Management’s Discussion and Analysis of Financial Condition and Results of Operations of…

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS OF DENALI

On October 29, 2013, Dell was acquired by Denali in a going-private transaction. For purposes of this management’s discussion and analysis and the historical consolidated financial statements and related notes of Denali included elsewhere in this proxy statement/prospectus, periods prior to October 29, 2013 reflect the financial position, results of operations and changes in financial position of Dell prior to the going-private transaction, referred to as the predecessor periods (with our company during such periods referred to as the Predecessor), and periods beginning on or after October 29, 2013 reflect the financial position, results of operations and changes in financial position of Denali subsequent to the going-private transaction, referred to as the successor periods (with our company during such periods referred to as the Successor).

This management’s discussion and analysis should be read in conjunction with the “Denali Unaudited Pro Forma Condensed Combined Financial Statements,” “Selected Historical Consolidated Financial Data of Denali” and the Audited Consolidated Financial Statements and related notes of Denali included elsewhere in this proxy statement/prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and that are subject to numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this proxy statement/prospectus. Our actual results may differ materially from those expressed or implied in any forward-looking statements.

Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods. Our fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. We refer to our fiscal years ended January 29, 2016, January 30, 2015, and January 31, 2014 as Fiscal 2016, Fiscal 2015, and Fiscal 2014, respectively. Each of these fiscal years includes 52 weeks. Unless the context indicates otherwise, references in this management’s discussion and analysis to “we,” “us,” “our,” “Denali,” and “Denali Holding” mean Denali Holding Inc. and its consolidated subsidiaries and references to “Dell” mean Dell Inc. and Dell Inc.’s consolidated subsidiaries.

The following management’s discussion and analysis of our financial condition and results of operations covers Fiscal 2016 and Fiscal 2015 and the combined results for the 2014 predecessor and successor periods, adjusted for pro forma items directly associated with the going-private transaction to give effect to that transaction as if it had occurred on the first day of Fiscal 2014, referred to as pro forma Fiscal 2014. These pro forma Fiscal 2014 results are unaudited. We believe the presentation of a twelve-month period on a pro forma basis for our 2014 fiscal year is meaningful to the reader and more useful for comparative purposes than any alternative presentation.

INTRODUCTION

We are a leading provider of scalable IT solutions enabling customers to be more efficient, mobile, informed and secure. We built our reputation through listening to customers and developing solutions that meet their needs. Several years ago, we initiated a broad transformation of our company to become the leading provider of scalable information technology solutions. We are positioned to help customers of any size with the essential infrastructure to modernize IT and enable digital business, differentiated by our practical innovation and efficient, simple, and affordable solutions. Our announcement in October 2015 of our agreement to combine with EMC evidences our intention to accelerate this strategy over the coming years as we bring together two companies with complementary product portfolios, sales teams and research and development strategies. See “—The EMC Merger Transaction” below for additional information. We will continue to build superior customer relationships through our direct model and through our network of channel partners, which includes value-added resellers, system integrators, distributors and retailers. We believe we can react quickly to customer needs, invest in strategic solutions and expand our go-to-market sales and marketing capabilities. We will continue to build strong capabilities to create a leading global technology company poised for long-term sustainable growth and innovation.

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A key component of our strategic transformation is to continue shifting our product and solutions portfolio to offerings that provide higher-value and recurring revenue streams over time. As part of this strategy, we are continuing to expand and enhance our offerings through acquisitions and strategic investments that will complement our existing portfolio of solutions. As we innovate to make our customers’ existing IT increasingly productive, we help them reinvest their savings into the next generation of technologies that they need to succeed in the digital economy of a hyper-connected world. These solutions include digital transformation, software-defined data centers, hybrid cloud, converged and hyper-converged infrastructure, mobile and security. In addition, our extended warranty and delivery offerings, and software and peripherals, which are closely tied to the sale of our hardware products, are important value differentiators that we are able to offer our customers. Our Client Solutions offerings are an important element of our strategy, and we believe the strategic expansion of this business is critical to our long-term success.

We operate a diversified business model with the majority of our net revenue and operating income derived from commercial clients (large enterprises, small and medium-sized businesses, and public sector customers). We have a large global presence across the Americas, Europe, Middle East, Asia and other geographic regions, with approximately 50% of revenue coming from customers outside of the United States during Fiscal 2016. We continue to view emerging markets, which include the vast majority of the world’s population, as a long-term growth opportunity. Accordingly, we continue to pursue the development of technology solutions that meet the needs of these markets.

Products and Services

We design, develop, manufacture, market, sell and support a wide range of products and services. We are organized into the following four product and services business units, which are our reportable segments: Client Solutions; Enterprise Solutions Group; Dell Software Group; and Dell Services.

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Client Solutions—Client Solutions includes sales to our commercial and consumer customers of desktops, notebooks, thin clients, and third-party software and peripherals and services closely tied to the sale of Client Solutions hardware. Generally, over half of Client Solutions revenue is generated in the Americas, with the remaining portion derived from sales in Europe, the Middle East and Africa, referred to as EMEA, and Asia Pacific and Japan, referred to as APJ.

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Enterprise Solutions Group (ESG)—ESG includes servers, networking and storage, as well as services and third-party software and peripherals that are closely tied to the sale of ESG hardware. Generally, over half of ESG revenue is generated in the Americas, with the remaining portion derived from sales in EMEA and APJ.

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Dell Software Group (DSG)—DSG includes systems management, security software solutions and information management software offerings. DSG revenue is primarily derived from sales in the Americas and EMEA.

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Dell Services—Dell Services includes a broad range of IT and business services, including infrastructure, cloud, applications, and business process services. Dell Services revenue is mostly generated in the Americas, primarily in the United States.

In the first quarter of Fiscal 2016, we redefined the categories within Client Solutions and ESG to reflect the way we currently organize products and services within these business units. None of these changes impacted our consolidated or total business unit results. Prior period amounts have been reclassified to conform to the current year presentation. See Note 15 of the Notes to the Audited Consolidated Financial Statements of Denali for a reconciliation of net revenue by reportable segment to consolidated net revenue.

We also offer or arrange various financing options and services for our commercial and consumer customers in the United States, Canada, Europe and Mexico through DFS and its affiliates. DFS services include originating, collecting, and servicing customer receivables primarily related to the purchase of Dell products. The results of these operations are allocated to our segments based on the underlying product or service financed.

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SecureWorks, a consolidated subsidiary of Dell and Denali, is a leading global provider of intelligence-driven information security solutions exclusively focused on protecting customers from cyber attacks. On April 27, 2016, SecureWorks completed a registered initial public offering of its Class A common stock. The results of the SecureWorks operations are recorded in Corporate.

For further discussion regarding our reportable segments, see “—Results of Operations—Product and Services Business Units.”

Business Trends and Challenges

We are seeing an unprecedented rate of change in the IT industry, but our strategy remains consistent. As a leading provider of scalable end-to-end technology solutions, we accelerate results for our customers by enabling them to be more efficient, mobile, informed and secure. We continue to invest in R&D, sales and other key areas of our business to deliver superior products and solution capabilities and to drive execution of long-term profitable growth. We believe that our results will improve over time in connection with the productivity initiatives directed at our salesforce and as a result of our differentiated products and solution capabilities. We intend to continue to execute on our business model and seek to balance liquidity, profitability and growth to position our company for long-term success.

We are able to leverage our traditional strength in the PC market to offer solutions and services that provide higher value recurring revenue streams. Revenue generated from our Client Solutions business unit was 65%, 68%, and 68% of total net revenue for Fiscal 2016, Fiscal 2015, and pro forma Fiscal 2014, respectively. We anticipate an increasingly challenging demand environment, increased pricing pressures, and intensifying market competition in Client Solutions, given the macroeconomic environment and PC demand trends. However, we are committed to a long-term growth strategy that will benefit from the consolidation trends that are occurring in the market. Our Client Solutions offerings remain an important element of our strategy, generating strong cash flow and opportunities for cross-selling of complementary solutions.

In addition, we expect our ESG business to continue to be impacted by declines in the traditional storage market, even as we continue to develop new solutions. We also continue to be impacted by the emerging trends of enterprises deploying software defined storage, hyper-converged, and modular solutions based on server-centric architectures. We are seeking to combine with EMC to complement our current offerings within this business unit and to strengthen our overall data center offerings.

We manage our business on a U.S. dollar basis, but a significant portion of our revenue is earned from international sources and, therefore, can be impacted by fluctuations in foreign currency exchange rates. The strength of the U.S. dollar relative to most foreign currencies continued during Fiscal 2016, which contributed to a challenging pricing and demand environment. 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.

The EMC Merger Transaction

On October 12, 2015, EMC, Denali, Dell, and Merger Sub entered into the merger agreement pursuant to which Merger Sub will be merged with and into EMC, with EMC surviving the merger as a wholly owned subsidiary of Denali.

Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each share of EMC common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Denali, Merger Sub, EMC, or any of EMC’s wholly owned subsidiaries, and other than shares with respect to which EMC’s shareholders are entitled to and properly exercise appraisal rights) automatically

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will be converted into the right to receive the merger consideration, consisting of (1) $24.05 in cash, without interest, and (2) a number of validly issued, fully paid and non-assessable shares of Class V Common Stock equal to the quotient (rounded to the nearest five decimal points) obtained by dividing (A) 222,966,450 by (B) the aggregate number of shares of EMC common stock issued and outstanding immediately prior to the effective time of the merger, plus cash in lieu of any fractional shares.

The merger agreement provides that each currently outstanding EMC stock option will vest and become fully exercisable for a reasonable period of time prior to the vesting effective time of the merger. Each EMC stock option that remains outstanding immediately prior to the vesting effective time of the merger will be automatically exercised immediately prior to the vesting effective time of the merger on a net exercise basis, such that shares of EMC common stock with a value equal to the aggregate exercise price and applicable tax withholding will reduce the number of shares of EMC common stock otherwise issuable. Each such holder of a net exercised EMC stock option will thereafter be entitled to receive the merger consideration with respect to the whole net number of shares of EMC common stock issued upon such net exercise, together with cash in lieu of any fractional shares of EMC common stock. The merger agreement also provides that immediately prior to the vesting effective time of the merger each currently outstanding EMC restricted stock unit and share of EMC restricted stock will fully vest (with performance vesting units vesting at the target level of performance) and the holder will become entitled to receive the merger consideration with respect to the whole net number of shares of EMC common stock subject to the award (which will be calculated net of the number of shares withheld in respect of taxes upon the vesting of the award), together with cash in lieu of any fractional shares of EMC common stock. The merger agreement provides that Denali may agree with individual award recipients to different equity treatment. No such agreements were in effect as of the date of this proxy statement/prospectus.

Also, in connection with the merger, all principal, accrued but unpaid interest, fees and other amounts (other than certain contingent obligations) outstanding at the effective time of the merger under EMC’s unsecured revolving credit facility, Dell International’s asset-based revolving credit facility and Dell International’s term facilities will be repaid in full substantially concurrently with the closing and all commitments to lend and guarantees and security interests, as applicable, in connection therewith will be terminated and/or released. In connection with the merger, Dell expects that the aggregate amounts of principal, interest and premium necessary to redeem in full the outstanding $1.4 billion in aggregate principal amount of 5.625% Senior First Lien Notes due 2020 co-issued by Dell International and Denali Finance Corp. will be deposited with the trustee for such notes, and that such notes will thereby be satisfied and discharged, substantially concurrently with the effective time of the merger. Dell further expects that all of Dell’s and EMC’s other outstanding senior notes and senior debentures will remain outstanding after the effective time of the merger in accordance with their respective terms.

