Dell will release its Q3 FY25 results on Nov 26. Analysts expect revenue to accelerate from 9.1% in Q2 to 11.1% in Q3 and adjusted EPS to grow 9% to $2.05.
The recent strong Nvidia results are a positive read-through for Dell in the coming quarters. Nvidia’s management suggested strong Blackwell and AI demand. Blackwell production shipments are scheduled for Q4 and are expected to ramp up in 2025. Nvidia’s CFO, Colette Kress, said in the earnings call, “Blackwell demand is staggering and we are racing to scale supply to meet the incredible demand customers are placing on us. Customers are gearing up to deploy Blackwell at scale.”
According to the recent UBS survey, Dell’s storage demand has been up year over year and stronger than that of its competitors. Dell’s all-flash storage demand was rated as strong by 71% of respondents compared to 53% for NetApp, 32% for HPE, and 20% for Pure Storage.
Similarly, another survey conducted by Morgan Stanley suggests that Dell is the best-positioned hardware vendor to capture traditional enterprise spending in the next three years. Analysts highlight the company's AI infrastructure momentum, driven by projected AI server shipments of about $20.6 billion in FY2026, up 56% from the previous forecast. We need an earnings report to confirm the survey results and hear management's AI demand commentary.
Dell also surprised the market with stronger-than-expected margins last quarter. The stock is a quality play compared to Super Micro even before the accounting issues cropped up.
Revenue
The company’s revenue is accelerating due to strong demand for Artificial Intelligence solutions. Management is optimistic about the significant opportunities in Enterprise AI, Tier-2 Cloud Service Providers, and sovereign AI opportunities. Dell is well-positioned to capitalize on these emerging markets by leveraging its existing solid relationships.
FQ2 revenue grew by 9.1% YoY to $25.03 billion. Jeff Clarke, Dell’s COO said in the earnings call, “Our AI momentum accelerated in Q2 and our results and outlook demonstrate that we are uniquely positioned to help customers leverage the benefits of artificial intelligence.”
- Analysts expect FQ3 revenue to accelerate to 11.1% YoY to $24.72 billion and to 14.5% growth to $25.54 billion in FQ4.
- During FQ2 results, management raised its full-year revenue guidance to $95.5 billion and $98.5 billion, representing 10% YoY growth at the midpoint. This is a $1.5 billion increase at the midpoint from the previous guidance, driven by solid momentum in AI servers and networking.
- Analysts expect FY 2026 revenue to grow 8.6% YoY to $105.88 billion and 5.9% YoY to $112.10 billion for FY2027.
Given that Blackwell is expected to ramp significantly this year, and combined with Super Micro likely losing business from its accounting issues, we are foreseeing these estimates being too low by the time we exit next year.
Key Operating Segments
Infrastructure Solutions Group
FQ2 revenue accelerated significantly in the quarter as the segment grew 38% YoY and 26% QoQ to $11.65 billion, accelerating 1600 bps sequentially from 22% YoY growth in Q1. Management guided ISG growth to be in the low 30% range for FQ3, pointing to a slight deceleration sequentially. According to Zacks consensus estimates the revenue is expected to grow 32.7% YoY to $11.28 billion in FQ3.
For the full-year, management has guided for growth to be approximately 30%. Nvidia’s CFO, Colette Kress’s commented during the recent Nvidia’s results that “Both Hopper and Blackwell systems have certain supply constraints, and the demand for Blackwell is expected to exceed supply for several quarters in fiscal 2026.” This explains the fact that the Blackwell revenue will impact Dell’s guidance in the coming quarters.
ISG’s growth in FQ2 was driven by servers and networking, with revenue accelerating to 80% YoY and 40% QoQ to $7.67 billion, a record for the segment. This was a 3700 bps sequential acceleration in the YoY growth rate from 43% in Q1. According to Zacks consensus estimates, the servers and networking revenue is expected to grow 58.7% YoY to $7.39 billion in FQ3.
