Dell reported some of the strongest AI revenue numbers in the industry last quarter with AI server revenue up 342% YoY to $9.0 billion, orders up 1,906% YoY to a record $34.1 billion and backlog up 177% QoQ to a record $43 billion. This strong AI momentum in Q4 is underpinning Dell’s FY27 guidance for AI server revenue to more than double to $50 billion, which management believes they can achieve while maintaining margins in the mid-single digits.
Driven by this AI strength, Dell guided for revenue to accelerate nearly five points to 23.3% YoY to $140 billion, emphasizing that they have the supply to achieve this guide in full for the entire year, despite supply constraints facing the industry, notably in memory. Dell also noted that the demand picture remains robust, and more supply would leave potential for more growth.
Below, we look into Dell’s AI server metrics, key risks ahead for growth and margins, and potential headwinds on the PC side.
Robust AI Server Growth, Backlog up 949% YoY
It’s hard to deny that Dell’s AI server guidance and key metrics were the strongest parts of its Q4 report, with the company guiding for just over 100% growth to $50 billion in AI server revenue this year and both orders and backlog up well over 100% QoQ. However, the predominant question for Dell’s stock is server margins, which Dell stated will be in the mid-single digits.
Starting with backlog and orders, perhaps the top two metrics this quarter, it’s hard to understate the strength of demand that Dell is seeing. Orders rose 1,906% YoY and 177% QoQ to a record $34.1 billion in the quarter, driving backlog up 949% YoY and 134% QoQ to a record $43 billion.
Dell clarified that the majority of the backlog consists of Grace Blackwell servers, while Vera Rubin is taking a larger share in its five-quarter pipeline but is not yet appearing in orders, likely due to the system timing in the second half of the year along with potential rumors of slight delays. Management also expects a smoother transition from Blackwell to Rubin, letting them ramp “with more velocity and speed” into calendar 2027. Here is what was stated: “So on the $43 billion backlog, Samik, it is predominantly overwhelmingly Grace Blackwell. There is no Vera Rubin [indiscernible] pipeline. The largest percentage of our 5-quarter pipeline is a combination of Grace Blackwell and Blackwell where we're seeing a rise in x86 Blackwell in the 5-quarter pipeline, driven primarily by enterprise deployment, air being the #1 consideration.”
Importantly, Dell noted that the dollar value of their five-quarter AI server pipeline has never been larger, despite the robust order activity and $34 billion in orders received, highlighting the breadth of demand from enterprises, CSPs and sovereigns.
While these both add a large layer of confidence in Dell’s $50 billion AI server revenue guidance for FY27, up 103% YoY, the question moving forward is, what does this mean for growth?
While Dell did guide for Q1’s AI server revenue to be $13 billion, up 620% YoY and 45% QoQ (some of the strongest growth across AI at the moment), its full year guide says this will be its max quarterly run rate. Management had explained at Morgan Stanley’s TMT Conference after earnings that they have “committed to $13 billion of Q1, which is effectively $1 billion a week of shipments going out the door.” Annualizing that gives $52 billion, which suggests there will be minimal QoQ growth moving forward as the max run rate, or that they will be some degree of lumpiness, potentially tied to the upcoming transition from Blackwell to Rubin.
There is also potential for orders to normalize lower moving through FY27 – Dell is likely quite capable of handling a high degree of orders, yet its backlog exiting Q4 already represents more than 85% of its AI server revenue guide, meaning continuous orders at this level ($10-30B) each quarter could cause its backlog to grow faster than it can get servers out the door.
Dell also has made clear that there isn’t enough supply to meet the level of demand they see: “If we were to look at some of the demand asks that we would see from customers today and replicate that for a full 12 months, there isn't enough supply to fulfill that.” While Dell emphasized that it has the supply to satisfy its entire guidance for the year (not just Q1), some of the constraints that we see on the memory side in particular may make it increasingly difficult to ramp server revenue much higher.
It’s Not Only About the AI Server Margins, but Also Storage
As mentioned above, Dell’s story mainly circulates around AI server margins, which the company is aiming to maintain in the mid-single digit range. Regardless of where mid-single digit is for Dell (whether it’s 5% or 7%), the fact is that AI servers lag its broader ISG segment on operating margins and could present a larger headwind as its share of revenue increases. However, Dell is offsetting this server drag via storage, its highest margin business where growth has been strong and attach rates are rising.