Denali expects to finance the merger, the refinancing of certain of Dell International’s and EMC’s indebtedness outstanding as of the closing of the merger, and the payment of related fees and expenses with up to $49.5 billion from debt financings and up to $4.25 billion of committed equity financing.

Other than the recognition of certain expenses related to the pending merger, there was no impact of the merger on the Audited Consolidated Financial Statements of Denali.

Going-Private Transaction

On October 29, 2013, Dell was acquired by Denali in a merger transaction pursuant to an agreement and plan of merger, dated as of February 5, 2013, as amended. Denali is a Delaware corporation owned by Michael S. Dell and a separate property trust for the benefit of Mr. Dell’s wife, investment funds affiliated with Silver Lake Partners, the MSD Partners stockholders, and certain members of Dell’s management. Mr. Dell serves as Chairman and Chief Executive Officer of Denali and Dell. See Note 1 and Note 3 of the Notes to the Audited Consolidated Financial Statements of Denali for more information about the going-private transaction.

NON-GAAP FINANCIAL MEASURES

In this management’s discussion and analysis we use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial

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statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These non-GAAP financial measures include non-GAAP product revenue, non-GAAP services revenue, non-GAAP revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, non-GAAP earnings per share—diluted, earnings before interest and other, net, taxes, depreciation and amortization, referred to as EBITDA, and adjusted EBITDA.

We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures will provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons.

In particular, we have excluded the impact of purchase accounting adjustments related to the going-private transaction. The going-private transaction was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations. This guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities on the date of the transaction. All of our assets and liabilities were accounted for and recognized at fair value as of the transaction date, and the fair value adjustments are being amortized over the estimated useful lives in the periods following the transaction, while the ongoing business and operations did not change. As a result, we believe that excluding these adjustments provides results that are useful in understanding our operating performance, and aligns with how we manage our business. Excluding these adjustments also provides for more comparable operating results over the periods presented.

There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Non-GAAP product revenue, non-GAAP services revenue, non-GAAP revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share—diluted, as defined by us, exclude the following items: the impact of purchase accounting, amortization of intangible assets, other corporate expenses, and for non-GAAP net income and non-GAAP earnings per share, an aggregate adjustment for income taxes. As the excluded items have a material impact on our financial results, our management compensates for this limitation by relying primarily on GAAP or pro forma results and using non-GAAP financial measures supplementally or for projections when comparable GAAP financial measures are not available. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, gross margin, operating expenses, operating income, or net income prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP or, for Fiscal 2014, pro forma basis. For comparative purposes, we have presented pro forma Fiscal 2014 operating results, giving effect to the going-private transaction as if it had occurred on the first day of Fiscal 2014. See “—Results of Operations—Dell’s Going-Private Transaction” for more information on pro forma Fiscal 2014. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP or pro forma financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. See the discussion below for more information on each of the excluded items as well as our reasons for excluding them from our non-GAAP results. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.

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The following is a summary of the items excluded from the most comparable GAAP or pro forma financial measures to calculate our non-GAAP financial measures:

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Impact of Purchase Accounting—The impact of purchase accounting includes purchase accounting adjustments recorded under the acquisition method of accounting, related to the going-private transaction. Purchase accounting adjustments primarily include fair value adjustments made to deferred revenue, inventory and property, plant, and equipment which are recorded over time. During pro forma Fiscal 2014, purchase accounting adjustments also include a provision charge on customer receivables recorded on October 29, 2013, amortization of fair value adjustments on customer shipments in transit, and compensation costs related to cash settlement of employee stock options, triggered by the going-private transaction. See Notes 1 and 3 of the Notes to the Audited Consolidated Financial Statements of Denali for more information on the going-private transaction. We exclude these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

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Amortization of Intangible Assets—Amortization of intangible assets consists of amortization of customer relationships, developed technology, and trade names. We incur charges related to the amortization of these intangibles, which are included in our consolidated financial statements. In connection with the going-private transaction, all of Denali’s tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. Accordingly, for the successor periods, amortization of intangible assets consists primarily of amortization associated with intangible assets recognized in connection with the going-private transaction. Amortization charges for purchased intangible assets are significantly impacted by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

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Other Corporate Expenses—Other corporate expenses consists of the following items:

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Severance and facility action costs primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives.

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Acquisition-related charges which are expensed as incurred and consist primarily of retention payments, integration costs, and other costs. This includes costs related to the merger.

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Stock-based compensation expense associated with equity awards.

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Costs related to the going-private transaction.

Other corporate expenses vary from period to period and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

In addition, pro forma Fiscal 2014 net income includes a $204 million valuation allowance on deferred tax assets for one of our foreign jurisdictions. We are excluding this valuation allowance on deferred tax assets described above for the purpose of calculating the non-GAAP net income financial measure presented below because we believe this adjustment is outside our ordinary course of business and does not contribute to a meaningful evaluation of our current operating performance or comparisons to our past operating performance.

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Aggregate Adjustment for Income Taxes—The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.

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Non-GAAP Adjustments Per Share—This financial measure shows the cumulative impact of the above adjustments on earnings per share—diluted.

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Fiscal 2016 compared to Fiscal 2015 and Fiscal 2015 compared to Pro Forma Fiscal 2014

The tables below presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP or, for Fiscal 2014, pro forma, measure for each of the periods presented:


	Fiscal Year Ended
	Successor					Successor					Pro Forma
	January 29, 2016		% Change			January 30, 2015		% Change			January 31, 2014
	(in millions, except percentages)
Product net revenue	$	43,317		(7	)%	$	46,690		6	%	$	44,004
Non-GAAP adjustments:
Impact of purchase accounting		1					23					151

Non-GAAP product net revenue	$	43,318		(7	)%	$	46,713		6	%	$	44,155

Services net revenue	$	11,569		1	%	$	11,429		(1	)%	$	11,575
Non-GAAP adjustments:
Impact of purchase accounting		505					953					1,071

Non-GAAP services net revenue	$	12,074		(2	)%	$	12,382		(2	)%	$	12,646

Net revenue	$	54,886		(6	)%	$	58,119		5	%	$	55,579
Non-GAAP adjustments:
Impact of purchase accounting		506					976					1,222

Non-GAAP net revenue	$	55,392		(6	)%	$	59,095		4	%	$	56,801

Product gross margin	$	5,394		(14	)%	$	6,275		22	%	$	5,134
Non-GAAP adjustments:
Impact of purchase accounting		59					119					866
Amortization of intangibles		483					466					459
Other corporate expenses		10					24					123

Non-GAAP product gross margin	$	5,946		(14	)%	$	6,884		5	%	$	6,582

Services gross margin	$	4,438		13	%	$	3,933		11	%	$	3,558
Non-GAAP adjustments:
Impact of purchase accounting		453					906					1,097
Amortization of intangibles		—					—					—
Other corporate expenses		13					24					4

Non-GAAP services gross margin	$	4,904		1	%	$	4,863		4	%	$	4,659

Gross margin	$	9,832		(4	)%	$	10,208		17	%	$	8,692
Non-GAAP adjustments:
Impact of purchase accounting		512					1,025					1,963
Amortization of intangibles		483					466					459
Other corporate expenses		23					48					127

Non-GAAP gross margin	$	10,850		(8	)%	$	11,747		5	%	$	11,241

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	Fiscal Year Ended
	Successor						Successor						Pro Forma
	January 29, 2016			% Change			January 30, 2015			% Change			January 31, 2014
	(in millions, except percentages)
Operating expenses	$	10,215			(4	)%	$	10,630			(7	)%	$	11,489
Non-GAAP adjustments:
Impact of purchase accounting		(104	)					(91	)					(157	)
Amortization of intangibles		(1,706	)					(1,833	)					(1,874	)
Other corporate expenses		(194	)					(152	)					(710	)

Non-GAAP operating expenses	$	8,211			(4	)%	$	8,554			(2	)%	$	8,748

Operating loss	$	(383	)		9	%	$	(422	)		85	%	$	(2,797	)
Non-GAAP adjustments:
Impact of purchase accounting		616						1,116						2,120
Amortization of intangibles		2,189						2,299						2,333
Other corporate expenses		217						200						837

Non-GAAP operating income	$	2,639			(17	)%	$	3,193			28	%	$	2,493

Net loss	$	(1,104	)		10	%	$	(1,221	)		63	%	$	(3,324	)
Non-GAAP adjustments:
Impact of purchase accounting		616						1,122						2,088
Amortization of intangibles		2,189						2,299						2,333
Other corporate expenses		211						202						1,041
Aggregate adjustment for income taxes		(558	)					(732	)					(1,075	)

Non-GAAP net income	$	1,354			(19	)%	$	1,670			57	%	$	1,063

Earnings (loss) per share—diluted	$	(2.73	)		10	%	$	(3.02	)		63	%	$	(8.23	)
Non-GAAP adjustments per share—diluted		6.03						7.15						10.86

Non-GAAP earnings per share—diluted	$	3.30			(20	)%	$	4.13			57	%	$	2.63

In addition to the above measures, we also use EBITDA and adjusted EBITDA to facilitate a more meaningful evaluation of our operating performance. Adjusted EBITDA excludes purchase accounting adjustments related to the going-private transaction, severance and facility actions, acquisition-related costs, stock-based compensation expense, and the costs related to the going-private transaction. EBITDA and adjusted EBITDA provide more comparability between our historical results prior to the completion of the going-private transaction and historical results that reflect our capital structure upon completion of the going-private transaction.

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

In deriving adjusted EBITDA, we have excluded the impact of purchase accounting related to the going-private transaction. We believe that due to the non-cash impact of the purchase accounting entries, it is appropriate to exclude these adjustments as they do not reflect our true operating performance.

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Our management believes that these non-GAAP financial measures are helpful in highlighting trends because they exclude the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.

The table below presents a reconciliation of EBITDA and adjusted EBITDA to net income (loss) for the periods presented:


	Fiscal Year Ended
	Successor						Successor						Pro Forma
	January 29, 2016			% Change			January 30, 2015			% Change			January 31, 2014
	(in millions, except percentages)
Net income (loss)	$	(1,104	)		10	%	$	(1,221	)		63	%	$	(3,324	)
Adjustments:
Interest and other, net (a)		792						924						872
Income tax provision (benefit)		(71	)					(125	)					(345	)
Depreciation and amortization		2,872						2,977						2,991

EBITDA	$	2,489			(3	)%	$	2,555			NM		$	194

EBITDA	$	2,489			(3	)%	$	2,555			NM		$	194
Adjustments:
Stock based compensation expense		72						72						135
Impact of purchase accounting (b)		494						1,011						2,010
Other corporate expenses (c)		145						128						748

Adjusted EBITDA	$	3,200			(15	)%	$	3,766			22	%	$	3,087

(a)	See “—Results of Operations—Interest and Other, Net” for more information on the components of interest and other, net.

(b)	This amount includes the non-cash purchase accounting adjustments related to the going-private transaction.

(c)	Consists of severance and facility action costs, acquisition-related costs, and the costs related to the going-private transaction.

RESULTS OF OPERATIONS

Dell’s Going-Private Transaction

The going-private transaction was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations. This guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities on the date of the transaction. All of our assets and liabilities were accounted for and recognized at fair value as of the transaction date. Accordingly, periods prior to October 29, 2013 reflect the financial position, results of operations, and changes in financial position of Dell prior to the going-private transaction, referred to as the predecessor periods (with our company referred to as the Predecessor entity during such periods), and the periods beginning on or after October 29, 2013 reflect the financial position, results of operations and changes in financial position of Denali Holding Inc. and its consolidated subsidiaries subsequent to the going-private transaction, referred to as the successor periods (with our company referred to as the Successor entity during such periods). Included in the results for the successor periods is the impact of purchase accounting adjustments, primarily related to deferred revenue, and an increase in amortization expense for intangible assets.

