Dell's revenue and profit exceeded expectations, but Q3 profit guidance fell short of expectations, dropping over 4.6% in after-hours trading | Earnings Report Insights

Dell announced its earnings report on Thursday. Despite second-quarter revenue and profit exceeding market expectations, the company's stock price fell more than 4.6% in after-hours trading due to third-quarter EPS guidance falling short of expectations, a sequential decline in orders for AI servers, and related profit margins being below analyst expectations.

Here are the key points from Dell's second-quarter performance:

Key Financial Data:

Revenue: Dell's second-quarter revenue reached a record $29.8 billion, exceeding analyst expectations of $29.2 billion, a year-on-year increase of 19%.

Operating Profit: Dell's second-quarter operating profit was $1.8 billion, up 27% year-on-year; adjusted non-GAAP operating profit was $2.3 billion, an increase of 10%.

Earnings Per Share: Dell's second-quarter earnings per share were $1.70, a robust increase of 38% year-on-year; adjusted non-GAAP earnings per share were $2.32, higher than the analyst expectation of $2.30, a year-on-year increase of 19%, marking a historical high for the second quarter.

Operating Cash Flow: Dell's second-quarter operating cash flow reached $2.5 billion.

Segment Data:

Infrastructure Solutions Group (ISG):

• ISG revenue reached $16.8 billion, a year-on-year increase of 44%, setting a historical record.
• Revenue from server and networking products reached $12.9 billion, a year-on-year increase of 69%, being the main driver of growth.
• Storage business revenue declined 3% year-on-year to $3.86 billion.
• ISG operating profit was $1.5 billion, a year-on-year increase of 14%, accounting for 65% of overall business operating profit.

Client Solutions Group (CSG)

• CSG total revenue was $12.5 billion, a year-on-year increase of 1%.
• Commercial PC business revenue was $10.8 billion, a year-on-year increase of 2%; consumer business declined 7% to $1.7 billion.
• Operating profit was $803 million, a slight year-on-year decline of 2%, accounting for 35% of overall business operating profit.

Performance Guidance:

Fiscal Year 2026 Revenue: Dell raised its full-year revenue forecast to between $105 billion and $109 billion, with a midpoint of $107 billion, higher than the previous expectation of $103 billion and analyst expectations of $105.2 billion, a year-on-year increase of 12%.

Fiscal Year 2026 Earnings Per Share: GAAP diluted earnings per share are expected to be $7.98, a year-on-year increase of 25%; non-GAAP diluted earnings per share are expected to be $9.55, a year-on-year increase of 17%, higher than the analyst expectation of $9.43 and the May forecast of around $9.

Third Quarter Revenue: Dell's third-quarter revenue is expected to be between $26.5 billion and $27.5 billion, with a midpoint year-on-year growth of 11%

Third Quarter Earnings Per Share: GAAP diluted earnings per share are expected to be $2.07, a year-on-year increase of 26%; non-GAAP diluted earnings per share are $2.45, below analysts' expectations of $2.55, a year-on-year increase of 11%.

Dell's Chief Financial Officer Yvonne McGill stated:

“We achieved strong revenue and profit growth in the second quarter, setting a record of nearly $30 billion in quarterly revenue, and once again generated strong cash flow.”

Due to negative factors such as the third quarter EPS guidance falling short of expectations, Dell's stock price fell over 4.6% in after-hours trading on Thursday. Year-to-date, Dell's stock price has risen 16%.

Third Quarter EPS Guidance Falls Short of Expectations, PC Business Performance Mediocre

Regarding the situation where full-year earnings per share exceed expectations but the third quarter does not, Dell explained that its profit expectations are mainly concentrated in the fourth quarter, related to seasonal factors in the storage business, thus the profitability in the third quarter is relatively weak.

From a business segment perspective, Dell's Infrastructure Solutions Division (covering storage, software, and server products) saw revenue growth of 44%, reaching $16.8 billion; while the Client Solutions Division, primarily targeting the PC market, saw revenue growth of only 1%, totaling $12.5 billion, below analysts' expectations of $12.9 billion.

This division mainly includes enterprise PC sales, which used to be the company's largest business segment, but its growth rate has significantly lagged behind that of data center-related businesses in recent quarters. Media reports indicate that some customers completed their purchases in the first half of the year to avoid the tariffs that the U.S. is set to implement, leading to weakened demand in the second quarter.

The company also stated that its Infrastructure Division's operating profit margin was 8.8%, far below the analysts' average expectation of 10.3%. The overall adjusted gross margin was 18.7%, narrowing compared to the same period last year and also below the market expectation of 19.6%.

The market expects that with Microsoft's plan to stop supporting Windows 10 in October this year, there will be a strong PC device upgrade cycle, which will boost sales for Dell and other PC manufacturers like HP.

Additionally, Dell's storage business revenue fell 3% year-on-year to $3.86 billion, missing the StreetAccount expectation of $4.1 billion.

Significant Decline in AI Server Orders

As AI servers are widely used to handle the computational demands of AI workloads, customers such as CoreWeave, Elon Musk's xAI, and various sovereign-level AI networks have increased their investments in AI infrastructure, driving strong demand for high-performance AI servers. Dell and Super Micro Computer, among others, are benefiting from this trend. However, media analysis indicates that the manufacturing costs of such servers are high, coupled with intense market competition, which also poses certain pressures on the company's profit margins Dell is one of NVIDIA's key customers, purchasing NVIDIA chips and building complete systems to sell to end users, such as cloud service provider CoreWeave. Dell stated that it has delivered $10 billion worth of AI servers over the past two quarters.

The company further stated that it plans to deliver $20 billion worth of AI server products throughout the 2026 fiscal year, which is double that of the previous fiscal year and higher than the previously forecasted $15 billion.

However, media analysis suggests that investors remain cautious about the profitability of such AI servers, as they heavily rely on high-priced processors provided by NVIDIA and AMD.

According to disclosures, as of the second fiscal quarter ending August 1, Dell received a total of $5.6 billion in AI server orders, a significant decrease from $12.1 billion in the previous quarter, although it was above market expectations. This quarter's AI server shipments amounted to $8.2 billion, with a backlog of orders reaching $11.7 billion at the end of the quarter, all three metrics exceeding analysts' average estimates.

Vice Chairman and Chief Operating Officer Jeff Clarke emphasized the important role of the AI product line and added that the company currently expects total AI server shipments for this fiscal year to reach $20 billion:

"We have shipped $10 billion worth of AI solutions in the first half of this fiscal year, surpassing the total shipments for the entire fiscal year of 2025. The strong demand for AI servers has driven a 69% year-on-year increase in revenue from server and networking business, setting a new record for a single quarter."

The company disclosed that since launching AI-optimized servers, its sales opportunity pipeline has been growing each quarter for five consecutive quarters. In addition to large cloud service providers, Dell is further expanding into the enterprise and sovereign-level customer markets, both of which have also achieved double-digit growth in their sales pipelines.

The company stated that it will continue to convert these potential customers into actual orders and shipments