Dell's profits exceeded expectations, AI business outlook is optimistic, but revenue and guidance fell short of expectations, dropping 10% in after-hours trading | Earnings Report Insights

On Tuesday after the U.S. stock market closed, Dell Technologies released its Q3 financial report for the period ending November 1. Although the company's Q3 profits exceeded expectations and it issued optimistic comments related to the growth of artificial intelligence (AI) sales, Dell's stock price fell by as much as 10% in after-hours trading due to a stagnation in the recovery momentum of the personal computer market, with revenue for the quarter falling short of expectations and projections for revenue and profits in the next quarter also below expectations.

1) Key Financial Data:

Revenue: Total net revenue for Q3 grew by 10% to $24.37 billion, below analysts' expectations of $24.59 billion.

Operating Profit: Adjusted operating profit for Q3 was $2.2 billion, with analysts expecting $2.16 billion.

EPS: Adjusted EPS for Q3 was $2.15, higher than analysts' expectations of $2.05.

2) Segment Business Data:

Revenue for the Infrastructure Solutions Group (ISG) in Q3 grew by 34% to $11.37 billion, with analysts expecting $11.34 billion. ISG includes AI servers, storage, network components, and traditional servers. The growth of ISG was primarily driven by AI sales.

Dell's Client Solutions Group (CSG), which sells personal computers and laptops to consumers and businesses, saw sales decline by 1% year-on-year to $12.1 billion, falling short of market expectations.

3) Performance Guidance:

Revenue: Expected operating revenue for Q4 is between $24 billion and $25 billion, below market expectations of $25.57 billion.

EPS: Expected adjusted EPS is $2.50, while the market expectation is $2.65.

Before the earnings report was released on Tuesday, Dell's stock fell nearly 1.7%. After the earnings report was released, Dell's stock price plummeted over 10% in after-hours trading. Morgan Stanley analyst Erik Woodring stated that investors had high expectations for Dell's earnings performance.

Artificial Intelligence Business

This year, the AI boom has revitalized the 40-year-old computer giant Dell, which reached a historic high of nearly $180 in May. Although Dell's stock price has retreated from its historical peak, it has still recorded an almost 90% increase year-to-date based on Tuesday's closing price, primarily due to its new AI server business line, positioning Dell as a key provider of tools and systems for AI developers.

Dell is a top supplier in the field of computer clusters, which are essential for developing and deploying AI, especially computers based on NVIDIA chips. Dell's competitors in the server manufacturing sector include Supermicro, HPE, and others. There is strong demand from cloud service providers, enterprises, and government agencies for NVIDIA AI accelerators, which often purchase systems equipped with tens of thousands of AI chips, and Dell sells complete systemsThis year, NVIDIA CEO Jensen Huang praised Dell and its founder Michael Dell, suggesting customers order NVIDIA's next-generation Blackwell AI chips through Dell. Earlier this month, Dell announced it would ship servers equipped with NVIDIA Blackwell to cloud infrastructure provider CoreWeave.

From the latest financial report, Dell's ISG business showed the strongest performance in its server and networking sub-segment, which includes AI systems. This segment's revenue grew by 58% to $7.4 billion. In the third quarter, Dell delivered $2.9 billion in AI servers, exceeding analysts' estimates of $2.8 billion. The company also stated that customers had booked $3.6 billion in future AI server orders during the quarter, with order volumes increasing across all customer types.

Dell indicated that the increase in AI server orders has driven a year-on-year growth in traditional server demand by "double digits." Traditional servers, based on Intel or AMD CPU chips, have lower power consumption and can free up space or power within data centers for companies investing heavily in AI infrastructure.

Dell executives noted that some customer demand is shifting to the next few quarters, awaiting NVIDIA's Blackwell chips, which are currently in production but have not yet been shipped in bulk to end users. Dell stated that much of the growth in its AI systems is already reflected in $4.5 billion of future orders.

Dell's Chief Operating Officer (COO) Jeff Clark told investors during the earnings call that growth in AI-related business will be quarter-to-quarter volatile. He pointed out:

This business will not grow linearly, especially as customers face a constantly changing underlying chip technology roadmap. We saw orders rapidly shift to our Blackwell designs in the third quarter.

We are still in the early stages of enterprises learning how to deploy AI. AI is a strong opportunity for us, and there are no signs of slowing down.

Dell's computer storage systems revenue grew less robustly than servers, rising 4% year-on-year to $4 billion.

PC Business

Dell's personal computer business declined by 1% to $12.1 billion, below expectations. While spending by commercial customers on personal computers for their employees increased by 3% year-on-year to $10.1 billion, the company's consumer-facing personal computer sales saw a significant year-on-year decline of 18% to $2 billion.

In recent years, driven by a surge in demand for remote work from students and corporate employees during the early pandemic, the PC market experienced a boom but subsequently faced a historic decline. Although signs of recovery have emerged this year, a report released by industry analysis firm IDC in October showed that PC shipments declined again in the third quarter.

The following chart shows that Dell desktop computers are quite popular in the United States according to a recent survey.