The cocaine nose jobs of Wall Street gave Dell’s server sales a thumbs down when they saw how much margins the grey box shifter was flogging them for.
Dell Technologies’ server sales reached a record high last quarter, and the long-anticipated PC refresh is evident on the balance sheet. However, investors were disappointed with Dell’s margins on its leading servers, dropping the share price by over 20 per cent.
Sales increased by six per cent year-on-year to $22.2bn (£17.6bn) in its fiscal 2025 first quarter, ending on 3 May. Infrastructure business revenue was $9.2bn (£7.3bn), up 22 per cent year-on-year, while PC and peripherals sales remained steady at $12bn (£9.5bn).
Dell Chief Operating Officer Jeff Clarke told investors that orders for AI-optimised servers are growing by $900 million (£714 million) quarter-to-quarter, with the pipeline being several times the current $3.8bn (£3.02bn) backlog in those servers.
Clarke said Dell was in an excellent position to assist customers with artificial intelligence, and our strong AI momentum continued in Q1.
“In ISG, our AI-optimised server orders rose to $2.6bn (£2.06bn), with shipments increasing by more than 100 per cent sequentially to $1.7bn (£1.35bn). Over the past three quarters, we have shipped more than $3 billion (£2.38bn) of AI servers,” he said.
Dell Technologies executives have been forecasting a PC refresh since the previous year when former co-COO Chuck Whitten mentioned that the installed base was overdue for new devices.
Sales did not align with projections until this quarter. According to Dell executives, commercial PC and peripheral revenue climbed to $10.2bn (£8.1bn), a 3 per cent increase year-over-year, with demand improving as the quarter advanced. Consumer sales of Dell PCs declined by 15 per cent year-on-year.
Analysts focused on the margins Dell achieved on its infrastructure products. Toni Sacconaghi, Managing Director and Senior Research Analyst at Bernstein, enquired whether there were zero operating margins in AI servers.
“If I look at the year-over-year at the ISG business, storage was perfectly flat. AI servers increased from zero to $1.7bn (£1.35bn), suggesting that traditional servers were flat,” he said.
“So the only change was the addition of $1.7 billion in AI servers while operating profit remained unchanged. Does this imply that operating margins for AI servers were effectively zero? And if not, how do you reconcile what I’ve just outlined?”
Dell Technologies CFO Yvonne McGill said that ISG income is anticipated to improve as the year progresses and as traditional storage sales cycles commence. She noted that Dell’s storage sales are typically low in the first quarter and tend to rise yearly, often accompanying server sales.
“Looking ahead to Q2 and FY 25, we expect ISG operational income to improve as indicated in the guide, over the year, and to truly deliver against our long-term framework of up to 14 per cent,” she said.
“The multifaceted nature of the first quarter is evident. We continue to expect a recovery as the year progresses. Those AI-optimised servers, which we’ve discussed as being margin-rate dilutive but margin-dollar accretive, will continue to be reflected in the results.”
Previously, Dell Technologies executives promised analysts that the services and consulting linked to AI server sales, including storage, should result in higher gross margins. Analysts clarified when this would be reflected in the company’s earnings.
“Our perspective on the extensive opportunity associated with each AI server we sell remains unchanged,” Clarke responded. “We believe a significant amount of storage is associated with these servers. The training of these models requires substantial data, which must be stored and supplied to GPUs at high bandwidth. The potential surrounding unstructured data here is vast. We believe this opportunity persists.”
