Dell Technologies, Inc. Class C (DELL.US) exceeded expectations in Q2 performance but was sold off as profit margins for AI servers narrowed, prompting concerns.
Dell Technologies (DELL.US) released its financial report after the market closed on August 28 Eastern Time. Both revenue and performance exceeded expectations, but the stock price dropped by 5% after the report was released.
Dell Technologies, Inc. Class C (DELL.US) released its financial report after market hours on August 28th, Eastern Time, resulting in a drop in stock prices. The report showed that the company's revenue increased by 19% to $29.8 billion, surpassing the average expected $29.2 billion. Adjusted earnings per share were $2.32, higher than the analyst's average expectation of $2.30. The financial report indicated a decline in sales of artificial intelligence (AI) servers compared to the previous quarter, with the profit margin of these high-performance machines lower than analysts' expectations.
The demand for high-performance servers from companies such as Dell Technologies, Inc. Class C, Super Micro Computer, Inc. (SMCI.US), and Hewlett Packard Enterprise Co. (HPE.US) has surged due to the computing power required for running AI tools. However, investors have been concerned about the profitability of AI servers as they rely on expensive processors produced by companies like NVIDIA Corporation (NVDA.US) and AMD (AMD.US).
In the second fiscal quarter ending August 1st, Dell Technologies, Inc. Class C recorded $5.6 billion in AI server orders, lower than the previous quarter's $12.1 billion. The company shipped servers worth $8.2 billion this quarter, with a backlog of orders worth $11.7 billion at the end of the quarter.
With a 69% growth in server and network business, the company's infrastructure department's revenue increased by 44%. However, the client department consisting of enterprise and consumer PCs only saw a 1% growth in sales, reaching $12.5 billion, below the average expected $12.8 billion.
In a statement on Thursday, Dell Technologies, Inc. Class C stated that the operating profit margin for its infrastructure department (including server and network sales) this quarter was 8.8%, below analysts' average expectation of 10.3%. The overall adjusted gross margin for Dell Technologies, Inc. Class C was 18.7%, narrowing from the same period last year and below analysts' expectation of 19.6%.
The stock closed at $134.05 on Thursday and fell by about 5% in after-hours trading. The stock has risen by 16% year-to-date.
Nevertheless, the Texas-based company raised its annual outlook, announcing quarterly sales and profits exceeding analysts' expectations.
Chief Operating Officer Jeff Clarke stated in the statement, "In the first half of fiscal year 26, we have shipped $10 billion worth of AI solutions, exceeding the full-year shipments of fiscal year 25."
Clarke mentioned that the company now expects server shipments to reach $20 billion by the end of the fiscal year.
During a conference call following the financial report release, the COO responded to analysts' questions regarding the profitability of the AI server business. He noted some atypical expenses this quarter, mainly due to additional costs incurred by Dell Technologies, Inc. Class C to win and complete transactions for servers equipped with the latest NVIDIA Corporation chips, as well as additional expenses to deal with evolving regulatory environments.
"These are positive deals, very competitive deals, and we've been shipping throughout the quarter," Clarke stated. Additionally, "We have some one-time costs in our supply chain because we accelerated the purchase of materials to meet customer demand."
Looking ahead, the company raised its adjusted earnings per share forecast for the fiscal year ending in January from the May prediction to $9.55. The company also raised its annual revenue forecast from around $103 billion to about $107 billion. Analysts' average expectations were earnings of $9.43 per share and revenue of $105.2 billion.
Furthermore, while Dell Technologies, Inc. Class C expects third-quarter revenue of $27 billion, above the expected $26.1 billion, it anticipates earnings per share of $2.45 in the third quarter, lower than the London Stock Exchange's forecast of $2.55. Dell Technologies, Inc. Class C mentioned that its profit forecast focuses on the fourth quarter partly due to seasonal factors, especially in its storage business.
Competitor HP Inc. (HP.US) reported more optimistic data on personal computer sales on Wednesday, with a 6% increase in sales. Overall, HP Inc.'s stock performance has been inferior to Dell Technologies, Inc. Class C, with a 13% decline year-to-date.
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