Dell Technologies Inc

Previous wording

Our “other businesses” primarily consist of our resale of standalone offerings of VMware LLC (formerly “VMware, Inc.” and individually and together with its subsidiaries, “VMware”), referred to as “VMware Resale,” and offerings of SecureWorks Corp. (“Secureworks”). These businesses are not classified as reportable segments, either individually or collectively.

Current wording

Our “other businesses” primarily consist of our resale of standalone offerings of VMware LLC (formerly “VMware, Inc.” and individually and together with its subsidiaries, “VMware”), referred to as “VMware Resale,” and offerings of SecureWorks Corp. (“Secureworks”). In October 2024, Secureworks announced that it has entered into a definitive agreement pursuant to which Sophos Inc., an affiliate of Thoma Bravo, L.P., a private equity and growth capital firm, will acquire Secureworks in an all-cash transaction for approximately $0.9 billion, subject to certain closing adjustments. The transaction is expected to close in early 2025, subject to customary closing conditions. Our other businesses are not classified as reportable segments, either individually or collectively.

Previous 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:

Current wording

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

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. 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.

Current wording

•Demand for AI-optimized solutions: Our ISG business continued to benefit from increased demand for AI-optimized solutions as customers continue to adopt and further integrate AI into their operations. As a result of the continued strong demand for our AI-optimized servers, backlog levels for such offerings remained elevated 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 driven by favorability in component costs. Input costs consist of both component and logistics costs.

Current wording

•Supply chain: Notwithstanding the increased demand for AI-optimized solutions, our supply chain continued to operate efficiently. We experienced an increase in input costs primarily driven by higher logistics costs, the effect of which was partially offset by favorability in component costs. Compared to the prior quarter, we began to observe an inflationary environment. Input costs primarily 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.

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.

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 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.

Current wording

We expect the demand environment will continue to remain strong in our servers and networking offerings, which we expect will result in ISG net revenue growth across our AI-optimized and traditional servers for the fourth quarter of Fiscal 2025. We expect modest CSG net revenue growth for the fourth quarter of Fiscal 2025 depending on the timing of the anticipated PC refresh cycle and a competitive pricing environment. 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 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.

Current wording

We expect input costs to increase during the fourth quarter 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 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.

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. 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, 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.

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 Broadcom’s VMware standalone products and services, though we will continue to support customers that have purchased resale offerings sold in prior periods. We continue to integrate and embed certain VMware products and services with select Dell Technologies’ offerings to end-users, such as through our VxRail solution. The results of such offerings are reflected within CSG or ISG, depending upon the nature of the underlying offering sold.

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. 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.

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 advancements and customer interest in AI and we are well-positioned to capture growth and support our customers’ needs.

Previous wording

CSG —We participate in all segments of the PC market but focus on commercial and high-end consumer computing devices, as we believe they represent the most stable and profitable markets. We anticipate that CSG will benefit from advances in AI over the long-term as customers will require PCs with the ability to run their complex AI workloads.

Current wording

CSG —We participate in all segments of the PC market with a focus on commercial and high-end consumer computing devices, as we believe they represent the most stable and profitable markets. We anticipate that CSG will benefit from advances in AI over the long-term as customers will require PCs with the ability to run their complex AI workloads.

Previous 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.

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 as well as the timing of the anticipated PC refresh cycle.

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 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.

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 third quarter and first nine 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. 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.

Current wording

•Other Corporate Expenses — Other corporate expenses consist primarily of severance expenses, payroll taxes associated with stock-based compensation, transaction-related expenses, facility action costs, 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 the first nine months of Fiscal 2025 and Fiscal 2024, we recognized $0.6 billion and $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 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.

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 nine 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

In addition to the above measures, we use free cash flow and adjusted free cash flow as non-GAAP liquidity measures to evaluate our performance. As presented in the following table, we define free cash flow to consist of cash flow from operations after excluding capital expenditures and capitalized software costs, net. To measure adjusted free cash flow, we exclude the impact of financing receivables and equipment under operating leases from free cash flow, as the initial funding of these DFS offerings at the time of origination is largely subsequently replaced with cash inflows from our DFS debt, the majority of which is asset-backed.