COO Jeff Clarke explained that Dell has “operated throughout the quarter and over the course of the year in that mid-single-digit operating income [for AI servers]. With what we see in front of us, there's no reason to change that. That is our guidance of where we can operate this business, and we're going to continue to grow it.” Clarke emphasized again in a later question that Dell believes it can maintain mid-single digit margins while transitioning from Blackwell to Rubin, noting that the current $43 billion backlog “will ship at mid-single digits” as well.
Looking more acutely at margins, Dell’s ISG segment operating margin was 14.8%, down 3.3 points YoY, with AI servers accounting for nearly 46% revenue share in the segment, up from less than 18% a year ago; Dell said pricing efforts allowed server margins to stabilize despite higher input costs.
For the entire fiscal year, ISG operating margin was 11.7%, down 1.1 points, with AI servers accounting for 41% of revenue, up from 21%. Based on management’s guide for $50 billion in AI server revenue and ISG growth of mid-40%, AI servers could exit the year at ~57% of ISG revenue, potentially creating a larger margin overhang by next Q4; quick back-of-napkin math assuming a 6% AI server margin roughly projects ISG operating margin dropping as low as 9.7% in FY27 all else unchanged.
Another challenge with maintaining margins is that Dell faces intense AI server competition, not only from Super Micro, guiding to a similar $40 billion in revenue with operating margins currently at 3.7%, but also from Taiwanese ODMs. Dell faced a question on the latter at Morgan Stanley’s TMT:
Erik Woodring, Morgan StanleyErik Woodring, Morgan Stanley
How do you make sure that you protect yourselves against some of the lower-priced Taiwanese ODMs, making sure that you can defend what you've done and stay with the customers that you have and grow with them?
David Kennedy, Dell CFODavid Kennedy, Dell CFO
“Back to your second part of the question, look, again, our value as we look at the production cycle here from the L11 scale and beyond, those engineering standards, those activities, I'm sure we might touch on OpEx in our P&L later. But within our OpEx framework, we are making sure we're investing, investing in our go-to-market teams. So as AI opportunities expand in the enterprise, we're building out the right pod structures and the right capacity to go execute that. But also two, giving Arthur Lewis and his team, the engineering capability, the labs and the investment. So they're not working just on, let's say, Vera Rubin, but the next gen beyond that and beyond that. We're ahead of the game right now. Our job is to stay ahead. So we maintain the value that we can find in our P&L.”
Dell’s answer here is incomplete without one other quote from management at BofA’s conference, where they explained that they “can deliver hundreds of these racks in a given week like clockwork and have them show up and within 24 to 36 hours, they're up and running and they're generating money for the customer,” where “competitors don't seem to be able to do that reliably.”
This speed and reliability is key as the Taiwanese ODMs may beat out Dell when it comes to cost at scale, yet Dell’s advantage lies in delivering full rack-scale systems that can almost immediately be monetized by customers. It is also a key advantage in serving the enterprise customer pipeline, now extending to 4,000 customers in its installed base, up from 3,300 in Q3. This also may play a key role in helping Dell mitigate AI server margin erosion moving forward while serving enterprise customers, as competitive pressures on the cost side and potential undercutting to gain share are unlikely to let Dell drive margins higher at the time being.
However, Dell is leaning on storage to help preserve ISG operating margins in the face of this growing AI-related margin pressure. Dell’s storage IP portfolio, including its PowerMax, PowerScale and PowerFlex, “is the biggest lever as to why we say our core margins, excluding AI, can show a bit of expansion” with ISG operating margin up 2.4 points sequentially to 14.8%. This was driven by storage revenue up 20% QoQ in its seasonally strongest quarter (a slight improvement versus the 18% QoQ last Q4) and 2% YoY, outperforming the market.
Looking ahead, Dell expects storage to be a primary lever in helping keep margins strong in the face of headwinds from increased AI server share and rising memory costs. This is because Dell is seeing stronger storage attach rates for AI servers in enterprise customers, and strong demand for storage products as inference expands. Management also sees its IP portfolio growing mid-single digit YoY in FY27 and taking a larger mix this year:
Benjamin Reitzes, Melius ResearchBenjamin Reitzes, Melius Research
Nice execution here, guys. I'll echo that. My question is on storage. It sounds like it's turning a little bit. You beat the Street by a little bit, 2%. And then you said, I believe that it will grow in the mid-singles for the year, and it looks like it may outgrow servers in the back half of the year. So can you just talk about what's really going on with storage, your highest margin business? Is it really turning? Is it going to be a contributor to mix in the upcoming year that allows you to keep gross margins pretty flat for the year in a tough component environment?