Storage revenue declined by (-5%) YoY and up 6% QoQ to $4.0 billion. During the earnings call, management mentioned that for FQ3, “Servers will grow in the low-single digits and storage will be down in the low-single digits. So that's relatively normal sequentially.” According to Zacks estimates, storage revenue is expected to grow 1.1% YoY to $3.89 billion. In the opening paragraphs, we discussed that UBS survey results point to better storage demand for the company. We need an earnings report to confirm the survey results.
AI server orders were $3.2 billion in FQ2, up 23% QoQ from $2.6 billion in Q1 as Tier 2 cloud service providers and enterprise customers increased. AI server shipments rose more than 82% QoQ, from $1.7 billion in Q1 to $3.1 billion in Q2. Growth also extended beyond AI to traditional servers, as traditional server demand rose YoY for the third consecutive quarter and rose QoQ for the fifth consecutive quarter.
Management had said during the earnings call Q&A that the AI servers would be down quarter-over-quarter. Evercore analyst note sounded more optimistic and expects the company to ship over $3.1 billion AI servers in FQ3, ahead of the management expectations due to the intra-quarter Tesla pull-ins and the expansion of xAI’s Colossus cluster. They also expect the backlog to remain between $3 billion and $4 billion for FQ3.
ISG’s adjusted operating margin expanded 300 bps QoQ to 11% in Q2, easing some concerns about AI servers weighing on segment margins. Management maintained its full year view for 11% to 14% adjusted operating margins for ISG, suggesting more upside to margins in the back half of the year.
Client Solutions Group
Client Solutions Group Q2 revenue declined (-4%) YoY but rose 4% QoQ to $12.41 billion. Commercial revenue was flat YoY and up 4% QoQ at $10.55 billion, while Consumer revenue declined (22%) YoY and up 2% QoQ to $1.86 billion. According to Zacks consensus estimates, the Client Solutions Group is expected to grow 0.3% YoY to $12.32 billion, while Consumer revenue is expected to decline by (-15.1%) YoY to $2.07 billion and Commercial revenue to grow 4.2% YoY to $10.24 billion.
The company is expecting growth in CSG in the second half of the year, with growth more concentrated in Q4. Q3 is expected to see flat to low single-digit growth, with management believing the “coming PC refresh cycle and the longer-term impacts of AI will create tailwinds for the PC market.” For the full-year, CSG is expected to also be “flat to low single digits for the year.” Recent data from Canalys showed strong AI PC shipments totaled 13.3 million, up 49% QoQ and accounting for 20% of PC sales in the third quarter signals a positive read-through for the Client Solutions Group.
Margins
The company’s margins remained resilient despite gross margin contracting, as Dell faces some competitive pressure and headwinds from increased AI server mix. Margins are expected to improve with a higher proportion of storage revenue in the second half of the year, as well as cost-cutting initiatives like reducing workforce.
- FQ2 gross margin was 21.2% compared to 23.5% in the same period last year. Adjusted gross margin was 21.8% compared to 24.1% in the same period last year. For the FY25 management has guided for adjusted gross margin to decline 180 bps YoY to 22.5% due to inflationary input costs, competitive environment, and higher mix of AI optimized servers.
- Operating margin improved to 30 bps YoY to 5.4%. Adjusted operating margin declined by 50 bps YoY to 8.1%, helped by higher revenue and lower operating expenses, offset by lower gross margins. Management expects FQ3 operating expenses to be $3.6 billion, down (-9.3%) sequentially and adjusted operating expenses to be $3.3 billion, down (-3.8%) sequentially.
- For the FY25 management expects operating margin to improve 60 bps YoY to 6.5% and adjusted operating margin to decline slightly by 10 bps to 8.6%.
- Net margin was 3.4% compared to 2.0% in the same period last year and adjusted net margin was 5.5% compared to 5.6% in the same period last year.
EPS
EPS growth rate is expected to accelerate in the coming quarters.
