Dell had the unfortunate timing of reporting earnings at the moment tariffs threats increased, with China to see 20% tariffs starting as soon as next week. Dell is exposed to tariffs as a report from 2023 stated China revenue falls between 8% and 14% of sales.

In addition, Dell is the clearest supplier yet to illustrate the impact of the NVL systems being delayed. This quarter, the company stated they project $15B in AI shipments this year, yet in Q4, AI orders were $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ with $4.1 billion in backlog as customers work through technology changes. If Wall Street didn’t get the point from Nvidia’s fairly vague commentary, then Dell made it abundantly clear by offering shipments and backlog, which Supermicro and others do not offer.

Down the income statement, the company reported mixed results. Revenue grew by 7.2% YoY to $23.93 billion, missing estimates by 2.6%. While adjusted EPS grew by 18.1% YoY to $2.68, beating estimates by 6.4%.

Management guided Q1 revenue in the range of $22.5B to $23.5B, representing a YoY growth of 3.4% at the midpoint, missing estimates by 3% and expects adjusted EPS to grow 25% YoY to $1.65.

Management has guided $15 billion in AI shipments for FY2026. The company’s AI server backlog increased from $4.5 billion in Q3 to $9.0 billion in Q4, primarily driven by the recent deals, including xAI.

Where Dell and Super Micro may both be seeing lower growth than expected likely goes back to the delivery of key Nvidia systems, where the larger systems lead to higher revenue (and you’re aware by now these were delayed by “couple months”). It’s also perhaps due to Nvidia’s partnership with Foxconn, who has seen more news lately than peers Dell and Supermicro in terms of shipping Blackwell systems. According to a news report from Economic Daily the GB200 was shipped by Foxconn in small quantities at the end of Dec and is expected to be shipped in large quantities at the end of January. Nvidia is expected to unveil the GB300 AI server product line at the GTC conference in March.

Ultimately, this is one more supplier that is offering a muted outlook. Per Knox’s webinars, IOF has been preparing for a rout of sorts. Our goal has been to add to AI positions during the rout. With that said, we have must-hold levels and will let you know if Dell breaks our must-hold.

Revenue

Q4 revenue grew by 7.2% YoY to $23.93 billion driven by the 22% YoY growth in the ISG segment. However, the revenue fell short of estimates by 2.6%.

Management guided Q1 revenue in the range of $22.5B to $23.5B, representing YoY growth of 3.4% at the midpoint, missing estimates by 3%.
Analysts expect revenue to grow 1.8% YoY to $25.5 billion in Q2 and 9.3% YoY to $26.6 billion in Q3.

FY2025 revenue grew by 8.1% YoY to $95.57 billion. The management guide for the FY2026 is $101B to $105B, representing YoY growth of 7.8% at the midpoint of $103 billion, slightly missing the consensus estimate of $103.62 billion.
Analysts expect FY2027 revenue to grow 6.8% YoY to $110.71 billion.

Key Operating Segments

Infrastructure Solutions Group

ISG revenue grew by 22% YoY and flat QoQ to $11.4 billion. Revenue growth decelerated from 34% in Q3.

In Q4, AI orders were $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ while management mentioned that $4.1 billion is in backlog as customers work through technology changes. The company’s AI server backlog increased from $4.5 billion in Q3 to $9.0 billion in Q4, primarily driven by the recent deals, including the $5 billion from XAI. Management has guided $15 billion in AI shipments for FY2026.

The company reported a record ISG operating income of $2.1 billion, up 44%. This was driven primarily by higher revenue. The ISG operating margin was 18.1% compared to 15.3% in the same period last year.

Servers and Networking revenue grew by 37% YoY and down (10%) QoQ to $6.6 billion.
Storage revenue grew by 5% YoY and 18% QoQ to $4.7 billion.

