Dell Technologies Inc

Previous wording

During the first quarter of Fiscal 2025, certain trends and conditions, including the following, continued to affect the environment in which we operate:

Current wording

During the second quarter and first six months of Fiscal 2025, the following trends and conditions continued to affect the environment in which we operate:

Previous wording

•Macroeconomic environment: During the first quarter of Fiscal 2025, the macroeconomic environment showed signs of stabilizing as the demand environment improved across a number of our offerings, resulting in overall net revenue growth. While the demand environment improved, the pricing environment became increasingly competitive, which affected our ISG and CSG gross margin performance.

Current wording

•Macroeconomic environment: The macroeconomic environment continued to show signs of stabilizing as the demand environment improved primarily in our servers and networking offerings, which resulted in overall net revenue growth. While overall net revenue grew, the pricing environment became increasingly competitive, which primarily affected our CSG gross margin performance.

Previous wording

•Advancements in artificial intelligence: Our ISG business continued to benefit from increased demand for AI-optimized solutions due to the impact of AI advancements on customer spending behavior, as organizations look to integrate AI into their operations. Demand for AI-optimized servers outpaced the supply of graphics processing units (“GPUs”) for these products, resulting in elevated backlog levels for such offerings as we exited the quarter.

Current wording

•Advancements in artificial intelligence: Our ISG business continued to benefit from increased demand for AI-optimized solutions due to the impact of AI advancements on customer spending behavior, as organizations look to integrate AI into their operations. As a result of continued strong demand for our AI-optimized servers, we maintained elevated backlog levels for such offerings as we exited the quarter.

Previous wording

•Supply Chain: Notwithstanding the elevated demand for AI-optimized solutions, our supply chain operated efficiently during the quarter. We experienced a decline in input costs, which consist of both component and logistics costs.

Current wording

•Supply chain: Notwithstanding the elevated demand for AI-optimized solutions, our supply chain operated efficiently during the quarter. We experienced a decline in input costs driven by favorability in component costs. Input costs consist of both component and logistics costs.

Previous wording

•Broadcom’s acquisition of VMware: On November 22, 2023, Broadcom Inc. (“Broadcom”) completed its acquisition of VMware, leading to changes to our relationship with VMware as described below. The changes continued to affect our other businesses net revenue for the first quarter of Fiscal 2025.

Current wording

•Broadcom’s acquisition of VMware: On November 22, 2023, Broadcom Inc. (“Broadcom”) completed its acquisition of VMware, leading to changes to our relationship with VMware as described below. The changes continued to affect our other businesses net revenue.

Previous wording

We expect the demand environment will continue to improve throughout the remainder of Fiscal 2025 as the macroeconomic environment continues to stabilize. While we anticipate the pricing environment will remain competitive throughout Fiscal 2025, we expect net revenue growth for the full fiscal year, driven primarily by net revenue attributable to ISG and, to a lesser extent, net revenue attributable to CSG. We expect ISG net revenue to grow, driven by our AI-optimized servers and continued demand improvement for our traditional servers and storage offerings. We expect CSG net revenue to grow, driven in part by the anticipated PC refresh cycle in the latter part of Fiscal 2025. We expect a continued reduction of our other businesses’ net revenue as we will no longer act as a distributor of VMware’s standalone products and services.

Current wording

We expect the demand environment will continue to improve throughout the remainder of Fiscal 2025 as the macroeconomic environment continues to stabilize. While we anticipate the pricing environment will remain competitive throughout Fiscal 2025, we expect net revenue growth for the full fiscal year primarily driven by ISG net revenue attributable to our AI-optimized servers and continued demand improvement for our traditional servers. We expect modest CSG net revenue growth for the full fiscal year driven by the timing of the anticipated PC refresh cycle. Additionally, we expect a continued reduction of our other businesses’ net revenue as we no longer act as a distributor of VMware’s standalone products and services.

