| FINANCIAL SERVICES | FINANCIAL SERVICES The Company offers or arranges various financing options and alternative payment structures for its customers globally. Alternative payment structures consist of various flexible consumption models, including utility, subscription, and as-a-Service models. Financing options are offered to our customers primarily through Dell Financial Services and its affiliates (“DFS”). The Company also arranges financing for some of its customers in various countries where DFS does not currently operate as a captive enterprise. The key activities of DFS include originating, collecting, and servicing customer financing arrangements primarily related to the purchase or use of Dell Technologies products and services. In some cases, DFS also offers financing for the purchase of third-party technology products that complement the Dell Technologies portfolio of products and services. New financing originations were $1.8 billion and $2.3 billion for the three months ended November 3, 2023 and October 28, 2022, respectively, and $6.0 billion and $6.7 billion for the nine months ended November 3, 2023 and October 28, 2022, respectively. The Company’s lease and loan arrangements with customers are aggregated primarily into the following categories: Fixed-term leases and loans — The Company enters into financing arrangements with customers who seek lease financing for equipment. DFS leases are generally classified as sales-type leases or operating leases. Leases with business customers have fixed terms of generally two The Company also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three Revolving loans — Revolving loans offered under a private label credit financing program, referred to as Dell Business Credit (“DBC”), provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell Technologies. The DBC product is primarily offered to small and medium-sized commercial customers. Revolving loans in the United States bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within twelve months on average. Due to the short-term nature of the revolving loan portfolio, the carrying value of the portfolio approximates fair value. Prior to the sale of the U.S. consumer revolving customer receivables portfolio described in Note 1 of the Notes to the Condensed Consolidated Financial Statements, the Company also offered private label credit financing under the Dell Preferred Account (“DPA”) program. The DPA product was primarily offered to individual consumer customers. Flexible consumption models, as defined above, further enable the Company to offer its customers the option to pay over time to provide them with financial flexibility to meet their changing technological requirements. Such models may result in identification of embedded lease arrangements that lead to the recognition of operating or sales-type leases. Financing Receivables The following table presents the components of the Company’s financing receivables segregated by portfolio segment as of the dates indicated: November 3, 2023 February 3, 2023 Revolving Fixed-term Total Revolving Fixed-term Total (in millions) Financing receivables, net: Customer receivables, gross (a) (b) $ 172 $ 10,144 $ 10,316 $ 685 $ 10,293 $ 10,978 Allowances for losses (9) (144) (153) (88) (113) (201) Customer receivables, net 163 10,000 10,163 597 10,180 10,777 Residual interest — 150 150 — 142 142 Financing receivables, net $ 163 $ 10,150 $ 10,313 $ 597 $ 10,322 $ 10,919 Short-term $ 163 $ 4,377 $ 4,540 $ 597 $ 4,684 $ 5,281 Long-term $ — $ 5,773 $ 5,773 $ — $ 5,638 $ 5,638 ____________________ (a) Customer receivables, gross include amounts due from customers under revolving loans, fixed-term loans, fixed-term leases, and accrued interest. (b) The decrease in revolving customer financing receivables is primarily attributable to the sale of the U.S. consumer revolving customer receivables portfolio described in Note 1 of the Notes to the Condensed Consolidated Financial Statements. The following table presents the changes in allowance for financing receivable losses for the periods indicated: Three Months Ended November 3, 2023 October 28, 2022 Revolving Fixed-term Total Revolving Fixed-term Total (in millions) Allowance for financing receivable losses: Balances at beginning of period $ 9 $ 140 $ 149 $ 91 $ 92 $ 183 Charge-offs, net of recoveries (4) (3) (7) (12) (1) (13) Provision charged to income statement 4 7 11 8 8 16 Balances at end of period $ 9 $ 144 $ 153 $ 87 $ 99 $ 186 Nine Months Ended November 3, 2023 October 28, 2022 Revolving Fixed-term Total Revolving Fixed-term Total (in millions) Allowance for financing receivable losses: Balances at beginning of period $ 88 $ 113 $ 201 $ 102 $ 87 $ 189 Charge-offs, net of recoveries (37) (5) (42) (37) (5) (42) Provision charged to income statement 32 36 68 22 17 39 Other (a) (74) — (74) — — — Balances at end of period $ 9 $ 144 $ 153 $ 87 $ 99 $ 186 ____________________ (a) Other represents the derecognition of the allowance for financing receivable losses related to the sale of the U.S. consumer revolving customer receivables portfolio described in Note 1 of the Notes to the Condensed Consolidated Financial Statements. The Company recognizes