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    Dell Technologies Inc (DELL)

    Q4 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$66.03October 31, 2023
    Final Price$82.88January 31, 2024
    Price Change$16.85
    % Change+25.52%

    What went well

    • Dell Technologies is experiencing strong momentum in AI-optimized servers, with AI server demand increasing by nearly 40% sequentially in Q4. The backlog for AI-optimized servers nearly doubled sequentially, reaching $2.9 billion at the end of the fiscal year. The company is optimistic about the AI opportunity ahead, with an expanding pipeline and increasing customer interest across a wider range of customers and geographies. ,
    • Dell's AI server margins are improving quarter-over-quarter, indicating enhanced profitability in this high-growth segment. Despite AI margins still being lower than traditional servers, they have improved for the second consecutive quarter, and the company is leveraging its engineering capabilities to further enhance margins. ,
    • The traditional server market is beginning to recover, with Dell's traditional server demand growing year-over-year in Q4, marking the third consecutive quarter of sequential growth. The company sees momentum in traditional servers across all geographies and expects modest growth in this segment, contributing to overall revenue growth.

    What went wrong

    • Dell's gross margins are under pressure due to a higher mix of lower-margin AI servers, increased component costs, and a competitive pricing environment, particularly in traditional servers.
    • The PC market remains soft, with recovery delayed to the second half of the fiscal year, impacting Dell's revenue in the near term.
    • Supply constraints, particularly in GPUs for AI servers, may limit Dell's ability to meet the strong demand for AI-optimized servers, potentially impacting revenue growth.

    Q&A Summary

    1. AI Server Demand and Backlog
      Q: Can you expand on your AI optimized server backlog and pipeline?
      A: Demand for AI optimized servers is up sequentially 40%. We have a growing and less concentrated customer base, with more Cloud Service Providers and enterprise customers purchasing from us. Demand spans across the H100, H800, H200, and MI300x silicon offerings. Our backlog is complex due to multiple variants and delivery schedules, but we expect to ship more in Q1 than in Q4. Our five-quarter pipeline has also grown, indicating strong future demand.

    2. Traditional Server Market Recovery
      Q: What's giving you confidence in the traditional server market recovery?
      A: We saw year-over-year demand growth in traditional servers in Q4, marking the third consecutive quarter of sequential growth. Our pipeline continues to improve, and we expect modest year-over-year growth in traditional servers. The long digestion period appears to be ending, setting up for renewed investment in traditional server workloads.

    3. Gross Margin Outlook
      Q: How does the higher AI mix impact gross margins?
      A: We expect gross margin rate to be down about 200 basis points quarter-over-quarter due to a seasonally lower storage mix, higher AI optimized server mix, an inflationary component cost environment, and increased competitive pressure. While AI servers have lower margins than traditional servers, margins improved quarter-over-quarter with AI. Operating margin rate will be down but is expected to improve as the year progresses.

    4. AI Opportunity in Enterprises
      Q: How do you view the AI opportunity and your plans to capitalize on it?
      A: We see significant AI opportunities as enterprises adopt AI where data is created, on-premise or at the edge. Our broad portfolio and capabilities allow us to provide solutions at node, rack, and data center scale. We believe the AI market is developing in alignment with our strengths, enabling us to access this market in a differentiated manner.

    5. Storage Demand Related to AI
      Q: How does AI change the storage outlook, and how are you leveraging your portfolio?
      A: Feeding GPUs for AI requires high-bandwidth, data-intensive storage solutions. As AI moves into enterprise with richer data sets, there is a growing storage opportunity. Our portfolio, including PowerScale F710 and F210 and object scale XF960, offers increased performance for high-concurrency, latency-sensitive workloads. These products position us well as customers move from training to inference in production.

    6. Component Costs and Pricing
      Q: How are you managing pricing pressure and component cost inflation?
      A: We are in an inflationary component cost environment and are pricing accordingly while considering market competitiveness. The AI server market is competitive, but we focus on maximizing profitability and have seen margins improve quarter-over-quarter with AI. We have accounted for cost considerations in our guidance and expect gross margins to improve as the year progresses.

    7. Storage Growth Expectations
      Q: What are your expectations for storage growth related to AI server sales?
      A: We observed demand growth in unstructured storage products like ECS and PowerScale, which are critical for AI workloads. As AI deployments scale, especially moving from proof of concept to production, we anticipate significant storage opportunities. However, the rate of enterprise adoption will influence the pace of storage growth.

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