Previous wording

We expect input costs to increase during Fiscal 2025, notably in the second half of the year, principally driven by anticipated inflation for component costs. Input cost trends are dependent on the strength or weakness of actual end-user demand and supply dynamics, which will continue to fluctuate and ultimately impact our costs, pricing, and operating results.

Current wording

We expect input costs to increase during the second half of Fiscal 2025, principally driven by anticipated inflation for component costs. Input cost trends are dependent on the strength or weakness of actual end-user demand and supply dynamics, which will continue to fluctuate and ultimately impact our costs, pricing, and operating results.

Previous wording

We remain focused on executing our key strategic priorities, building long-term value creation for our stakeholders, and addressing our customers’ needs while continuing to make prudent decisions in response to the environment. We look to balance profitability and growth while maintaining disciplined pricing as we navigate through competitive pricing pressures. We continue to remain committed to disciplined cost management, including limitation of external hiring, employee reorganizations, and other actions to align our investments with our strategic priorities and customer needs.

Current wording

We remain focused on executing our key strategic priorities, building long-term value creation for our stakeholders, and addressing our customers’ needs while continuing to make prudent decisions in response to the environment. We look to balance profitability and growth while maintaining disciplined pricing as we navigate through competitive pricing pressures.

Previous wording

Throughout the year, we will continue to advance our own capabilities to change the way we work and make decisions, improve business outcomes and the customer experience, and reduce costs by leveraging new technology to streamline our own systems and optimize business processes. We believe our unique operating advantages provide a foundation to foster growth, drive efficiencies, and continue to position us for long-term success.

Current wording

We continue to advance our own capabilities to change the way we work and make decisions, improve business outcomes and the customer experience, and reduce costs by leveraging new technology and optimizing business processes. Throughout Fiscal 2025, we remain committed to disciplined cost management in coordination with our ongoing business transformation initiatives and will continue to take certain measures to reduce costs, including limitation of external hiring, employee reorganizations, and other actions to align our investments with our strategic priorities and customer needs. We anticipate these actions will result in a continued reduction in our overall headcount. We believe our unique operating advantages provide a foundation to foster growth, drive efficiencies, and continue to position us for long-term success.

Previous wording

Relationship with VMware — On November 22, 2023, VMware was acquired by Broadcom, and subsequently announced changes to its go-to-market approach for VMware offerings that impacted our commercial relationship with VMware. On March 25, 2024, the Company terminated the Commercial Framework Agreement (“CFA”) with VMware, which provided the framework under which we and VMware continued our commercial relationship following our spin-off of VMware by means of a special stock dividend. We no longer act as a distributor of VMware’s standalone products and services, though we will continue to support customers that have purchased resale offerings sold in prior periods. The Company continues to integrate certain VMware products and services with select Dell Technologies’ offerings to end-users. The results of such offerings are reflected within CSG or ISG, depending upon the nature of the underlying offering sold.

Current wording

Relationship with VMware — On November 22, 2023, VMware was acquired by Broadcom, and subsequently announced changes to its go-to-market approach for VMware offerings that impacted our commercial relationship with VMware. On March 25, 2024, we terminated our Commercial Framework Agreement with VMware, which provided the framework under which we and VMware continued our commercial relationship following our spin-off of VMware on November 1, 2021. We no longer act as a distributor of VMware’s standalone products and services, though we will continue to support customers that have purchased resale offerings sold in prior periods. We continue to integrate certain VMware products and services with select Dell Technologies’ offerings to end-users. The results of such offerings are reflected within CSG or ISG, depending upon the nature of the underlying offering sold.

Previous wording

VMware was a related party until the date of its acquisition by Broadcom. The acquisition terminated the preexisting related party relationship with VMware such that no related party relationship exists with either Broadcom or VMware effective as of November 22, 2023. For more information regarding the impact of the Broadcom acquisition of VMware and our related party transactions with VMware, see Note 15 of the Notes to the Condensed Consolidated Financial Statements included in this report.

