Key takeaways as PC sales drive Dell's growth but infrastructure suffers

Overall revenue rises two per cent

Dell has reported year-on-year revenue growth of two per cent for its second quarter - but the slight increase does not tell the whole story.

The vendor's business units experienced differing fortunes, with servers and networking struggling, but PC sales rocketing.

The results were enough to impress investors, with Dell's share price climbing as much as nine per cent in after-hours trading.

We've pulled out the key information from Dell's quarterly report and accompanying earnings call.

Infrastructure struggles

Revenue in Dell's Infrastructure Solutions Group (ISG) fell seven per cent year on year to $8.6bn, attributed to a drop in server and networking sales.

While storage revenue was flat at $4.2bn, sales derived from servers and networking plummeted 12 per cent to $4.4bn.

On an earnings call, transcribed by Seeking Alpha, Dell VP Jeffrey Clarke said that server sales suffered because of a tough comparison quarter in 2018.

"The industry saw unprecedented growth last year and many customers are still digesting their Capex investments," he said.

"We're balancing revenue and profitability as we navigate through the current server dynamics. Our Q2 server revenue declined, but we realised higher margin dollars as we were consciously more selective on large low-margin deals in all geographies."

Dell said that it has turned its back on the hyperscale server market, particularly in China, instead focusing on higher margin deals.

It added that, outside China, server orders were up one per cent. Average selling prices outside of China were up single digits as customers are "increasingly buying higher-end system support for high-value workloads".

Broadly speaking, Clarke said the "enterprise infrastructure the market is softer than we and the industry anticipated".

Enterprise sales drive PC business

Dell's Client Solutions Group (CSG) saw revenue climb six per cent year on year to $11.7bn.

The growth came entirely from commercial sales (which grew 12 per cent to $9.1bn) as consumer income fell 12 per cent to $2.7bn.

Clarke said that Dell is experiencing a "clear split between enterprise infrastructure and PC spending globally", as infrastructure sales stall.

Dell is prioritising higher-margin commercial sales over consumer, Clarke added, which has contributed to stronger profitability.

Operating income more than doubled to $982m, and was also helped by a drop in costs.

Dell said it expects PC margins to "gradually normalise back towards historic norms" as a result.

Clarke however warned that the quarter has created a tough comparison for next year, with analysts predicting the PC market will contract by around four per cent next year.

Tariffs will impact pricing this year

Earlier this month Donald Trump announced that he would be delaying the introduction of tariffs on a fresh batch of tech products manufactured in China - some until September and some until December.

Dell said it has spent a lot of time preparing for the next batch of sanctions, explaining that its 25 manufacturing plants around the world enable it to respond quickly and minimise the impact.

"We successfully mitigated that cost impact to the vast majority of our products," Clarke said.

"There has been cases where we have raised price, and we will continue to work to mitigate the impact to our customers with List 4, starting with all-in-ones from 1 September, followed by 15 December with monitors and notebooks. In some cases our costs are going to go up."

VMware growth continues

VMware announced its quarterly results last week, at the same time as it confirmed the acquisitions of Carbon Black and Pivotal Software (which is owned by Dell).

Revenue increased 12 per cent year on year to $2.5bn in the three month period ending 2 August 2019.

Operating income rose four per cent to $762m.

"With VMware's acquisition of Carbon Black, Unified Workspace will only improve at a comprehensive intrinsic security portfolio for the multi-cloud world and for modern applications and devices," Clarke said.

"As you can see we are delivering on our promise to innovate across Dell Technologies to create the future of technology infrastructure from the cloud to the edge, while dramatically simplifying the customer experience."