Dell Technologies Inc. (DELL) Earnings

Management highlights

### Overall Quarterly Performance & Strategic Positioning - Delivered record Q1 revenue, EPS, and operating cash flow in a challenging supply environment, driven by stronger-than-expected broad-based demand across all geographies and business lines, as customers proactively secure IT supply amid constraints. - Maintained pricing and margin discipline across all segments, drove significant operating leverage, and continued strong shareholder capital returns, returning $2.1 billion to shareholders in Q1 (including $11 million in share repurchases at an average price of $147 per share, and a 63 cent per share dividend). ### AI Business Expansion & Innovation - Extended the Dell AI Factory partnership with NVIDIA, launching new infrastructure for NVIDIA's VeraRubin platform, Rubin GPU architecture, and RTX GPUs, enabling scalable AI deployments from large hyperscale clusters to on-prem enterprise environments. Launched the industry's first OEM desktop with GB300 GPU for edge AI. - Introduced new on-prem desk-side agentic AI solutions that let enterprises run production AI workloads locally to keep sensitive data and IP on-site, launched the turnkey Dell Power Rack integrated rack-scale system, and expanded 18th generation PowerEdge servers with new high-density, energy-efficient air-cooled systems for AI, HPC, and enterprise workloads. - Updated the storage portfolio for AI workloads: PowerStore Elite delivers up to 3x the performance and density of prior generations with a 6:1 data reduction guarantee, ObjectScale added higher-density object storage, and PowerScale extended exascale unified storage across block, file, and object workloads. The Dell AI Data Platform improves unstructured data indexing, orchestration, and analytics performance to prepare enterprise data for AI at scale. - Expanded the AI ecosystem to include partners like Google Cloud, OpenAI, Palantir, ServiceNow, and CrowdStrike; for example, with Google Distributed Cloud, Dell brings Gemini models on-prem with confidential compute to meet data residency, privacy, and sovereignty requirements. - Ended Q1 with $24.4 billion in AI orders, a record $51.3 billion AI backlog, and an AI pipeline that remains multiples of the current backlog and continues to grow sequentially. AI customer count surpassed 5,000, with growth across neocloud, sovereign, and enterprise segments, and Dell continues to gain market share driven by its end-to-end integration, large-scale deployment capabilities, and global support network. ### Core Business Performance - Traditional servers: Demand outpaces supply, with 92% YOY revenue growth driven by large enterprise infrastructure refresh and expansion, incremental demand from AI inference workloads, and customer focus on higher-density consolidation to optimize data center space and costs. Roughly 70% of the installed base remains on 14th generation or older servers, leaving significant ongoing refresh opportunity. - CSG: Gained share for the second consecutive quarter, driven by large enterprise PC refreshes; roughly one-third of the CSG installed base consists of devices 4+ years old, leaving strong remaining refresh runway. Profitability improved due to higher scale, stronger attached peripheral and services revenue, and improved consumer segment margins.

Guidance

- **Q2 FY27 Guidance**: Revenue is expected to be $44 billion to $45 billion, up ~50% YOY at the midpoint. ISG is expected to grow ~75% YOY, with $15.5 billion in AI server revenue; CSG is expected to grow ~20% YOY. Operating expenses are expected to decline low single digits sequentially. Operating income is expected to grow ~80% YOY, with sequential improvement in ISG operating margin and CSG operating margin moderating to ~6%. Diluted non-GAAP EPS is expected to be $4.80 ± $0.10, up over 100% YOY at the midpoint. - **Full Year FY27 Guidance**: Revenue is expected to be $165 billion to $169 billion, up nearly 50% YOY at the midpoint, representing a $27 billion upward revision to prior guidance, driven by a higher second half revenue outlook. ISG is expected to grow ~80% YOY, with $60 billion in AI server revenue at the midpoint (2.4x YOY growth); traditional servers are expected to grow just over 60% YOY; storage is expected to grow mid-single digits; CSG is expected to grow low teens. - Gross margin: Excluding AI mix impact, full year gross margin guidance is higher than prior guidance and remains up YOY, with expected margin expansion through the second half of the year. - Operating expenses: Operating expense dollars are expected to grow high single digits YOY, primarily driven by variable compensation tied to outperformance, but OPEX as a percentage of revenue will remain in the single digits due to strong operating leverage from modernization and automation efforts. - Full year operating income is expected to grow over 55% YOY, with growth in both absolute dollars and as a percentage of revenue. Diluted non-GAAP EPS is expected to be $17.90 ± $0.25, up roughly 75% YOY at the midpoint, representing a $5 upward revision to prior guidance. - Management maintained prudence in guidance even after upward revisions due to ongoing supply constraints, and expects to exit FY27 with a meaningful remaining AI backlog that will carry into FY28.