Current wording

VMware was a related party until the date of its acquisition by Broadcom. The acquisition terminated the preexisting related party relationship with VMware such that no related party relationship exists with either Broadcom or VMware effective as of November 22, 2023. For more information regarding the impact of the Broadcom acquisition of VMware and our prior related party transactions with VMware, see Note 15 of the Notes to the Condensed Consolidated Financial Statements included in this report.

Previous wording

ISG — We expect that ISG will continue to be impacted by the evolving nature of the IT infrastructure market and competitive environment. With our scale and strong solutions portfolio, we believe we are well-positioned to address the ongoing competitive dynamics and trends in technology and customer needs. Through our collaborative, customer-focused approach to innovation, we strive to deliver new and relevant solutions and software to our customers quickly and efficiently. We continue to focus on customer base expansion and the lifetime value of customer relationships.

Current wording

ISG — We expect that ISG will continue to be impacted by the evolving nature of the IT infrastructure market and competitive environment. With our scale and strong solutions portfolio, we believe we are well-positioned to address the ongoing competitive dynamics and trends in technology and customer needs. Through our collaborative, customer-focused approach to innovation, we strive to deliver new and relevant solutions and software to our customers quickly and efficiently. We continue to focus on customer base expansion and the lifetime value of customer relationships. We anticipate that ISG will continue to benefit from technology advances and customer interest in AI and we are well-positioned to capture growth and support our customers’ needs.

Previous wording

Competitive dynamics continue to be an important factor in our CSG business and continue to impact pricing and operating results. We remain committed to our long-term CSG strategy and will continue to make investments to innovate across the portfolio. We expect that the CSG demand environment will continue to be subject to seasonal trends.

Current wording

Competitive dynamics remain an important factor in our CSG business and continue to impact pricing and operating results. We are committed to our long-term CSG strategy and will continue to make investments to innovate across the portfolio. We expect that the CSG demand environment will be subject to seasonal trends.

Previous wording

Strategic Investments and Acquisitions — As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm, Dell Technologies Capital, with a focus on emerging technology areas that are relevant to our business. 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.

Current wording

Strategic Investments and Acquisitions — As part of our strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm, Dell Technologies Capital, with a focus on emerging technology areas that are relevant to our business and that will complement our existing portfolio of solutions. 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. In addition to these investments, we may also make disciplined acquisitions of businesses that advance our strategic objectives and accelerate our innovation agenda.

Previous wording

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 2025 and Fiscal 2024. As a result, our operating results can be, and particularly in recent periods have been, impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts.

Current wording

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 second quarter and first six months of Fiscal 2025 and Fiscal 2024. As a result, our operating results can be, and particularly in recent periods have been, impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts.

Previous wording

•Other Corporate Expenses — Other corporate expenses consist primarily of severance expenses, payroll taxes associated with stock-based compensation, facility action costs, transaction-related expenses, impairment charges, and incentive charges related to equity investments. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost management initiatives. Transaction-related expenses typically consist of acquisition, integration, and divestitures related costs, primarily representing costs for legal, banking, consulting, and advisory services, and are expensed as incurred. Although we may incur these types of expenses in the future, we exclude other corporate expenses as they can vary from period to period, are significantly impacted by the timing and nature of these events, and are not used by management in assessing operating performance of the business.

Current wording

•Other Corporate Expenses — Other corporate expenses consist primarily of severance expenses, payroll taxes associated with stock-based compensation, facility action costs, transaction-related expenses, impairment charges, and incentive charges related to equity investments. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost management initiatives. During both the first six months of Fiscal 2025 and Fiscal 2024, we recognized $0.4 billion of severance expense related to workforce reduction activities. Transaction-related expenses typically consist of acquisition, integration, and divestitures related costs, primarily representing costs for legal, banking, consulting, and advisory services, and are expensed as incurred. Although we may incur these types of expenses in the future, we exclude other corporate expenses as they can vary from period to period, are significantly impacted by the timing and nature of these events, and are not used by management in assessing operating performance of the business.