Regarding Dell’s AI server solutions, the company highlighted the Power Edge servers and the ability to scale up and scale in the opening remarks:

“We added five platforms to our AI-optimized portfolio, including support of Blackwell architectures, the highlight being the PowerEdge XE9712 supporting NVIDIA's NVL72 GB200, which we were the first to ship in the world. We launched the Dell Infrastructure Rack Scalable System, our IR7000 and 5000 in both 21-inch and 19-inch versions, providing up to 96 GPUs in a rack and 786 GPUs in a scalable unit. We have made significant advancements with CDUs, cold plates, manifolds and power distribution with our IR7000 supporting up to 480 kilowatts per rack.”

The company also benefits from the increase needs of storage due to data-hungry AI models: “We made significant advancements to PowerStore with PowerStore Prime, our mid-range storage solution addressing the fastest-growing portion of the market. And we introduced the PowerScale F910 and F710 in our unstructured portfolio that is primed to support unstructured and AI workloads.”

Client Solutions Group

Client Solutions Group revenue grew by 1% YoY and down (2%) QoQ to $11.9 billion. The CFO said in the earnings call, “We saw some promising signs as we went through November and December with pockets of strength in large deals, but overall saw a slowdown in January. As Jeff mentioned, we saw strength in small and medium business, which is historically a leading indicator.”

The CSG operating margin was 5.3% of revenue compared to 6.2% of revenue in the same period last year and was also down 90 basis points sequentially due to a more competitive pricing environment.

Commercial revenue was up 5% YoY and down (1%) QoQ to $10 billion.
Consumer revenue declined by (12%) YoY and (5%) QoQ to $1.9 billion.

When AI PCs take off, Dell will be a beneficiary with the following stated on the call regarding their participating in both Arm-based and x86-based PCs: “We introduced the most Copilot+ PCs powered by ARM-based Qualcomm Snapdragon processors and also launched the broadest portfolio of Intel Lunar Lake commercial PCs, furthering our number one leadership position in commercial AI PCs worldwide.”

Operating Margins Stronger than Expected

The company’s margins improved due to the operating leverage and higher profits in the ISG segment driven by the Dell IP storage portfolio. The company also discovered previously unrecognized accumulated credits from suppliers and have revised the margins slightly higher than the previous figures. However, the company’s gross margins are feeling pressure due to increasing competition faced in the CSG segment and also the increase in AI revenue.

The gross margin was 23.7% compared to 24.1% in the same period last year. Adjusted gross margin was 24.3% compared to 24.8% in the same period last year. The lower gross margin was due to a higher AI-optimized server revenue mix and lower profits in the CSG segment due to increased competition. The gross margin rate will be lower sequentially given seasonally lower storage mix and a higher AI-optimized server mix.
The operating margin was 9% compared to 6.9% in the same period last year. Adjusted operating margin was 11.2% compared to 9.8% in the same period last year. The improvement in the operating margin was due to higher revenue and lower operating expenses.
Net margin was 6.4% compared to 5.4% in the same period last year. The adjusted net margin also showed improvement as it reported 8% compared to 7.4% in the same period last year.

FY2025 adjusted gross margin was 22.8% compared to 24.5% in FY2024. Management expects adjusted gross margin to be down 100 basis points in FY2026 due to a higher mix of AI-optimized servers and the current competitive environment.
FY2025 operating margin improved 40 basis points to 6.5%. Adjusted operating margin remained the same at 8.9%.
FY2025 net margin improved 100 basis points to 4.8% and adjusted net margin remained the same at 6.1%.

Adj.EPS grew by 18.1%

Q4 adjusted EPS grew by 18.1% YoY to $2.68, beating estimates by 6.4% driven by operating leverage and improvement in the ISG segment operating margin and partly helped by revisions from the previously unrecognized accumulated credits from suppliers.
Management expects Q1 GAAP EPS to be $1.29, down (6%) YoY and adjusted EPS to grow 25% YoY to $1.65.
Full-year FY26 GAAP EPS expected to be $7.85, up 23% year over year, and adjusted EPS to be $9.30, up 14%.

