DELL Earnings Preview: Another AI company steps into the earnings confessional

Dell Technologies (DELL) is set to report its Q2 earnings on August 29, 2024, after the market close, with an earnings conference call scheduled for 4:30 PM ET. Analysts are expecting the company to post earnings per share (EPS) of $1.70 and revenue of $24.14 billion, reflecting a 2% year-over-year decline in EPS and a 5% increase in revenue. Dell typically provides guidance for the upcoming quarter and the fiscal year during its earnings release, which will be closely watched by investors for any updates on its performance and outlook, particularly in the rapidly evolving AI market.

Dell's Q1 results highlighted some challenges, particularly in terms of margins, which have been under pressure due to a competitive pricing environment and a higher mix of AI-optimized servers. Despite these challenges, Dell remains optimistic about sequential improvements in operating margins for Q2, driven by growth in its Infrastructure Solutions Group (ISG) and storage business. The company's guidance will be critical in assessing whether it can achieve these improvements and how it plans to navigate the ongoing competitive and macroeconomic pressures.

A key focus for Dell in this earnings report will be its AI server business, which has become increasingly important as the company positions itself as a major player in the AI infrastructure market. Analysts believe that Dell's strong partnership with NVIDIA and its significant sales of AI-optimized servers could help the company gain market share, especially as demand for AI solutions continues to rise. However, there are concerns about the sustainability of this growth, particularly as the broader IT hardware market faces headwinds from a weakening macro environment.

Investors will also be keen to see how Dell addresses the challenges in its traditional PC and server markets, which have been impacted by softening demand and competitive pressures. While the company remains optimistic about a potential PC refresh cycle, driven by factors such as the aging install base and advancements in AI-enabled architectures, the near-term outlook for these segments remains uncertain. Dell's ability to balance growth in its AI business with stability in its traditional markets will be crucial for its overall performance.

One development investors will be watching closely is the issues facing Supermicro Computer (SMCI). Super Micro's stock plummeted after announcing a delay in filing its Form 10-K due to the need for more time to assess its internal controls, following a critical report from Hindenburg Research alleging accounting red flags and other issues. This development has opened an opportunity for Dell Technologies, with analysts from Evercore ISI suggesting that Dell could gain market share in the AI server space as customers seek more reliable partners. The analysts maintain an Outperform rating on Dell with a $140 price target, highlighting Dell's strong supply chain diversity and services offering as key competitive advantages. Analysts will ask DELL about this on the call.

Dell's Q1 earnings report disappointed investors, leading to a 19% drop in the stock price. Despite a return to year-over-year revenue growth, with a 6.3% increase to $22.24 billion, Dell's EPS only met expectations, breaking a streak of six consecutive large EPS beats. The company's Infrastructure Solutions Group (ISG) showed strong performance, with a 22% year-over-year increase in revenue, driven by record growth in server and networking sales, particularly in AI-optimized servers. However, the main concern was margin compression, which was reflected in both the Q1 results and the weaker-than-expected EPS guidance for Q2, despite the company raising its full-year EPS and revenue outlook.

The ISG segment's success was notable, with AI-optimized shipments up more than 100% sequentially, and a growing backlog of AI server orders. However, the Client Solutions Group (CSG) showed flat revenue year-over-year, with commercial PC demand stabilizing but consumer revenue declining by 15%. Dell's margins suffered, with non-GAAP gross margin falling to 22.2% from 24.7% a year ago, and operating margin dropping to 6.6% from 7.6%. This was attributed to a more competitive pricing environment and a higher mix of AI-optimized servers. While Dell remains optimistic about future growth, particularly in AI and the upcoming PC refresh cycle, the margin pressures and competitive landscape are causing concern among investors.

Overall, while Dell's fundamentals remain strong, and the company is well-positioned to capitalize on the growing AI market, the upcoming earnings report will need to demonstrate clear progress on margins and provide reassurance about the sustainability of its growth trajectory. With the stock having pulled back significantly from its May highs, the market's reaction to the earnings report could hinge on Dell's ability to deliver a robust outlook and address the key concerns facing the business.