Previous wording

•Aggregate Adjustment for Income Taxes — The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments described above and determined based on the tax jurisdictions where those adjustments were incurred, as well as an adjustment for discrete tax items. During the first quarter of Fiscal 2025, the aggregate adjustment for income taxes included discrete tax benefits of $0.4 billion related to changes in uncertain tax benefits resulting from the expiration of certain statutes of limitations and $0.2 billion related to stock-based compensation. We exclude these benefits or charges for purposes of calculating non-GAAP net income due to the variability in recognition of discrete tax items from period to period. The tax effects are determined based on the tax jurisdictions where the above items were incurred. See Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our income taxes. Beginning in Fiscal 2025, our non-GAAP income tax is calculated using a fixed estimated annual tax rate which is determined based on historical trends and projections for the current fiscal year. We may adjust our estimated annual tax rate during the fiscal year to take into account events that would significantly impact our income tax expense, including significant changes resulting from tax legislation, material changes in geographic mix of revenue and expenses, changes to our corporate structure, and other significant events.

Current wording

•Aggregate Adjustment for Income Taxes — The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments described above and determined based on the tax jurisdictions where those adjustments were incurred, as well as an adjustment for discrete tax items. During the first six months of Fiscal 2025, the aggregate adjustment for income taxes included discrete tax benefits of $0.4 billion related to changes in uncertain tax benefits resulting from the expiration of certain statutes of limitations and $0.2 billion related to stock-based compensation. We exclude these benefits or charges for purposes of calculating non-GAAP net income due to the variability in recognition of discrete tax items from period to period. The tax effects are determined based on the tax jurisdictions where the above items were incurred. See Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information about our income taxes. Beginning in Fiscal 2025, our non-GAAP income tax is calculated using a fixed estimated annual tax rate which is determined based on historical trends and projections for the current fiscal year. We may adjust our estimated annual tax rate during the fiscal year to take into account events that would significantly impact our income tax expense, including significant changes resulting from tax legislation, material changes in geographic mix of revenue and expenses, changes to our corporate structure, and other significant events.

Previous wording

(c) Equipment under operating leases represents the net change of capital expenditures and depreciation expense for DFS leases and contractually embedded leases identified within flexible consumption arrangements.

Current wording

(c) Equipment under operating leases represents the net impact of capital expenditures and depreciation expense for DFS leases and contractually embedded leases identified within flexible consumption arrangements.

Previous wording

During the first quarter of Fiscal 2025, net revenue increased by 6%, driven by an increase in ISG net revenue, that was partially offset by a decrease in other businesses net revenue. The increase in ISG net revenue was primarily attributable to growth in our AI-optimized server offerings. Other businesses net revenue declined primarily due to a decrease in VMware Resale revenue driven by the change in our distributor relationship with VMware.

Current wording

During the second quarter and first six months of Fiscal 2025, net revenue increased by 9% and 8%, respectively, driven by an increase in ISG net revenue that was partially offset by a decrease in other businesses net revenue and CSG net revenue. The increase in ISG net revenue was driven by growth in our servers and networking offerings. Other businesses net revenue declined primarily due to a decrease in VMware Resale revenue as we no longer act as a distributor of standalone VMware offerings. The decline in CSG net revenue was primarily attributable to a decrease in sales of our consumer offerings.

Previous wording

During the first three months of Fiscal 2025, both operating income and non-GAAP operating income as a percentage of net revenue decreased 100 basis points to 4.1% and 6.6%, respectively. These decreases reflected a decline in gross margin as a percentage of net revenue, as a result of a competitive pricing environment coupled with a shift in mix towards AI-optimized server offerings. The decreases in operating income and non-GAAP operating income as a percentage of net revenue were offset by a decrease in operating expense rate that was driven by strong ISG net revenue growth coupled with continued disciplined cost management.