When the time comes for AI servers to ship in volume, one thing to keep in mind is Dell’s operating leverage compared to other hardware peers – here is how the CFO described it with double digit growth that exceeds revenue growth: “Now let's look at operating income. We delivered a 22% increase to $2.7 billion or 11.2% of revenue. This was driven by higher revenue and lower operating expenses, partially offset by a decline in our gross margin rate. Q4 net income was up 15% to $1.9 billion primarily driven by stronger operating income. And our diluted EPS was up 18% to $2.68.”

Cash Flow and Balance Sheet

The company’s cash flows were lower due to lower CSG revenue and also higher inventory to support the AI demand. This was clarified by the management in the earnings call Q&A as they expect cash flows to improve this year with higher CSG revenue.

Q: Amit Daryanani (Analyst)

Thanks a lot. I guess I have a question on free cash flow. In fiscal '25, it looks like your free cash flow is down a couple of billion dollars versus '24. Can you just talk about what's driving this contraction in free cash flow? And maybe, Yvonne, you can help us kind of understand how do we think about free cash flow expectations as we head into fiscal '26? What are sort of puts and takes around it? It would be really helpful to kind of get the context, at least for fiscal '26, what's going on?

A: Tyler Johnson (Vice President and Treasurer)

“Amit, look, I think — as I was sitting here last year, I definitely thought cash flow was going to be a little bit stronger. If you look at what played out, one, we didn't see the growth in CSG that we were expecting. And as you know that throw off really good cash. And then two, we invested a lot in our AI business through inventory. And so you can see that our inventory has gone up, and that had a big impact to CCC. Now if I look where I am today and I think about FY '26, I would say I've got a few things working in my favor. So one, we're at a CCC level where historically, we've always shown improvement from here. And that will throw off good cash. We expect good CSG this year, and that will throw off good cash. And if I think about the growth in the P&L, that will throw off good cash. So look, I think we feel pretty good about cash. I do expect it to be greater than 1x and so yes.”

— End of Quote

Q4 operating cash flow margin was 2.4% compared to 6.9% in the same period last year.
Q4 free cash flow margin was (-0.5%) compared to 3.6% in the same period last year and adjusted free cash flow margin was 2.0% compared to 4.5% in the same period last year.
Cash and investments were $5.13 billion and debt of $24.57 billion compared to $6.5 billion and $25.02 billion in Q3.
Inventories were $6.7 billion in Q4 compared to $6.65 billion in Q3. However, it was significantly higher than the $3.62 billion in the same period last year to support the AI demand.
The company repurchased shares worth $734 million and paid dividends of $311 million.
It also announced an 18% increase in the annual dividend to $2.10 per share. Additionally, the Board of Directors has approved a $10 billion increase in the share repurchase authorization.

Earnings Call:

Blackwell Margins to be Lower than Hopper Margins; Yet Dell Likely Will Win the Margin Battle

Margins are a key issue with hardware suppliers, and Dell stated Blackwell margins will be lower than Hopper margins, which is something to watch as the next architecture ramps: “I mentioned in the last call that the Blackwell margins were lower than the Hopper margins and remains so today. We're still early. The deals are very large upfront. There's more competitors, so it's a more competitive landscape.”

An analyst pointed out that despite growing their mix of AI server revenue, Dell guided for ISG margins to be flat – which is a win since AI servers are supposed to weigh on margins. Dell’s response is they will leverage storage to offset any margin weakness from AI servers.

In terms of Dell’s thesis, I would place margins equal to its AI server backlog, which is why I’m starting with this piece rather that AI in the call summary.

“Michael Ng

Hi good afternoon. Thank you for the question. I just have one on the ISG margin outlook of flat year-over-year for the upcoming year. It's a great outlook, particularly considering AI server revenues growing 50%. So can you talk a little bit about the expectations for margins for some of the components, traditional servers, storage AI servers? I'm just trying to understand the ability to keep ISG margins flat despite presumably the dilutive effect from the AI server margins. Thank you.