Current wording

In addition to the above measures, we use free cash flow and adjusted free cash flow as non-GAAP liquidity measures to evaluate our performance. As presented in the following table, we define free cash flow as cash flow from operations after excluding capital expenditures and capitalized software costs, net. To measure adjusted free cash flow, we exclude the impact of financing receivables and equipment under operating leases from free cash flow, as the initial funding of these DFS offerings at the time of origination is largely subsequently replaced with cash inflows from our DFS debt, the majority of which is asset-backed.

Previous wording

As is the case with the non-GAAP measures presented above, users should consider the limitations of using free cash flow and adjusted free cash flow, including the fact that those measures do not provide a complete measure of our cash flows for any period. Free cash flow and adjusted free cash flow do not purport to be alternatives to cash flows from operating activities as a measure of liquidity. In particular, free cash flow and adjusted free cash flow are not intended to be a measure of cash flow available for management’s discretionary use, as these measures do not reflect certain cash requirements, such as debt service requirements and other contractual commitments.

Current wording

As is the case with the other non-GAAP measures presented above, users should consider the limitations of using free cash flow and adjusted free cash flow, including the fact that those measures do not provide a complete measure of our cash flows for any period. Free cash flow and adjusted free cash flow do not purport to be alternatives to cash flows from operating activities as a measure of liquidity. In particular, free cash flow and adjusted free cash flow are not intended to be a measure of cash flow available for management’s discretionary use, as these measures do not reflect certain cash requirements, such as debt service requirements and other contractual commitments.

Previous wording

The following table presents a reconciliation of free cash flow and adjusted free cash flow to cash from operating activities for the periods indicated:

Current wording

The following table presents a reconciliation of free cash flow and adjusted free cash flow to cash flow from operations for the periods indicated:

Previous wording

(a) Capital expenditures and capitalized software development costs, net include proceeds from sales of facilities, land, and other assets.

Current wording

(a) Capital expenditures and capitalized software development costs, net includes proceeds from sales of facilities, land, and other assets.

Previous 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.

Current wording

During the third quarter and first nine months of Fiscal 2025, net revenue increased by 10% and 8%, respectively, driven by an increase in ISG net revenue that was partially offset by a decrease in other businesses net revenue and, to a lesser extent, 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 attributable to a decrease in sales of our consumer offerings.

Previous wording

During the second quarter of Fiscal 2025, operating income and non-GAAP operating income increased by 15% to $1.3 billion and 3% to $2.0 billion, respectively. During the first six months of Fiscal 2025, operating income and non-GAAP operating income increased by 1% to $2.3 billion and decreased by 2% to $3.5 billion, respectively. During both the second quarter and first six months of Fiscal 2025, operating income and non-GAAP operating income were impacted by an increase in ISG operating income driven by our servers and networking offerings and a decrease in CSG operating income primarily driven by our commercial offerings.

Current wording

During the third quarter of Fiscal 2025, both operating income and non-GAAP operating income increased by 12%, to $1.7 billion and $2.2 billion, respectively. During the first nine months of Fiscal 2025, operating income and non-GAAP operating income increased by 6% to $3.9 billion and 3% to $5.7 billion, respectively. During both the third quarter and first nine months of Fiscal 2025, the increases in operating income and non-GAAP operating income were primarily attributable to an increase in ISG operating income driven by our servers and networking offerings, which was largely offset by a decrease in CSG operating income.

Previous 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.

Current wording

During the third quarter of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue increased 10 basis points to 6.8% and increased 20 basis points to 9.0%, respectively. During the first nine months of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue decreased 10 basis points to 5.5% and 40 basis points to 8.0%, respectively. Operating income and non-GAAP operating income as a percentage of net revenue during both the third quarter and first nine months of Fiscal 2025 were impacted by a decline in gross margin as a percentage of net revenue due to a shift in mix towards AI-optimized server offerings and 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 $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.