Segment performance

1. Infrastructure Solutions Group (ISG): Total revenue of $29 billion, up 181% year-over-year (YOY), marking 9 consecutive quarters of double-digit growth. Operating income hit a record $3.1 billion, up 206% YOY, with an operating margin of 10.5% (up 80 bps YOY). Of ISG revenue: AI server revenue was $16.1 billion (up nearly 9x YOY, contributing ~55.5% of ISG revenue), traditional server and networking revenue was $8.5 billion (up 92% YOY, ~29.3% of ISG revenue), and storage revenue was $4.3 billion (up 8% YOY, ~14.8% of ISG revenue). Storage saw strong outperformance from the high-margin Dell IP portfolio, with 5 consecutive quarters of above-market growth, led by primary storage (PowerMax, PowerStore, which grew double-digit for 8 consecutive quarters) and unstructured storage (PowerScale, ObjectScale, with 2 consecutive quarters of double-digit growth). 2. Client Solutions Group (CSG): Total revenue of $14.6 billion, up 17% YOY, with 2 consecutive quarters of share gains. Operating income was $1.2 billion, with an 8% operating margin. Of CSG revenue: commercial revenue was $13 billion (up 18% YOY, ~89% of CSG revenue, 7 consecutive quarters of growth) and consumer revenue was $1.6 billion (up 9% YOY, ~11% of CSG revenue, 3 consecutive quarters of growth, led by strength in gaming). Overall company total revenue was $43.8 billion, up 88% YOY, with operating income of $4.2 billion (up 154% YOY) and diluted non-GAAP EPS of $4.86 (up 214% YOY, a new record).

Risks & headwinds

- Ongoing supply constraints across key components, primarily DRAM memory, followed by NAND, microprocessors, and hard drives; leading and trailing semiconductor nodes are fully allocated with 12-month lead times, limiting the company's ability to meet all existing demand, and supply constraints will cap second half FY27 revenue even though demand outpaces available supply. - Persistent broad inflation across raw materials, energy, logistics, and component costs that requires ongoing frequent price adjustments, and there is a risk that further price increases will dampen demand in transactional segments (consumer, small and medium business) if customers choose to wait out higher prices. - Forward-looking results are subject to uncertainty around the long-term size of the AI-driven TAM expansion, as the emerging agentic AI market creates new demand but its long-term size and trajectory are still developing.

Analyst Q&A

• Q: Does the strong Q1 performance reflect demand pull-forward that will reduce demand for the rest of the year, and why did management raise the second half guidance? /

  A: Management said current demand dynamics are different from historical periods. While some buy-ahead behavior exists as customers secure supply, most demand growth comes from multiple durable drivers: a large overdue refresh cycle (1/3 of PCs are 4+ years old, most servers are 14G or older), fundamental new demand from agentic AI that creates incremental need for traditional compute and infrastructure, and ongoing market share gains across all four core business units. Dell's pipeline continues to grow faster than historical rates, which gave management confidence to raise full year guidance. (278 chars) ---

• Q: What is the split between unit growth and price increases for traditional servers and PCs, and is the current growth sustainable? /

  A: Both segments saw solid absolute unit growth alongside price increases driven by inflation and product mix. PCs gained share in both consumer and commercial units, with stronger growth in high price-band products (high-end gaming, commercial workstations) plus higher attached revenue from peripherals and services that lifted per-unit revenue. For traditional servers, Dell saw significant unit growth, plus higher content per server (more cores, DRAM, and NAND per unit driven by modernization and AI workloads) that lifted average selling prices. Incremental AI inference and agentic AI workloads are creating durable new demand for traditional servers. (349 chars) ---

• Q: Why does the full year guidance only have 48% of revenue in H2 (below the historical 52%), and is this due to conservatism or supply constraints? /

  A: The lower H2 revenue share is entirely due to supply constraints, not weak demand. Demand remains broad-based and continues to outpace available supply across all segments (AI, traditional servers, PCs), not just GPU-based AI infrastructure. Dell teams are working closely with supply chain partners to maximize available supply, but existing component limits cap how much revenue the company can fulfill in H2. The pipeline remains very healthy, and unfulfilled demand will carry into 2028 as a backlog. (287 chars) ---

• Q: What is driving the better-than-expected non-AI gross margin outlook? /

  A: The main driver is stronger than expected demand and revenue growth for the high-margin Dell IP storage portfolio, which management raised guidance for across both Q2 and the full year. Dell IP storage (including mid-range primary storage and unstructured data products) is seeing strong market traction, and the higher mix of this higher-margin product creates a natural margin tailwind. For CSG and traditional servers, management has maintained consistent margin discipline and has a clear path to sustain targeted margin rates despite cost pressures, leading to the improved overall outlook. (267 chars)