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    Dell Technologies (DELL)

    DELL Q1 2026: $12B AI Backlog Drives Margin Gains Amid Server Slowdown

    Reported on Jun 10, 2025 (After Market Close)
    Pre-Earnings Price$113.63Last close (May 29, 2025)
    Post-Earnings Price$112.48Open (May 30, 2025)
    Price Change
    $-1.15(-1.01%)
    • Strong AI Demand & Backlog: Dell’s AI server segment is generating significant enthusiasm with over $12 billion in AI orders this quarter, backed by a $14.4 billion backlog primarily driven by Blackwell-based systems – illustrating a robust and growing demand for its AI-focused products.
    • Attractive Margin Accretion: Management highlighted that the AI business is not only driving revenue but is also highly accretive to gross margin and operating income, with AI server profitability offsetting competitive price pressures and supporting faster earnings growth.
    • Operational Excellence & Execution: Dell’s ability to rapidly deploy solutions – with systems becoming operational within 24 hours – along with disciplined navigation of tariff challenges and record Q1 cash flow generation underscores its strong execution and market resilience.
    • Slowing Growth in Traditional Servers and Storage: Executives noted a softening of demand for traditional servers, particularly due to a lower high-margin North America mix and a seasonal slowdown in Q1 (Weeks 10–12), which raises concerns about sustaining revenue and margins in those segments .
    • Low Profitability in AI Server Segment: Despite strong order growth in AI servers, questions were raised about profitability—with indications of low single-digit operating margins on these sales. This could signal that robust demand may not translate into proportionate earnings improvement .
    • Competitive and Macro Challenges Pressuring Pricing and Margins: Management highlighted maintaining stable ASPs amid aggressive competitive pricing, especially in the consumer segment, and navigating a volatile macro environment. Such pressures may result in margin compression and cautious forward guidance .
    MetricYoY ChangeReason

    Total Revenue

    +2.6% ( )

    Total Revenue increased modestly from $22,244 million in Q1 FY 2025 to $22,826 million in Q1 FY 2026. This modest growth, compared to a lower previous base, reflects incremental gains from disciplined cost management and stable market conditions, despite greater operational improvements seen in other segments.

    Net Revenue

    +5% ( )

    Net Revenue grew from $22,244 million in Q1 FY 2025 to $23,378 million in Q1 FY 2026, driven largely by the strengthened performance of the Infrastructure Solutions Group (ISG) and previous investments in AI-optimized offerings. This improvement builds on earlier period momentum and a shift towards high‑value revenue streams.

    Operating Income

    +26% ( )

    Operating Income surged from $920 million to $1,165 million, reflecting higher margins achieved primarily through the robust performance in ISG and improved cost efficiency measures. This significant jump compared to the prior period indicates a sharper operational turnaround amid competitive pressures.

    Income Before Income Taxes

    +98% ( )

    Income Before Income Taxes nearly doubled—from $547 million to $1,083 million—thanks to the marked improvement in operating income, reduction in interest expenses, and gains on investments. This outcome builds on earlier period cost management and strategic financial adjustments leading to enhanced profitability.

    ISG Revenue

    +11.8% ( )

    ISG Revenue increased from $9,227 million to $10,317 million, with growth driven by a 16% rise in servers and networking revenue (boosted by high demand for AI-optimized offerings) and additional gains in storage. This continued momentum builds on the previous strong performance and targeted strategic focus in the ISG segment.

    CSG Revenue

    Flat ( )

    CSG Revenue remained relatively flat as gains in the commercial segment, which grew by around 9%, were offset by a decline in the consumer segment. This balance reflects trends seen in the previous period where mixed performance in sub-segments led to a subdued overall change.

    Geographical Revenue

    Shifting – Americas down; EMEA & APJ up ( )

    Approximately 50% of total revenue came from foreign markets in Q1 FY 2026. The Americas experienced a decline, while both EMEA and APJ regions registered increases. This shift reflects evolving regional demand patterns and competitive dynamics, building on earlier trends where diverse growth was seen outside the Americas.

    MetricPeriodPrevious GuidanceCurrent GuidanceChange

    Revenue

    Q2 2026

    Expected to be between $22.5B and $23.5B, with a midpoint of $23B, representing a 3% growth

    Expected to be between $28.5B and $29.5B, with a midpoint of $29B, up 16%

    raised

    ISG and CSG Combined Growth

    Q2 2026

    Expected to grow 6% at the midpoint (ISG: low teens; CSG: flat)

    Expected to grow 19% at the midpoint

    raised

    Operating Expenses (OpEx)

    Q2 2026

    Expected to decline in the low single digits year-over-year

    Expected to be down low single digits year-over-year

    no change

    Diluted Non-GAAP EPS

    Q2 2026

    Expected to be $1.65 ± $0.10, representing a 25% growth at the midpoint

    Expected to be $2.25 ± $0.10, up 15% at the midpoint

    raised

    Diluted Share Count

    Q2 2026

    Expected to be between 706 million and 710 million shares

    Expected to be roughly 685 million shares

    lowered

    Operating Income

    Q2 2026

    no prior guidance

    Expected to be up roughly 8%

    no prior guidance

    Revenue

    FY 2026

    Expected to be between $101B and $105B, with a midpoint of $103B, representing an 8% growth