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The following tables provide unaudited pro forma results of operations for the fiscal year ended January 31, 2014 as if the going-private transaction had occurred at the beginning of the fiscal year ended January 31, 2014. The impact of the fair value adjustments related to deferred revenue and intangible assets and the impact of interest expense on borrowings are the primary items impacting comparability between the Fiscal 2014 predecessor and successor periods.


	As Reported
	Successor			Predecessor			Subtotal			Adjustments						Pro Forma
	October 29, 2013 through January 31, 2014			February 2, 2013 through October 28, 2013			Fiscal Year Ended January 31, 2014			Going- private transaction			Notes			Fiscal Year Ended January 31, 2014
	(in millions)
Net revenue:
Products	$	11,253		$	32,786		$	44,039		$	(35	)		(1	)(2)	$	44,004
Services, including software related		2,822			9,516			12,338			(763	)		(2	)		11,575

Total net revenue		14,075			42,302			56,377			(798	)					55,579

Cost of net revenue:
Products		10,695			28,150			38,845			25			(1	)(3)(4)(6)		38,870
Services, including software related		1,987			6,161			8,148			(131	)		(3	)(4)(5)(9)		8,017

Total cost of net revenue		12,682			34,311			46,993			(106	)					46,887

Gross margin		1,393			7,991			9,384			(692	)					8,692

Operating expenses:
Selling, general, and administrative		2,863			6,528			9,391			822			(3	)(4)(6)		10,213
Research, development, and engineering		328			945			1,273			3			(3	)(4)		1,276

Total operating expenses		3,191			7,473			10,664			825						11,489

Operating income (loss)		(1,798	)		518			(1,280	)		(1,517	)					(2,797	)
Interest and other, net		(204	)		(198	)		(402	)		(470	)		(7	)(10)		(872	)

Income before income taxes		(2,002	)		320			(1,682	)		(1,987	)					(3,669	)
Income tax provision (benefit)		(390	)		413			23			(368	)		(8	)		(345	)

Net income (loss)	$	(1,612	)	$	(93	)	$	(1,705	)	$	(1,619	)				$	(3,324	)

(1)

Reflects the impact on the products net revenue and cost of net revenue as if the purchase accounting was applied to financing receivables as of the first day in the period. The adjustment reflects amortization of the financing receivables fair value adjustment over the three year weighted average useful life of the loan portfolio.

(2)	Reflects the decrease in products and services net revenue to illustrate the effects of the going-private transaction. The adjustment represents the amortization of the deferred revenue fair value adjustment over the estimated useful life of one to three years.

(3)	Reflects the impact on depreciation and amortization as if purchase accounting was applied to property, plant and equipment and purchased intangible assets as of the first day in the period.

(4)	Reflects the impact to compensation expense related to replacement of share-based compensation awards.

(5)	Reflects the impact on services cost of net revenue as if purchase accounting was applied to extended warranty liability as of the first day in the period. The adjustment reflects amortization related to the fair value adjustment over the estimated useful life of 2.5 years.

(6)	Represents the transaction costs related to the going-private transaction, included in the historical results, as these expenses are non-recurring and are not expected to have a continuing impact.

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(7)	Reflects interest expense and income resulting from our new capital structure, including acquisition-related debt upon closing the going-private transaction and extinguishment of existing debt.

(8)

Reflects the tax effect of the pro forma adjustments. The tax effect pro forma adjustments for the going-private transaction were calculated utilizing blended tax rates. We operate in multiple jurisdictions, and therefore the adjustments were tax-affected based on marginal tax rates of the related jurisdictions, which resulted in a higher tax rate for the pro forma adjustments compared to the historical rate.

(9)	Reflects the write-off of deferred cost of net revenue primarily related to the Dell Services business unit.

(10)	Reflects the impact of adjusting for the mark to market of post-going-private transaction de-designated cash flow hedges.

Summary of Pro Forma Adjustments for Results of Operations for Fiscal Year Ended January 31, 2014


	(in millions)
Net revenue:
Products	$	(35	)
(1) Amortization of financing receivables adjustment		(33	)
(2) Amortization of deferred revenue adjustment		(2	)

Services, including software related		(763	)
(2) Amortization of deferred revenue adjustment		(763	)

Cost of net revenue:
Products		25
(1) Amortization of financing receivables adjustment		28
(3) Amortization of property, plant, and equipment and intangibles adjustments		17
(4) Impact to compensation expense		(14	)
(6) Costs related to the going-private transaction		(6	)

Services, including software related		(131	)
(3) Amortization of property, plant, and equipment and intangibles adjustments		(86	)
(4) Impact to compensation expense		(3	)
(5) Amortization of warranty liability adjustment		(27	)
(9) Write-off of deferred cost of net revenue		(15	)

Operating expenses:
Selling, general, and administrative		822
(3) Amortization of property, plant, and equipment and intangibles adjustments		1,296
(4) Impact to compensation expense		(105	)
(6) Costs related to the going-private transaction		(369	)

Research, development, and engineering		3
(3) Amortization of property, plant, and equipment and intangibles adjustments		11
(4) Impact to compensation expense		(8	)

Interest and other, net		(470	)
(7) Interest expense and income resulting from new capital structure		(464	)
(10) Mark to market adjustment of de-designated cash flow hedges		(6	)

Income tax provision / (benefit)		(368	)
(8) Cumulative tax effect of pro forma adjustments		(368	)

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Consolidated Operations

Fiscal 2016 compared to Fiscal 2015 and Fiscal 2015 compared to Pro Forma Fiscal 2014

We have also presented pro forma Fiscal 2014 on a non-GAAP basis, referred to as non-GAAP pro forma Fiscal 2014, as we believe this presentation facilitates an enhanced understanding of our operating performance and enables more meaningful period-to-period comparisons.

The following table summarizes our consolidated results of operations for each of the periods presented:


	Fiscal Year Ended
	Successor									Successor									Pro Forma
	January 29, 2016									January 30, 2015									January 31, 2014
	Dollars			% of Revenue			% Change			Dollars			% of Revenue			% Change			Dollars			% of Revenue
	(in millions, except percentages)
Net revenue:
Product	$	43,317			78.9	%		(7	)%	$	46,690			80.3	%		6	%	$	44,004			79.2	%
Services, including software related		11,569			21.1	%		1	%		11,429			19.7	%		(1	)%		11,575			20.8	%

Total net revenue	$	54,886			100.0	%		(6	)%	$	58,119			100.0	%		5	%	$	55,579			100.0	%
Gross margin:
Product	$	5,394			12.5	%		(14	)%	$	6,275			13.4	%		22	%	$	5,134			11.7	%
Services, including software related		4,438			38.4	%		13	%		3,933			34.4	%		11	%		3,558			30.7	%

Total gross margin	$	9,832			17.9	%		(4	)%	$	10,208			17.6	%		17	%	$	8,692			15.6	%
Operating expenses	$	10,215			18.6	%		(4	)%	$	10,630			18.3	%		(7	)%	$	11,489			20.7	%
Operating income (loss)	$	(383	)		(0.7	)%		9	%	$	(422	)		(0.7	)%		85	%	$	(2,797	)		(5.0	)%
Net income (loss)	$	(1,104	)		(2.0	)%		10	%	$	(1,221	)		(2.1	)%		63	%	$	(3,324	)		(6.0	)%
Earnings (loss) per share—diluted	$	(2.73	)		N/A			10	%		(3.02	)		N/A			63	%		(8.23	)		N/A

Other Financial Information
Non-GAAP revenue	$	55,392			N/A			(6	)%	$	59,095			N/A			4	%	$	56,801			N/A
Non-GAAP gross margin	$	10,850			19.6	%		(8	)%	$	11,747			19.9	%		5	%	$	11,241			19.8	%
Non-GAAP operating expenses	$	8,211			14.8	%		(4	)%	$	8,554			14.5	%		(2	)%	$	8,748			15.4	%
Non-GAAP operating income	$	2,639			4.8	%		(17	)%	$	3,193			5.4	%		28	%	$	2,493			4.4	%
Non-GAAP net income	$	1,354			2.4	%		(19	)%	$	1,670			2.8	%		57	%	$	1,063			1.9	%
EBITDA	$	2,489			4.5	%		(3	)%	$	2,555			4.3	%		NM		$	194			0.3	%
Adjusted EBITDA	$	3,200			5.8	%		(15	)%	$	3,766			6.4	%		22	%	$	3,087			5.4	%
Non-GAAP earnings per share—diluted	$	3.30			N/A			(20	)%	$	4.13			N/A			57	%	$	2.63			N/A

Non-GAAP revenue, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, EBITDA, adjusted EBITDA, and non-GAAP earnings per share—diluted are not measurements of financial performance prepared in accordance with GAAP. Non-GAAP financial measures

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as a percentage of revenue are calculated based on non-GAAP revenue. See “—Non-GAAP Financial Measures” for information about these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Overview

During Fiscal 2016, our total net revenue decreased 6% on both a GAAP and non-GAAP basis. The decreases in net revenue during Fiscal 2016 were attributable to lower revenue in our Client Solutions, DSG, and Dell Services business units. Client Solutions contributed to most of the decrease in revenue during Fiscal 2016, driven by a global decline in demand for desktops and notebooks. In aggregate, revenue from our ESG, DSG, and Dell Services business units remained relatively flat during Fiscal 2016. As a result the combined revenue from ESG, DSG, and Dell Services represented 34.9% of total GAAP revenue for Fiscal 2016 compared to 33.0% of total GAAP revenue for Fiscal 2015.

During Fiscal 2016, on a GAAP basis we incurred operating losses of $383 million, compared to operating losses of $422 million in Fiscal 2015. Operating loss on a GAAP basis includes purchase accounting adjustments related to the going-private transaction, amortization of intangible assets, and other corporate expenses. In aggregate, these items totaled $3.0 billion and $3.6 billion during Fiscal 2016 and Fiscal 2015, respectively. On a non-GAAP basis, during Fiscal 2016, operating income decreased 17% to $2.6 billion from $3.2 billion in Fiscal 2015. The decrease in non-GAAP operating income was primarily attributable to lower gross margin, partially offset by a decrease in operating expenses.

We generated cash flow from operations of $2.2 billion during Fiscal 2016, compared to $2.6 billion during Fiscal 2015. The decline in operating cash flows was due to a decline in profitability and lower working capital benefits in the current period. Despite this decline, our operating cash flow performance has remained strong over the periods presented. See “Liquidity, Capital Commitments, and Contractual Cash Obligations” for further information on our cash flow metrics.

Revenue

Fiscal 2016 compared to Fiscal 2015

•

Product Revenue—Product revenue includes revenue from the sale of hardware products and Dell-owned software licenses. During Fiscal 2016, product revenue decreased 7%, on both a GAAP and non-GAAP basis, due to decreases in revenue from Client Solutions as we experienced an overall decline in demand for desktops and notebooks. Product revenue for Fiscal 2016 did not benefit from the positive effects of the Windows XP refresh that contributed to product revenue in Fiscal 2015.