Jeffrey Clarke, Dell COO Jeffrey Clarke, Dell COO
Sure, Ben. Look, we're excited about our storage business. Again, we're reporting that on an orders basis, our Dell IP portfolio grew double digits. That's the entire portfolio. PowerMax, PowerStore, PowerScale, ObjectScale and our data domain platforms all grew double-digit demand. Our all-flash grew double-digit demand. It grew in all regions, and we acquired new customers. PowerStore grew its 8th consecutive quarter, 7 of those — the last 7, double digit.
Half of those new customers that we are winning are new to PowerStore and nearly 30% are new to Dell buying storage. We saw tremendous demand for our unstructured products as AI inference and AI continues to grow, grow, grow. Our Dell IP portfolio is now a greater percentage of the mix year-over-year. We expect it to grow FY '27 over '26, it will be a greater percentage of mix next year than this year. That's part of the profit contribution that David has outlined in our guidance.
Memory Costs, PC Demand and Pull Ahead Dynamics
We touched upon some of memory headwinds and potential significant PC unit volume shrinkage the market faces this year in our Silicon Motion analysis, Silicon Motion: Strong Consumer SSD Demand, Trying to Move into AI Enterprise Markets for 2027-2028, with Dell’s management similarly pessimistic on PC growth.
Management explained that they foresee PC units declining in the range of (11%) to (12%) this year, at odds with the refresh cycle underway, though emphasized that they do “expect the back half of the year to be deeper, probably high teen double-digit negative growth.” To note, this is slightly more pessimistic than estimates from IDC and Gartner calling for (11.3%) and (10.4%) decline in unit volumes this year. Dell also outlined a bit of a pull ahead dynamic, with customers are beginning to understand that quotes tomorrow or next quarter are likely to be higher than price quotes today, spurring some purchasing activity.
This challenging demand environment has the potential to weigh on CSG growth especially in 2H, though Dell expects its pricing activities to allow them to hit their CSG revenue guidance of 1% YoY even if price increase take unit growth even lower.
Management pointed out that their price quotes “are valid for the shortest period of time they've ever been. And we're reducing promotions and all sorts of special pricing going forward. … In PCs, we purposely delayed implementing that price move to stay in the hunt to take share and to drive growth, which will serve us for the long run. And then when we made the change on January 6, it wasn't 90 days later, it was that day we stabilized margins.” Management had also clarified that CSG’s higher deal volumes means its repricing efforts take longer to flow through, meaning it will not have as immediate an impact as servers on growth.
Dell shared a bit on memory costs, noting that Q2 is estimated to rise 20% to 50%, Q3 up 5% to 15%, and Q4 up 5% to 10% for combined DRAM and NAND. Management expects these industry estimates to be in the ballpark, explaining that they have LTAs and capacity agreements in place and that they have experience budgeting prices as needed. However, current forecasts point to conventional DRAM up 58-63% QoQ and NAND up 70-75% QoQ, far ahead of management’s expectations and suggesting that memory prices may still remain a tougher constraint through the summer and beyond. Even if Dell does have the ability within LTAs to avoid some of these increases, broader demand destruction may still occur and impact growth.
Financials
Revenue Growth Accelerates to 39.5% in Q4
Dell’s Q4 revenue grew by 39.5% YoY and 23.6% QoQ to $33.4 billion driven primarily by outperformance in AI servers. Revenue growth accelerated by 28.7 percentage points from 10.8% YoY growth in the previous quarter and significant improvement from the (9.3%) QoQ decline in the previous quarter.
Management also provided strong Q1 guidance of $34.7 billion to $35.7 billion, implying YoY growth of 50.6% and 5.5% QoQ at the midpoint. Analysts currently expect Q1 revenue to grow by 51.8% YoY to $35.5 billion and will moderate to 17.6% and 26.6% growth in the next two quarters.
FY2026 revenue ending January grew by 18.8% YoY to $113.5 billion. Management provided a strong FY2027 guidance of $138 billion to $142 billion, implying YoY growth of 23.3%, with one analyst pointing out that Dell is “adding $30 billion more on top line with very little incremental OpEx.” Analysts currently expect FY2027 revenue to grow by 24.8% YoY to $141.7 billion and will decelerate to 6.9% and 4.5% growth in the next two years.
Key Segments
ISG Revenue Grew by 73%
Infrastructure Solutions Group (ISG) Q4 revenue grew by 73% YoY and 39% QoQ to $19.6 billion primarily driven by very strong AI server revenue growth. It marked the eight consecutive quarter of double-digit revenue growth for the ISG segment. ISG revenue is expected to grow over 100% in Q1, primarily driven by strong AI server revenue.