Current wording

Cash provided by operating activities was $3.9 billion during the first nine months of Fiscal 2025, and was driven by profitability, partially offset by working capital dynamics. Working capital was primarily impacted by AI dynamics, which led to higher inventory, accounts receivable, and accounts payable levels. During the first nine months of Fiscal 2024, cash provided by operating activities was $7.1 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. Cash provided by operating activities also reflected the impact of the $0.9 billion net payment to settle the Class V transaction litigation and $0.4 billion in proceeds from the sale of our U.S. consumer revolving customer receivables portfolio. See “Liquidity, Cash Requirements, and Market Conditions” for additional information about our cash flow metrics.

Previous 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.

Current wording

During the third quarter and first nine months of Fiscal 2025, net revenue increased 10% 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, to a lesser extent, 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 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.

Current wording

•Product Net Revenue — Product net revenue includes revenue from the sale of hardware products and software licenses. During the third quarter of Fiscal 2025, product net revenue increased 13% due to an increase in ISG product net revenue driven by growth in our servers and networking offerings. The increase was partially offset by a decline in CSG product net revenue as a result of a decrease in units sold within our consumer offerings, as well as a decline in other businesses product net revenue 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 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.

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 third quarter and first nine months of Fiscal 2025, services net revenue increased 1% and 2%, respectively, driven primarily by growth within services net revenue attributable to CSG and, to a lesser extent, services net revenue attributable to ISG, partially offset by a decline in other businesses services net revenue. The increase in services net revenue was primarily attributable to CSG third-party software support and maintenance and, to a lesser extent, support and maintenance associated with products sold in prior periods within both ISG and CSG. 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, to a lesser extent, APJ, and decreased in EMEA during both the second quarter and first six months of Fiscal 2025.

Current wording

From a geographical perspective, net revenue increased in the Americas and, to a lesser extent, the Asia Pacific and Japan (“APJ”) and Europe, the Middle East and Africa (“EMEA”) regions during the third quarter of Fiscal 2025. Net revenue increased in both the Americas and APJ and decreased in EMEA during the first nine months of Fiscal 2025.

Previous 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.

Current wording

During the third quarter of Fiscal 2025, both gross margin and non-GAAP gross margin increased 3%, to $5.3 billion and $5.4 billion, respectively, driven by an increase in ISG gross margin that was largely offset by a decrease in CSG gross margin. During the first nine months of Fiscal 2025, both gross margin and non-GAAP gross margin decreased 1%, to $15.4 billion and $15.8 billion, respectively, driven by a decrease in CSG gross margin that was largely offset by an increase in ISG gross margin. The increase in ISG gross margin during both the third quarter and first nine months of Fiscal 2025 was primarily attributable to growth in our AI-optimized server offerings. The decrease in CSG gross margin during both the third quarter and first nine months of Fiscal 2025 was primarily attributable to a competitive pricing environment.

Previous 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.

Current wording

During the third quarter of Fiscal 2025, gross margin and non-GAAP gross margin percentage decreased 130 basis points to 21.8% and 140 basis points to 22.3%, respectively. During the first nine months of Fiscal 2025, gross margin and non-GAAP gross margin percentage decreased 200 basis points to 21.5% and 210 basis points to 22.1%, respectively. The decreases in gross margin percentage and non-GAAP gross margin percentage during both the third quarter and first nine months of Fiscal 2025 were primarily driven by a shift in mix towards AI-optimized server offerings and a competitive CSG pricing environment.

Previous wording

During the second quarter of Fiscal 2025, product gross margin percentage and non-GAAP product gross margin percentage decreased 210 basis points to 15.2% and 230 basis points to 15.6%, respectively. During the first six months of Fiscal 2025, product gross margin percentage and non-GAAP product gross margin percentage decreased 260 basis points to 14.9% and 270 basis points to 15.4%, respectively. The declines during both the second quarter and first six months of Fiscal 2025 were primarily attributable to a shift in mix towards our AI-optimized server offerings and, to a lesser extent, a competitive CSG pricing environment.

