back to the dot com bust of 2000 or the great financial crisis of 2008, 2009. In general, what you see is a period of decline in both the client and servers, I’d say, four to six quarters worth of decline. And if we think about where we are, it’s not a perfect predictor, but if you think about where we are in the context of that sort of metric to where we are today, we’re on the tail-end of that.

And so, we’re optimistic that if we go through the year, we’ll see some lift in that. And so, look, I’m not going to probability weight where my risk is. I do think that — I think we’ve got a solid plan that is focused on executing and you can count on us to navigate the environment and we’ll be disciplined in how we do it.

Samik Chatterjee — JP Morgan — Analyst

Great. Thank you. Thanks for the color.

Operator

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

Wamsi Mohan — Bank of America — Analyst

Yes, thank you. I was wondering if you could clarify a little bit on the linearity of demand. It sounds like it was a pretty back-end loaded quarter, given your comments on the receivables, but you’re also talking about weakness here, more than normal seasonal in 1Q. Can you talk about maybe what you saw happen to orders a little bit more granularly? What did you see in January? What did you see in February? And how are you expecting order patterns to trend here in the near-term?

Chuck Whitten — Co-Chief Operating Officer

Yes, let me start and tell you what we observed in Q4, which was we did see our, as is typical, given our high storage quarter, linearity trend towards the back part of the quarter. That’s not atypical for our business in Q4, particularly given the heavy storage mix and the seasonally strong storage quarter. I would say that maybe versus historical norms, the server business also tended to trend a little bit more back-end loaded. As I mentioned in my earlier response, we did see deterioration over the course of the quarter of server demand. And to the extent that large bids or deals closed, they did tend to close in the back part of this quarter, more than normal. So there was a little bit of uneven seasonality.

I don’t know that we expect any material change sort of coming into our next quarter and we certainly won’t try to forecast the linearity in the next quarter. I would say, storage tends to be booked in the last portions of the quarter. That’s very typical. Server was a little bit of an anomaly and I think reflects the cautious demand environment that we’re navigating our way through.

Tom Sweet — Executive Vice President and Chief Financial Officer

Hey, Chuck, let me add that as we finished January, we obviously came to the end of a sales compensation cycle as well, which always tends to be dry, a bit more activity towards the end of the quarter. That’s not unusual on six-month quota periods. So that also sort of highlights that it was a bit more back-end loaded. And so — but Wamsi, in terms of trying to extrapolate that into, okay, how do you think about that demand trend for our linearity pattern for Q1. It’s a different pattern in Q1. You’re coming off of a year-end budgets for corporates that tend to spend a bit more in the fourth-quarter versus a seasonally softer quarter. And so it tends to be a bit more — a little less back-end loaded, but that’s hard to predict in this environment, to be honest.

Rob Williams — Head of Investor Relationss

All right. Thanks, Tom. Thanks, Wamsi.

Operator

Our next question will come from Amit Daryanani with Evercore.

Amit Daryanani — Evercore — Analyst

Thanks for taking my question. I guess I was hoping to talk a bit more about the ISG segment with the full year guide being down 15%. That seems to be more severe than I think what your storage or server peers are talking about. I think NetApp said flat storage environment, HPE, I think raised the full year guide actually right now. So I’m just trying to understand, what are you seeing that’s driving a much more tempered outlook versus your peers? And if you think about this down 15% expectation in ISG. Can you just slice the servers versus storage? Or are you seeing share gains reverse some there? Just any clarity that would be helpful because it seems a bit more severe than what IDC Gartner or your peers are saying.

Tom Sweet — Executive Vice President and Chief Financial Officer

Yes, Amit, I would say, I can’t speak to what others have said about their businesses. All I would tell you is that as we think about the trends and what we expect is that we would expect servers to be softer than storage as we go through the full year, right? With probably more pressure on the front half on servers than on the back and as we go through the year. We do expect storage to hold up better. Yes, I’m not going to do the split, but that’s our general thinking. That’s what we see. If it’s stronger than that, great, but that’s our expectation right now, about how we plan the business is on that sort of framework.

Amit Daryanani — Evercore — Analyst

[Speech Overlap] Sorry, I was just thinking, you don’t expect share gain to reverse course or any of that is embedded in these expectations, right?

Chuck Whitten — Co-Chief Operating Officer

No, we don’t. We build our plans to gain share. So this is what’s reflected in our core guide is to gain share in all of our core business as we have consistently. Again, I think the customer texture is what we’re reflecting in the guide in Q1, which is that as we enter the year, it’s a challenging demand drop or demand backdrop, excuse me, it weakened as the quarter progressed. As we look forward for the rest of the year, as Tom said, we do expect a return to sequential growth. It’s driven by really a couple of factors. One is, just a belief that when you compare this cycle to prior macro cycles in our industry, that four to six quarters of demand decline that Tom referenced as being the historic level. We’re deep into that now.