an allowance for financing receivable losses, including both the lease receivable and unguaranteed residual, in an amount equal to the expected losses net of recoveries. The allowance for financing receivable losses on the lease receivable is determined based on various factors, including lifetime expected losses determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the portfolios as well as past due receivables, receivable type, and customer risk profile. The Company continues to monitor broader economic indicators and their potential impact on future credit loss performance. Aging The following table presents the aging of the Company’s customer financing receivables, gross, including accrued interest, segregated by class, as of the dates indicated: November 3, 2023 February 3, 2023 Current Past Due Past Due Total Current Past Due Past Due Total (in millions) Revolving — DPA $ 5 $ — $ — $ 5 $ 457 $ 34 $ 17 $ 508 Revolving — DBC 146 17 4 167 154 19 4 177 Fixed-term — Consumer and Commercial 9,140 868 136 10,144 9,309 927 57 10,293 Total customer receivables, gross $ 9,291 $ 885 $ 140 $ 10,316 $ 9,920 $ 980 $ 78 $ 10,978 Aging is likely to fluctuate as a result of the variability in volume of large transactions entered into over the period, and the administrative processes that accompany those transactions. Aging is also impacted by the timing of the Company’s fiscal period end date relative to calendar month-end customer payment due dates. As a result of these factors, fluctuations in aging from period to period do not necessarily indicate a material change in the collectibility of the portfolio. Fixed-term consumer and commercial customer receivables are placed on non-accrual status if principal or interest is past due and considered delinquent, or if there is concern about the collectibility of a specific customer receivable. The receivables identified as doubtful for collectibility may be classified as current for aging purposes. Aged revolving portfolio customer receivables identified as delinquent are charged off. Credit Quality The following tables present customer receivables, gross, including accrued interest, by credit quality indicator, segregated by class, as of the dates indicated: November 3, 2023 Fixed-term — Consumer and Commercial Fiscal Year of Origination 2024 2023 2022 2021 2020 Years Prior Revolving — DPA Revolving — DBC Total (in millions) Higher $ 2,494 $ 2,195 $ 1,076 $ 499 $ 127 $ 3 $ 1 $ 42 $ 6,437 Mid 849 1,047 378 159 40 2 2 49 2,526 Lower 454 516 210 69 25 1 2 76 1,353 Total $ 3,797 $ 3,758 $ 1,664 $ 727 $ 192 $ 6 $ 5 $ 167 $ 10,316 February 3, 2023 Fixed-term — Consumer and Commercial Fiscal Year of Origination 2023 2022 2021 2020 2019 Years Prior Revolving — DPA Revolving — DBC Total (in millions) Higher $ 3,210 $ 1,805 $ 914 $ 343 $ 37 $ 1 $ 123 $ 44 $ 6,477 Mid 1,242 631 362 119 17 1 136 54 2,562 Lower 1,017 364 157 65 7 1 249 79 1,939 Total $ 5,469 $ 2,800 $ 1,433 $ 527 $ 61 $ 3 $ 508 $ 177 $ 10,978 The categories shown in the tables above segregate customer receivables based on the relative degrees of credit risk. Credit quality indicators for DBC revolving and fixed-term accounts are generally updated on a periodic basis. For the DBC revolving receivables and fixed-term commercial receivables shown in the table above, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The grading criteria and classifications for the fixed-term products differ from those for the revolving products as loss experience varies between these product and customer groups. The credit quality categories cannot be compared between the different classes as loss experience varies substantially between the classes. Prior to the sale of the U.S. consumer revolving customer receivables revolving portfolio described in Note 1 of the Notes to the Condensed Consolidated Financial Statements, the Company made credit decisions based on proprietary scorecards, which included the customer’s credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category included prime accounts generally comparable to U.S. customer FICO scores of 720 or above. The mid category represented mid-tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category represented accounts that are comparable to U.S. customer FICO scores below 660. Leases The following table presents net revenue, cost of net revenue, and gross margin recognized at the commencement date of sales-type leases for the periods indicated: Three Months Ended Nine Months Ended November 3, 2023 October 28, 2022 November 3, 2023 October 28, 2022 (in millions) Net revenue — products $ 227 $ 207 $ 766 $ 646 Cost of net revenue — products 176 164 564 532 Gross margin — products $ 51 $ 43 $ 202 $ 114 The following table presents the future maturity of the Company’s fixed-term customer leases and associated financing payments, and reconciles the undiscounted cash flows to the customer receivables, gross recognized on the Condensed Consolidated Statement of Financial Position as of the date indicated: November 3, 2023 (in millions) Fiscal 2024 (remaining three months) $ 809 Fiscal 2025 2,221 Fiscal 2026 1,712 Fiscal 2027 971 Fiscal 2028 and beyond 388 Total undiscounted cash flows 6,101 Fixed-term loans 