Dell Technologies Inc. 2027 Q2 Earnings Call

Thanks everyone for joining us. With me today are Jeff Clarke, David Kennedy, and Tyler Johnson. Our earnings materials are available on our IR website, and I encourage you to review these materials. Also, please take some time to review the presentation, which includes additional content to complement our discussion this afternoon. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP gross margin, operating expenses, operating income, net income, diluted earnings per share, free cash flow, and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our press release. Growth percentages refer to year-over-year change unless otherwise specified. Statements made during this call that relate to future results and events are forward-looking statements based on current expectations.

Actual results and events could differ materially from those projected due to a number of risks and uncertainties which are discussed in our web deck and our SEC filings. We assume no obligation to update our forward-looking statements. Now, I'll turn it over to Jeff.

Thanks, Paul, and thanks everyone for joining us. Another outstanding quarter. I am proud of how our team executed across the business, delivering record revenue and record earnings per share. Revenue was $47 billion, up 58%, and earnings per share was $7.04, up 203%. These results reflect the compounding benefits of our competitive advantages, the breadth of our portfolio, and the strength of our operating model. Our modernization efforts are driving greater efficiency and significant operating leverage, enabling us to grow earnings faster than revenue. Customers no longer see IT environments simply as cost centers, but as value drivers that enable growth, productivity, and competitive advantage. As a result, they are expanding and reallocating budgets to support continued investment. This is creating opportunities across our portfolio from infrastructure to client devices.

Our world-class supply chain and ability to serve customers across their IT environment are helping us meet more of their needs and gain share. Our deployment and service capabilities are helping customers integrate solutions across their IT environments and capture more value quickly. The proof is in our results. Over the past 12 months, we have booked more than $130 billion in AI server orders. In just the past two quarters, we have generated almost as much revenue from traditional servers and networking as we have in any prior full year in company history. Storage returned to growth and share gain, with strong demand for Dell IP storage products, and CSG revenue is growing at the fastest rate in five years. It is clear why demand for our solutions is exceeding available supply.

Our results and guidance demonstrate the strength of our position as customers enter a new era of infrastructure modernization. Customers are modernizing their data centers for both AI and non-AI workloads, and the benefits are meaningful. AI is an important catalyst, but the opportunity extends well beyond AI-optimized infrastructure. AI requires modern, disaggregated architectures that keep data accessible and in motion across compute, storage, and networking. It is also accelerating investment across traditional IT environments as customers see greater performance, efficiency, and resiliency. Our AI server momentum continues to accelerate. We booked $60.9 billion of AI orders in this quarter, the most in our history. We are also seeing AI-related tailwinds in traditional servers and networking, along with early signs of increased storage demand as customers prepare, manage, and protect growing volumes of data. Deployment methods are evolving as well.

On-prem and edge infrastructure offers attractive token economics for the right workloads while giving customers greater control over their data and intellectual property. Our portfolio, global reach, and deep customer relationships position us to help customers design, deploy the right solutions for their performance, cost, and security requirements. Together, these trends are expanding our addressable market and driving demand across compute, networking, storage, and PCs. This represents a significant long-term opportunity for us. It plays directly to our strengths and expands the value we can deliver across the entire IT environment. Now, on to the results. Starting with ISG, revenue increased 89% to a record $31.8 billion, with operating income of $4.8 billion and an operating income rate of 15%. In AI, demand continues to accelerate. In Q2, we booked a record of $60.9 billion in AI orders and recognized $16.4 billion in AI server revenue.

We exited the quarter with a record $95 billion of AI backlog, and our pipeline continued to grow sequentially and remains multiples of our backlog, even after converting $131.7 billion into orders over the past 12 months. Demand is broadening across Neoclouds, sovereigns, and enterprise customers, and our customer count has surpassed 6,500. The scale and complexity of these deployments reinforce why customers choose us. AI infrastructure requires much more than assembling and delivering components. These opportunities demand significant engineering, design, and deployment expertise, with some engagements requiring upwards of 50 unique designs as customers optimize for workload performance, power, cooling, and the data center environment. This complexity plays to our strength. Our engineering capabilities, broad portfolio, global supply chain, and ability to deploy and support infrastructure at scale globally differentiate us, enable customers to move from design to production more quickly.