•

Services Revenue, including software related—Services revenue, including software related, includes revenue from our services offerings, third-party software revenue, and support services related to Dell-owned software. During Fiscal 2016, revenue attributable to these services increased 1% on a GAAP basis, which was primarily attributable to the diminishing negative impact of purchase accounting adjustments which were $0.5 billion in Fiscal 2016, compared to $1.0 billion in Fiscal 2015. On a non-GAAP basis, during Fiscal 2016, revenue attributable to these services decreased 2%, which was attributable to both a decrease in revenue from our Dell Services business unit and a decrease in sales of our third-party software offerings and post-contract customer support associated with those software offerings.

See “—Product and Services Business Units” for further information regarding revenue from our products, services, and software offerings.

From a geographical perspective, net revenue decreased in all regions during Fiscal 2016, partially offset by growth in certain emerging markets, including China and India.

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Fiscal 2015 compared to Pro Forma Fiscal 2014

•

Product Revenue—During Fiscal 2015, product revenue increased 6% when compared to pro forma Fiscal 2014. On a non-GAAP basis, product revenue during Fiscal 2015 also increased 6% when compared to non-GAAP pro forma Fiscal 2014. Overall, these increases were primarily attributable to increases in revenue from Client Solutions due to favorable market conditions during Fiscal 2015 and also due to our improved execution through strategic pricing. See “—Dell’s Going-Private Transaction” above for more information about pro forma Fiscal 2014.

•

Services Revenue, including software related—During Fiscal 2015, revenue on a GAAP basis attributable to services, including software related, decreased 1% when compared to pro forma Fiscal 2014. On a non-GAAP basis, revenue during Fiscal 2015 decreased 2% when compared to non-GAAP pro forma Fiscal 2014. The slight decline in services revenue, including software related, for Fiscal 2015 was primarily attributable to decreases in revenue from third-party software, as we elected not to resell certain third-party software offerings during the period. See “—Dell’s Going-Private Transaction” above for more information about pro forma Fiscal 2014.

See “—Product and Services Business Units” above for further information regarding revenue from our products, services, and software offerings.

From a geographical perspective, revenue across all regions increased during Fiscal 2015 when compared to pro forma Fiscal 2014. Revenue from emerging countries increased 9% during Fiscal 2015, driven primarily by an increase in revenue from India and China.

Gross Margin

Fiscal 2016 compared to Fiscal 2015

During Fiscal 2016, our total gross margin decreased 4% to $9.8 billion on a GAAP basis and 8% to $10.9 billion on a non-GAAP basis. During Fiscal 2016, our gross margin percentage increased 30 basis points to 17.9% on a GAAP basis, and decreased 30 basis points to 19.6% on a non-GAAP basis. Gross margin on a GAAP basis for Fiscal 2016 included the effects of $1.0 billion in purchase accounting adjustments and amortization of intangibles related to the going-private transaction.

•

Products—During Fiscal 2016, product gross margin dollars decreased 14%, on both a GAAP and non-GAAP basis. Product gross margin percentage on a GAAP and non-GAAP basis decreased 90 and 100 basis points during Fiscal 2016 to 12.5% and 13.7%, respectively. The decrease in product gross margin in dollars and percentages on both a GAAP and non-GAAP basis was primarily attributable to the adverse impact on Client Solutions of an overall decline in demand that resulted in a decrease in desktop and notebook units sold, as well as challenging pricing dynamics. These pricing dynamics included the impacts of competitive pressure and foreign currency volatility. Our gross margins include benefits relating primarily to settlements from certain vendors regarding their past pricing practices. These benefits were $97 million and $109 million for Fiscal 2016 and Fiscal 2015, respectively. Vendor settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment.

•

Services, including software related—During Fiscal 2016, our gross margin dollars for services, including software related, increased 13% and 1% on a GAAP and non-GAAP basis, respectively. The increase in GAAP services gross margin dollars was primarily attributable to the diminishing negative impact of purchase accounting adjustments which were $0.5 billion in Fiscal 2016, compared to $0.9 billion in Fiscal 2015. Services gross margin percentage on a GAAP and non-GAAP basis increased 400 and 130 basis points during Fiscal 2016 to 38.4% and 40.6%, respectively. The increase in services gross margin in dollars and gross margin percentages on a non-GAAP basis was attributable to higher gross margin from Dell Services and a shift away from lower margin product offerings.

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Fiscal 2015 compared to Pro Forma Fiscal 2014

During Fiscal 2015, our total gross margin increased 17% to $10.2 billion on a GAAP basis when compared to pro forma Fiscal 2014. On a non-GAAP basis, our total gross margin during Fiscal 2015 increased 5% to $11.7 billion when compared to non-GAAP pro forma Fiscal 2014. During Fiscal 2015, gross margin percentage on a GAAP basis increased 200 basis points to 17.6% when compared to pro forma Fiscal 2014. On a non-GAAP basis, gross margin percentage increased 10 basis points to 19.9% when compared to non-GAAP pro forma Fiscal 2014. Gross margin on a GAAP basis for Fiscal 2015 includes the effects of $1.5 billion in purchase accounting adjustments and amortization of intangibles related to the going-private transaction. In comparison, our gross margin for pro forma Fiscal 2014 included $2.4 billion in purchase accounting adjustments and amortization of intangibles related to the going-private transaction. See “—Dell’s Going-Private Transaction” above for more information about pro forma Fiscal 2014.

•

Products—During Fiscal 2015, product gross margin dollars on a GAAP basis increased 22% when compared to pro forma Fiscal 2014. Product gross margin dollars on a non-GAAP basis for Fiscal 2015 increased 5% when compared to non-GAAP pro forma Fiscal 2014. Product gross margin percentage on a GAAP basis increased 170 basis points to 13.4% when compared to pro forma Fiscal 2014. Product gross margin percentage on a non-GAAP basis remained relatively unchanged when compared to non-GAAP pro forma Fiscal 2014. The increase in product gross margin dollars was driven by higher gross margin from Client Solutions, resulting from favorable market conditions coupled with pricing discipline and continued focus on our cost structure. Our gross margins include benefits, relating primarily to settlements from certain vendors regarding their past pricing practices. These benefits were $109 million for Fiscal 2015 and immaterial for pro forma Fiscal 2014.

•

Services, including software related—During Fiscal 2015, our gross margin for services, including software related, increased 11% on a GAAP basis when compared to pro forma Fiscal 2014. On a non-GAAP basis, during Fiscal 2015, our gross margin for services, including software related, increased 4% when compared to non-GAAP pro forma Fiscal 2014. On a GAAP basis, services, including software related, gross margin percentage increased 370 basis points to 34.4% when compared to pro forma Fiscal 2014. On a non-GAAP basis, services, including software related, gross margin percentage increased 250 basis points to 39.3% when compared to non-GAAP pro forma Fiscal 2014. The increase in services gross margin in dollars and gross margin percentages on a non-GAAP basis was attributable to higher gross margin from Dell Services as well as higher gross margin for support services related to DSG offerings.

Vendor Programs and Settlements

Our gross margin is affected by our ability to achieve competitive pricing with our vendors and contract manufacturers, including through our negotiation of a variety of vendor rebate programs to achieve lower net costs for the various components we include in our products. Under these programs, vendors provide us with rebates or other discounts from the list prices for the components, which are generally elements of their pricing strategy. We account for vendor rebates and other discounts as a reduction in cost of net revenue. We manage our costs on a total net cost basis, which includes supplier list prices reduced by vendor rebates and other discounts.

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 Fiscal 2016, Fiscal 2015 and pro forma Fiscal 2014 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 programmatic changes to vendor pricing or rebate programs that may impact our results in the near term.

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In addition, we have pursued legal action against certain vendors and are currently involved in negotiations with other vendors regarding their past pricing practices. We have negotiated settlements with some of these vendors and may have additional settlements in future quarters. These settlements are allocated to our segments based on the relative amount of affected vendor products used by each segment.

Operating Expenses

The following table presents information regarding our operating expenses during each of the periods presented:


	Fiscal Year Ended
	Successor								Successor								Pro Forma
	January 29, 2016								January 30, 2015								January 31, 2014
	Dollars		% of Revenue			% Change			Dollars		% of Revenue			% Change			Dollars		% of Revenue
	(in millions, except percentages)
Operating expenses:
Selling, general, and administrative	$	8,900		16.2	%		(6	)%	$	9,428		16.2	%		(8	)%	$	10,213		18.4	%
Research, development, and engineering		1,315		2.4	%		9	%		1,202		2.1	%		(6	)%		1,276		2.3	%

Total operating expenses	$	10,215		18.6	%		(4	)%	$	10,630		18.3	%		(7	)%	$	11,489		20.7	%

*Other Financial Information*
Non-GAAP operating expenses	$	8,211		14.8	%		(4	)%	$	8,554		14.5	%		(2	)%	$	8,748		15.4	%

Fiscal 2016 compared to Fiscal 2015

During Fiscal 2016, our total operating expenses decreased 4% on both a GAAP and non-GAAP basis. During Fiscal 2016 and Fiscal 2015, we recognized $1.8 billion and $1.9 billion, respectively, in amortization of intangible assets and purchase accounting adjustments related to the going-private transaction.

•

Selling, General, and Administrative—Selling, general, and administrative, or SG&A, expenses on a GAAP basis decreased 6% during Fiscal 2016. The decreases were driven by a reduction in compensation expense, primarily due to a decrease in performance-based compensation. We continue to actively manage our cost structure, which allows us to invest in strategic areas such as strengthening our sales force.

•

Research, Development, and Engineering—On a GAAP basis, RD&E expenses were 2.4% of net revenue for Fiscal 2016, compared to 2.1% for Fiscal 2015. The increase in RD&E expenses was primarily related to personnel-related expenses as we continue to invest in product development.

Fiscal 2015 compared to Pro Forma Fiscal 2014

During Fiscal 2015, total operating expenses on a GAAP basis decreased 7% to $10.6 billion when compared to pro forma Fiscal 2014. During Fiscal 2015 and pro forma Fiscal 2014, we recognized $1.9 billion and $2.0 billion, respectively, in amortization of intangible assets and purchase accounting adjustments related to the going-private transaction. Excluding these costs as well as other corporate expenses, total operating expenses on a non-GAAP basis decreased 2% during Fiscal 2015 when compared to non-GAAP pro forma Fiscal 2014. See “—Dell’s Going-Private Transaction” above for more information about pro forma Fiscal 2014.

•

Selling, General, and Administrative—SG&A expenses declined 8% on a GAAP basis when compared to pro forma Fiscal 2014. The decrease was driven by a reduction in compensation expense, due to personnel-related productivity initiatives enacted primarily in the fourth quarter of pro forma Fiscal 2014. This decrease was partially offset by an increase in costs associated with our annual incentive plans, which is directly related to our stronger results for Fiscal 2015.

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•

Research, Development, and Engineering—On a GAAP basis, RD&E expenses were 2.1% of net revenue for Fiscal 2015. For pro forma Fiscal 2014, RD&E expenses were 2.3% of net revenue.

Operating Income/Loss

Fiscal 2016 compared to Fiscal 2015

On a GAAP basis during Fiscal 2016, operating loss was $383 million, compared to $422 million during Fiscal 2015. The decrease in operating loss over the period was primarily attributable to the diminishing negative impact of purchase accounting adjustments. Operating loss on a GAAP basis includes amortization of intangible assets and purchase accounting adjustments associated with the going-private transaction of $2.8 billion for Fiscal 2016. In comparison, during Fiscal 2015, we recognized $3.4 billion in amortization of intangibles and purchase accounting adjustments associated with the going-private transaction. Excluding these costs as well as other corporate expenses, during Fiscal 2016, operating income on a non-GAAP basis decreased 17% to an operating income of $2.6 billion. These decreases were primarily attributable to lower gross margin primarily driven by Client Solutions, the effect of which was offset partially by a reduction in operating expenses.