4,954 Revolving loans 172 Less: Unearned income (911) Total customer receivables, gross $ 10,316 Operating Leases The Company’s operating leases primarily consist of DFS captive fixed-term leases and contractually committed embedded leases identified within flexible consumption arrangements. The following table presents the components of the Company’s operating lease portfolio included in property, plant, and equipment, net as of the dates indicated: November 3, 2023 February 3, 2023 (in millions) Equipment under operating lease, gross $ 3,855 $ 3,725 Less: Accumulated depreciation (1,721) (1,517) Equipment under operating lease, net $ 2,134 $ 2,208 The following table presents operating lease income related to lease payments and depreciation expense for the Company’s operating lease portfolio for the periods indicated: Three Months Ended Nine Months Ended November 3, 2023 October 28, 2022 November 3, 2023 October 28, 2022 (in millions) Income related to lease payments $ 341 $ 297 $ 992 $ 782 Depreciation expense $ 234 $ 212 $ 703 $ 571 The following table presents the future payments to be received by the Company in operating lease contracts as of the date indicated: November 3, 2023 (in millions) Fiscal 2024 (remaining three months) $ 330 Fiscal 2025 974 Fiscal 2026 628 Fiscal 2027 272 Fiscal 2028 and beyond 113 Total $ 2,317 DFS Debt The Company maintains programs that facilitate the funding of leases, loans, and other alternative payment structures in the capital markets. The majority of DFS debt is non-recourse to Dell Technologies and represents borrowings under securitization programs and structured financing programs, for which the Company’s risk of loss is limited to transferred loan and lease payments and associated equipment. The following table presents DFS debt as of the dates indicated and excludes the allocated portion of the Company’s other borrowings, which represents the additional amount considered to fund the DFS business: November 3, 2023 February 3, 2023 DFS debt (in millions) DFS U.S. debt: Asset-based financing and securitization facilities $ 2,443 $ 3,987 Fixed-term securitization offerings 3,715 2,679 Other 31 76 Total DFS U.S. debt 6,189 6,742 DFS international debt: Securitization facility 749 790 Other borrowings 839 871 Note payable 250 250 Dell Bank senior unsecured eurobonds 1,593 1,637 Total DFS international debt 3,431 3,548 Total DFS debt $ 9,620 $ 10,290 Total short-term DFS debt $ 5,374 $ 5,400 Total long-term DFS debt $ 4,246 $ 4,890 DFS U.S. Debt Asset-Based Financing and Securitization Facilities — The Company maintains separate asset-based financing facilities in the United States, which are revolving facilities for fixed-term leases and loans. This debt is collateralized solely by the U.S. loan and lease payments and associated equipment in the facilities. The debt has a variable interest rate, and the duration of the debt is based on the terms of the underlying loan and lease payment streams. As of November 3, 2023, the total debt capacity related to the U.S. asset-based financing facilities was $5.1 billion. The Company enters into interest swap agreements to effectively convert a portion of this debt from a floating rate to a fixed rate. See Note 7 of the Notes to the Condensed Consolidated Financial Statements for additional information about the Company’s interest rate swaps. The Company’s two U.S. asset-based financing facilities for fixed-term leases and loans are effective through July 7, 2025 and June 21, 2024, respectively. The asset-based financing facilities contain standard structural features related to the performance of the funded receivables, which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the facility, no further funding of receivables will be permitted and the timing of the Company’s expected cash flows from over-collateralization will be delayed. As of November 3, 2023, these criteria were met. The Company previously maintained a U.S. securitization facility for revolving loans effective through June 25, 2025. In connection with the sale of the U.S. consumer revolving customer receivables portfolio described in Note 1 of the Notes to the Condensed Consolidated Financial Statements, the Company’s U.S. securitization facility for revolving loans was paid down and terminated during the three months ended November 3, 2023. Fixed-Term Securitization Offerings — The Company periodically issues asset-backed debt securities under fixed-term securitization programs to private investors. The asset-backed debt securities are collateralized solely by the U.S. fixed-term lease and loan payments and associated equipment, which are held by Special Purpose Entities (“SPEs”), as discussed below. The interest rate on these securities is fixed and ranges from 0.53% to 6.80% per annum as of November 3, 2023, and the duration of these securities is based on the terms of the underlying lease and loan payment streams. DFS International Debt Securitization Facility — The Company maintains a securitization facility in Europe for fixed-term leases and loans. The debt under this facility has a variable interest rate, and the duration of the debt is based on the terms of the underlying loan and lease