From Q4, the company has started to bifurcate servers and networking revenue into AI optimized server revenue and traditional servers & networking revenue. Q4 AI revenue grew by 342% YoY and 60% QoQ to $9.0 billion. While the traditional servers & networking revenue grew by 27% YoY to $5.85 billion and storage revenue grew by 2% YoY and 20% QoQ in its seasonally strongest quarter to $4.8 billion.
Management expects Q1 AI revenue to be $13 billion, implying a YoY growth of about 620% and 45% QoQ. FY2026 AI revenue grew by 166% to $24.68 billion, and management expects AI revenue to grow 103% YoY to about $50 billion in FY2027.
AI orders grew by 1906% YoY and 177% QoQ to a record $34.1 billion in Q4. While AI shipments grew by 352% YoY and 70% QoQ to $9.5 billion. The company’s AI server backlog grew by 949% YoY and 134% QoQ to a record $43 billion.
CSG Revenue grew by 14%
Client Solutions Group (CSG) Q4 revenue grew by 14% YoY and 8% QoQ to $13.5 billion. Commercial revenue grew by 16% YoY and 9% QoQ to $11.6 billion. It was the sixth consecutive quarter of growth and demand up for the eighth quarter. The company is witnessing growth across geographies, with strong large enterprise demand and traction in the lower end of commercial markets. Consumer revenue was flat YoY and up 1% QoQ to $1.88 billion with demand up for the second consecutive quarter, supported by strength in gaming. Management expects CSG revenue to be up roughly 2% YoY in the next quarter.
Margins
The market was growing concerned that rapidly rising memory costs would squeeze on Dell’s margins (“you're supposed to miss numbers, by the way, when memory prices go up”), yet Dell’s margins are among the highest they’ve been since we began tracking the stock. This is quite impressive given the AI server and memory headwinds, with storage being a key piece of this margin strength despite being a much smaller portion of revenue at $4.8 billion this quarter.
- Q4 gross profits were $6.7 billion or 20.2% of revenue compared to $5.7 billion or 23.7% in the same period last year. The lower margins reflect higher proportion of AI revenue mix.
- Q4 operating income grew by 43.2% YoY to $3.1 billion primarily driven by operating leverage. Operating margin was 9.3% compared to 9% in the same period last year.
- Q4 net income was $2.3 billion or 6.8% of revenue compared to $1.5 billion or 6.4% of revenue in the same period last year.
Q4 Adjusted EPS grew by 45.1%
The company’s Q4 adjusted EPS grew by 45.1% YoY to $3.89 primarily driven by operating leverage. Analysts expect Q1 adjusted EPS to grow by 89% YoY to $2.93 and will decelerate to 27.8% and 20.5% in the next two quarters.
Looking ahead, FY2027 adjusted EPS is expected to grow by 24.5% YoY to $12.82 and 13.8% in FY2028.
Cash Flow and Balance Sheet
Similar to margins, Dell’s cash flows were equally as strong, with operating cash flow margin expanding by double digits and free cash flow following. Cash flow margins were also around the highest they’ve been over the last three years.
- Q4 operating cash flow was $4.7 billion or 14% of revenue compared to $585 million or 2.4% of revenue in the same period last year.
- Q4 adjusted free cash flow was $5.1 billion or 15.2% of revenue compared to $474 million or 2% of revenue in the same period last year.
- The company had a high debt of $31.5 billion and cash & investments of $13.3 billion at the end of Q4. The company repurchased shares worth $1.85 billion and paid dividends of $346 million in Q4.
- The company’s inventories rose 50.2% QoQ to $10.4 billion in Q4 primarily to support the strong AI demand.
Conclusion
Dell’s Q4 saw some of the strongest AI revenue growth across the AI industry with AI server revenue up 342% YoY to $9 billion, while orders surged 1,906% YoY to a record $34.1 billion. This order momentum drove Dell’s AI server backlog to a record $43 billion, with it consisting primarily of Grace Blackwell systems, which could be quite helpful if the upcoming Vera Rubin generation sees a delay. Importantly, Dell also has supply secured to satisfy its guidance in full for the entire year, a key advantage considering the memory and component shortages persisting across the industry.
Moving down the line, Dell’s margins and cash flows stand out as they both approached the highest levels over the last three years, despite AI server margin headwinds and rising memory costs, with Dell leveraging its IP storage portfolio growth to keep margins strong. Growing storage attach rates through FY27 provides a large lever to keep margins strong through the rest of this year even with AI servers guided to grow >100%.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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