And then customers, what I would say is that just the cycle feels different right now. There’s less outright company financial distress. There’s fewer outright cancellations of projects. We’re seeing some evidence of budget stabilizing and even increasing given inflation. So look, in infrastructure, customers are continuing to plan projects, but they’re also behaving cautious right now, and that’s what’s sort of reflected in our commentary.

Amit Daryanani — Evercore — Analyst

Thank you.

Chuck Whitten — Co-Chief Operating Officer

Thanks, Amit. I appreciate the question.

Rob Williams — Head of Investor Relationss

Next question.

Operator

We’ll now move to Simon Leopold with Raymond James.

Simon Leopold — Raymond James — Analyst

Thanks for taking the question. I guess what I want to try to follow up on is, in particular, the relationship between storage and servers. In that last earnings call, you did sound cautious on servers, but were more optimistic on your storage business, and now we’re seeing you more cautious on storage. And I guess I’m a little bit surprised, I would think that the two should be correlated and be driven by many of the same trends. So I’m trying to understand better what changed in the last 90 days or so to change that view on your storage?

Chuck Whitten — Co-Chief Operating Officer

Yes. Thanks for the question. Look, we’re just seeing underlying evidence of moderating growth as we came through the quarter. So look, as we said in the prepared remarks, we had a good quarter. And specifically, we saw strength in our very large customers, but that large strength was offsetting declines that we saw in medium and small business. So our medium and small business performance in storage did moderate quarter-on-quarter. And that’s typically a leading indicator for us, for a slowdown in the business. And texturally, I would tell you the caution that we saw in the server market is starting to appear in the storage market as well, cycle times on deals has stretched, the number of opportunities we see has declined and we see customers resizing budgets, increasing the number of approvals, all of the things that we saw in the server market.

So as you referenced, we’ve long cautioned that the storage market is not immune to the broader trends in IT but it often lags the server business. It also shows less amplitude than servers but it’s ultimately not immune. And so that’s the caution you hear us reflecting and that’s what we saw in Q4. We think we’re seeing the early signs of a little bit of slowing in the storage market.

Simon Leopold — Raymond James — Analyst

Thank you.

Rob Williams — Head of Investor Relationss

Thanks, Simon.

Operator

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

Sidney Ho — Deutsche Bank — Analyst

Thanks for taking the question. I also want to ask about the full year guidance. Obviously, things seems to have deteriorated throughout the quarter and the correction, like you said, could be four to six quarters. But I’m curious, are you seeing any of your businesses reaching a trough sooner than others because of your customers so aggressively cutting back on inventory. I’m thinking about server, storage and PC, maybe within PC, consumer versus commercial, which one will help you come back to resume growth later in the year? Thanks.

Tom Sweet — Executive Vice President and Chief Financial Officer

Yes, Sidney, look, I think if you look at the pattern, we saw the softness, if you go all the way back early last year, we saw the softness first manifest itself in the PC space, right? And then the servers base followed as we got through Q2 to Q3, Q4. So logically, one would think that PCs come back as we think about a pattern that — and how we plan the business, we would expect to see some level of PC recovery as a leading indicator. And then I think servers would follow. I will highlight Chuck’s comment on storage, which is, look, it’s not immune to some of the softness, but the amplitude of the variation there is going to be, we think less, just given the data creation activity that’s out there in the market and the underlying trends. So I think our perspective is how past patterns have been, I would expect PCs first, and servers, and then storage to be sort of relatively stable, but a little bit of pressure on that.

Rob Williams — Head of Investor Relationss

Okay. Great. Hey, thanks for the question, Sidney. Operator, let’s take two more questions, then I wanted to let everyone know that we’re going to turn the call over to Michael for a short close.

Operator

Right. Great. We will take our next question from Krish Sankar with TD Cowen.

Krish Sankar — TD Cowen — Analyst

Yes, hi, thanks for taking my questsion and congrats on the good results. I just wanted to check, Chuck, on pricing and cost, how to think about the commodity and logistical cost environment in both CSG and ISG? Specifically, how to think about it over the next few quarters relative to the past two? Are the biggest rate of cost declines behind us? Thank you.

Jeffrey Clarke — Co-Chief Operating Officer and Vice Chairman

Hey, Chris, this is Jeff. I’ll do commodities, and then I’ll hand it over to Chuck to talk about pricing. But if you think about the environment we’re in today and you look at the landscape of inventory, what’s happening with the falling demand, we were deflationary in Q4, we expect component cost to be deflationary in Q1 and Q2. Most notably, driven by the RAM, NAND and LCDs across our businesses. We also think when you look at freight costs, which we’ve talked a lot over the past, seems forever, but two years plus, about the rise in logistics costs. They have tilted the other way as well. We’re paying fewer dollars in supplier premiums, fewer parts are being expedited, our freight costs are down on those parts. We’re able now to use our ocean network more vastly than our air network. We’ve seen ocean costs come down to near pre-Covid levels, and we’ve seen air costs come down, not quite to pre-COVID levels, but they have tilted going the other way. So our input cost for the first half of the year will be down.