We demonstrated those capabilities again by becoming the first to ship rack systems engineered on the NVIDIA Vera Rubin platform. The AI market is evolving rapidly, and we are focused on expanding our platforms and capabilities, solving increasingly complex customer challenges, and innovating across the infrastructure stack. With accelerating demand and a growing pipeline in differentiated capabilities, we are well-positioned to capture the opportunity ahead. Moving to traditional servers, revenue was up 122% as demand remains exceptionally strong, supported by multiple vectors of growth. First, a majority of our growth is coming from existing customers as they continue to refresh and modernize their data centers to support traditional workloads. Heightened security and resiliency requirements are also creating incremental demand as customers modernize their infrastructure. Second, we are seeing a growing trend of customers that require meaningful CPU compute capacity to support AI and agentic workflows.

These workloads are creating incremental demand for traditional servers. We are executing very well against both opportunities and gaining share. Over the past two quarters, we have gained more than 10 points of traditional server share, and we expect to gain share again this quarter. With the majority of the install base still on 14G or older servers, we see a significant and durable refresh opportunity ahead. The strength and breadth of demand, combined with our continued share gains, demonstrate the competitiveness of our portfolio and the consistency of our execution. Turning to storage, revenue was up 26% as strong demand for our Dell IP portfolio translated into revenue growth and improved storage profitability. Dell IP delivered another record demand growth quarter, making this our sixth consecutive quarter of demand growth above market. Demand remains broad-based. Enterprises continue to modernize their storage environments as data growth increases the importance of keeping data available and secure.

At the same time, we are beginning to see incremental demand from AI workloads, which require customers to prepare, manage, and move increasingly large volumes of data. We saw strong growth across PowerFlex, PowerStore, PowerProtect, and PowerVault, with PowerStore posting double-digit demand growth for the ninth consecutive quarter. PowerScale and ObjectScale also drove another exceptional quarter in unstructured storage, which has now grown at double digit or better for three consecutive quarters. Storage is becoming a more meaningful contributor to our growth and profitability. Dell IP continues to increase as a percentage of our storage mix, and margins continue to improve, supporting overall ISG profitability. Our share gains, expanding Dell IP mix, and accelerating pace of product development give us confidence in the opportunity ahead.

Turning to CSG, revenue grew 20% with demand growth across all regions and verticals. Commercial revenue grew 22%, our eighth consecutive quarter of growth, with demand up for the 10th quarter. Large enterprise customers continue to refresh their PC install base, driving double-digit growth across all regions. More cost-sensitive customers are extending their upgrade cycles. This is increasing the number of older devices in the install base and extending the long-term refresh opportunity for CSG. Consumer revenue was up 7%, the fourth consecutive quarter of demand growth. CSG profitability remained strong, benefiting from price discipline and greater scale. In closing, we delivered record revenue and EPS with continued strong cash flow and record capital returned to shareholders. Our results reflects several reinforcing factors. First, infrastructure demand is growing structurally, driven by data center modernization, AI adoption, and attractive economics of deploying workloads on-prem.

Second, our broad-based portfolio across AI infrastructure, traditional servers and networking, storage and PCs enable us to serve the full range of our customers' needs. Lastly, we delivered value at scale through our engineering and deployment expertise, supply chain scale, and fast discipline operating model. Our full-year operating expense rate guidance of approximately 8% of revenue is the lowest in our company's 42-year history, demonstrates the operating leverage this model can deliver. These advantages reinforce one another. They are driving growth, share gains, profitability, and cash generation. By creating more value for our customers, we compound our advantages and create durable cash flow and long-term value for our shareholders. I am proud of our team's performance. We enter the second half with strong momentum and confidence in our position. With that, let me turn it over to David to walk through the financials and our outlook.

Thanks, Jeff. We delivered another record quarter, capping a very strong first half of the year. The team executed exceptionally well, driving record revenue, record EPS, and record shareholder returns. Total revenue was up 58% to $47 billion. Gross margin dollars grew 78% to $9.9 billion. Gross margin rate was 21.1%, driven by an improvement in ISG margin rate and a higher mix of ISG revenue. Operating expenses were up 22% to $4 billion, primarily from variable compensation tied to our outperformance. Building on last quarter, we continued to drive significant scale in the P&L, with OpEx down 250 basis points to 8.5% of revenue. Operating income grew 160% to $5.9 billion or 12.6% of revenue, driven by higher revenue, scale, and price discipline across servers, storage, and CSG. Net income was up 189% to $4.6 billion, primarily driven by strong operating income.