Current wording

During the second quarter of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue increased 30 basis points to 5.4% and decreased 50 basis points to 8.1%, respectively. During the first six months of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue decreased 30 basis points to 4.8% and 80 basis points to 7.4%, 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 2025 were impacted by a decline in gross margin as a percentage of net revenue as a result of a shift in mix towards AI-optimized server offerings and, to a lesser extent, a competitive CSG pricing environment. The decline in gross margin as a percentage of net revenue was offset by the favorable impact of a decrease in operating expense rate that was driven by strong ISG net revenue growth coupled with continued disciplined cost management.

Previous wording

Cash provided by operating activities was $1.0 billion during the first three months of Fiscal 2025, and was primarily driven by profitability partially offset by annual incentive-based personnel-related payments. Cash provided by operating activities was also impacted by other working capital dynamics, including strong cash collections performance, a shift in mix of the business, and timing of purchases and payments to vendors. During the first three months of Fiscal 2024, cash provided by operating activities was $1.8 billion, which primarily reflected strong working capital performance as we reduced inventory and accounts receivable. See “Liquidity, Cash Requirements, and Market Conditions” for additional information about our cash flow metrics.

Current wording

Cash provided by operating activities was $2.4 billion during the first six months of Fiscal 2025, and was driven by profitability, partially offset by working capital dynamics primarily due to growth in our AI-optimized server offerings. During the first six months of Fiscal 2024, cash provided by operating activities was $5.0 billion, which 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. See “Liquidity, Cash Requirements, and Market Conditions” for additional information about our cash flow metrics.

Previous wording

During the first quarter of Fiscal 2025, net revenue increased 6%, primarily driven by an increase in ISG net revenue that was partially offset by a decrease in other businesses net revenue. See “Business Unit Results” for further information.

Current wording

During the second quarter and first six months of Fiscal 2025, net revenue increased 9% and 8%, respectively, primarily driven by an increase in ISG net revenue that was partially offset by a decrease in other businesses net revenue and CSG net revenue. See “Business Unit Results” for further information.

Previous wording

•Product Net Revenue — Product net revenue includes revenue from the sale of hardware products and software licenses. During the first quarter of Fiscal 2025, product net revenue increased 7%, due to an increase in ISG product net revenue, partially offset by a decline in CSG and other businesses product net revenue. ISG product net revenue increased due to growth in our AI-optimized server offerings. CSG product net revenue decreased as the decline in our average selling prices of our CSG offerings outpaced the favorable impact of an increase in units sold. Other businesses product net revenue declined driven by the change in our distributor relationship with VMware.

Current wording

•Product Net Revenue — Product net revenue includes revenue from the sale of hardware products and software licenses. During the second quarter and first six months of Fiscal 2025, product net revenue increased 12% and 10%, respectively, due to an increase in ISG product net revenue, partially offset by a decline in CSG and other businesses product net revenue. ISG product net revenue increased due to growth in our servers and networking offerings. CSG product net revenue decreased primarily as a result of a decline in the average selling prices of our CSG offerings. During the second quarter of Fiscal 2025, CSG product net revenue was also impacted by a decline in units sold. Other businesses product net revenue declined as we no longer act as a distributor of standalone VMware offerings.

Previous wording

•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 2025, services net revenue increased 4%, driven primarily by growth within services net revenue attributable to CSG, partially offset by a decline in other businesses services net revenue. The increase in CSG services net revenue was primarily attributable to third-party software support and maintenance and support and maintenance associated with products sold in prior periods. Other businesses services net revenue declined driven by the change in our distributor relationship with VMware.

