Dell (DELL -22%) is facing significant pressure today following its Q1 earnings report. Despite six consecutive large EPS beats, Dell reported just in-line EPS results. On a positive note, revenue rose 6.3% year-over-year to $22.24 billion, surpassing expectations and marking a return to year-over-year growth after six consecutive declines. The company saw exceptional growth in servers and a resurgence in its commercial PC business.
- Margins were the main issue this quarter. Q2 guidance showed upside revenue but EPS guidance fell short of analyst expectations, indicating weak margins. Despite this, Dell raised its FY25 EPS and revenue guidance.
- Infrastructure Solutions Group (ISG) revenue jumped 22% year-over-year to $9.23 billion, with an 8.0% segment operating margin compared to 9.7% last year. Server and networking revenue hit a record $5.5 billion, up 42% year-over-year. AI-optimized server demand grew sequentially, with orders increasing to $2.6 billion.
- AI-optimized shipments stood out, rising more than 100% sequentially to $1.7 billion. Dell has shipped over $3 billion of AI servers in the last three quarters, with a backlog of $3.8 billion, up $900 million sequentially. Storage demand stabilized with flat year-over-year revenue at $3.76 billion.
- Client Solutions Group (CSG) revenue was flat year-over-year at $11.97 billion, with a 6.1% operating margin compared to 7.4% last year. Commercial revenue increased 3% to $10.2 billion, while consumer revenue fell 15% to $1.8 billion. Dell expects commercial PC demand to improve as the year progresses.
- Dell remains optimistic about the upcoming PC refresh cycle, driven by an aging PC install base, the end of life for Windows 10 next year, and advancements in AI-enabled architectures. The company plans to focus on commercial PCs and high-end consumer and gaming segments.
- Non-GAAP gross margin fell to 22.2% from 24.7% a year ago, due to a competitive pricing environment and a higher AI-optimized server mix. Non-GAAP operating margin declined to 6.6% from 7.6% last year. However, Dell expects sequential improvement in operating margin in Q2, driven by growth in ISG and its storage business.
Overall, investors accustomed to Dell's massive EPS beats found this quarter's results to be a wake-up call. Strong demand for AI-optimized servers and collaboration with NVDA have driven up Dell shares. While investor excitement is justified, AI servers remain a small part of Dell's overall business, which includes traditional servers, networking, storage, and PCs. Margin compression in Q1 has affected EPS, and comments about a competitive pricing environment raise concerns about future margins.
