On Thursday, Dell Technologies Inc (NYSE:DELL) surpassed estimates with its first quarter results, but also showed its earnings lag sales. Shares tanked on Friday as Wall Street was displeased by AI servers being sold at near-zero margins.
First Quarter Highlights
For the quarter ended on May 3rd, revenue grew 6.3% YoY to $22.24 billion, surpassing LSEG’s estimate of $21.64 billion and marking Dell’s return to sales growth after six straight quarters of YoY declines. But while revenue grew, earnings dropped 3% as adjusted earnings per share amounted to $1.27, in line with FactSet’s estimate.
Powerful servers equipped to handle artificial intelligence tasks reported revenue more than doubled from the previous quarter to $1.7 billion, with backlog increasing more than 30% on a quarter-over-quarter basis to $3.8 billion.
Infrastructure Solutions Group that sells servers, storage and networking gear reported sales grew 22% YoY to $9.2 billion.
But the segment for desktop and notebook PCs, Client Solutions Group, recorded flat sales of $12 billion, while PC sales alone grew 3% to $10.2 billion. Meanwhile, its PC industry peer, HP (NYSE:HPQ) topped analyst estimates with its fiscal second quarter results on Wednesday. HP reported sales of $12.8 billion and adjusted earnings of 82 cents a share. But, HP recorded a sales drop of almost 1%, marking its eight consecutive quarter of revenue declines. But HP also posted an earnings rise of 4% for the quarter that ended on April 30th. By doing so, HP also provided hope that the computer market is recovering.
Guidance
For the current quarter, Dell guided for earnings of $1.65 per share on sales in the range from $23.5 billion to $24.5 billion, surpassing FactSet’s estimate of $23.35 billion. As for the full fiscal year that will end in February 2025, Dell expects sales in the range between $93.5 billion and $97.5 billion, lifting its prior outlook yet still implying relatively flat AI server sales.
AI servers failed to impress.
Wall Street got discouraged with lower-than-expected AI server backlog and an estimated decline in margins. In simple words, analysts expressed their concern because Dell’s AI initiatives are not translating into profits yet. But, Dell COO Jeff Clarke emphasized that when looking at the composition of the backlog, Nvidia Corporation (NASDAQ:NVDA) is to blame. Nvidia has been unable to keep up with the surging demand amid the AI hype. Clarke mentioned that the situation is better with the H100, while Nvidia is expected to improve the supply of H200 during the second half of the year. Moreover, Nvidia will be launching its newest and most powerful offering to date, B200. With Blackwell, which is currently in production, Nvidia promises to power a new era of computing. During its Dell Technologies World conference that took place from May 20th to May 23rd, Dell also announced it will be expanding its partnership with Nvidia.
With its latest quarterly report, Dell revealed sluggish enterprise AI adoption. AI also comes with complexity that enterprises won’t be able to overcome overnight. But, the potential remains and Dell secured the best partner for the job, which is also why expectations were simply too high.
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