DELL Q2 Deep Dive: AI Server Demand Drives Revenue, Margin Mix Raises Questions

Computer hardware and IT solutions company Dell (NYSE:DELL) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 19% year on year to $29.78 billion. On top of that, next quarter’s revenue guidance ($27 billion at the midpoint) was surprisingly good and 3.4% above what analysts were expecting. Its non-GAAP profit of $2.32 per share was 1.1% above analysts’ consensus estimates.

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StockStory’s Take

Dell’s second quarter was marked by robust revenue growth, propelled by record shipments of artificial intelligence (AI) servers and ongoing operational efficiency efforts. Management pointed to a surge in enterprise and sovereign demand for AI infrastructure, with orders spanning financial services, healthcare, and manufacturing sectors. CEO Jeff Clarke highlighted, “We have shipped more AI servers in the first half of this year than all of last,” underscoring the scale of customer adoption. However, the market’s negative reaction appears tied to a lower gross margin rate and softer traditional storage and North American server demand, particularly among large accounts. Executive remarks reflected an acute awareness of these mixed results, with Clarke acknowledging the “unacceptable” stagnation in storage growth and continued softness in federal spending.

Looking ahead, Dell’s raised full-year guidance is anchored in expectations of continued strength in AI server shipments and a seasonal upturn in storage profitability. Management expects the mix of higher-margin proprietary storage and improvements in AI server margin rates to drive profitability in the second half. CFO Yvonne McGill pointed to the anticipated recovery in traditional server demand and the ongoing Windows 10 end-of-life refresh cycle as further supporting factors. Clarke emphasized the company’s intent to convert a growing pipeline of AI orders, stating, “We have every intention to convert that very large pipeline into incremental orders,” while noting that enterprise adoption of turnkey AI solutions could be a key differentiator going forward.

Key Insights from Management’s Remarks

Management attributed the quarter’s revenue outperformance to record AI server shipments, expanding enterprise demand, and continued progress on cost efficiencies. However, margin pressures stemmed from a greater AI hardware mix and ongoing weakness in traditional storage.

• Record AI server demand: AI infrastructure orders and shipments set new highs, with Dell’s pipeline now spanning over 6,700 unique customers. Enterprise and sovereign demand grew double digits, and the company highlighted rapid deployment capabilities as a differentiator.
• Traditional storage softness: Storage revenue declined due to weaker demand from large accounts in North America, as well as continued slow federal spending. Management described this performance as “unacceptable” but pointed to the outperformance of proprietary Dell IP storage and PowerStore’s ongoing customer acquisition.
• Margin rate impact from business mix: The surge in AI hardware shipments led to a shift in revenue mix that diluted overall gross margins, as AI server deals remained highly competitive and required supply chain expedites, which management expects to moderate in future quarters.
• Operational efficiency gains: Operating expenses fell 4% year over year, driven by modernization initiatives and process improvements, allowing Dell to invest in R&D while supporting profitability even as gross margin rates declined.
• PC refresh cycle and product launch: Commercial PC momentum continued due to the Windows 10 end-of-life, and Dell launched a new entry-level business notebook aimed at expanding market share in commercial PCs, reflecting a renewed push to offset consumer softness.

Drivers of Future Performance

Dell’s outlook is driven by ongoing AI infrastructure demand, improvements in storage and traditional server profitability, and operating expense control.

• AI pipeline conversion: Management believes the expanding five-quarter AI server pipeline, now dominated by Blackwell-based solutions, will fuel further orders. Clarke noted the company’s manufacturing flexibility enables rapid scaling to meet enterprise and sovereign demand, though the timing of large deployments depends on customer readiness.
• Storage profitability recovery: The company expects sequential improvement in storage results, with a greater contribution from higher-margin proprietary Dell IP storage. Management anticipates seasonal acceleration in storage revenue and margin gains as customers refresh legacy infrastructure and as new automation offerings address evolving private cloud needs.
• Margin rate improvement initiatives: Dell aims to improve gross margin rates by reducing onetime supply chain costs, value engineering, and increasing enterprise customer attach rates for networking and professional services—especially in AI factories. McGill highlighted that a more favorable business mix and continued cost discipline should support operating income growth, even as AI hardware remains a lower-margin segment.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will focus on (1) the pace of AI pipeline conversion and the consistency of enterprise demand; (2) sequential recovery in storage revenue and margin mix, especially from proprietary offerings; and (3) the impact of the ongoing PC refresh cycle on commercial market share. Execution on margin improvement initiatives and the integration of new automation platforms in storage will also be critical signposts for Dell’s progress.

Dell currently trades at $127.00, down from $134.52 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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