    Expected to be between $101B and $105B, with a midpoint of $103B, up 8%

    no change

    ISG Growth

    FY 2026

    Expected to grow in the high teens

    Expected to grow high teens

    no change

    CSG Growth

    FY 2026

    Expected to grow in the low to mid-single digits

    Expected to grow low to mid-single digits

    no change

    ISG and CSG Combined Growth

    FY 2026

    Expected to grow 10% at the midpoint

    Expected to grow 10% at the midpoint

    no change

    Operating Expenses (OpEx)

    FY 2026

    Expected to decline in the low single digits year-over-year

    Expected to be down low single digits year-over-year

    no change

    Operating Income

    FY 2026

    no prior guidance

    Expected to be up roughly 9%

    no prior guidance

    Diluted Non-GAAP EPS

    FY 2026

    Expected to be $9.30 ± $0.25, representing a 14% growth at the midpoint

    Expected to be $9.40 ± $0.25, up 15% at the midpoint

    raised

    MetricPeriodGuidanceActualPerformance
    Revenue
    Q1 2026
    $22.5B - $23.5B (≈3% YoY growth at midpoint)
    $22,826M, up ~2.6% YoY from $22,244M
    Met
    ISG YoY Growth
    Q1 2026
    Low teens
    ~12% YoY (from 9,227To 10,317)
    Met
    CSG YoY Growth
    Q1 2026
    Flat (0% YoY)
    ~4.5% YoY (from 11,967To 12,509)
    Surpassed
    ISG + CSG Combined YoY Growth
    Q1 2026
    ~6% at midpoint
    ~7.7% YoY (from 21,194Total to 22,826Total)
    Surpassed
    Operating Expenses YoY
    Q1 2026
    Decline in low single digits YoY
    Decreased from 3,886To 3,772(~2.9% decline)
    Met
    TopicPrevious MentionsCurrent PeriodTrend

    AI Server Demand & Pipeline Growth

    Mentioned consistently in Q2–Q4 2025 with strong order demand, robust backlog figures (e.g., $4.1B–$9B) and substantial pipeline growth across enterprise and CSP customers

    Q1 2026 shows exceptionally strong AI server demand with record order values ($12.1B), a backlog of $14.4B, and a 5‐quarter pipeline that is “multiples of the backlog”

    Improved volume and pipeline strength with continued enterprise momentum despite mixed profitability concerns

    Traditional Servers & Storage Demand Evolution

    Consistently discussed in Q2–Q4 2025: traditional servers showed multi-quarter growth driven by consolidation and repatriation trends, while storage (especially Dell IP storage) led with double-digit gains in parts

    Q1 2026 revealed that traditional server demand remained positive with six consecutive quarters of YoY growth, though moderated by a lower North American mix; storage revenue increased 6%

    Servers show moderate growth while storage remains robust, reflecting a slight softening in higher‐margin geographies

    Dell IP Storage Solutions Expansion

    Emphasized in Q2–Q4 2025 with strong demand for PowerStore, PowerScale, and PowerFlex products, record storage profitability, and a strategic pivot to Dell IP over partner IP

    Q1 2026 continued focus on expanding Dell IP storage with 6% revenue growth and enhanced product capabilities (e.g., integration of security and AI analytics)

    Consistent strategic emphasis with improved margins and continued innovation in product capabilities

    PC Refresh Cycle & New AI PC Introductions

    Discussed across Q2–Q4 2025: refresh cycle driven by Windows 10 end‐of‐life and aging installed base; new AI PCs, including Lunar Lake-based and AMD AI models, were introduced to stimulate market interest

    Q1 2026 notes that the PC refresh cycle is behind prior cycles yet highlights strong traction in commercial segments and broadened AI PC portfolio (e.g., Pro Max notebooks)

    Refresh cycle remains slower than ideal, but new AI-enabled products are positioned as growth drivers with mixed near-term pace

    Competitive Environment & Pricing Pressures

    Q2–Q4 2025 calls noted aggressive pricing in consumer and competitive pressures across segments; operating margins were pressured, especially in CSG, though AI server segments maintained a market premium

    Q1 2026 maintains stability in ASPs and disciplined pricing across commercial PCs and ISG, with no major price moves despite ongoing competition

    Stable pricing strategies with consistent management of competitive pressures help balance growth and profitability

    Supply Chain Constraints Impacting AI Server Shipments

    Q2 2025 described complex logistics (data center readiness, power, cooling) and Q3 2025 noted constraints during the Blackwell ramp-up, while Q4 2025 stated supply was not a major issue

    Q1 2026 did not mention any supply chain constraints, indicating improved conditions and fewer disruptions

    Constraints have eased in Q1, suggesting improved supply chain agility and a positive outlook for shipment execution

    Trade Tariffs & Macro-economic Challenges

    Q2 2025 provided limited info; Q3 and Q4 2025 highlighted fluid tariff environments and ongoing macro uncertainties impacting demand and margins