Current wording

•Services Net Revenue — Services net revenue includes revenue from our services offerings and support services related to hardware products and software licenses. During the second quarter and first six months of Fiscal 2025, services net revenue increased 1% and 3%, respectively, driven primarily by growth within services net revenue attributable to CSG, partially offset by a decline in other businesses services net revenue. The increase in CSG services net revenue was primarily attributable to third-party software support and maintenance and support and maintenance associated with products sold in prior periods within our commercial offerings. Other businesses services net revenue declined as we no longer act as a distributor of standalone VMware offerings.

Previous wording

From a geographical perspective, net revenue increased in the Americas and decreased in EMEA and APJ during the first quarter of Fiscal 2025.

Current wording

From a geographical perspective, net revenue increased in the Americas and, to a lesser extent, APJ, and decreased in EMEA during both the second quarter and first six months of Fiscal 2025.

Previous wording

During the first three months of Fiscal 2025, gross margin and non-GAAP gross margin both decreased 4% to $4.8 billion and $4.9 billion, respectively. The declines in gross margin and non-GAAP gross margin were driven by a decrease in CSG gross margin that was primarily attributable to a competitive pricing environment. The competitive pricing environment resulted in a decrease in the average selling prices of our CSG offerings that outpaced the favorable impact of an increase in units sold.

Current wording

During the second quarter of Fiscal 2025, both gross margin and non-GAAP gross margin decreased 1%, to $5.3 billion and $5.5 billion, respectively. During the first six months of Fiscal 2025, gross margin and non-GAAP gross margin both decreased 3%, to $10.1 billion and $10.4 billion, respectively. The declines in gross margin and non-GAAP gross margin during both the second quarter and first six months of Fiscal 2025 were driven by a decrease in CSG gross margin, partially offset by an increase in ISG gross margin. The decrease in CSG gross margin was primarily attributable to a competitive pricing environment which resulted in a decrease in the average selling prices of our CSG offerings. The increase in ISG gross margin was primarily attributable to growth in our AI-optimized server offerings.

Previous wording

Gross margin and non-GAAP gross margin percentage decreased 240 basis points and 250 basis points to 21.6% and 22.2%, respectively, during the first three months of Fiscal 2025. The decreases in gross margin percentage and non-GAAP gross margin percentage were driven by a competitive pricing environment coupled with a shift in mix towards AI-optimized server offerings.

Current wording

During the second quarter of Fiscal 2025, both gross margin and non-GAAP gross margin percentage decreased 230 basis points, to 21.2% and 21.8%, respectively. During the first six months of Fiscal 2025, gross margin and non-GAAP gross margin percentage decreased 230 basis points to 21.4% and 240 basis points to 22.0%, respectively. The decreases in gross margin percentage and non-GAAP gross margin percentage during both the second quarter and first six months of Fiscal 2025 were driven by a shift in mix towards AI-optimized server offerings and, to a lesser extent, a competitive CSG pricing environment.

Previous wording

•Product Gross Margin — During the first three months of Fiscal 2025, product gross margin and non-GAAP product gross margin decreased 11% and 12%, respectively, to $2.4 billion. The decreases were primarily driven by a decline in CSG product gross margin, which was primarily attributable to the decline in the average selling prices of our CSG offerings as a result of a competitive pricing environment.

Current wording

•Product Gross Margin — During the second quarter of Fiscal 2025, product gross margin and non-GAAP product gross margin decreased 2% to $2.9 billion and 3% to $3.0 billion, respectively. During the first six months of Fiscal 2025, product gross margin and non-GAAP product gross margin decreased 6% to $5.2 billion and 7% to $5.4 billion, respectively. The decreases during both the second quarter and first six months of Fiscal 2025 were primarily driven by a decline in CSG product gross margin, which was primarily attributable to the decline in the average selling prices of our CSG offerings as a result of a competitive pricing environment. The decline in CSG product gross margin was partially offset by an increase in ISG product gross margin that was primarily attributable to growth in our AI-optimized server offerings.

