Dell reported surging demand in AI optimized servers in Q1 with orders of $12.1 billion. This outpaces the entirety of last year while representing a 612% sequential increase from $1.7B last quarter. To further compare, the peak quarter for orders last year was $3.6B.

Server shipments were low in Q1, which has readthrough to Blackwell as all around Q1 was slow for Blackwell servers. Server shipments were guided to be nearly 4x higher sequentially in Q2. Check out the graph below for the sudden inflection point from this quarter in terms of server growth.

This strong AI server shipment forecast contributed to a nearly $4 billion beat for Q2’s guidance. Notably, Dell did not raise its revenue forecast for the year, suggesting that tariff-related impacts may still bite in H2, or that AI server shipments will be lumpy and not be linear from here out.

Cash flows improved significantly in Q1, with strong triple-digit YoY growth for both operating and free cash flow. Adjusted EPS missed consensus estimates by more than 8%. Despite misisng estimages, EPS increased 17% or 3X faster than revenue.

Revenue Growth to Accelerate 11 Points in Q2

Dell reported $23.38 billion in revenue in Q1, a slight <1% beat to estimates as all of its core businesses grew in the quarter. Revenue growth decelerated to 5.1% YoY in the quarter with Dell forecasting a sharp acceleration in Q2 as it is now rapidly ramping AI server shipments after orders surged in Q1.

For Q2, Dell guided $28.5 to $29.5 billion in revenue, or 15.9% YoY growth at the $29 billion midpoint, which marks a nearly 11-point sequential acceleration. Interestingly, while Q2’s guidance was nearly $4 billion ahead of the consensus estimate for 0.9% growth to $25.26 billion in revenue, Dell opted to maintain its FY26 revenue forecast at $101 to 105 billion.

Key Operating Segments

Infrastructure Solutions Group

Dell’s ISG segment grew 12% YoY to $10.32 billion in revenue, as Dell’s surge in AI server orders did not translate into booked revenue this quarter. ISG operating income was $0.99 billion, up 36% YoY for a 9.7% operating margin. This was up 1.7 points YoY in what is typically the lowest seasonal quarter for profitability for the segment.

In Q1, AI server orders were up 612% YoY and QoQ to $12.1 billion with Dell saying this exceeded the entirety of their fiscal 2025 AI server shipments of $9.8 billion. This surge in orders brought Dell’s AI server backlog up to $14.4 billion, up from $4.1 billion in Q4.

However, Q1’s AI server shipments were just $1.8 billion, up just 6% YoY and down more than (14%) QoQ. This likely boils down to the timing of Blackwell’s ramp, as Dell projected more than $7 billion in shipments in Q2.

This also raises the question that Q2’s shipment forecast is simply a surge aligning with Blackwell’s strong ramp, as Nvidia’s earnings pointed toward yesterday. With that said, AI server shipments could normalize at a much lower quarterly run rate, something in the range of $3.5 billion to $4 billion (with what we know today). Dell is remaining conservative by only slightly changing the language of its AI server guidance for the year, previously sticking to $15 billion but now aiming for $15B+.

Within ISG:

Servers and Networking revenue grew 16% YoY to $6.32 billion, with Dell stating that demand has grown for a sixth consecutive quarter, with traditional servers seeing double digit growth. Revenue has continued to decelerate off of Q2 FY25’s peak at 80%, though the $7 billion AI server shipment forecast will reverse this trend.
Storage revenue increased 6% YoY to $4.0 billion, the third consecutive quarter of storage growth.

Client Solutions Group

Client Solutions segment revenue fared much better than expected despite weak Consumer revenue, with growth of 5% YoY to $12.51 billion. This accelerated from 1% growth in Q4 and marked Dell’s second consecutive quarter for growth. CSG operating income was $653 million, down (16%) YoY for a 5.2% margin.

This growth was driven by increased momentum in Dell’s Commercial PC business, where Dell said that demand was up YoY for a fifth consecutive quarter and up double-digits this quarter. Management also said that they are “seeing clear indications that the install base is upgrading to new Windows 11 PCs, many of them AI PCs.”

Commercial’s momentum helped offset Consumer weakness, as revenue decelerated further, dropping (23%) QoQ and (19%) YoY, versus a (12%) YoY decline in Q4. Within CSG:

Commercial revenue accelerated from 5% in Q4 to 9% in Q1 to $11.05 billion.
Consumer revenue declined (19%) YoY to $1.46 billion.