Jeff Clarke

I think, Mike, maybe the way to look at this is the, first and foremost, as we think about holding ISG margins flat, I love the way that you asked the question, we're going to do that by growing at least $15 billion in AI servers. I know your question is how we're going to do that. But for us, that's a very important mark that we're going to be able to meet that operating range that we've committed in our long-term framework and we're going to grow at a minimum of $15 billion in AI servers. And we're going to do that by what we've done in traditional servers and what we've done in storage. The storage leverage that Yvonne talked about earlier is front and center. When we grow the storage business and we control our expenses, scale matters, the operating margins improve. When we pivot to Dell IP storage, which we have done, our margins improve. The margins of our own IP are vastly superior than third-party IP. We've been doing that for some time.”

— End Quote

Dell Calms Supply Fears About Blackwell

Dell is the perfect company to corner on the GB200s shipping and if there is a “supply” issue. This is also the perfect question to ask as DeepSeek has greatly obfuscated the issue to where the media is focused on demand (which is def not the problem for 2025!!). Supply is the issue, to where rather than there being supply constraints (like during Covid), there are supply hiccups.

I find there are two kinds of management teams – those that are transparent and take it on the chin for being so, and those who are more vague and hope the market skates over their commentary. Dell is the former.

Samik Chatterjee

Hi, hopefully you can hear me now. Jeff, I just wanted to go back to some of your prepared remarks and — about the $15 billion of AI server revenue that you were highlighting that you at least expect to grow to that level. Just wondering, how much of that is gated by supply, particularly versus the visibility into supply that you're getting? And how much of that commentary around sort of at least growing there is a supply dynamic versus a demand dynamic? And should we be expecting more sort of linear growth for the quarter as we think about the — with visibility on supply? Thank you.

Jeff Clarke

Well, I think clearly, Hopper supply is available today. I believe there is references yesterday that Blackwell is in production and ramping. We're open for business and taking orders. The message that I really wanted to drive in our remarks is on day 27 of the fiscal year, we're trying to communicate that we are at least $15 billion in AI shipments. Our 5-quarter pipeline continues to grow. It's several multiples of our backlog. We are going to pursue every opportunity with the CSPs and in enterprise. These large-scale systems are accelerating and getting bigger. Models are quickly moving to reasoning models, which consume and require more computational capability, i.e., more computers. And the use cases continue to get clearer for enterprise to drive the return on investments they want to see to actually use AI more broadly. Algorithm innovation continues to accelerate. Again, these reasoning models are — will consume more computational capability. They're moving to be multimodal, which even consumes more kind of like where this is going. We're optimistic. I don't see supply as an issue. Clearly, these are about building the right architecture. There's a customer preparation or customer readiness component of this, new data centers getting powered, getting water, getting cooling. There's other materials beyond the GPU, getting the rack, getting the cold plates, getting the CDUs, the PDUs, all of that is what we orchestrate. We have line of sight that is at least $15 billion. We'll continue to update as that might change. And we're all in. I don't know what else I can tell you. I hope that helped.

Conclusion:

Dell’s server shipments QoQ makes it abundantly clear they were impacted by the delay in Blackwell NVL server shipments. How any issues are sorted will be fluid, as any supplier that can alleviate the issues around standing up the systems will be exponentially rewarded while those who falter will be eliminated. Dell’s $15B is lower compared to Supermicro with annual FY estimates of $24B. However, Dell is quickly catching up. What separates the two is the operating leverage, the more trustworthy management team (given SMCI has been in the crosshairs of the SEC lately), and the AI PC story that will materialize eventually.

Given the weak price action AH, we have a must hold level for Dell as the market is panicked right now over tariffs and weak AI supplier commentary (officially across the board now that we have Dell’s more transparent report on server shipments). Our goal is to not get shook out the position, while adhering to risk management. We will keep you in the loop if the must hold breaks.

I/O Fund Equity Analyst Royston Roche contributed to this article.

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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Dell Q4: Projects $15 billion in AI shipments this year