Dell (DELL, Financial) is experiencing a downturn after releasing its Q3 results. While the company reported a solid EPS, it was smaller than Q2. Revenue increased by 9.5% year-over-year to $24.37 billion, slightly below expectations. This marks Dell's largest year-over-year revenue growth in the past 10 quarters, driven by strength in AI and traditional servers. However, the downside guidance for Q4 in both EPS and revenue has raised concerns.
- Infrastructure Solutions Group (ISG): Revenue surged 34% year-over-year to $11.37 billion, with a 13.3% segment operating margin compared to 12.6% last year. Server and networking revenue reached a record $7.36 billion, a 58% year-over-year increase. Dell's AI server momentum continued, with a substantial expansion in its five-quarter pipeline. Orders hit a record $3.6 billion, up 11% sequentially, driven by Tier 2 cloud service providers and growth in enterprise customers.
- Dell shipped $2.9 billion of AI servers in Q3, resulting in an AI server backlog of $4.5 billion. The five-quarter pipeline grew over 50% sequentially across all customer types. Enterprises are recognizing the disruptive potential and innovation opportunities with GenAI. Traditional server demand improved double-digits in Q3, driven by growing units and ASPs with denser core counts, memory, and storage per server. Customers are modernizing data centers with more efficient and dense 16G servers to consolidate and enhance power efficiency, freeing up space and power for AI infrastructure.
- Storage revenue rose 4% year-over-year to $4.00 billion, though demand in storage lags behind traditional servers.
- Client Solutions Group (CSG): Segment revenue declined 1% year-over-year to $12.13 billion, with a 5.7% operating margin versus 7.5% last year. This decline is due to a competitive pricing environment, especially in Consumer. Commercial revenue grew 3% to $10.14 billion, while Consumer revenue fell 18% year-over-year to $1.99 billion. Dell noted weaker-than-expected Consumer business performance, with demand and profitability challenges. The PC refresh cycle is extending into next year.
- Regarding Q4 guidance, Dell noted that enterprise and large customers are being cautious with PC and storage IT spending in the short term. ISG is expected to grow in the mid-20s for Q4, while CSG is projected to increase low-single digits. While Dell did not provide formal guidance for FY26, it anticipates multiple tailwinds, including stronger AI demand and an aging install base in PCs and traditional servers ready for a refresh.
Investors had high expectations for this report, but the guidance was disappointing. While AI server demand remains strong, Dell's comments on enterprise and large customers being cautious with IT spending have concerned investors. Additionally, the weaker-than-expected Consumer segment mirrors sentiments from HP, Inc. (HPQ, Financial). Dell was optimistic about the PC refresh cycle in Q4 during its Q2 call, but now anticipates it being delayed until next year. Although Dell should see strong demand next year, the stock may have been overly optimistic in recent months.
