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Dell Technologies beat Q1 FY25 expectations on surging AI server demand, raised full-year guidance, and highlighted a record AI server backlog, despite near-term margin and regulatory risks.

# Dell Technologies Delivers Strong Q1 FY25 Beat on AI Server Momentum and Upgraded Guidance

---

## Executive Summary

- **Dell Technologies** reported a robust **Q1 FY25**, with **revenue of $29.4B** (above consensus of $29.17B) and **EPS of $2.35** (beating consensus of $2.275). The outperformance was driven by **record AI server shipments**, a surging **ISG (Infrastructure Solutions Group)** order book, and a growing **AI server backlog** exceeding **$12B**.
- **Earnings quality** was solid, with operating expenses trimmed by **4% YoY** and cost controls offsetting margin pressures in the AI server business. While AI server margins remain compressed due to early aggressive deals and supply chain costs, management expects improvement as the business mix normalizes.
- Management’s tone was **decidedly bullish**, raising full-year revenue guidance to **$105–$109B** and non-GAAP EPS to **$9.55 ± $0.25**. The company highlighted strong AI demand, innovation with Nvidia platforms, and a strategic focus on high-margin services.
- **Risks** include regulatory headwinds (notably export controls on AI servers) and near-term margin compression. However, the **opportunity** in the expanding AI server backlog and ISG margin growth could drive significant upside if execution remains strong.
- **Catalyst watch**: Investors should monitor regulatory developments, margin trends in AI, and the pace of backlog conversion. The next earnings report and any updates on export controls will be key near-term events.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $29.4B   | $29.17B   | +$0.23B  | +6%        |
| EPS            | $2.35    | $2.275    | +$0.075  | +15%       |
| ISG Revenue    | (not specified) | — | — | Record orders |
| AI Server Backlog | >$12B | — | — | +100%+ YoY |

*Note: ISG and AI server backlog figures are qualitative, as specific dollar values were not provided.*

---

## Earnings Quality

- **Revenue mix** was favorably skewed toward high-growth segments, with AI server shipments and ISG volume driving the beat. Commercial PC sales also contributed positively.
- **Margins** in the AI server business remain under pressure due to early-stage pricing and supply chain costs, but management expects normalization as the business matures and the mix shifts toward higher-margin services.
- **Cost structure** was a highlight, with operating expenses down **4% YoY**, reflecting effective cost discipline. The company continues to decouple revenue growth from opex, supporting future margin expansion.

---

## Management Commentary & Guidance

- Management struck a **bullish tone**, emphasizing rapid AI innovation, strong Nvidia platform momentum, and a growing service attachment strategy.
- **Guidance was raised**: Full-year revenue now expected at **$105–$109B** (up from prior guidance), and non-GAAP EPS at **$9.55 ± $0.25**. These upgrades reflect confidence in sustained AI demand and robust ISG performance.
- Assumptions include continued strength in AI server orders, backlog conversion, and ongoing cost discipline.

---

## Key Risks

- **Margin pressures** in the AI server segment may persist in the near term due to aggressive early deals and supply chain costs.
- **Regulatory risks** are rising, particularly around export controls for AI servers and potential international demand shifts.
- **Demand-side risks** could emerge if macro conditions deteriorate or if AI adoption slows unexpectedly.

---

## Expected Market Reaction

- The combination of revenue/EPS beats and raised guidance should be **positively received** by the market, especially given the strong AI narrative.
- However, recent tech sector volatility and concerns about AI margin sustainability may temper the initial reaction, with some investors awaiting further evidence of margin normalization.
- Analyst commentary suggests the market may be **underestimating the long-term upside** from Dell’s AI server backlog and operational leverage.

---

## Final Takeaway

- **Dell Technologies delivered a strong quarter**, with clear evidence of operational momentum in AI and ISG. The market may be **overpricing near-term margin risks** and **underpricing the long-term potential** of the AI server backlog and service growth.
- This is a **robust quarter** that sets a high bar for execution, but regulatory and margin risks remain watchpoints.
- **Upcoming catalysts**: (1) Next quarter’s earnings for further margin and backlog updates; (2) Regulatory developments on AI server exports.

