Dell Technologies Inc. (DELL) Q3 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

Dell's earnings call presents a positive outlook with increased revenue and EPS guidance, strong cash flow, and substantial capital returns to shareholders. The Q&A highlighted proactive strategies to manage rising costs and leverage AI growth, despite some uncertainties. The raised AI revenue forecast and improved margins indicate potential stock price growth over the next two weeks.

Key Financial Performance

Total Revenue $27 billion, up 11% year-over-year. Growth driven by ISG and CSG combined, which grew 13%.

Year-to-date Total Revenue Up 12%, with ISG revenue up 28%. Growth attributed to strong performance in AI and storage.

Earnings Per Share (EPS) $2.59, up 17% year-over-year. Driven by improved profitability in AI and storage, and operational scaling.

AI Server Orders $12.3 billion in the quarter, bringing year-to-date orders to $30 billion. Growth due to strong demand and customer base expansion.

AI Server Shipments $5.6 billion in the quarter, totaling $15.6 billion year-to-date. Growth supported by rapid deployment capabilities and high uptimes.

AI Server Backlog $18.4 billion, a record high. Reflects robust demand and growing pipeline.

Traditional Servers Demand Grew double digits year-over-year, with growth in EMEA and North America. Driven by workload expansion and IT modernization.

Storage Revenue $4 billion, down 1% year-over-year. However, demand for Dell-IP portfolio remained strong, with double-digit growth in all-flash array portfolio.

PowerStore Demand Grew for 7 consecutive quarters, with 6 quarters of double-digit growth. Reflects strong demand for Dell-IP offerings.

CSG Revenue $12.5 billion, up 3% year-over-year. Commercial revenue grew 5%, while consumer revenue declined 7%.

Gross Margin $5.7 billion, up 4% year-over-year. Driven by a mix shift to AI servers and improved profitability in storage.

Operating Expense $3.2 billion, down 2% year-over-year. Reflects operational scaling and cost management.

Operating Income $2.5 billion, up 11% year-over-year. Growth driven by higher revenue and lower operating expenses.

Net Income $1.8 billion, up 11% year-over-year. Primarily driven by stronger operating income.

ISG Revenue $14.1 billion, up 24% year-over-year. Marking 7 consecutive quarters of double-digit growth, driven by AI server demand.

Servers and Networking Revenue $10.1 billion, up 37% year-over-year. Growth supported by AI server demand and traditional server stability.

ISG Operating Income $1.7 billion, up 16% year-over-year. Growth driven by higher revenue and improved profitability in AI servers and storage.

CSG Operating Income $0.7 billion, 6% of revenue. Commercial profitability stable, while consumer profitability improved year-over-year.

Cash Flow from Operations $1.2 billion, driven by profitability and working capital improvements.

Cash and Investments $11.3 billion, up $1.6 billion sequentially. Reflects strong cash generation.

Capital Returned to Shareholders $1.6 billion, including stock repurchases and dividends. Year-to-date capital return totaled $5.3 billion.

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Operating Highlights

AI server orders: Achieved a record $12.3 billion in orders for the quarter, bringing year-to-date orders to $30 billion. Shipped $5.6 billion in AI servers during the quarter, totaling $15.6 billion year-to-date.

AI server profitability: Improved sequentially, supported by engineering and rapid deployment capabilities.

Traditional servers: Demand grew double digits, with growth in EMEA and North America. Customers preferred dense, high-performing compute configurations.

Storage: Revenue declined 1% year-over-year, but demand for Dell-IP portfolio remained strong. PowerStore demand grew for 7 consecutive quarters, with 6 quarters of double-digit growth.

AI customer base expansion: Broadened across Neoclouds, Tier 2 CSPs, and Sovereigns, showcasing Dell's ability to design, deploy, and maintain large-scale AI factories.

International growth in CSG: Accelerated sequentially, up double digits year-over-year, with strong demand in North America and small/medium businesses.

Revenue and EPS: Achieved record Q3 revenue of $27 billion, up 11%, and EPS of $2.59, up 17%.

Cash flow and shareholder returns: Generated $1.2 billion in cash flow from operations and returned $1.6 billion to shareholders through stock repurchases and dividends.

Commodity supply environment: Well-positioned with a deflationary Q3 and stable outlook for Q4.

AI infrastructure build-outs: Positioned to capitalize on AI infrastructure demand with bespoke, high-performance solutions and global support.

PC refresh cycle: Focused on leveraging the aging installed base and systems not upgraded to Windows 11 to drive growth.

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Risk or Challenges

AI server demand and backlog: While AI server demand is exceptionally strong, the record backlog of $18.4 billion and a growing 5-quarter pipeline could pose challenges in meeting delivery timelines and managing customer expectations.

Storage revenue decline: Storage revenue declined 1% year-over-year, indicating potential challenges in maintaining growth in this segment despite strong demand for specific products like PowerStore.

Consumer revenue decline: Consumer revenue declined 7%, reflecting challenges in the consumer market and competitive pressures in this segment.

Commodity supply dynamics: Although the company is well-positioned currently, future dynamics in the commodity supply environment could create challenges in securing supply and adjusting pricing effectively.