Fiscal 2015 compared to Pro Forma Fiscal 2014

On a GAAP basis, during Fiscal 2015, operating loss decreased 85% to an operating loss of $422 million when compared to pro forma Fiscal 2014. Operating income on a GAAP basis for Fiscal 2015 included $3.4 billion in amortization of intangible assets and purchase accounting adjustments associated with the going-private transaction. In comparison, during pro forma Fiscal 2014, we recognized $4.5 billion in amortization of intangibles and purchase accounting adjustments associated with the going-private transaction. Excluding these costs as well as other corporate expenses, during Fiscal 2015, operating income on a non-GAAP basis increased 28% to $3.2 billion when compared to non-GAAP pro forma Fiscal 2014. These increases were primarily attributable to higher gross margin, coupled with a decrease in operating expenses. See “—Dell’s Going-Private Transaction” above for more information about pro forma Fiscal 2014.

Interest and Other, Net

The following table provides a detailed presentation of interest and other, net for each of the periods presented:


	Fiscal Year Ended
	Successor			Successor			Pro Forma
	January 29, 2016			January 30, 2015			January 31, 2014
	(in millions)
Interest and other, net:
Investment income, primarily interest	$	39		$	47		$	42
Gain (loss) on investments, net		(2	)		(29	)		2
Interest expense		(680	)		(807	)		(857	)
Foreign exchange		(122	)		(96	)		(47	)
Other		(27	)		(39	)		(12	)

Total interest and other, net	$	(792	)	$	(924	)	$	(872	)

Fiscal 2016 compared to Fiscal 2015

During Fiscal 2016, changes in interest and other, net were favorable by $132 million, primarily due to a decrease in interest expense from lower debt balances over the period. The positive effect of lower interest expense was partially offset by an increase in foreign exchange losses. Foreign exchanges losses increased due to revaluations of certain un-hedged foreign currencies, which were partially offset by lower trading costs.

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Fiscal 2015 compared to Pro Forma Fiscal 2014

During Fiscal 2015, changes in interest and other, net were unfavorable by $52 million, when compared to pro forma Fiscal 2014. This change was primarily attributable to an increase in foreign exchange losses and a loss on investments, partially offset by a decrease in interest expense due to lower debt balances over the period. The increase in foreign exchange losses was due to higher costs associated with our hedging program and revaluations of certain un-hedged foreign currencies.

Income and Other Taxes

Our effective income tax rate was 6.0% and 9.3% on pre-tax losses of $1,175 million and $1,346 million for Fiscal 2016 and Fiscal 2015, respectively, and 9.4% on pre-tax losses of $3,669 million for pro forma Fiscal 2014. The change in our effective income tax rate for Fiscal 2016 was primarily attributable to a change in the mix of geographical income, as well as higher discrete tax expenses. The change in our effective income tax rate for Fiscal 2015 as compared to pro forma Fiscal 2014 was primarily attributable to fewer charges related to the going-private transaction which are generally deductible at higher tax rates, offset by a valuation allowance on deferred tax assets recorded in pro forma Fiscal 2014 for one of our foreign jurisdictions, and a change in the mix of geographic income to lower tax jurisdictions.

Our effective tax rate can fluctuate depending on the geographic distribution of our world-wide earnings, as our foreign earnings are generally taxed at lower rates than in the United States. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and lower tax rates is attributable to Singapore, China, and Malaysia. A significant portion of these income tax benefits is related to a tax holiday that will expire on January 31, 2017. We are currently seeking new terms for the affected subsidiary and it is uncertain whether any terms will be agreed upon. Our other tax holidays will expire in whole or in part during Fiscal 2019 through Fiscal 2023. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally resulted from the geographical distribution of taxable income discussed above and permanent differences between the book and tax treatment of certain items. We continue to assess our business model and its impact in various taxing jurisdictions.

For further discussion regarding tax matters, including the status of income tax audits, see Note 12 of the Notes to the Audited Consolidated Financial Statements of Denali.

Net Income/Loss

Fiscal 2016 compared to Fiscal 2015

During Fiscal 2016, net loss on a GAAP basis decreased 10% to a loss of $1.1 billion when compared to Fiscal 2015. Net loss for Fiscal 2016, on a GAAP basis includes amortization of intangible assets, purchase accounting adjustments, costs related to the going-private transaction, and other corporate expenses. In aggregate these costs totaled $3.0 billion and $3.6 billion for Fiscal 2016 and Fiscal 2015, respectively. Excluding these costs, net income for Fiscal 2016 on a non-GAAP basis decreased 19% to $1.4 billion. The decrease in non-GAAP net income for Fiscal 2016 was primarily attributable to a decrease in non-GAAP operating income, which was partially offset by a decrease in non-GAAP tax expense. See Note 12 of the Notes to the Audited Consolidated Financial Statements of Denali for more information regarding our effective tax rate.

Fiscal 2015 compared to Pro Forma Fiscal 2014

During Fiscal 2015, net loss on a GAAP basis decreased 63% to a loss of $1.2 billion when compared to pro forma Fiscal 2014. Net loss for Fiscal 2015, on a GAAP basis, and pro forma Fiscal 2014 includes amortization of intangible assets, purchase accounting adjustments, the costs related to the going-private transaction, and other

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corporate expenses. In aggregate these costs totaled $3.6 billion and $5.5 billion for Fiscal 2015 and pro forma Fiscal 2014, respectively. Excluding these costs, net income for Fiscal 2015 on a non-GAAP basis increased 57% to $1.7 billion when compared to non-GAAP pro forma Fiscal 2014. The increase in non-GAAP net income for Fiscal 2015 is primarily attributable to an increase in operating income. See “—Dell’s Going-Private Transaction” above for more information about pro forma Fiscal 2014.

Product and Services Business Units

Fiscal 2016 compared to Fiscal 2015 and Fiscal 2015 compared to Pro Forma Fiscal 2014

Recognition of Dell’s Going-Private Transaction for Product and Services Business Units

In analyzing results of operations for Product and Services Business Units, we have presented “Fiscal 2015 compared to pro forma Fiscal 2014.” The impact of purchase accounting and intangibles amortization associated with the going-private transaction are recorded at the corporate level and not recorded within the business units. As a result, the comparability of business unit results across the fiscal periods being analyzed in this management’s discussion and analysis are not affected by the going-private transaction and related accounting impacts.


	Successor			Predecessor			Subtotal			Adjustments			Pro Forma
	October 29, 2013 through January 31, 2014			February 2, 2013 through October 28, 2013			Fiscal Year Ended January 31, 2014			Going- Private Transaction			Fiscal Year Ended January 31, 2014
				(in millions)
Consolidated net revenue:
Client Solutions	$	9,839		$	28,101		$	37,940		$	—		$	37,940
Enterprise Solutions Group		3,500			10,875			14,375			—			14,375
Dell Software Group		360			951			1,311			—			1,311
Dell Services		739			2,219			2,958			—			2,958

Segment net revenue	$	14,438		$	42,146		$	56,584		$	—			56,584
Corporate (a)		61			156			217			—			217
Impact of purchase accounting (b)		(424	)		—			(424	)		(798	)		(1,222	)

Total	$	14,075		$	42,302		$	56,377		$	(798	)	$	55,579

Consolidated operating income:
Client Solutions	$	289		$	1,070		$	1,359		$	—		$	1,359
Enterprise Solutions Group		270			867			1,137			—			1,137
Dell Software Group		(52	)		(196	)		(248	)		—			(248	)
Dell Services		2			(44	)		(42	)		—			(42	)

Segment operating income		509			1,697			2,206			—			2,206
Impact of purchase accounting (b)		(1,252	)		—			(1,252	)		(868	)		(2,120	)
Amortization of intangible assets		(584	)		(594	)		(1,178	)		(1,155	)		(2,333	)
Corporate (a)		102			—			102			185			287
Other (c)		(573	)		(585	)		(1,158	)		321			(837	)

Total	$	(1,798	)	$	518		$	(1,280	)	$	(1,517	)	$	(2,797	)

(a)	Corporate primarily consists of unallocated transactions and certain security offerings.

(b)	Impact of purchase accounting in the successor periods represents the non-cash purchase accounting adjustments related to the going-private transaction.

(c)	Other costs include severance, facility, acquisition, and compensation expenses and costs related to the going-private transaction.

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Client Solutions:

The following table presents revenue and operating income attributable to Client Solutions for the respective periods:


	Fiscal Year Ended
	Successor						Successor						Pro Forma
	January 29, 2016			% Change			January 30, 2015			% Change			January 31, 2014
	(in millions, except percentages)
Net Revenue:
Commercial	$	21,297			(11	)%	$	23,988			9	%	$	21,954
Consumer		9,167			(7	)%		9,886			—	%		9,918
Third-party software and after-point-of-sale peripherals		5,413			(6	)%		5,760			(5	)%		6,068

Total Client Solutions revenue	$	35,877			(9	)%	$	39,634			4	%	$	37,940

Operating Income:

Client Solutions operating income	$	1,410			(31	)%	$	2,051			51	%	$	1,359

% of segment revenue		3.9	%					5.2	%					3.6	%

Fiscal 2016 compared to Fiscal 2015

Net Revenue—During Fiscal 2016, Client Solutions experienced a 9% decrease in net revenue due to lower demand across all Client Solutions product categories coupled with competitive pricing pressure. The decline in commercial and consumer revenue reflected decreased demand for desktops and notebooks, which was magnified by our product mix. Product revenue for Fiscal 2016 did not benefit from the positive effects of the Windows XP refresh that contributed to product revenue in Fiscal 2015. From a geographical perspective, revenue attributable to Client Solutions decreased across all regions during Fiscal 2016, with revenue from the Americas and EMEA representing most of the decline.

Operating Income—During the Fiscal 2016, operating income as a percentage of revenue attributable to Client Solutions decreased 130 basis points to 3.9%. This decline was driven by both a decrease in our gross margin percentage, and an increase in our operating expense percentage. The decline in our gross margin percentage was a result of challenging economic conditions, competitive pressures, and a strong U.S. dollar that all impacted our ability to adjust pricing accordingly. Despite this challenging environment, we are making investments in our sales force to enhance efficiency and drive growth in future periods. As a result of this investment and strategic R&D investments, operating expenses as a percentage of revenue increased over the period.

Fiscal 2015 compared to Pro Forma Fiscal 2014

Net Revenue—During Fiscal 2015, Client Solutions experienced a 4% increase in net revenue when compared to pro forma Fiscal 2014, due to growth in the commercial category driven by an increase in units sold. Client Solutions net revenue also benefited from favorable market conditions, driven by the Windows XP refresh cycle, which gradually weakened in the second half of the year. Consumer net revenue was effectively unchanged during Fiscal 2015. Throughout Fiscal 2015, we improved our execution through strategic pricing, leveraging our direct sales force as well as our channel partners. We have also been experiencing a consolidation of the industry, which contributed to the improved results for Fiscal 2015. From a geographical perspective, revenue attributable to Client Solutions increased across all regions during Fiscal 2015, led by an increase in revenue from the Americas.

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Operating Income—During Fiscal 2015, Client Solutions operating income as a percentage of revenue increased 160 basis points to 5.2%. This increase was attributable to an improvement in our gross margin percentage, driven primarily by desktops and notebooks as we benefited from favorable market conditions. The increase in operating income was also due to a reduction in our operating expense percentage as we continue to optimize our cost structure.