---

Dell (DELL): AI Server Momentum Drives Guidance Upgrade

Dell’s record AI server orders and ISG backlog drive bullish Q2 FY26 outlook, but persistent consumer PC weakness could limit upside despite strong free cash flow and positive institutional sentiment.

# Dell Technologies: AI-Driven Surge Sets the Stage for Q2 FY26—But Can Consumer Weakness Be Contained?

## Executive Summary

We are **bullish** on Dell Technologies Inc. (NYSE: DELL) heading into Q2 FY26, driven by **record AI server orders (\$12.1B in Q1 FY26) and a robust ISG backlog (\$14.4B)**, which underpin management’s aggressive revenue guidance of **\$28.5B–\$29.5B** for the quarter. The company’s **adj. EPS target of \$2.25** reflects both operational leverage and strong free cash flow (FCF up **258% YoY**). However, the market may be underestimating the **margin drag from ongoing consumer PC segment softness**, which could temper upside if macro or competitive pressures intensify. **Short interest remains below historical averages (~11%)**, and options activity signals a bullish institutional stance—an underappreciated support for near-term valuation.

## Recent Trends Signal What’s Next

Dell’s Q1 FY26 results set a strong foundation for Q2, with **total revenue of \$23.38B** and a **gross margin of 21.1%**. Operating margin improved by **70 bps QoQ**, and the ISG segment posted double-digit growth, fueled by AI infrastructure demand. The company’s **free cash flow reached \$2.23B (up 258% YoY)**, highlighting operational discipline. The following table summarizes the last four quarters’ key financials, showing a clear upward trend in both revenue and profitability:

### Quarterly Financial Trends

| Quarter   | Revenue (\$B) | Gross Margin (%) | Operating Margin (%) | Adj. EPS (\$) |
|-----------|---------------|------------------|----------------------|---------------|
| Q2 FY25   | 22.93         | 20.2             | 7.8                  | 1.34          |
| Q3 FY25   | 23.77         | 20.5             | 8.1                  | 1.45          |
| Q4 FY25   | 22.32         | 20.7             | 8.3                  | 1.39          |
| Q1 FY26   | 23.38         | 21.1             | 9.0                  | 1.55          |

**Trend:** Revenue and margins have steadily improved, with Q1 FY26 marking a new high in both gross and operating margins, setting a positive trajectory for Q2.

## Management’s Forward Tone and Positioning

Management’s Q1 FY26 call was marked by **assertive optimism** on AI and ISG, with CEO Michael Dell stating, “We’re seeing unprecedented demand for AI-optimized infrastructure and record performance in our ISG business.” This is a notable shift from the more cautious tone in Q4 FY25, where management emphasized “navigating a challenging macro environment.” The Q2 guidance—**revenue of \$28.5B–\$29.5B and EPS of \$2.25**—reflects confidence in backlog conversion and operational execution, but also acknowledges “continued headwinds in the consumer PC market.” The communication strategy has clearly pivoted to highlight AI-driven growth while transparently flagging areas of risk.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q2 FY26 are **AI server orders, ISG backlog, and free cash flow**. Q1 FY26 saw **AI server orders hit \$12.1B** and the **ISG backlog reach \$14.4B**, both record levels. Free cash flow surged to **\$2.23B (up 258% YoY)**, while inventory increased from **\$6.7B to \$7.4B QoQ** to support higher demand. The table below summarizes these KPIs:

### Key KPI Movements

| KPI                | Q1 FY25 | Q4 FY25 | Q1 FY26 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| AI Server Orders   | \$4.7B  | \$8.9B  | \$12.1B | +157%      | +36%       |
| ISG Backlog        | \$7.2B  | \$10.3B | \$14.4B | +100%      | +40%       |
| Free Cash Flow     | \$0.62B | \$1.45B | \$2.23B | +258%      | +54%       |
| Inventory          | \$6.1B  | \$6.7B  | \$7.4B  | +21%       | +10%       |

**Implication:** Sustained growth in AI orders and backlog will drive revenue and margin expansion, while strong FCF and inventory build position Dell to capitalize on demand spikes and mitigate supply chain risks.

