Dell Q2: Massive AI opportunities to drive future growth
'As the number one infrastructure provider, we are clearly positioned to serve the [generative AI] market in a unique and differentiated way. And we have the world’s broadest GenAI infrastructure portfolio that spans from the cloud to the client,' says Dell Technologies vice chairman and COO Jeff Clarke
Dell Technology's latest financial results show the vendor's fiscal 2024 second quarter was a bust, but company executives say AI and other emerging technology, along with improved macroeconomic trends, make the quarter a strong one. And investors late Wednesday showed their thumbs-up.
Dell reported Thursday a significant year-over-year drop in revenue and GAAP net income along with tiny growth in non-GAAP net income.
While the company's revenue guidance for the next quarter is for another double-digit decline.
However, talk about Dell's investment in AI convinced investors the tech giant is moving in the right direction, giving Dell share prices a 7-plus-per cent boost in after-hours trading.
Jeff Clarke, vice chairman and COO for Dell Technologies, said during his prepared remarks that his company had been cautious given its first fiscal quarter results.
"But the demand environment improved at a faster rate than we anticipated, particularly as we moved into June and July," Clarke (pictured) said.
"Operationally, we executed well with expense controls, pricing discipline, and lower input costs. We sharpened our focus on pricing this quarter, and we were selective on deals particularly where shared benefits would have been temporary. While revenue was down year-over-year, a better demand environment and strong execution enabled extraordinary Q2 results."
Read on for Clarke's outlook for H2.
'Encouraged' about H2, gen AI demand
Clarke said Dell is encouraged with some of the macro environment signs it sees in the second half of the year.
"We saw better underlying demand in the US market and EMEA was better than anticipated," he said. "We also saw demand growth in government and SMB, and our transactional demand improved through the quarter. However, most of our largest global customers remain careful with their spending levels."
On the technology side, Dell saw significant strength in AI-enabled servers, as well as in parts of its storage portfolio, particularly with its PowerFlex proprietary software-defined storage technology, which has recorded revenue growth for eight consecutive quarters, Clarke said.
"Workstation demand grew and was another bright spot that will continue to benefit from the rise of AI," he said. "Developers and data scientists can now fine tune gen AI models locally before deploying them at scale."
AI is a strong tailwind for all things data and compute, Clarke added.
"When you think about the potential for workstations, and eventually all PCs, AI is expanding the TAM [total addressable market] for total technology spending and is projected to grow at an 18 per cent CAGR [cumulative annual growth rate] for the next couple of years to approximately $90bn, including hardware and services."
"As the number one infrastructure provider, we are clearly positioned to serve the market in a unique and differentiated way," he continued.
"And we have the world's broadest GenAI infrastructure portfolio that spans from the cloud to the client. Customers big and small are using their own data and business context to train, fine tune, and inference on Dell infrastructure solutions to incorporate advanced AI into their core business processes effectively and efficiently."
Dell is helping customers size, characterize, and build GenAI solutions, meeting their performance, cost, and security requirements, with any of these new workloads located on-premises or at the edge because of latency, data security, and cost reasons, Clarke said.
In the near term, Dell sees businesses concentrating on four gen AI use cases including customer operations, content creation and management, software development, and sales. And Dell is doing the same internally, Clarke said.
When asked by a financial analyst during the question and answer portion of the call about how Clarke sees the prospects for AI going forward, Clarke said AI is just a new series of workloads and new incremental capabilities that goes across the PC to the datacentre to the cloud.
"And we think it is absolutely, because of the uniqueness of the workload, a growth opportunity in all three of those areas," he said. "Distinct in how it's built out, distinct in how it's going to be used on the PC, opening a whole new opportunity to drive productivity [for] these big foundational models at cloud scale."
On the enterprise level and in business, generative AI will drive the notion of domain-specific, process-specific, or field of study-type AI using customers' actual data to develop their own models and run inference on-site or at the edge, Clarke said.
One size does not fit all, Clarke said.
"We think there's a whole slew of AI solutions, again, from the PC to workstations to what happens in the datacentre," he said. And the datacentre can be a single server running inference at the edge, it could be defined as a small cluster doing a small micro or fine-level tuning, all the way into these big, foundational models for renewed cloud-scale training."
When asked by another analyst about allocation of GPUs for AI requirements, Clark said ordering a product today might result in a 39-week lead time, or delivery in late May of 2024.
Dell Q2: Massive AI opportunities to drive future growth
'As the number one infrastructure provider, we are clearly positioned to serve the [generative AI] market in a unique and differentiated way. And we have the world’s broadest GenAI infrastructure portfolio that spans from the cloud to the client,' says Dell Technologies vice chairman and COO Jeff Clarke
GPU supply still an issue
"So we are certainly asking for more parts, working to get more parts," he said. "It's what we do. I'm not the allocator. I'm the allocatee. So we're advocating our position, our demand. Again, we are winning business, signalled by the $2bn in backlog today."
Dell will advocate for more supply and is currently tracking at least 30 different accelerator chips that are in the development pipeline, Clarke said.
For its fiscal 2024 second quarter, Dell Technologies reported revenue of $22.93bn, down 13 per cent from the $26.43bn the company reported for its fiscal 2023 second quarter.
This included an 11 per cent year-over-year drop in its Infrastructure Solutions Group revenue to $8.46bn, led by an 18 per cent drop in server and networking revenue to $4.27bn and a three per cent drop in storage revenue to $4.18bn.
It also included a 16 per cent drop in its Client Solutions Group revenue to $12.94bn led by a 13 per cent drop in commercial revenue to $10.55bn and a 29 per cent drop in consumer revenue to $2.39bn.
The quarter's revenue beat analyst expectations by $2.09bn, according to Seeking Alpha.
Dell reported GAAP net income of $455m or 63 cents per share, down from last year's $506m or 68 cents per share. On a non-GAAP basis, Dell reported net income of $1.28bn or $1.74 per share, up from last year's $1.27bn or $1.68 per share. That beat analyst expectations by 60 cents per share, according to Seeking Alpha.
Looking forward, Dell CFO Yvonne McGill said the company's largest corporate and global enterprise customers are still measured in their IT projects investment and spending plans.
As a result, she said Dell expects fiscal 2024 third quarter revenue to be in the range of $22.5bn to $23.5bn, with a midpoint of $23bn, which would be a seven per cent drop over last year's $24.7bn.
Dell also expects earnings per share of $1.45, plus or minus 10 cents per share.
For all of fiscal 2024, Dell is raising revenue expectations to be in the range of $89.5bn to $91.5bn, which at the midpoint would be down 12 per cent year-over-year.