Dell (DELL +1%) reported impressive Q2 (Jul) earnings, bouncing back from a rare in-line EPS result in Q1. Revenue increased by 9.1% year-over-year to $25.03 billion, surpassing expectations and setting a record for its servers and networking business. This growth came despite the headwind from exiting its VMware Resale business. Dell has now posted back-to-back revenue growth quarters after six consecutive declines. However, Dell's Q3 (Oct) EPS guidance came in below consensus, with in-line revenue expectations.
- Infrastructure Solutions Group (ISG) segment revenue surged 38% year-over-year to $11.65 billion, with an 11.0% operating margin compared to 12.4% last year. Server and networking revenue soared 80% year-over-year to a record $7.67 billion. Strong growth was seen across traditional and AI servers, with $3.1 billion worth of AI servers shipped in Q2 and a healthy AI server backlog of $3.8 billion.
- Dell's AI server pipeline expanded significantly in Q2, particularly among tier 2 CSPs and enterprise customers. The company sees substantial opportunity in the enterprise sector, which is still in the early stages of AI adoption. Dell is also excited about its emerging sovereign AI opportunity.
- Storage revenue declined 5% year-over-year to $3.97 billion. Despite double-digit demand growth across its core storage portfolio, this was offset by headwinds in the partner IP portion of its HCI portfolio.
- Client Solutions Group (CSG) segment revenue fell 4% year-over-year to $12.41 billion, with a 6.2% operating margin compared to 7.5% last year. Commercial revenue remained flat at $10.56 billion, while Consumer revenue dropped 22% year-over-year to $1.86 billion. Dell expects CSG growth in the second half, particularly in Q4 (Jan), driven by the upcoming PC refresh cycle and long-term AI impacts.
- For Q3, Dell expects ISG revenue to grow in the low-30% range and CSG revenue to be flat to up in the low-single digits. Margins have been impacted by higher input costs due to inflation, a competitive environment, and a higher mix of AI-optimized servers.
Investors welcomed Dell's return to strong EPS beats, especially after the stock's pullback since its Q1 report in May. Sentiment was more tempered this quarter, aiding the stock's performance. Dell's positioning as an AI play excites investors, given the high demand for its AI servers and the growth potential as many enterprises are still early in their AI adoption. Although AI servers are a relatively small part of Dell's total sales, the company sees a promising future. Furthermore, while Dell is often associated with PCs, its Consumer business is relatively small, so the Q2 sales decline is not a major concern. An attractive PC upgrade cycle also appears to be on the horizon.