Previous wording

•Services Gross Margin — During the first three months of Fiscal 2025, services gross margin and non-GAAP services gross margin both increased 4% to $2.4 billion and $2.5 billion, respectively. The increases were primarily attributable to growth within CSG services gross margin that was driven by hardware and third-party software support and maintenance as well as support and maintenance associated with products sold in prior periods.

Current wording

•Services Gross Margin — During the second quarter of Fiscal 2025, services gross margin and non-GAAP services gross margin decreased 1% to $2.4 billion and remained flat at $2.5 billion, respectively. During the first six months of Fiscal 2025, services gross margin and non-GAAP services gross margin increased 1% to $4.9 billion and 2% to $5.0 billion, respectively. During both the second quarter and first six months of Fiscal 2025, services gross margin and non-GAAP services gross margin benefited from an increase in CSG services gross margin driven by hardware and third-party software support and maintenance as well as support and maintenance associated with products sold in prior periods. Services gross margin and non-GAAP gross margin were also impacted by a decline in other businesses services net revenue as we no longer act as a distributor of standalone VMware offerings.

Previous wording

The terms and conditions of our vendor rebate programs are largely based on product volumes and are generally negotiated either at the beginning of the annual or quarterly period, depending on the program. The timing and amount of vendor rebates and other discounts we receive under the programs may vary from period to period, reflecting changes in the competitive environment. 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 2025 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.

Current wording

The terms and conditions of our vendor rebate programs are largely based on product volumes and are generally negotiated either at the beginning of the annual or quarterly period, depending on the program. The timing and amount of vendor rebates and other discounts we receive under the programs may vary from period to period, reflecting changes in the competitive environment. 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 second quarter and first six months of Fiscal 2025 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.

Previous wording

During the first quarter of Fiscal 2025, total operating expenses decreased 2%, due to a decline in selling, general, and administrative expenses.

Current wording

During the second quarter and first six months of Fiscal 2025, total operating expenses decreased 6% and 4%, respectively, due to a decline in selling, general, and administrative expenses.

Previous wording

•Selling, General, and Administrative — During the first quarter of Fiscal 2025, selling, general, and administrative (“SG&A”) expenses decreased 4%, driven by a decrease in employee compensation and benefits expense, principally due to a decline in overall headcount and, to a lesser extent, a decrease in advertising expenses as a result of continued disciplined cost management.

Current wording

•Selling, General, and Administrative — During the second quarter and first six months of Fiscal 2025, selling, general, and administrative expenses decreased 9% and 7%, respectively, driven by a decrease in employee compensation and benefits expense, principally due to a decline in overall headcount.

Previous wording

•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 11% during the first quarter of Fiscal 2025, principally due to an increase in R&D-related employee compensation and benefits expense.

Current wording

•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 11% during both the second quarter and first six months of Fiscal 2025, principally due to an increase in R&D-related employee compensation and benefits expense.

Previous wording

As a percentage of net revenue, R&D expenses for the first three months of Fiscal 2025 and Fiscal 2024 were 3.4% and 3.3%, respectively. The increase in R&D expenses as a percentage of net revenue was attributable to continued support of R&D initiatives.

Current wording

As a percentage of net revenue, R&D expenses for both the second quarter of Fiscal 2025 and Fiscal 2024 were 3.1% and for the first six months of Fiscal 2025 and Fiscal 2024 were 3.3% and 3.2%, respectively. During the first six months of Fiscal 2025, the increase in R&D expenses as a percentage of net revenue was attributable to continued support of R&D initiatives.

Previous wording

During the first quarter of Fiscal 2025, non-GAAP operating expenses decreased 3%, driven by a decline in employee compensation and benefits expense, primarily resulting from a decline in overall headcount, and advertising expenses due to continued disciplined cost management, partially offset by continued support of R&D initiatives.

Current wording

During the second quarter and first six months of Fiscal 2025, non-GAAP operating expenses decreased 4% and 3%, respectively, driven by a decline in employee compensation and benefits expense, primarily resulting from a decline in overall headcount. The decline in employee compensation and benefits expense was partially offset by continued support of R&D initiatives.