Operating margin pressures: Operating income growth was partially offset by a decline in gross margin rate, indicating potential pressures on profitability.

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Guidance & Outlook

AI Server Shipments: Dell expects to ship approximately $9.4 billion of AI servers in Q4, bringing full-year shipments to roughly $25 billion, representing over 150% year-over-year growth.

Q4 Revenue Outlook: Revenue is projected to be between $31 billion and $32 billion, with a midpoint of $31.5 billion, reflecting a 32% increase.

ISG and CSG Growth: ISG and CSG combined are expected to grow 34% at the midpoint, with ISG growing mid-60s and CSG up low to mid-single digits.

Operating Income and EPS: Operating income is anticipated to increase by approximately 21%, with diluted non-GAAP EPS expected to be $3.50, plus or minus $0.10, up 31% at the midpoint.

FY '26 Revenue and EPS: Full-year FY '26 revenue is expected to reach $111.7 billion, up 17%, and non-GAAP EPS is projected at $9.92, up 22% at the midpoint.

FY '27 Planning: Dell has strong conviction in its AI business, supported by backlog, pipeline, and customer discussions. The long-term framework outlined at the Securities Analyst Meeting remains a solid starting point for FY '27 planning.

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Shareholder Return Plan

Dividend per share: Approximately $0.53 per share

Total dividends paid: $1.6 billion in Q3

Shares repurchased: 8.9 million shares

Average repurchase price: $140 per share

Total capital returned to shareholders: $1.6 billion in Q3

Year-to-date capital returned: $5.3 billion

Year-to-date shares repurchased: Over 39 million shares

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Key Q&A

Q:What are Dell's thoughts on customer reactions to pricing discussions across product categories?

A:Dell acknowledges the unprecedented cost increases across all products, including DRAM, NAND, and storage. They aim to minimize the impact on customers by leveraging their supply chain, adjusting configurations, and using their direct model to respond to market signals. However, they admit that the cost basis is increasing across all product categories.

Q:Can Dell still achieve mid-teens EPS growth despite headwinds in the memory side?

A:Dell's management believes the framework from their Security Analyst Meeting is a good starting point for EPS growth. They plan to leverage their go-to-market engine, scale in OpEx, and remain committed to capital return KPIs like share repurchase and dividends. However, they note it is still early in the planning process.

Q:How is Dell navigating NVIDIA's potential vertical integration in the AI server market?

A:Dell remains confident in its differentiation at the rack and solution level, focusing on performance per watt, performance per dollar, and deployment capabilities. They believe their engineering skills and investments in high-density rack power give them a competitive edge.

Q:What is the mix of AI servers, and how is it changing?

A:Dell observed a shift in their backlog towards GB300 AI servers and continues to see growth in Sovereign and Enterprise AI server orders.

Q:What is the outlook for AI server margins?

A:Dell's AI server margins are in the mid-single digits, consistent with their long-term value creation framework. They expect this trend to continue into Q4, supported by a broader customer mix and improved differentiation.

Q:What is Dell's perspective on the PC refresh cycle?

A:Dell believes the Windows 11 transition is not yet complete, with significant opportunities for upgrades. They also see potential in AI PCs and expect the PC market to remain flat year-over-year, with plans to take market share.

Q:How does Dell view the growth potential of its AI business?

A:Dell raised its AI revenue guidance to $25 billion for FY '25, citing strong demand across Neoclouds, Sovereigns, and Enterprises. They are confident in their ability to meet customer needs despite financing challenges in some areas.

Q:How is Dell addressing rising commodity costs?

A:Dell is taking extraordinary actions to mitigate the impact of rising costs, including leveraging their supply chain, repricing, and adjusting configurations. They believe they can recover more than the typical two-thirds of cost increases within 90 days.

Q:What drove the improvement in ISG margins in Q3?

A:The improvement was driven by demand growth in Dell-IP storage, pricing discipline, and a favorable product mix. AI margins also contributed, with mid-single-digit operating profit.

Q:What is the outlook for traditional server demand?

A:Dell sees continued modernization and consolidation in data centers, with 70% of their installed base still using older generation servers. They expect this trend to persist into FY '27.

Q:How is Dell managing commodity cost recovery and pricing?

A:Dell is leveraging its direct model to adjust pricing and configurations in response to market conditions. They are actively managing costs and believe their ability to recover costs is better than in normal times due to scarcity of parts.

Q:What is Dell's strategy for its storage business?

A:Dell is focusing on Dell-IP storage, which offers better margins. They are seeing growth in all-flash storage and other Dell-IP products, with a strategy centered on private cloud, AI data platforms, and cyber resilience.

Q:What factors contributed to the raised AI revenue forecast?

A:The increase is driven by strong customer demand, growing backlog, and Dell's ability to deliver solutions aligned with customer readiness and supply chain capabilities.

Q:How is Dell addressing share loss in the PC market?

A:Dell is focusing on regaining share in non-premium segments by targeting education and holiday consumer markets. They are also refining their product cost and roadmap to balance growth and profitability.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on how much of the rising costs could be recovered through pricing versus operational efficiencies. They also did not clarify the exact impact of longer-term contracts on their ability to adjust pricing in response to commodity cost increases.

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Earnings Word Cloud

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