Enterprise Solutions Group:

The following table presents revenue and operating income attributable to ESG for the respective periods:


	Fiscal Year Ended
	Successor						Successor						Pro Forma
	January 29, 2016			% Change			January 30, 2015			% Change			January 31, 2014
	(in millions, except percentages)
Net Revenue:
Servers and networking	$	12,761			3	%	$	12,368			4	%	$	11,901
Storage		2,217			(5	)%		2,346			(5	)%		2,474

Total ESG revenue	$	14,978			2	%	$	14,714			2	%	$	14,375

Operating Income:

ESG operating income	$	1,052			(14	)%	$	1,230			8	%	$	1,137

% of segment revenue		7.0	%					8.4	%					7.9	%

Fiscal 2016 compared to Fiscal 2015

Net Revenue—During Fiscal 2016, ESG net revenue increased 2% primarily due to a 3% increase in net revenue from servers and networking. PowerEdge server average selling prices increased due to a shift to products with richer configurations, while overall units remained relatively flat. The increase in net revenue from servers and networking was partially offset by a 5% decrease in storage revenue. From a geographical perspective, during Fiscal 2016, the overall increase in ESG net revenue was primarily due to increased revenue in APJ.

Operating Income—During Fiscal 2016, ESG operating income as a percentage of revenue decreased 140 basis points to 7.0%. The decrease in our operating income percentage was driven by lower gross margin percentages. These declines were primarily driven by challenging pricing dynamics, including competitive pressures and the strong U.S. dollar. These challenging economic conditions affected our ability to raise prices sufficiently to offset the higher costs associated with the shift to products with richer configurations.

Fiscal 2015 compared to Pro Forma Fiscal 2014

Net Revenue—During Fiscal 2015, ESG experienced a 2% increase in net revenue, which was attributable to a 4% increase in revenue from our servers and networking products, driven by an increase in PowerEdge server units and average selling prices attributable to richer configurations. These increases were partially offset by a 5% decline in storage revenue. From a geographical perspective, ESG revenue increased during Fiscal 2015 driven by an increase in revenue from EMEA and, to a lesser extent, an increase in revenue from APJ, partially offset by a decline in revenue from the Americas.

Operating Income—During Fiscal 2015, operating income as a percentage of revenue attributable to ESG increased 50 basis points to 8.4%. This increase was primarily driven by a decline in our operating expense percentage as we continue to optimize our cost structure, partially offset by a decline in our gross margin percentage.

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Dell Software Group:

The following table presents revenue and operating income attributable to DSG for the respective periods:


	Fiscal Year Ended
	Successor						Successor						Pro Forma
	January 29, 2016			% Change			January 30, 2015			% Change			January 31, 2014
	(in millions, except percentages)
Net Revenue:

DSG revenue	$	1,362			(9	)%	$	1,493			14	%	$	1,311

Operating Loss:

DSG operating loss	$	(1	)		97	%	$	(30	)		88	%	$	(248	)

% of segment revenue		(0.1	)%					(2.0	)%					(18.9	)%

Fiscal 2016 compared to Fiscal 2015

Net Revenue—During Fiscal 2016, revenue attributable to DSG decreased 9%, driven by a decrease in systems management software sales, primarily due to disruption from a realignment of our sales organization. From a geographical perspective, DSG revenue decreased across all regions during Fiscal 2016.

Operating Income—During Fiscal 2016, DSG operating income as a percentage of revenue increased 190 basis points to an operating loss percentage of 0.1%. This improvement was attributable to a decrease in our operating expense percentage, driven by a decrease in SG&A expenses, primarily as a result of headcount reduction. The positive impact of the decreases was partially offset by a decline in our gross margin percentage due to a shift to software solutions with lower margins.

Fiscal 2015 compared to Pro Forma Fiscal 2014

Net Revenue—During Fiscal 2015, revenue attributable to DSG increased 14% as we experienced growth across our entire portfolio of software solutions.

Operating Income—During Fiscal 2015, DSG operating loss as a percentage of revenue decreased to an operating loss percentage of 2.0%. Overall, the decrease in operating loss percentage was primarily driven by a decrease in our operating expense percentage.

Dell Services:

The following table presents revenue and operating income attributable to Dell Services for the respective periods:


	Fiscal Year Ended
	Successor						Successor						Pro Forma
	January 29, 2016			% Change			January 30, 2015			% Change			January 31, 2014
	(in millions, except percentages)
Net Revenue:
Infrastructure and cloud services	$	1,679			(3	)%	$	1,734			—	%	$	1,735
Applications and business process services		1,163			(7	)%		1,248			2	%		1,223

Total Dell Services revenue	$	2,842			(5	)%	$	2,982			1	%	$	2,958

Operating Income (Loss):
Dell Services operating income (loss)	$	152			23	%	$	124			395	%	$	(42	)

% of segment revenue		5.3	%					4.2	%					(1.4	)%

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Fiscal 2016 compared to Fiscal 2015

Net Revenue—During Fiscal 2016, Dell Services experienced a 5% decrease in net revenue. The decrease was attributable to a decline in revenue across all Dell Services categories driven by revenue runoff from several large contracts in advance of the benefits to be recognized from new contract signings. At a regional level, Dell Services revenue is mostly generated in the Americas, primarily in the United States. Dell Services revenue generated in the Americas decreased 3% during Fiscal 2016.

Operating Income—For Fiscal 2016, operating income as a percentage of revenue attributable to Dell Services increased 110 basis points to 5.3%. This increase was driven by improved gross margin percentages, primarily attributable to our infrastructure and cloud offerings, as we continued to optimize our cost structure and automate our delivery process. This increase in gross margin percentages was partially offset by an increase in our operating expense percentage primarily due to an increase in outside services fees.

Services Backlog—Services backlog decreased 10% to $7.2 billion as of January 29, 2016, compared to $8.0 billion as of January 30, 2015. Our focus continues to be on building a sustainable pipeline and improving our cost structure to enable our growth in the market. Estimated services backlog is primarily related to our outsourcing services business. The majority of services backlog represents signed contracts that are initially $2 million or more in total expected revenue with an initial contract term of at least 18 months. We provide information regarding services backlog because we believe it provides useful trend information regarding changes in the size of our services business over time. The terms of the signed services contracts included in our calculation of services backlog are subject to change and are affected by terminations, changes in the scope of services, and changes to other factors that could impact the value of the contract. For these and other reasons, it is not reasonably practicable to estimate the portions of these backlog amounts that will ultimately be recognized as revenue when performance on the contracts is completed.

Fiscal 2015 compared to Pro Forma Fiscal 2014

Net Revenue—During Fiscal 2015, Dell Services experienced a 1% increase in net revenue. Revenue from applications and business process services increased 2% during Fiscal 2015, due to an increase in revenue from applications services. Revenue from infrastructure and cloud services was effectively unchanged during that period. At a regional level, Dell Services revenue is generated primarily from sales in the U.S. market, and U.S. revenue remained largely unchanged during Fiscal 2015.

Operating Income—During Fiscal 2015, operating income percentage increased 560 basis points to 4.2%. Overall, this increase was attributable to an increase in our gross margin percentage, driven by infrastructure and cloud services, coupled with a decline in our operating expense percentage.

Services Backlog—Services backlog decreased 4% to $8.0 billion as of January 30, 2015, compared to $8.3 billion as of January 31, 2014.

Accounts Receivable

We sell products and services directly to customers and through a variety of sales channels, including retail distribution. As of January 29, 2016, our accounts receivable, net, was $5.5 billion, compared to $6.1 billion as of January 30, 2015. This decrease was primarily driven by a decrease in revenue over the period and improved collections performance. We maintain an allowance for doubtful accounts to cover receivables that may be deemed uncollectible. The allowance for losses is based on a provision for accounts that are collectively evaluated based on historical bad debt experience as well as specific identifiable customer accounts that are deemed at risk. As of January 29, 2016 and January 30, 2015, the allowance for doubtful accounts was $57 million and $60 million, respectively. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We monitor the aging of our accounts receivable and continue to take actions to reduce our exposure to credit losses.

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Dell Financial Services and Financing Receivables

Dell Financial Services, referred to as DFS, offers a wide range of financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of Dell products. In some cases, we originate financing activities for our commercial customers related to the purchase of third-party technology products that complement our portfolio of products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including third-party originations, were $3.7 billion for both Fiscal 2016 and Fiscal 2015 and $3.3 billion for pro forma Fiscal 2014. As of January 29, 2016 and January 30, 2015, our financing receivables, net were $5.1 billion and $5.0 billion, respectively.

During pro forma Fiscal 2014, prior to the going-private transaction, we completed our acquisition of CIT Vendor Finance’s Dell-related financing assets portfolio and sales and servicing functions in Europe which has enabled global expansion of our direct finance model. In connection with this transaction we obtained a bank license from The Central Bank of Ireland to facilitate our ongoing offerings of financial services in Europe.

We have securitization programs to fund revolving loans and fixed-term leases and loans through consolidated special purpose entities, referred to as SPEs, which we account for as secured borrowings. We transfer certain U.S. customer financing receivables to these SPEs, whose purpose is to facilitate the funding of customer receivables through financing arrangements with multi-seller conduits that issue asset-backed debt securities in the capital markets and to private investors. During Fiscal 2016, Fiscal 2015, and pro forma Fiscal 2014, we transferred $3.2 billion, $2.7 billion and $5.4 billion to these SPEs, respectively. The significant amount of receivables securitized through SPEs during pro forma Fiscal 2014 reflect our entry into new securitization programs as a result of the going-private transaction. Our risk of loss related to these securitized receivables is limited to the amount of our over-collateralization in the transferred pool of receivables. The structured financing debt related to all of our securitization programs included as secured borrowing was $2.8 billion and $2.3 billion, as of January 29, 2016 and January 30, 2015, respectively. In addition, the carrying amount of the corresponding financing receivables was $3.3 billion and $3.0 billion, as of January 29, 2016 and January 30, 2015, respectively.

We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. For Fiscal 2016, Fiscal 2015 and pro forma Fiscal 2014, the principal charge-off rate for our total portfolio was 2.5%, 2.9% and 3.7%, respectively. The credit quality mix of our financing receivables has improved in recent years due to our underwriting actions and as the mix of high quality commercial accounts in our portfolio has increased. The allowance for losses is determined based on various factors, including historical and anticipated experience, past due receivables, receivable type, and customer risk profile. At January 29, 2016 and January 30, 2015, the allowance for financing receivable losses was $176 million and $194 million, respectively. In general, the loss rates on our financing receivables have improved over the periods presented. We expect the loss rates in future periods to stabilize, with movements in these rates being primarily driven by seasonality and a continued shift in portfolio composition to lower risk commercial assets. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved.

See Note 5 of the Notes to the Audited Consolidated Financial Statements of Denali for additional information about our financing receivables and the associated allowance.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

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LIQUIDITY, CAPITAL COMMITMENTS, AND CONTRACTUAL CASH OBLIGATIONS

Market Conditions

We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties.

We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments.

We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than the U.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See Note 7 of the Notes to the Audited Consolidated Financial Statements of Denali for more information about our use of derivative instruments.

See “Risk Factors” for further discussion of risks associated with our use of counterparties. The impact on our Consolidated Financial Statements of any credit adjustments related to these counterparties has been immaterial.

Liquidity

To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our strategic initiatives. In addition to internally generated cash, we have access to other capital sources, including the ABL Credit Facility, to finance our strategic initiatives and fund growth in our financing operations. As of January 29, 2016 we had $6.6 billion of total cash and cash equivalents, substantially all of which was held outside of the U.S. Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost effective manner.