    Q1 2026 discussed incorporating known tariff impacts into guidance and observed a demand slowdown, particularly in North America, due to macroeconomic factors

    Continued caution with tariffs and macro challenges, though strategic measures are in place to mitigate impacts

    Operational Excellence & Execution Efficiency

    Across Q2–Q4 2025, Dell stressed modernization, cost discipline, and improved operating income, with notable reductions in operating expenses and optimized processes

    Q1 2026 reiterated a focus on operational excellence through supply chain agility, reduced operating expenses, and disciplined capital allocation (including record cash flow and shareholder returns)

    A consistent emphasis on efficiency and modernization yields improved profitability and strong operational metrics

    Financial Flexibility & Free Cash Flow Concerns

    Q2–Q4 2025 saw discussions on free cash flow pressures from lower CSG growth and investments in AI, with mixed signals in free cash generation and capital returns

    Q1 2026 showcased record cash flow from operations ($2.8B), increased cash reserves, and significant capital returns, indicating strong financial flexibility

    Enhanced free cash flow and robust liquidity contrast earlier concerns, reflecting improved financial execution

    Shifting Profitability & Margin Dynamics

    Q2–Q4 2025 addressed challenges of margin dilution in AI servers despite gross margin dollar accretion, improved ISG margins, and the impact of competitive pricing on CSG

    Q1 2026 showed continued improvement in ISG operating income, stable AI server contribution to margin accretion, and acknowledgment of seasonal impacts on traditional servers

    Progressive margin management with strategic focus on high-margin segments and AI-driven profitability enhances overall dynamics

    Repatriation of Workloads from Cloud (No Longer Emphasized)

    Q2 2025 mentioned workload repatriation from the cloud as a demand driver for traditional servers

    Q3 2025 and Q4 2025 did not reference this topic, and it is absent in Q1 2026 discussions

    The topic has faded from recent commentary, suggesting a reduced emphasis on cloud repatriation as a growth driver

    Direct Sales and Partner Program Advantages (Less Emphasized)

    Q2 2025 highlighted Dell’s broad coverage model combining direct sales and partner programs; Q3 and Q4 2025 mentioned these channels, especially for storage growth

    Q1 2026 did not mention direct sales or partner program advantages

    There is a reduced emphasis on dealer/channel advantages, indicating a possible strategic shift or lower priority in current messaging

    1. AI Profit Outlook
      Q: What’s full-year AI profit forecast?
      A: Management emphasized that AI server revenue is highly accretive, boosting both gross and operating income even as traditional segments face caution. They expect AI orders to drive significant operating income growth over the full year.

    2. AI Shipment Guidance
      Q: Is AI order pipeline lumpy in H2?
      A: They explained that while quarterly shipments may vary—with indications of $7B in Q2—the dynamic pipeline, which is multiple times their backlog, remains strong and is expected to convert steadily.

    3. Backlog Sustainability
      Q: Will $12B orders support the full year?
      A: Management noted that a robust backlog of over $12.1B along with a five‐quarter pipeline exceeding $14B will underpin revenue across fiscal quarters, ensuring steadiness despite temporary fluctuations.

    4. Server Spend & Cash Flow
      Q: Are AI servers crowding out traditional revenue?
      A: They clarified that traditional server growth remains robust, with AI offerings complementing rather than displacing existing business, while strong working capital improvements drove healthy cash flow without nonrecurring distortions.

    5. ISG Margin Trends
      Q: What drove recent ISG margin changes?
      A: Management attributed lower Q1 margins partly to seasonality and a reduced mix of high-margin North American traditional sales, although gains in the Dell IP storage portfolio helped partly offset these effects.

    6. Tariffs & AI Margin
      Q: Any tariff impact on AI server margins?
      A: They confirmed that tariff-related costs were fully factored into their guidance and, even though AI server margins are in the low single-digits, overall operational efficiency and revenue growth remain positive.

    7. Competitive Dynamics
      Q: How did competition affect pricing and margins?
      A: Management noted that competitive pressure remained disciplined—with stable ASPs in commercial PCs and modest promotional pricing in consumer segments—helping maintain margin stability as new AI products lift the mix.

    8. Storage Attach
      Q: When will attach opportunities mature in storage?
      A: They indicated modest but growing attach rates, as Dell’s expanded storage and services portfolio is being integrated with AI server sales to support improved margins over time.

    9. AI Order Composition
      Q: What’s the tech mix within AI orders?
      A: Management described a backlog primarily comprised of Blackwell systems—both ARM and x86—with custom designs that enable rapid deployment within 24 hours, reflecting robust technological diversity.

    10. Legacy Storage & AI
      Q: Will legacy storage affect AI service attach?
      A: They clarified that traditional storage markets and AI training requirements are distinct; Dell’s high-performance ObjectScale platform is designed to address both needs without compromise.

    11. Customer Pull Forward
      Q: Is there evidence of pull forward from customers?
      A: Management acknowledged that some customers accelerated orders amid market dynamics and refresh cycles, though the effect was moderate and already incorporated into their guidance.

    Research analysts covering Dell Technologies.