payment streams. This facility is effective through December 23, 2024 and had a total debt capacity of $850 million as of November 3, 2023. The securitization facility contains standard structural features related to the performance of the securitized receivables, which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the program, no further funding of receivables will be permitted and the timing of the Company’s expected cash flows from over-collateralization will be delayed. As of November 3, 2023, these criteria were met. Other Borrowings — In connection with the Company’s international financing operations, the Company has entered into revolving structured financing debt programs related to its fixed-term lease and loan products sold in Canada, Europe, Australia, New Zealand, and the Middle East. The debt under these programs has a variable interest rate, and the duration of the debt is based on the terms of the underlying loan and lease payment streams. The Canadian facility, which is collateralized solely by Canadian loan and lease payments and associated equipment, had a total debt capacity of $328 million as of November 3, 2023 and is effective through January 16, 2025. The European facility, which is collateralized solely by European loan and lease payments and associated equipment, had a total debt capacity of $531 million as of November 3, 2023 and is effective through June 14, 2025. The Australia and New Zealand facility, which is collateralized solely by Australia and New Zealand loan and lease payments and associated equipment, had a total debt capacity of $290 million as of November 3, 2023 and is effective through April 20, 2025. The Middle East facility, which is collateralized solely by Middle East loan and lease payments and associated equipment, had a total debt capacity of $150 million as of November 3, 2023 and is effective through March 24, 2025. Note Payable — On May 25, 2022, the Company entered into an unsecured credit agreement to fund receivables in Mexico. As of November 3, 2023, the aggregate principal amount of the note payable was $250 million. The note bears interest at an annual rate of 4.24% and will mature on May 31, 2024. Dell Bank Senior Unsecured Eurobonds — On June 24, 2020, Dell Bank issued 500 million Euro of 1.625% senior unsecured four year eurobonds due June 2024. On October 27, 2021, Dell Bank issued 500 million Euro of 0.5% senior unsecured five year eurobonds due October 2026. On October 18, 2022, Dell Bank issued 500 million Euro of 4.5% senior unsecured five year eurobonds due October 2027. The issuances of the senior unsecured eurobonds support the expansion of the financing operations in Europe. Variable Interest Entities In connection with the asset-based financing facilities, securitization facilities, and fixed-term securitization offerings discussed above, the Company transfers certain U.S. and European lease and loan payments and associated equipment to SPEs that meet the definition of a VIE and are consolidated, along with the associated debt described above, into the Condensed Consolidated Financial Statements as the Company is the primary beneficiary of the VIEs. The SPEs are bankruptcy-remote legal entities with separate assets and liabilities. The purpose of the SPEs is to facilitate the funding of customer loan and lease payments and associated equipment in the capital markets. Some of the SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. DFS debt outstanding held by the consolidated VIEs is collateralized by the lease and loan payments and associated equipment. The Company’s risk of loss related to securitized receivables is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities. The Company provides credit enhancement to the securitization in the form of over-collateralization. The following table presents the assets and liabilities held by the consolidated VIEs as of the dates indicated, which are included in the Condensed Consolidated Statements of Financial Position: November 3, 2023 February 3, 2023 (in millions) Assets held by consolidated VIEs Other current assets $ 146 $ 274 Financing receivables, net of allowance Short-term $ 3,059 $ 3,702 Long-term $ 3,261 $ 3,295 Property, plant, and equipment, net $ 1,097 $ 1,164 Liabilities held by consolidated VIEs Debt, net of unamortized debt issuance costs Short-term $ 4,138 $ 4,761 Long-term $ 2,753 $ 2,685 Lease and loan payments and associated equipment transferred via securitization through SPEs were $1.1 billion and $1.6 billion for the three months ended November 3, 2023 and October 28, 2022, respectively, and $3.7 billion and $4.5 billion for the nine months ended November 3, 2023 and October 28, 2022, respectively. Customer Receivable Sales To manage certain concentrations of customer credit exposure, the Company may sell selected fixed-term customer receivables to unrelated third parties on a periodic basis, without recourse. The amount of customer receivables sold for this purpose was $205 million and $431 million for the nine months ended November 3, 2023 and October 28, 2022, respectively. The Company’s continuing involvement in these customer receivables is primarily limited to servicing arrangements. |