A significant portion of our income is earned in non-U.S. jurisdictions. Under current law, earnings available to be repatriated to the U.S. would be subject to U.S. federal income tax, less applicable foreign tax credits. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. We utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash available in the locations where it is needed.

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The following table summarizes our cash and cash equivalents as well as our available borrowings as of January 29, 2016 and January 30, 2015:


	Successor
	January 29, 2016		January 30, 2015
	(in millions)
Cash and cash equivalents, and available borrowings:
Cash and cash equivalents	$	6,576	$	5,398
Remaining available borrowings under the asset-backed credit line (“ABL Credit Facility”)		1,676		1,716

Total cash, cash equivalents, and available borrowings	$	8,252	$	7,114

The maximum aggregate borrowings under the ABL Credit Facility are approximately $2.0 billion. Borrowings under the ABL Credit Facility are subject to a borrowing base, which consists of certain receivables and inventory. Available borrowings under the ABL Credit Facility are reduced by draws on the facility as well as outstanding letters of credit. As of January 29, 2016, there were no draws on the facility and, after taking into account outstanding letters of credit, our available capacity totaled $1.7 billion.

To finance the going-private transaction, we issued $13.9 billion in debt, which included borrowings under the Term Loan Facilities and the ABL Credit Facility, proceeds from the sale of Senior First Lien Notes and other notes, and borrowings under structured financing debt programs. See Note 1 and Note 6 of the Notes to the Audited Consolidated Financial Statements of Denali for more information on the going-private transaction and our outstanding borrowings.

The following table summarizes our outstanding debt as of January 29, 2016 and January 30, 2015:


	Successor
	January 29, 2016			January 30, 2015
	(in millions)
Outstanding Debt:
Term loan facilities and Senior First Lien Notes	$	7,623		$	8,071
Unsecured notes and debentures		2,853			3,553
Structured financing debt		3,411			2,690
Borrowings under the ABL credit facility		—			—
Other		93			73

Total debt, principal amount		13,980			14,387
Carrying value adjustments		(221	)		(232	)

Total debt, carrying value	$	13,759		$	14,155

During Fiscal 2016, we repaid $1.1 billion of debt, which primarily consisted of $0.7 billion in Unsecured Notes and Debentures, and $0.4 billion in Term Loan Facilities. In addition, during Fiscal 2016, we issued $0.7 billion, net, in additional structured financing debt.

Our requirements for cash to pay principal and interest have increased significantly due to the incremental borrowings we incurred to finance the going-private transaction. We may, from time to time, at our sole discretion, purchase, redeem, prepay, refinance, or otherwise retire our outstanding indebtedness under the terms of such indebtedness, in open market or negotiated transactions with the holders of such indebtedness, or otherwise. On June 10, 2015, we refinanced and amended the Term Loan facilities to reduce interest rate floors and margins and to modify certain covenant requirements. The refinancing increased the outstanding Term Loan Euro Facility from €0.6 billion to €0.8 billion, offset by a decrease in the Term Loan B Facility from $4.6 billion to $4.4 billion. The interest rate for both the Term Loan B Facility and Euro Facility was reduced to 4%.

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We balance the use of our securitization programs with working capital and other sources of liquidity to fund growth in our global financial services business. Of the $14.0 billion in outstanding principal debt as of January 29, 2016, $4.5 billion, which includes $3.4 billion in structured financing debt, is used to fund this business.

We believe that our current cash and cash equivalents, along with cash that will be provided by future operations, and borrowings expected to be available under the ABL Credit Facility, will be sufficient to fund our operations, capital expenditures, debt service requirements, shares subject to the appraisal proceedings, and any tax audit settlements described in Note 11 and Note 12 of the Notes to the Audited Consolidated Financial Statements of Denali, respectively, over at least the next twelve months.

The following table contains a summary of our Consolidated Statements of Cash Flows for the respective periods:


	Successor (a)									Predecessor
	Fiscal Year Ended January 29, 2016			Fiscal Year Ended January 30, 2015			October 29, 2013 through January 31, 2014			February 2, 2013 through October 28, 2013
				(in millions)
Net change in cash from:
Operating activities	$	2,162		$	2,551		$	1,082		$	1,604
Investing activities		(321	)		(355	)		(8,553	)		1,564
Financing activities		(496	)		(3,094	)		13,960			(4,630	)
Effect of exchange rate changes on cash and cash equivalents		(167	)		(153	)		(40	)		(67	)

Change in cash and cash equivalents	$	1,178		$	(1,051	)	$	6,449		$	(1,529	)

Cash and cash equivalents at beginning of period	$	5,398		$	6,449		$	—		$	12,569

Cash and cash equivalents at end of the period	$	6,576		$	5,398		$	6,449		$	11,040

(a)

In accordance with authoritative guidance for business combinations, we have reflected the acquisition of Dell by Denali Holding as a cash outflow, net of cash acquired, in cash used in investing activities in the successor period ending January 31, 2014. See Note 1 of the Notes to the Audited Consolidated Financial Statements of Denali for more information on the going-private transaction.

Operating Activities—Cash provided by operating activities was $2.2 billion and $2.6 billion for Fiscal 2016 and Fiscal 2015, respectively. The decline in operating cash flows was due to a decline in profitability and lower working capital benefits in the current period. Despite this decline, our operating cash flow performance has remained strong over the periods presented.

Cash provided by operating activities was $2.6 billion for Fiscal 2015, $1.1 billion for the successor period ended January 31, 2014, and $1.6 billion for the predecessor period ended October 28, 2013. Our strong operating cash flows over these periods was due to balanced working capital management and sustained profitability.

Cash provided by operating activities was $1.1 billion for the successor period ended January 31, 2014 and $1.6 billion for the predecessor period ended October 28, 2013, respectively. The decrease in the successor period ended January 31, 2014 was attributable to a decrease in net income, the effect of which was largely offset by favorable changes in working capital.

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Investing Activities—Investing activities primarily consist of capital expenditures for property, plant, and equipment, collections on purchased financing receivables, and proceeds from sale of facilities, land and other assets. Cash used in investing activities was $321 million and $355 million during Fiscal 2016 and Fiscal 2015, respectively. In Fiscal 2015, investing activities also included $73 million used to fund acquisitions.

For the successor period ended January 31, 2014, cash used in investing activities was primarily comprised of the net cash used to fund the acquisition of Dell by Denali. The cash consideration at the close of the going-private transaction was $19.7 billion, which is presented net of $11.0 billion in acquired cash in the Consolidated Statements of Cash Flow. See Note 1 and Note 3 of the Notes to the Audited Consolidated Financial Statements of Denali for more information on the going-private transaction.

For the predecessor period ended October 28, 2013 cash provided by investing activities was $1.6 billion and was primarily driven by the liquidation of our investment portfolio in connection with the going-private transaction.

Financing Activities—Financing activities primarily consist of the proceeds and repayments of debt. During Fiscal 2016, cash used in financing activities was $0.5 billion, as we issued $0.7 billion, net, in additional structured financing debt, repaid $0.7 billion in maturing Unsecured Notes and Debentures, and repaid $0.5 billion, net, in Term Loan Facilities and related foreign currency derivative settlements. In comparison, during Fiscal 2015, cash used in financing activities primarily comprised of repayments of debt of $2.0 billion principal amount of the Microsoft Note issued in the going-private transaction and $0.8 billion in borrowings outstanding under the ABL Credit Facility.

For the successor period ended January 31, 2014, cash provided by financing activities was $14.0 billion, primarily attributable to the issuance of $13.9 billion in new debt used to finance the going-private transaction. Issuance costs for these borrowings totaled $0.3 billion. In connection with the going-private transaction, we retired $1.3 billion in structured financing debt and paid $0.9 billion into escrow in order to retire our near term maturity notes. Also, during the Predecessor period ended October 28, 2013, we repaid $1.8 billion in outstanding commercial paper.

For the predecessor period ended October 28, 2013, cash used in financing activities was $4.6 billion and was primarily attributable to repayment of debt.

See Note 5 of the Notes to the Audited Consolidated Financial Statements of Denali for more information about our securitization programs, and Note 6 of the Notes to the Audited Consolidated Financial Statements of Denali for more information about our debt.

Key Performance Metrics—

The following table presents the components of our cash conversion cycle for the periods presented:


	Successor
	Fiscal Quarter Ended
	January 29, 2016			January 30, 2015			January 31, 2014
Days of sales outstanding (a)		40			43			43
Days of supply in inventory (b)		14			13			14
Days in accounts payable (c)		(106	)		(103	)		(96	)

Cash conversion cycle (d)		(52	)		(47	)		(39	)

(a)

Days of sales outstanding, referred to as DSO, calculates the average collection period of our receivables. DSO is based on the ending net trade receivables and the most recent quarterly non-GAAP net revenue for each period. DSO also includes the effect of product costs related to customer shipments not yet recognized

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as revenue that are classified in other current assets. DSO is calculated by adding accounts receivable, net of allowance for doubtful accounts, and customer shipments in transit and dividing that sum by average non-GAAP net revenue per day for the current quarter (90 days for all fiscal quarters presented herein). At January 29, 2016, DSO and days of customer shipments not yet recognized were 36 and 4 days. At January 30, 2015 and January 31, 2014, DSO and days of customer shipments not yet recognized were 38 and 5 days, and 39 and 4 days, respectively.

(b)

Days of supply in inventory, referred to as DSI, measures the average number of days from procurement to sale of our products. DSI is based on ending inventory and most recent quarterly non-GAAP cost of goods sold for each period. DSI is calculated by dividing ending inventory by average non-GAAP cost of goods sold per day for the current quarter (90 days for all fiscal quarters presented herein).

(c)

Days in accounts payable, referred to as DPO, calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly non-GAAP cost of goods sold for each period. DPO is calculated by dividing accounts payable by average non-GAAP cost of goods sold per day for the current quarter (90 days for all fiscal quarters presented herein).

(d)

We calculate our cash conversion cycle using non-GAAP net revenue and non-GAAP cost of goods sold because we believe that excluding certain items from the GAAP results, including the large non-cash purchase accounting adjustments following the going-private transaction, facilitates management’s understanding of this key performance metric. The table below provides a reconciliation of GAAP net revenue and GAAP cost of goods sold to non-GAAP net revenue and non-GAAP cost of goods sold used in calculating the DSO, DSI and DPO metrics:


	Successor
	Fiscal Quarter Ended
	January 29, 2016			January 30, 2015			January 31, 2014
	(in millions)
GAAP net revenue	$	13,682		$	14,261		$	14,075
Non-GAAP adjustments:
Impact of purchase accounting		100			192			424

Non-GAAP net revenue	$	13,782		$	14,453		$	14,499

GAAP cost of goods sold	$	11,062		$	11,905		$	12,475
Non-GAAP adjustments:
Impact of purchase accounting		(3	)		(4	)		(535	)
Amortization of intangibles		(120	)		(121	)		(114	)
Other corporate expenses		(3	)		(5	)		(70	)

Non-GAAP cost of goods sold	$	10,936		$	11,775		$	11,756

Our cash conversion cycle for the fiscal quarter ended January 29, 2016 improved five days when compared to the fiscal quarter ended January 30, 2015, driven by a three day improvement in both DPO and DSO. The increase in DPO was primarily due to the timing of supplier purchases and payments. The decrease in DSO was primarily driven by improved collections performance. We believe our business model allows us to maintain an efficient cash conversion cycle, which compares favorably with that of others in our industry.