Margins Down Sequentially on Seasonality, Mixed YoY

Dell had forecast its adjusted margins to come down sequentially due to seasonality, which played out in the quarter. On a YoY basis, gross margins contracted though margins down the line were relatively strong, suggesting Dell is beginning to capture some operating leverage via cost cuts.

GAAP gross margin was 21.1%, down half a point YoY and more than 2.5 points sequentially due to lower storage and higher AI server mix. Adjusted gross margin was 21.6%, down more than half a point YoY and more than 2.5 points sequentially.
GAAP operating margin was 5.0%, up more than 0.8 points YoY as Dell cut expenses by (3%) YoY, but down 4 points sequentially on seasonality. Adjusted operating margin was 7.1%, up half a point YoY but down 4 points sequentially.
GAAP net margin was 4.1%, lower than last year’s 4.5%. Adjusted net margin was 4.6%, up 0.3 points from 4.3% last year.

Adjusted EPS Misses Estimates, Though FY EPS Guide Raised

Dell reported a fairly large (8.3%) miss on adjusted EPS, reporting $1.55 in the quarter versus its guidance for $1.65 and analyst estimates for $1.69. However, Dell raised its FY26 EPS guidance, speaking to management’s confidence in executing as AI servers ramp and tariffs cloud the macro outlook.

For Q2, Dell guided for $2.15 to $2.35 in adjusted EPS for growth of 15% at midpoint, marking a slight deceleration from the 17.4% growth reported in Q1. Q3 and Q4 are expected to see EPS growth decelerate a bit further, with growth of just 10.7% in Q4.

For the full year, Dell slightly raised its FY26 adjusted EPS guidance to $9.40 for 15% growth, up from its prior view for $9.30 for 14% growth. Dell also slightly hiked its GAAP EPS view for FY26, now seeing $7.99 for 25% growth versus its prior view for $7.85 for 23% growth.

Cash Flows Show Strong Triple Digit Growth

Some of the stronger numbers of the report aside from AI server orders were Dell’s cash flow metrics, showing strong triple digit growth and a return to double digit margins for OCF.

Operating cash flow rose 168% YoY to $2.80 billion. OCF margin was 12.0%, up more than 7 points from 4.7% a year ago and more than 9.5 points higher than Q4’ s 2.4% margin.
Free cash flow rose 388% YoY to $2.23 billion, while adjusted free cash flow rose 258% YoY to $2.23 billion. FCF and adjusted FCF margin was 9.5%, a significant improvement from 2.1% and 2.8% a year ago.
Cash, equivalents and investments totaled $9.29 billion, up more than $4 billion QoQ. Debt also rose more than $4 billion QoQ to $28.78 billion.
Inventories were $7.42 billion, up more than 10% sequentially.

Share Buybacks and Dividends:

In the recent quarter, Dell returned $2.4 billion to shareholders with 22.1 million shares of stock repurchased and also paid a dividend of $0.53 per share. The CFO pointed out that since the start of 2023, Dell has returned $13.2 billion to shareholders through stock repurchases and dividends.

Earnings Q&A:

Lumpy Server Orders – Not Budging on the $15B Annual Forecast

Per our analysis yesterday, Nvidia stated the ramp for Blackwell is happening very quickly “On average, major hyperscalers are each deploying nearly 1,000 NVL72 racks or 72,000 Blackwell GPUs per week and are on track to further ramp output this quarter.”

Dell primarily focuses on Tier 2 CSPs, yet a press release was issued stating the following that would indicate Dell is shipping Nvidia’s largest systems at scale: “One of Dell’s U.S. factories can ship thousands of NVIDIA Blackwell GPUs to customers in a week. It’s why they were chosen by one of their largest customers to deploy 100,000 NVIDIA GPUs in just six weeks.”

Also buried in the call was a comment by the CEO stating they have 3,000 AI customers – which feels very high to me given the current order number (meaning orders should follow i time): “Our enterprise growth is exciting with over 3,000 customers now buying various forms of our Dell AI factories. We saw a mix from Hopper technology and Blackwell technology across those. We saw it with [Worm and x86] (ph), so a great cross-representation there.”