- Management has guided FQ3 GAAP EPS in the range of $1.43 to $1.63 and adjusted EPS in the range of $1.90 to $2.10. Analysts expect adjusted EPS to grow 9.0% YoY to $2.05 in FQ3.
- Adjusted EPS is expected to accelerate to 20.8% growth and 49.8% growth in the subsequent two quarters.
- Management raised the mid-point range of FY2025 adjusted EPS by $0.15 to $7.80.
- Analysts expect FY25 adjusted EPS to grow 10.5%, followed by 19.8% and 14.6% in the subsequent years.
Cash Flow and Balance Sheet
Cash flows were lower in FQ2 due to higher working capital requirements.
- Operating cash flow was $1.34 billion or 5.4% compared to 14% in the same period last year.
- Adjusted free cash flow was $1.28 billion or 5.1% of revenue compared to 13.3% in the same period last year.
- Cash and investments were $5.85 billion and debt of $24.52 billion compared to $7.12 billion and $25.48 billion at the end of FQ1. The core leverage ratio was down to 1.4x from 1.5x in FQ1.
- The company repaid $1 billion in debt during FQ2. It also repurchased shares worth $712 million and paid $316 million in dividends.
Other Key Points
Positive Blackwell comments from Nvidia management
Nvidia’s CEO Jensen Huang said in the recent Q3 earnings call, “Blackwell production is in full steam. In fact, as Colette mentioned earlier, we will deliver this quarter more Blackwells than we had previously estimated. And so the supply chain team is doing an incredible job working with our supply partners to increase Blackwell, and we're going to continue to work hard to increase Blackwell through next year. It is the case that demand exceeds our supply and that's expected as we're in the beginnings of this generative AI revolution as we all know.
And so Blackwell demand is very strong. Our execution is on — is going well. And there's obviously a lot of engineering that we're doing across the world. You see now systems that are being stood up by Dell and CoreWeave, I think you saw systems from Oracle stood up.”
Jeff Clarke, Dell’s COO, had announced earlier this month that Dell had started shipments of servers based on Nvidia's Blackwell GPUs. The servers, which are aimed at enterprises, use liquid-cooled PowerEdge XE9712 racks.
Dell was mentioned before HPE and Super Micro is another positive read-through from Nvidia’s earnings call.
“And in terms of how much Blackwell total systems will ship this quarter, which is measured in billions, the ramp is incredible. And so almost every company in the world seems to be involved in our supply chain. And we've got great partners, everybody from, of course, TSMC and Amphenol, the connector company, incredible company, Vertiv and SK Hynix and Micron Spill, Amkor and KYEC and there's Foxconn and the many the factories that they've built and Quanta and Wiwynn and gosh, Dell and HP and Super Micro, Lenovo and the number of companies is just really quite incredible, Quanta. And I'm sure I've missed partners that are involved in the ramping up of Blackwell, which I really appreciate. And so anyways, I think we're in great shape with respect to the Blackwell ramp at this point.”
Super Micro Woes
Dell is also expected to benefit from the recent challenges faced by Super Micro. According to an article from Tomshardware Elon Musk’s xAI has reportedly shifted $6 billion of AI server orders to its rivals.
Valuation
Dell is trading at a P/E ratio of 26.26 and a forward P/E ratio of 18.31, higher than the average P/E ratio of 13.24. Similarly, it trades at a P/S ratio of 1.15 and a forward P/S ratio of 1.04, higher than the average P/S ratio of 0.47.
Conclusion
Dell is a beneficiary of the AI server opportunity. The recent Nvidia management comments allayed investor fears about Blackwell delays. The company is also expected to benefit from Super Micro issues, which is another catalyst for the stock. In FQ2 the company eased some concerns about AI servers weighing on ISG segment margins and we continue to monitor the margins in the coming quarters.
Due to timing of Blackwell, we added to our position as we may be a hair early but not by much, the risk to us is greater in missing out on Dell becoming the leader in AI servers at the very time that AI servers go through an important transition toward complex AI systems with up to 36 CPUs and 72 GPUs combined.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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