Dell's Q2 2026 Earnings Call: Contradictions Emerge on AI Server Margins, Traditional Demand, Pipeline/Backlog, and Supply Chain Costs

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
• EPS: $2.32 diluted non-GAAP EPS, up 19% YOY
• Gross Margin: $5.6B or 18.7% of revenue; rate declined YOY due to mix shift to AI servers
• Operating Margin: 7.7% of revenue; operating income up 10% YOY

Guidance:

• Q3 revenue expected at $26.5–$27.5B (midpoint $27B, up 11%).
• Q3 ISG growth low-20s; CSG up mid-single digits; combined up ~13%.
• Q3 OpEx down low single digits; operating income up ~7%; EPS $2.45 ± $0.10; ~681M diluted shares.
• Raised FY26 revenue to $105–$109B (midpoint $107B, up 12%).
• Raised AI server shipments to ~$20B (up $5B); slightly Q3-weighted; 1H shipments $10B.
• Expect 2H profitability improvement across ISG and CSG; AI server margins to improve.
• FY: ISG mid- to high-20s growth; storage flat; CSG low to mid-single digits; ISG+CSG ~14%.
• FY OpEx down low single digits; operating income up ~10%; I&O $1.4–$1.5B; tax 18%.
• FY26 EPS $9.55 ± $0.25 (up 17% at midpoint).

Business Commentary:

• Record Revenue and AI Demand:
• Dell Technologies reported record revenue of $29.8 billion for Q2, up 19% year-over-year.

• This growth was driven by strong demand for AI servers, with $5.6 billion in orders and $8.2 billion in shipments, resulting in an ending backlog of $11.7 billion.

• Operational Efficiency and Expense Reduction:

• The company saw a 4% decrease in operating expenses to $3.3 billion, contributing to an operating income increase of 10% to $2.3 billion.

• This was due to internal modernization efforts that decoupled revenue growth from operational expenses.

• Enhanced Cash Flow and Shareholder Returns:

• Dell generated cash flow from operations of $2.5 billion, with a return of $1.3 billion to shareholders through stock repurchases and dividends.

• The strong cash generation and shareholder returns were driven by record revenue and operational efficiencies.

• Storage and Server Market Dynamics:

• Storage revenue was down 3% to $3.9 billion, while server and networking revenue increased by 69% to $12.9 billion.
• The decline in storage revenue was attributed to slower demand in large accounts, particularly in North America, whereas server growth was supported by international markets and richly configured servers.

Sentiment Analysis:

• Record revenue $29.8B, up 19% YOY, and EPS up 19% to $2.32. Raised AI server shipment guidance to ~$20B (from $15B) and increased FY26 revenue ($105–$109B) and EPS guidance ($9.55 ± $0.25). Management expects 2H profitability improvement across ISG and CSG, with improving AI server margins. Q3 guide: revenue $26.5–$27.5B; EPS $2.45 ± $0.10.

Q&A:

• Question from Aaron Christopher Rakers (Wells Fargo Securities): What is your capacity to flex above the raised $20B AI server shipments, given $8.2B shipped in Q2 and a strong GB300 cycle?
  Response: Pipeline is growing and lumpy; Dell has adequate manufacturing capacity and intends to exceed $20B, but timing depends on customer site readiness and supply transitions.

• Question from Wamsi Mohan (BofA Securities): What drives the stronger profit flow-through into Q4 versus Q3?
  Response: Profit lift is driven by storage seasonality and higher Dell IP mix, improving AI server margins, traditional server growth, and lower OpEx, with Q4 more weighted to storage.

• Question from Erik Woodring (Morgan Stanley): Why the softer storage results and more cautious outlook versus 90 days ago?
  Response: Large-account demand slowed in North America late in the quarter; however, Dell IP/all-flash grew double digits, and storage should improve sequentially with market outgrowth in 2H amid HCI customers reassessing architectures.

• Question from Benjamin Alexander Reitzes (Melius Research): Why and how will AI server margins improve from perceived low levels?
  Response: Q2 had aggressive early-Blackwell deals and one-time expedite costs; margins should improve via value engineering, scale, removal of expedite costs, and higher enterprise attach of networking/storage/services.

• Question from Vijay Raghavan Rakesh (Mizuho): How is the pipeline split across sovereign vs. enterprise, and what drives AI margin upside?
  Response: Sovereign and enterprise pipeline grew double digits with >6,700 customers, predominantly Blackwell; margin uplift comes from eliminating one-time supply-chain costs, scaling, and richer enterprise attaches.

• Question from David Vogt (UBS): Should proprietary storage margin gains offset ISG rate pressure from AI mix in 2H?
  Response: Shift to higher-margin Dell IP storage and seasonal strength support 2H profitability, while AI mix lessens versus Q2; overall ISG profitability improves despite potential rate compression.

• Question from Amit Jawaharlaz Daryanani (Evercore ISI): Why is incremental margin on the raised FY guide modest?
  Response: 2H profit improvement is broad-based—especially storage seasonality/mix and efficiencies—so conversion is driven holistically, not solely by AI server margins.

• Question from Michael Ng (Goldman Sachs): What impacted traditional servers and storage, and any margin callouts?
  Response: North America traditional server demand and federal spending were weak; other regions grew; expect 2H traditional server growth with richer configs; storage softness was large NA accounts, while Dell IP/flash remained strong.

• Question from Simon Matthew Leopold (Raymond James): Can you quantify enterprise AI progress and comment on Hopper strength?
  Response: Enterprise AI hit records in customers and revenue with more POCs converting; many enterprises favor air-cooled (e.g., Hopper/RTX 6000) given power/cooling limits, aiding near-term adoption.

• Question from Samik Chatterjee (JPMorgan): How is backlog/pipeline shifting to GB300 and any pricing pressure on older platforms?
  Response: Backlog/pipeline are primarily Blackwell across variants (GB200/GB300); both are in full production with broad shipments; transition is proceeding smoothly without noted pricing issues.

• Question from Asiya Merchant (Citi): What underpins PC share gains and can momentum sustain into 2026?
  Response: Windows 10 EOL drives a multi-quarter refresh beyond 2025; Dell is leaning in to gain share while keeping 5–7% op margins, including new entry commercial notebooks to expand TAM.

• Question from Mehdi Hosseini (SIG): What drives 2H gross margin improvement, and why not scale services faster?
  Response: GM uplift is led by storage seasonality and higher Dell IP mix, plus efficiency gains; services scale via higher product growth and attach across ProSupport, deployment, and professional services.

• Question from Krish Sankar (TD Cowen): What is the AI server mix (DLC vs air, ARM) and why is EPS less responsive to the revenue raise?
  Response: Backlog/pipeline are biased to direct liquid cooling for GB200/GB300; the EPS raise reflects mix—+$5B AI and ~+$1B core—tempered by rate dilutive AI and efficiency-led improvements.

• Question from Steven Bryant Fox (Fox Advisors): How will supply-chain dynamics evolve through year-end?
  Response: Q2 expedite and reconfiguration costs for GB200 were one-time; input costs were deflationary in Q2 and should flatten in 2H, with no repeat of those expedite charges.