Previous wording

We continue to make strategic investments designed to enable growth, marketing, and R&D, while balancing our efforts to drive cost efficiencies in the business. We also expect to continue making investments in support of our own digital transformation which aims to streamline and optimize our business processes.

Current wording

We continue to make strategic investments designed to enable growth and innovation, while balancing our efforts to drive cost efficiencies in the business. We also expect to continue making investments in support of our own digital transformation which aims to streamline and optimize our business processes.

Previous wording

During the first three months of Fiscal 2025, both operating income and non-GAAP operating income as a percentage of net revenue decreased 100 basis points to 4.1% and 6.6%, respectively. These decreases reflected a decline in gross margin as a percentage of net revenue, as a result of a competitive pricing environment coupled with a shift in mix towards AI-optimized server offerings. The decreases in operating income and non-GAAP operating income as a percentage of net revenue were offset by a decrease in operating expense rate that was driven by strong ISG net revenue growth coupled with continued disciplined cost management.

Current wording

During the second quarter of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue increased 30 basis points to 5.4% and decreased 50 basis points to 8.1%, respectively. During the first six months of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue decreased 30 basis points to 4.8% and 80 basis points to 7.4%, 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 2025 were impacted by a decline in gross margin as a percentage of net revenue as a result of a shift in mix towards AI-optimized server offerings and, to a lesser extent, a competitive CSG pricing environment. The decline in gross margin as a percentage of net revenue was offset by the favorable impact of a decrease in operating expense rate that was driven by strong ISG net revenue growth coupled with continued disciplined cost management.

Previous wording

For the first three months of Fiscal 2025 and Fiscal 2024, our effective income tax rate was (74.6)% and 18.0%, respectively. The change in our effective income tax rate was primarily attributable to discrete tax benefits of $0.4 billion related to changes in uncertain tax benefits resulting from the expiration of certain statutes of limitations and $0.2 billion related to stock-based compensation.

Current wording

For the second quarter of Fiscal 2025 and Fiscal 2024, our effective income tax rate was 15.0% and 36.3%, respectively. For the first six months of Fiscal 2025 and Fiscal 2024, our effective income tax rate was (16.9)% and 27.2%, respectively. The changes in our effective income tax rate were primarily driven by discrete tax items. For the first six months of Fiscal 2025, we recorded discrete tax benefits of $0.4 billion related to changes in uncertain tax benefits resulting from the expiration of certain statutes of limitations and $0.2 billion related to stock-based compensation.

Previous wording

Many countries have enacted or are in the process of enacting laws based on the Pillar Two proposal relating to global minimum tax issued by the Organisation for Economic Co-operation and Development (“OECD”). While we expect our effective income tax rate and cash income tax payments could increase in future years as a result of the global minimum tax, we do not expect it will have a material impact to our Fiscal 2025 consolidated results of operations. Our assessment could be affected by legislative guidance and future enactment of additional provisions within the Pillar Two framework, particularly in countries in which we have tax holidays and incentives.

Current wording

Many countries have enacted or are in the process of enacting laws based on the Pillar Two proposal relating to a global minimum tax issued by the Organisation for Economic Co-operation and Development (“OECD”). While we expect our effective income tax rate and cash income tax payments could increase in future years as a result of the global minimum tax, we do not expect the tax will have a material impact to our Fiscal 2025 consolidated results of operations. Our assessment could be affected by legislative guidance and future enactment of additional provisions within the Pillar Two framework, particularly in countries in which we have tax holidays and incentives.

Previous wording

Net Revenue —During the first quarter of Fiscal 2025, ISG net revenue increased 22% driven by strength in our servers and networking offerings.

Current wording

Net Revenue —During the second quarter and first six months of Fiscal 2025, ISG net revenue increased 38% and 30%, respectively, driven by strength in our servers and networking offerings.