Current wording

During the third quarter of Fiscal 2025, both product gross margin percentage and non-GAAP product gross margin percentage decreased 160 basis points, to 15.0% and 15.5%, respectively. During the first nine months of Fiscal 2025, product gross margin percentage and non-GAAP product gross margin percentage decreased 220 basis points to 15.0% and 240 basis points to 15.4%, respectively. The declines during both the third quarter and first nine months of Fiscal 2025 were primarily attributable to a shift in mix towards our AI-optimized server offerings and a competitive CSG pricing environment.

Previous 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.

Current wording

•Services Gross Margin — During the third quarter of Fiscal 2025, services gross margin and non-GAAP services gross margin increased 4% to $2.6 billion and 5% to $2.6 billion, respectively. During the first nine months of Fiscal 2025, services gross margin and non-GAAP services gross margin increased 2% to $7.4 billion and 3% to $7.6 billion, respectively. During both the third quarter and first nine months of Fiscal 2025, services gross margin and non-GAAP services gross margin benefited from an increase in support and maintenance associated with products sold in prior periods within both ISG and CSG and, to a lesser extent, an increase CSG third-party software support and maintenance.

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 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.

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 third quarter and first nine 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 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.

Current wording

During the third quarter and first nine months of Fiscal 2025, total operating expenses decreased 1% and 3%, respectively, due to a decline in selling, general, and administrative expenses.

Previous 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.

Current wording

•Selling, General, and Administrative — During the third quarter and first nine months of Fiscal 2025, selling, general, and administrative expenses decreased 3% and 6%, 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 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.

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 8% and 10%, respectively, during the third quarter and first nine 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 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.

Current wording

As a percentage of net revenue, R&D expenses for both the third quarter of Fiscal 2025 and Fiscal 2024 were 3.1% and for both the first nine months of Fiscal 2025 and Fiscal 2024 were 3.2%. We continue to support R&D initiatives to innovate and introduce new and enhanced solutions into the market.

Previous 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.

Current wording

During the third quarter and first nine months of Fiscal 2025, non-GAAP operating expenses decreased 2% 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

During the second quarter of Fiscal 2025, operating income and non-GAAP operating income increased by 15% to $1.3 billion and 3% to $2.0 billion, respectively. During the first six months of Fiscal 2025, operating income and non-GAAP operating income increased by 1% to $2.3 billion and decreased by 2% to $3.5 billion, respectively. During both the second quarter and first six months of Fiscal 2025, operating income and non-GAAP operating income were impacted by an increase in ISG operating income driven by our servers and networking offerings and a decrease in CSG operating income primarily driven by our commercial offerings.

Current wording

During the third quarter of Fiscal 2025, both operating income and non-GAAP operating income increased by 12%, to $1.7 billion and $2.2 billion, respectively. During the first nine months of Fiscal 2025, operating income and non-GAAP operating income increased by 6% to $3.9 billion and 3% to $5.7 billion, respectively. During both the third quarter and first nine months of Fiscal 2025, the increases in operating income and non-GAAP operating income were primarily attributable to an increase in ISG operating income driven by our servers and networking offerings, which was largely offset by a decrease in CSG operating income.

Previous 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.

Current wording

During the third quarter of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue increased 10 basis points to 6.8% and increased 20 basis points to 9.0%, respectively. During the first nine months of Fiscal 2025, operating income and non-GAAP operating income as a percentage of net revenue decreased 10 basis points to 5.5% and 40 basis points to 8.0%, respectively. Operating income and non-GAAP operating income as a percentage of net revenue during both the third quarter and first nine months of Fiscal 2025 were impacted by a decline in gross margin as a percentage of net revenue due to a shift in mix towards AI-optimized server offerings and 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 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.

Current wording

For the third quarter of Fiscal 2025 and Fiscal 2024, our effective income tax rate was 19.0% and 14.9%, respectively. For the first nine months of Fiscal 2025 and Fiscal 2024, our effective income tax rate was 0.2% and 21.6%, respectively. The changes in our effective income tax rate were primarily driven by discrete tax items. For the first nine 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.