Our cash conversion cycle for the fiscal quarter ended January 30, 2015 improved eight days when compared to the fiscal quarter ended January 31, 2014, driven by a seven day improvement in DPO. The improvement in DPO was primarily attributable to favorable changes in our payment terms for certain suppliers. For the fiscal quarter ended January 30, 2015, DSO and DSI were effectively unchanged when compared to the fiscal quarter ended January 31, 2014.

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Capital Commitments

Capital Expenditures—During Fiscal 2016 and Fiscal 2015, we spent $482 million and $478 million, respectively, on property, plant, and equipment. These expenditures were primarily incurred in connection with our global expansion efforts and infrastructure investments made to support future growth. Product demand, product mix, and the increased use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2017, which will be primarily related to infrastructure investments and strategic initiatives, are currently expected to total approximately $0.5 billion.

Contractual Cash Obligations

The following table summarizes our contractual cash obligations as of January 29, 2016:


	Total		Payments Due by Period
	Total		Fiscal 2017		Fiscal 2018-2019		Fiscal 2020-2021		Thereafter
	(in millions)
Contractual cash obligations:
Principal payments on borrowings	$	13,980	$	2,984	$	2,545	$	7,072	$	1,379
Operating leases		436		126		177		101		32
Purchase obligations		2,487		2,346		140		1		—
Interest		2,904		516		897		590		901
Uncertain tax positions (a)		—		—		—		—		—

Contractual cash obligations	$	19,807	$	5,972	$	3,759	$	7,764	$	2,312

(a)

We have approximately $3.1 billion in additional liabilities associated with uncertain tax positions as of January 29, 2016. Although the timing of resolution and closure of audits is uncertain, we believe it is reasonably possible that tax audit resolutions could result in reductions to the liability of between $300 million and $750 million within the next 12 months. We are unable to estimate the expected payment dates for the remaining portion. See Note 12 of the Notes to the Audited Consolidated Financial Statements of Denali for further discussion regarding tax matters, including the status of income tax audits.

Principal Payments on Borrowings—Our expected principal cash payments on borrowings are exclusive of discounts and premiums. We have outstanding long-term notes with varying maturities. As of January 29, 2016, the future principal payments related to structured financing debt were expected to be $2.1 billion in Fiscal 2017 and $1.3 billion in Fiscal 2018-2019. For additional information, see Note 6 of the Notes to the Audited Consolidated Financial Statements of Denali.

Operating Leases—We lease property and equipment, manufacturing facilities, and office space under non-cancelable leases. Certain of these leases obligate us to pay taxes, maintenance, and repair costs.

Purchase Obligations—Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be canceled without penalty.

We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for our production. Purchase orders are not included in the table above as they typically represent our authorization to purchase rather than binding purchase obligations.

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Interest—See Note 6 of the Notes to the Audited Consolidated Financial Statements of Denali for further discussion of our debt and related interest expense.

CRITICAL ACCOUNTING POLICIES

We prepare our financial statements in conformity with GAAP. The preparation of financial statements in accordance with GAAP requires certain estimates, assumptions, and judgments to be made that may affect our Consolidated Statements of Financial Position and Consolidated Statements of Income. Accounting policies that have a significant impact on our Consolidated Financial Statements are described in Note 2 of the Notes to the Audited Consolidated Financial Statements of Denali. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical. We consider an accounting policy to be critical if the nature of the estimate or assumption is subject to a material level of judgment and if changes in those estimates or assumptions are reasonably likely to materially impact our Consolidated Financial Statements. We have discussed the development, selection, and disclosure of our critical accounting policies with the Audit Committee of our Board of Directors.

Revenue Recognition and Related Allowances—We enter into contracts to sell our products and services, and frequently enter into sales arrangements with customers that contain multiple elements or deliverables, such as hardware, services, software, and peripherals. We use general revenue recognition accounting guidance for hardware, software bundled with hardware that is essential to the functionality of the hardware, peripherals, and certain services. We recognize revenue for these products when it is realized or realizable and earned. Revenue is considered realized and earned when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; our fee is fixed and determinable; and collection of the resulting receivable is reasonably assured. Judgments and estimates are necessary to ensure compliance with GAAP. These judgments include the allocation of the proceeds received from an arrangement to the multiple elements, and the appropriate timing of revenue recognition.

Revenue from sales of third-party software and extended warranties for third-party products, for which we do not meet the criteria for gross revenue recognition, is recognized on a net basis. All other revenue is recognized on a gross basis.

Services revenue and cost of services revenue captions in our Consolidated Statements of Income include services revenue, third-party software revenue, and support services related to Dell-owned software offerings.

Most of our products and services qualify as separate units of accounting. We allocate revenue to all deliverables based on their relative selling prices. GAAP requires the following hierarchy to be used to determine the selling price for allocating revenue to deliverables; (1) vendor-specific objective evidence, referred to as VSOE; (2) third-party evidence of selling price, referred to as TPE; or (3) best estimate of the selling price, referred to as ESP. In instances where we cannot establish VSOE, we establish TPE by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers.

We record reductions to revenue for estimated customer sales returns, rebates, and certain other customer incentive programs. These reductions to revenue are made based upon reasonable and reliable estimates that are determined by historical experience, contractual terms, and current conditions. The primary factors affecting our accrual for estimated customer returns include estimated return rates as well as the number of units shipped that have a right of return that has not expired as of the balance sheet date. If returns cannot be reliably estimated, revenue is not recognized until a reliable estimate can be made or the return right lapses. Each quarter, we reevaluate our estimates to assess the adequacy of our recorded accruals and allowance for doubtful accounts, and adjust the amounts as necessary.

We sell our products directly to customers as well as through other distribution channels, including retailers, distributors, and resellers. Sales through our distribution channels are primarily made under agreements allowing

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for limited rights of return, price protection, rebates, and marketing development funds. We have generally limited return rights through contractual caps or we have an established selling history for these arrangements. Therefore, there is sufficient data to establish reasonable and reliable estimates of returns for the majority of these sales. To the extent price protection or return rights are not limited and a reliable estimate cannot be made, all of the revenue and related cost are deferred until the product has been sold to the end-user or the rights expire. We record estimated reductions to revenue or an expense for distribution channel programs at the later of the offer or the time revenue is recognized.

We recognize revenue in accordance with industry-specific software accounting guidance for all software and post-contract support, referred to as PCS, that are not essential to the functionality of the hardware. Accounting for software that is essential to the functionality of the hardware is accounted for as specified above. We have not established VSOE for third-party software offerings. For the majority of Dell-owned software offerings, we have established VSOE to support a separation of the software license and PCS elements. VSOE of the PCS element is determined by reference to the prices customers pay for support when it is sold separately. In instances where VSOE is established, we recognize revenue from the sale of software licenses at the time of initial sale, assuming all of the above criteria have been met, and revenue from the PCS element over the maintenance period. When we have not established VSOE to support a separation of the software license and PCS elements, the revenue and related costs are generally recognized over the term of the agreement.

We offer extended warranty and service contracts to customers that extend and/or enhance the technical support, parts, and labor coverage offered as part of the base warranty included with the product. Revenue from extended warranty and service contracts, for which we are obligated to perform, is recorded as deferred revenue and subsequently recognized on a straight-line basis over the term of the contract or ratably as services are completed.

Business Combinations and Intangible Assets Including Goodwill—We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to our consolidated financial results will be adjusted retroactively. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.

The results of operations of acquired businesses are included in our Consolidated Financial Statements from the acquisition date.

Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third fiscal quarter and whenever events or circumstances may indicate that an impairment has occurred. To determine whether goodwill is impaired, we first assess certain qualitative factors. Based on this assessment, if it is determined more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform the quantitative analysis of the goodwill impairment test. We determine the fair values of each of our reportable business units using a discounted cash flow methodology and then compare the fair values to the carrying values of each reportable business unit.

Standard Warranty Liabilities—We record warranty liabilities at the time of sale for the estimated costs that may be incurred under the terms of the limited warranty. The liability for standard warranties is included in

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accrued and other current and other non-current liabilities on the Consolidated Statements of Financial Position. The specific warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include technical support, parts, and labor over a period ranging from one to three years. Factors that affect our warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy our warranty obligation. The anticipated rate of warranty claims is the primary factor impacting our estimated warranty obligation. The other factors are less significant due to the fact that the average remaining aggregate warranty period of the covered installed base is approximately 16 months, repair parts are generally already in stock or available at pre-determined prices, and labor rates are generally arranged at pre-established amounts with service providers. Warranty claims are reasonably predictable based on historical experience of failure rates. If actual results differ from our estimates, we revise our estimated warranty liability to reflect such changes. Each quarter, we reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

Income Taxes—We are subject to income tax in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. We calculate a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. We provide related valuation allowances for deferred tax assets, where appropriate. Significant judgment is required in determining any valuation allowance against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence for each jurisdiction, including past operating results, estimates of future taxable income, and the feasibility of ongoing tax planning strategies. In the event we determine all or part of the net deferred tax assets are not realizable in the future, we will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made.

Significant judgment is also required in evaluating our uncertain tax positions. While we believe our tax return positions are sustainable, we recognize tax benefits from uncertain tax positions in the financial statements only when it is more likely than not that the positions will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority’s administrative practices and precedents. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties. We believe we have provided adequate reserves for all uncertain tax positions.

Loss Contingencies—We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Third parties have in the past asserted, and may in the future assert, claims or initiate litigation related to exclusive patent, copyright, and other intellectual property rights to technologies and related standards that are relevant to us. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.

Inventories—We state our inventory at the lower of cost or market. We record a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. We perform a detailed review of inventory each fiscal quarter that considers multiple factors, including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. The industries in which we compete are

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subject to demand changes. If future demand or market conditions for our products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of component inventory, we may be required to record additional write-downs, which would adversely affect our gross margin.

Recently Issued Accounting Pronouncements

See Note 2 of the Notes to the Audited Consolidated Financial Statements of Denali for a summary of recently issued accounting pronouncements that are applicable to our Consolidated Financial Statements.

UNAUDITED QUARTERLY RESULTS

The following tables present selected unaudited consolidated statements of income (loss) for each quarter of Fiscal 2016 and Fiscal 2015:


	Fiscal Year 2016
	Successor
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in millions, except per share data)
Net revenue	$	13,538		$	13,999		$	13,667		$	13,682
Gross margin	$	2,237		$	2,468		$	2,507		$	2,620
Net income (loss)	$	(504	)	$	(265	)	$	(180	)	$	(155	)
Earnings (loss) per share:
Basic	$	(1.24	)	$	(0.65	)	$	(0.44	)	$	(0.38	)
Diluted	$	(1.24	)	$	(0.65	)	$	(0.44	)	$	(0.38	)
Weighted-average shares outstanding:
Basic		405			405			405			405
Diluted		405			405			405			405


	Fiscal Year 2015
	Successor
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in millions, except per share data)
Net revenue	$	14,669		$	14,825		$	14,364		$	14,261
Gross margin	$	2,557		$	2,763		$	2,532		$	2,356
Net income (loss)	$	(436	)	$	(178	)	$	(261	)	$	(346	)
Earnings (loss) per share:
Basic	$	(1.08	)	$	(0.44	)	$	(0.64	)	$	(0.85	)
Diluted	$	(1.08	)	$	(0.44	)	$	(0.64	)	$	(0.85	)
Weighted-average shares outstanding:
Basic		404			405			405			405
Diluted		404			405			405			405

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Management’s Discussion and Analysis of Financial Condition and Results of Operations of…

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