Dell 2Q24: 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. 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,’ says Dell Technologies Vice Chairman and COO Jeff Clarke.

Dell Technology’s latest quarterly financial numbers say the company’s fiscal 2024 second quarter was a bust, but company executives say that 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. And 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 that Dell is moving in the right direction, giving Dell share prices a 7-plus-percent boost in after-hours trading.

[Related: Dell Technologies World 2023: Five Big Announcements]

Jeff Clarke, vice chairman and chief operating officer 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.”

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 U.S. market and EMEA (Europe, Middle East, and Africa) 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 GenAI models locally before deploying them at scale.”

AI is a strong tailwind for all things data and compute, Clarke said.

“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-percent CAGR [cumulative annual growth rate] for the next couple of years to approximately $90 billion, including hardware and services.”

For Dell, that meant sales of its new PowerEdge XE9680 in the quarter made it the fastest ramping of a new product in Dell history, Clarke said. The PowerEdge XE9680 is a GPU-enabled server and a key element in Dell’s generative AI solutions engineered to speed the deployment of a modular, secure, and scalable platform for enterprise generative AI, he said.

“AI servers increased to 20 percent of our servers order revenue in the first half of the year and the 9680 was a big factor,” he said. “Currently, we have approximately $2 billion in XE9680 orders in backlog, and our sales pipeline is substantially higher.”

Generative AP represents an inflection point driving fundamental change in the pace of innovation, productivity gains, and new ways to work, Clarke said.

“As the number one infrastructure provider, we are clearly positioned to serve the market in a unique and differentiated way,” he said. “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 GenAI 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 data center 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.

“So when you think about the vertical nature of this and how it will actually work in the real world, we think that technology makes its way all the way out to the edge,” he said. “AI follows where the data is going to be created, where the sensors are collecting the information. And that allows us to put those compute resources where the data is actually being again created. That is not specific to geography. It’s not specific to size of business. It’s going to be really driven by the type of application and the usage environment.”

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 data center,” he said. And the data center 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.

“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, signaled by the $2 billion dollars 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 $22.93 billion, down 13 percent from the $26.43 billion the company reported for its fiscal 2023 second quarter.

This included an 11-percent year-over-year drop in its Infrastructure Solutions Group revenue to $8.46 billion, led by an 18-percent drop in server and networking revenue to $4.27 billion and a 3-percent drop in storage revenue to $4.18 billion. It also included a 16-percent drop in its Client Solutions Group revenue to $12.94 billion led by a 13-percent drop in commercial revenue to $10.55 billion and a 29-percent drop in consumer revenue to $2.39 billion.

The quarter’s revenue beat analyst expectations by $2.09 billion, according to Seeking Alpha.

Dell reported GAAP net income of $455 million or 63 cents per share, down from last year’s $506 million or 68 cents per share. On a non-GAAP basis, Dell reported net income of $1.28 billion or $1.74 per share, up from last year’s $1.27 billion 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 $22.5 billion to $23.5 billion, with a midpoint of $23.0 billion, which would be a 7-percent drop over last year’s $24.7 billion.

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 $89.5 billion to $91.5 billion, which at the midpoint would be down 12 percent year-over-year.