Despite this excitement, Dell offered a muted tone on the call especially as they declined to increase their AI forecast for $15 billion in AI servers this year, stating: “The customer deployments that we have in front of us are large. They're complex. They have very detailed schedule deliveries. There's lots of dependencies on this. We've talked about this business being lumpy and nonlinear. The dependencies in this business are waiting for data centers to be built, power to be provided, direct liquid cooling infrastructure put in place. We're orchestrating a highly complex supply chain [..]” and later it was stated: “[…] I like our prospects of converting more pipeline in the second half, but at this point, we're on the $15 billion plus side. Our annual guidance that we just delivered suggests that's exactly where we are.”

My readthrough is that Dell is not willing to offer guidance on these systems that have had many delays. From what I can tell, companies in the United States supply chain would rather just surprise the market down the line than overpromise on something outside of their control.

When it comes to other Nvidia server makers such as Foxconn, Wistron and Quanta, many of them have extensive manufacturing operations in China (although headquartered in Taiwan). I would not be surprised if we see Nvidia more “encouraged” to use USA-based server makers such as Dell somewhere down the line.

Discussions around AI Server Margins

There was an exchange around ISG margins on the call with an analyst trying to pinpoint if AI servers result in “a low single-digit operating margin” — however, management pushed back on this stating that ISG margins are expanding on a QoQ basis due to AI servers.

Because AI server margins can make or break a stock like Dell (or Supermicro), I’m quoting the response in full – this is about the guide and not the current quarter results, which had lower margins.

The CEO stated: “When I think about AI and the numbers that we gave, the $7 billion of incremental revenue. When you look at it, I believe it's roughly $4 billion on a year-over-year basis. It's roughly $5 billion on a quarter-over-quarter basis. And it drives significant gross margin dollar growth on both a year-over-year and quarter-over-quarter basis. And it drives significant operating income dollar growth on a quarter-over-quarter and year-over-year basis. I'll turn it over to Yvonne, she can add more.”

The CFO later stated: “Yes, I'd say embedded within the guide is a 10% quarter-over-quarter increase in gross margin dollars. As Jeff mentioned, we're seeing — what we're seeing in ISG quarter-over-quarter is [indiscernible] $5.3 billion more revenue, with roughly $0.5 billion more in operating income, which is being driven by AI server profitability and to a lesser extent improvement in the profitability within our Storage portfolio.”

This would mean the flat guide on adjusted operating margin is coming from traditional servers as it was stated in the opening remarks: “We are expecting sub-seasonal performance in traditional server and storage, our larger profit pools that provide scale, as customers evaluate their IT spend for the year given the dynamic macro environment.”

Weak Macro Backdrop:

When asked directly about a tariff pull forward, Dell cut to the chase and confirmed they believe a pull forward occurred in all three of their traditional businesses of PCs, storage and non-AI servers.

The CEO was quite granular in discussing the details:

“Jeff Clarke:

I think I mentioned in my remarks at North American, EMEA and APJ all grew double digits from a demand perspective. We did see a slowdown in month three. Month one was greater than January. Month two was greater than February. Month three slowed in weeks 10 through 12 in actually all three US businesses, commercial PCs, traditional servers, and storage. So clearly there is a bump along the journey there, along they reference to that with a slowdown in our traditional server business. So, a pull ahead. We are still optimistic about the year. We have all of the businesses growing. We are maybe a little more needed in what we think in those businesses. They may be down a point in terms of their absolute market growth. I don't think anyone knows, but when you look at traditional servers, you look at storage, the other two businesses that I was referring to. I think, both were growing nicely. North America speed bump with 10 through 12 in month three. Worked our way through that. We now have that reflected in our guidance in Q2.”

Conclusion:

We took a stab at Dell as it was becoming apparent from Nvidia’s report that Dell would likely beat its AI server business. It was a blowout in that regard, as the chart shows, yet there are a few puts and takes to consider. First off, Dell is not comfortable guiding to more than what they are sure will be delivered in light of many delays with Blackwell. Secondly, Dell’s other segments saw a pull forward and will weigh on results as we move into future quarters. However, one reason we took a stab is that a bullish setup is forming – like with many AI stocks right now, it requires some patience.

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 Riding Nvidia’s Tailwinds to Record $12.1B in AI Server Orders in Q1