## Missed by the Street

Two signals are being overlooked by consensus:  
1. **Short interest remains below the historical average (~11%)**, and options activity shows **50–60% bullish sentiment** among large traders (source: options/short interest news). This suggests institutional investors are positioning for upside, despite headline concerns over consumer PCs.  
2. **Record FCF and shareholder returns** (not widely discussed in analyst notes) provide a buffer against margin volatility and support for capital allocation flexibility.

## Scenarios for the Upcoming Quarter

### Q2 FY26 Scenario Table

| Scenario | Revenue (\$B) | EPS (\$) | Operating Margin (%) | Key Assumptions                                         |
|----------|---------------|----------|----------------------|---------------------------------------------------------|
| Bull     | 29.5          | 2.35     | ~22                  | ISG/AI demand accelerates, consumer stabilizes, no macro shocks |
| Base     | 28.9          | 2.25     | ~21                  | Backlog conversion steady, consumer weak but stable      |
| Bear     | 28.5          | 2.15     | ~20                  | Consumer PC declines persist, regulatory/macro headwinds |

**Most Likely:** The **Base case** is most probable, given current backlog, management’s tone, and ongoing consumer headwinds. However, upside risk exists if AI demand outpaces expectations.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter   | Revenue (\$B) | Adj. EPS (\$) | Gross Margin (%) | Operating Margin (%) |
|-----------|---------------|---------------|------------------|----------------------|
| Q2 FY25   | 22.93         | 1.34          | 20.2             | 7.8                  |
| Q3 FY25   | 23.77         | 1.45          | 20.5             | 8.1                  |
| Q4 FY25   | 22.32         | 1.39          | 20.7             | 8.3                  |
| Q1 FY26   | 23.38         | 1.55          | 21.1             | 9.0                  |

### KPI Movement Table

| KPI                | Q1 FY25 | Q4 FY25 | Q1 FY26 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| AI Server Orders   | \$4.7B  | \$8.9B  | \$12.1B | +157%      | +36%       |
| ISG Backlog        | \$7.2B  | \$10.3B | \$14.4B | +100%      | +40%       |
| Free Cash Flow     | \$0.62B | \$1.45B | \$2.23B | +258%      | +54%       |

### Management Quotes

1. **“We’re seeing unprecedented demand for AI-optimized infrastructure and record performance in our ISG business.”**  
   – Q1 FY26 Earnings Call  
   *Signals confidence in AI-driven growth; supports bullish revenue guidance.*

2. **“We expect Q2 revenue in the range of \$28.5B to \$29.5B, with EPS around \$2.25.”**  
   – Q1 FY26 Earnings Call  
   *Sets a high bar for near-term performance; implies strong backlog conversion.*

3. **“Consumer PC demand remains soft, and we are monitoring the segment closely.”**  
   – Q1 FY26 Earnings Call  
   *Highlights ongoing risk to margin and topline from consumer segment.*

4. **“Free cash flow reached a record \$2.23B, reflecting operational discipline and strong execution.”**  
   – Q1 FY26 Earnings Call  
   *Underscores liquidity strength and capital allocation flexibility.*

5. **“We are prepared to navigate potential regulatory and macroeconomic headwinds.”**  
   – Q1 FY26 Earnings Call  
   *Acknowledges external risks that could impact results.*

6. **“Our AI server backlog now stands at \$14.4B, positioning us well for the coming quarters.”**  
   – Q1 FY26 Earnings Call  
   *Indicates visibility and confidence in future revenue streams.*

7. **“Short interest remains below our historical average, and we see constructive options activity.”**  
   – Analyst/Options/Short Interest News  
   *Suggests institutional investors are positioning for upside, not fully reflected in consensus.*

---

**Bottom Line:** Dell Technologies is poised for a strong Q2 FY26, with AI and ISG momentum likely to drive results above consensus—provided consumer and macro risks remain contained. Investors should watch for margin signals and backlog conversion rates as key determinants of upside.

Dell (DELL): AI Momentum vs. Consumer PC Headwinds