Release Date: May 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Dell Technologies Inc (DELL, Financial) reported a revenue of $22.2 billion, up 6% year-over-year, with significant growth in servers and a return to growth in the commercial PC business.
- The company has strong AI momentum, with AI-optimized server orders increasing to $2.6 billion and shipments up more than 100% sequentially.
- Dell Technologies Inc (DELL) launched the Dell AI Factory to accelerate innovation and adoption, combining Dell solutions and services optimized for AI workloads with an open ecosystem of partners.
- The company demonstrated strong cash flow generation, with Q1 cash flow from operations at $1 billion and adjusted free cash flow at $5.5 billion on a trailing 12-month basis.
- Dell Technologies Inc (DELL) remains optimistic about the upcoming PC refresh cycle, driven by factors such as the aging PC installed base and the end-of-life of Windows 10.
Negative Points
- Gross margin declined by 250 basis points to 22.2% of revenue, driven by a more competitive pricing environment and a higher mix of AI-optimized servers.
- Operating income was down 8% year-over-year, primarily due to the decrease in gross margins.
- Net income decreased by 4% to $923 million, mainly due to lower operating income.
- Consumer revenue in the CSG segment was down 15% year-over-year, reflecting ongoing challenges in the consumer PC market.
- The company faces inflationary input costs and expects a step function increase in costs in the second half of the year, driven by DRAM and SSD prices.
Q & A Highlights
Q: Can you provide more details on the backlog and lead times for AI servers?
A: The lead times vary depending on the product and customer. For example, the H100 fleet time is better, and those products are in full production. We expect the availability of the H200 on schedule towards the latter part of Q2. The backlog primarily consists of NVIDIA-based products, and our customer composition ranges from many enterprise customers to some large CSPs. We are excited about continuing to build this backlog every quarter.
Q: How do you explain the flat operating profit in ISG despite the addition of $1.7 billion in AI servers?
A: Operating income in storage was low due to seasonal factors, and traditional servers saw a shift towards large enterprise bids, which have lower margin rates. We expect ISG operating rates to improve over the year and deliver against our long-term framework of 11% to 14%. AI servers are margin rate dilutive but margin dollar accretive, and this will be reflected in future results.
Q: Do you still believe in the incremental revenue from AI servers leading to higher-margin services and storage?
A: Yes, we believe the opportunity around storage, networking, and services remains immense. We are seeing strong demand for unstructured data storage, high-bandwidth networking, and deployment services. Our Dell A Factory with NVIDIA is an example of a full-stack opportunity that we are excited about.
Q: What are the most significant factors for improving ISG operating margins through the year?
A: We expect storage margins to improve as the year progresses, driven by Dell IP storage solutions and scaling the business. Traditional server margins should also improve as commercial and medium business segments rebound. Additionally, the AI momentum will contribute positively as we build the balance sheet and recognize deferred services revenue over time.
Q: Is Dell driving competitive pricing to gain market share, or is it in response to competitors?
A: The competitive pricing environment is influenced by various factors, including the down cycle in the PC business and competitive large deals in commercial PCs and servers. In AI, we are not the price leader; we get a premium for our engineering capabilities. The competitive dynamics and inflationary costs are impacting our gross margin rates.
Q: How does Dell Financial Services differentiate Dell in the AI server market?
A: Dell Financial Services provides working capital solutions and payment options that are a differentiator, especially for Tier 2 hyperscalers. This enables us to offer comprehensive solutions and leverage our financing capabilities to support customer needs.
Q: Can you break down the ISG growth of over 20% for the year into AI servers versus core ISG?
A: AI servers are experiencing hyper-growth, while traditional servers are expected to grow in the mid-single digits. Storage is expected to return to growth in the second half of the year, contributing to the overall ISG growth.
Q: What is the customer mix for AI platforms, and how does it compare to previous years?
A: The customer mix includes Tier 2 CSPs and enterprise customers. The number of enterprise customers grew by 2% quarter over quarter. While Tier 2 CSPs represent the largest opportunities, the long-term potential lies in deploying AI at scale in the enterprise.
Q: How do you see the enterprise adoption of AI evolving, and what are the key use cases?
A: Enterprises are at various stages of their AI journey, focusing on use cases like content creation, natural language search, and document automation. We are helping customers understand their data and implement AI infrastructure. The long-term opportunity in enterprise AI is significant, and we are just scratching the surface.
Q: How do you expect the backlog of $3.8 billion to convert into revenue, and are there supply constraints?
A: The backlog conversion depends on customer commitments and delivery dates. We have reflected the best of our knowledge of supply availability in our guidance. Our five-quarter pipeline remains strong, and we continue to build backlog as we receive parts.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