Chuck Whitten — Co-Chief Operating Officer

And on pricing, look, we’ve certainly seen increased pricing pressure. It was most acute in the consumer business where we saw high levels of discounting and front and back-end rebates being used to move channel inventory. We saw pressure in the commercial PC business as well. It was most acute again in large bids and in our channel stock and sell business where there is still elevated levels of industry inventory. And pricing aggression stepped up in servers as well, again, particularly the largest bids and largest customers.

I’d say, given what Jeff just said, ultimately, we recognize that in a weak demand environment and a deflationary commodity environment, there’s going to be downward pricing pressure. We’ve obviously factored that into our financial and operating plans and ultimately the guidance we gave you today. I’d just add that we try to remain very disciplined in our pricing. There’s frankly not a lot of elasticity right now in the market, particularly in the commercial PC and server business. So we’re being very disciplined given that backdrop.

Krish Sankar — TD Cowen — Analyst

Thanks.

Rob Williams — Head of Investor Relationss

Thanks, Chris.

Operator

We will now take our final question from Kyle McNeely with Jefferies.

Kyle McNeely — Jefferies — Analyst

Hi, thanks very much for the question. You mentioned that you’ll see sequential growth through the year, which indicates you may be getting past the peak pressure of slowing demand and elevated channel inventories in PCs or you expect to get past that in Q1 at least. Is there anything you can say about what gives you that confidence that we could get past — getting past peak pressure, whether it’s channel inventories coming down at the margin or year-over-year trends getting less negative in recent weeks?

And following on to that, when do you expect to start seeing some refreshes of early pandemic PC buys coming into the model? Can we see some of that later this year? Or is that or is that a fiscal ’25 and beyond event? Thanks.

Chuck Whitten — Co-Chief Operating Officer

Well, look, again, as we’ve tried to highlight, it’s hard to pin the exact moment of the rebound. We are — again, if you compare it to the historic cycles, four to six quarters of demand decline and we’re deep into that in the PC business. I think what we would say is in commercial PCs, customers continue to reinforce the criticality of that device to us. As you said, there were 62 million core commercial notebooks shipped in the first nine months of 2020. A refresh cycle is coming. When exactly that starts is what we’re trying to think our way through. But the logic of prior cycles and what we’re hearing from customers says that we should expect sort of sequential growth to return later this year.

Jeffrey Clarke — Co-Chief Operating Officer and Vice Chairman

Well, maybe a little bit of texture there, as Chuck talked about the range, consumer PCs in the industry went negative in Q1 of last year, and commercial PCs went negative in Q2 of last year. So we are in quarter four and quarter five, I should say, quarter five and quarter four, respectively, consumer and commercial. And we’ve talked about ranges of four to six.

Rob Williams — Head of Investor Relationss

That’s good perspective. Appreciate it, Jeff. Okay, thanks. Thanks everyone. Let’s turn it over to Michael for close.

Michael Dell — Chairman and Chief Executive Officer

Thanks, Rob. As you are all aware now, Tom has decided that it’s time for him to retire from Dell. He will be leaving us at the end of Q2 after an incredible 26 years with the company and as our longest-serving CFO in company history. Since joining Dell in 1997, Tom has overseen every aspect of finance, guiding us through tremendous growth and through some extraordinary milestones. From the merger with EMC to returning to the public markets, the spinning off Dell stake in VMware. Tom, thank you for everything. And most of all, thank you for your friendship.

With Tom’s retirement, I’d like to welcome Yvonne McGill, currently our Corporate Controller, as our new CFO, effective day one of Q3 FY ’24. Many of you already know Yvonne. She also joined Dell in 1997. Among other roles, Yvonne has been ISG CFO, Chief Accounting Officer and led our finance functions for our APJ and China business, and as our Corporate Controller, she has been responsible for a number of functions, including ISG, tax, treasury, accounting and Investor Relations since 2020. She is a proven finance leader and we are all thrilled to have her as our next CFO. Tom, Yvonne and the team will work closely to ensure a smooth transition. And I know you will all join me in congratulating them both.

To close the call, let me reiterate what you’ve heard from Tom, Jeff and Chuck. We have delivered strong performance over the last few years, and we did so again in FY ’23. We delivered for our customers, drove share gains, generated strong profitability, accelerated our innovation agenda and executed against our capital return commitments. While the near-term demand environment is challenging, we expect it to improve as we move through the fiscal year. The quantity and value of data continues to explode, and the long-term trends are in our favor. Thank you for letting me join you today, and we look forward to seeing you all soon.

Rob Williams — Head of Investor Relationss

All right. Thanks. I’m just going to close it off. So thanks, everyone, for joining us today. We’ve got a pretty active schedule over the course of the next six weeks with management and the investment community. And that begins with Morgan Stanley next week in San Francisco with both Chuck Whitten and Sam Burg. So we look forward to seeing everyone out there. Thanks a lot.

Operator

[Operator Closing Remarks]

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