Dell's Q2 2026 Earnings Call: Contradictions in AI Server Revenue, Storage Demand, and PC Growth Outlook

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: $29.8B, up 19% YOY (Q2 FY26 record)
• EPS: $2.32 per diluted share, up 19% YOY (Q2 record)
• Gross Margin: 18.7% of revenue ($5.6B); rate impacted by AI mix; no prior-year comparison disclosed
• Operating Margin: 7.7% of revenue; operating income $2.3B, up 10% YOY

Guidance:

• Q3 revenue: $26.5–$27.5B (midpoint $27B, +11% YOY).
• Q3 ISG+CSG: +13% at midpoint; ISG growth low-20s; CSG up mid-single digits.
• Q3 non-GAAP EPS: $2.45 ± $0.10; operating income ~+7%; OpEx down low single digits; diluted shares ~681M.
• FY26 revenue: $105–$109B (midpoint $107B, +12%).
• FY26: ISG mid-to-high 20s; storage flat; CSG low-to-mid single digits; ISG+CSG +14% at midpoint.
• FY26 non-GAAP EPS: $9.55 ± $0.25 (+17%); I&O $1.4–$1.5B; tax 18%.
• AI server shipments raised to $20B, slightly weighted to Q3; 2H profitability to improve; traditional server/storage softness to persist.

Business Commentary:

• Revenue Growth and AI Integration:
• Dell Technologies reported record revenue of $29.8 billion for Q2 FY2026, up 19% year-on-year.

• This growth was driven by strong demand for AI servers, with record shipments of $8.2 billion, contributing to a backlog of $11.7 billion.

• AI Server Market Leadership:

• AI servers represented nearly half of Dell's ISG revenue in Q2, with $5.6 billion in orders booked.

• The company's leadership in AI is attributed to its ability to deploy large-scale clusters quickly and its innovative engineering and manufacturing capabilities.

• Storage and Traditional Server Market Performance:

• Dell's storage revenue decreased by 3% in Q2, with demand moderating.

• The decrease was due to slower demand in large North American accounts and the impact of HCI customers reevaluating their private cloud options.

• PC Market Share and Refresh Opportunity:

• Dell's commercial PC revenue grew 2%, with double-digit growth in small and medium businesses, despite a 7% decline in consumer revenue.
• Growth was driven by the Windows 10 end-of-life event, which presents a significant refresh opportunity, and new business notebook launches to capture entry-level commercial segments.

Sentiment Analysis:

• Record revenue and EPS (+19% each). Raised full-year revenue to $105–$109B and EPS to $9.55 ± $0.25. AI shipments guidance increased to $20B with improving AI margins expected in 2H. Management: “We are pleased with our overall performance,” and “expect profitability to improve in the second half across CSG and ISG.” Acknowledged storage softness and margin rate dilution from AI mix, but emphasized seasonality and mix shift to Dell IP storage to boost profitability.

Q&A:

• Question from Aaron Christopher Rakers (Wells Fargo): What capacity do you have to exceed the raised $20B AI server shipment target given $8.2B shipped in Q2 and a strong GB300 cycle?
  Response: Pipeline keeps growing; deployments are lumpy, but Dell has ample manufacturing capacity and aims to surpass $20B despite timing dependencies (sites, power, cooling).

• Question from Wamsi Mohan (BofA Securities): What drives the step-up in profitability into Q4 versus Q2 and Q3?
  Response: 2H profit uplift comes from storage seasonality and higher Dell IP mix, improved AI server margins, traditional server growth, and lower OpEx—heaviest in Q4.

• Question from Erik William Richard Woodring (Morgan Stanley): Why the softer storage performance and more cautious outlook versus 90 days ago?
  Response: Large U.S. accounts slowed late in the quarter; however, PowerStore and all-flash grew double digits, and Dell expects better-than-normal sequential improvement and to outgrow the market in 2H despite HCI pause.

• Question from Benjamin Alexander Reitzes (Melius Research): Why will AI server margins improve, and by how much?
  Response: Q2 margins were diluted by aggressive early Blackwell deals and one-time supply-chain costs; margins should improve via value engineering, scale, and higher enterprise attach of storage/networking/services.

• Question from Vijay Raghavan Rakesh (Mizuho): What’s the sovereign mix in the pipeline and drivers of AI margin upside?
  Response: Sovereign and enterprise pipeline grew double digits, faster than CSP, with 6,700+ customers and predominantly Blackwell; AI margins benefit as one-time costs fade and enterprise attachments increase.

• Question from David Vogt (UBS): With a mix shift to Dell IP storage and traditional servers, how should ISG margins trend vs last year?
  Response: Higher-margin Dell IP storage mix is rising and margins are improving per product, but overall rate faces AI mix dilution; 2H should be more profitable aided by storage seasonality.

• Question from Amit Jawaharlaz Daryanani (Evercore ISI): Why is incremental EPS modest versus the top-line raise—are AI server margins ~2–2.5%?
  Response: Conversion reflects mix and seasonality—profit uplift is weighted to Q4 storage; overall profitability is driven holistically by portfolio mix and efficiencies, not just AI server rates.

• Question from Michael Ng (Goldman Sachs): What impacted traditional servers and storage in Q2 (including federal)? Any notable margin changes?
  Response: North America traditional server demand and federal were weak; other regions grew. Storage softness concentrated in large U.S. accounts late in quarter; expect 2H server growth (muted) and continued Dell IP outperformance.

• Question from Simon Matthew Leopold (Raymond James): Can you quantify enterprise AI progress and comment on NVIDIA’s Hopper sequential uptick?
  Response: Enterprise AI hit record customers and revenue with rising POCs; Hopper/RTX air-cooled demand fits enterprises lacking DLC, enabling AI in existing data centers.

• Question from Samik Chatterjee (JPMorgan): How is demand shifting to GB300, and any pricing pressure on older platforms?
  Response: Backlog/pipeline are primarily Blackwell across variants; both GB200 and GB300 are in wide-scale production and shipping smoothly without noted pricing pressure.

• Question from Asiya Merchant (Citi): Why confidence in 2H PC growth and will momentum sustain into calendar 2026?
  Response: Windows 10 EOL leaves ~half the installed base unupgraded, sustaining refresh into next year; Dell plans to take share while keeping 5–7% CSG operating margin.

• Question from Mehdi Hosseini (Susquehanna): What drives 2H gross margin improvement and why not scale services faster?
  Response: Storage seasonality and higher Dell IP mix, improving AI margins, traditional server growth, and efficiencies drive margin; services scale via higher product growth and attach across offers.

• Question from Krish Sankar (TD Cowen): What’s the AI server mix (liquid vs air; ARM) and why is EPS up less than revenue in FY26?
  Response: Backlog/pipeline skew to DLC with GB200/GB300; EPS uplift reflects +$5B AI plus contributions and ~$1B from CSG/traditional server/storage, with mix/efficiency driving profits.

• Question from Steven Bryant Fox (Fox Advisors): How do supply-chain dynamics (expedites, deflation, tariffs) play out in 2H?
  Response: Input-cost deflation in Q2 should flatten in 2H; tariffs managed without price hikes; Q2 AI expediting/reconfiguration costs were one-time and won’t recur in Q3–Q4.