Executive Summary / Key Takeaways

• Dell Technologies is successfully leveraging its broad portfolio and go-to-market strength to capitalize on the burgeoning AI infrastructure market, driving significant order and revenue growth, particularly in its Infrastructure Solutions Group (ISG).
• The company's differentiated engineering capabilities, integrated rack-scale solutions, and comprehensive services are enabling it to win large AI deployments and improve profitability within this segment, offsetting margin rate dilution from the high component costs.
• Strong operational execution and ongoing business modernization initiatives are driving significant cost efficiencies, contributing to operating income and EPS growth that is outpacing revenue expansion.
• An anticipated recovery in traditional servers and storage, coupled with an impending PC refresh cycle driven by an aging installed base and Windows 10 end-of-life, provides additional tailwinds for growth and profitability in Fiscal Year 2026.
• Management has provided optimistic guidance for Q2 and reiterated full-year FY26 expectations, projecting continued revenue and EPS growth above their long-term framework, supported by a robust AI pipeline and disciplined capital allocation focused on shareholder returns.

The AI Era Beckons: Dell Technologies Positions for Growth

Dell Technologies stands as a formidable player in the global technology industry, strategically focused on delivering comprehensive and integrated solutions tailored for the burgeoning data and artificial intelligence era. With a history tracing back to 1984, the company has evolved through pivotal moments, including the going-private transaction in 2013 and the transformative acquisition of EMC Corporation in 2016, which significantly bolstered its enterprise capabilities and infrastructure portfolio. Dell's overarching vision is to become the most essential technology partner, a goal it pursues by leveraging its foundational strengths – a broad product portfolio spanning client devices to complex data center infrastructure, a powerful go-to-market engine, a globally diverse and agile supply chain, and extensive services capabilities – to extend its leadership and capture new growth opportunities.

The industry landscape is currently defined by several potent trends. The escalating demand for AI-optimized solutions is reshaping IT spending, driving data center modernization focused on consolidation and power efficiency, and accelerating the need for high-performance computing and storage. Concurrently, an anticipated PC refresh cycle, spurred by an aging installed base and the approaching Windows 10 end-of-life, is expected to revitalize the client market. Dell's strategy is deeply intertwined with these drivers, positioning itself to provide the foundational technology required for this digital transformation, from the edge to the core to the cloud.

In this dynamic environment, Dell competes across multiple fronts. In the PC market, rivals like HP (HPQ) and Lenovo (LNVGY) offer broad portfolios, while Apple (AAPL) dominates the premium consumer segment. In servers and storage, traditional competitors include HP and IBM (IBM), alongside the increasing influence of cloud providers like AWS (AMZN) and Microsoft Azure (MSFT) offering infrastructure-as-a-service alternatives. Dell differentiates itself through its direct sales model, deep customer relationships, and the ability to deliver integrated, end-to-end solutions. While competitors may offer specific advantages – HP in printing, Lenovo in emerging market penetration, Apple in ecosystem lock-in and premium margins, and IBM in software and consulting – Dell's strength lies in its comprehensive portfolio and ability to orchestrate complex deployments, particularly in the enterprise and increasingly in the AI space. Its focus on Dell IP storage, for instance, yields significantly higher margins compared to third-party IP, a strategic pivot aimed at enhancing profitability.

Technological innovation forms the bedrock of Dell's competitive positioning. In the Infrastructure Solutions Group (ISG), the company offers high-performance general-purpose and AI-optimized servers designed for density and energy efficiency. Its 16th and 17th generation servers are highlighted for their role in data center modernization, with a single 16G server capable of consolidating 3 to 5 (sometimes up to 7) older 14G servers, offering 2.5 to 3 times more cores and 25% to 35% better power efficiency. This consolidation frees up valuable space and power for new AI workloads. Dell's AI-optimized server portfolio includes advanced liquid-cooled platforms like the XE9712, supporting up to 256 NVIDIA (NVDA) HGX b300 GPUs per rack, and the XE7745 designed for inferencing with support for up to eight GPUs in a 4U chassis. The company is also developing new power cooling solutions, such as rear door heat exchangers that can reduce cooling energy costs by up to 60%.

In storage, Dell's Dell IP portfolio, including PowerStore, PowerScale, PowerFlex, and PowerProtect Data Domain, targets high-growth areas like unstructured data and the midrange market. PowerStore boasts an industry-leading 5:1 data reduction guarantee and recent updates (PowerStore Prime) delivered a 30% improvement in IOPS. PowerScale, crucial for AI workloads, offers high capacity density (F710 with 614TB/rack unit, F910 with 1.46PB) and recent software enhancements, combined with 200Gb Ethernet, have dramatically improved streaming read and write performance (over 2x and 163% respectively). Dell is also developing Project Lightning, a parallel file system co-engineered with NVIDIA, and the Dell Data Lakehouse platform, aimed at providing high-performance storage and data management for AI. These technological advancements contribute to Dell's competitive moat by offering differentiated performance, efficiency, and integrated solutions, enabling higher ASPs and improved margins, particularly as the mix shifts towards Dell IP and AI-optimized offerings.

Performance Reflects Strategic Momentum

Dell's recent financial performance underscores the impact of its strategic focus and operational execution. In the first quarter of Fiscal Year 2026, the company reported total net revenue of $23.38 billion, a 5% increase year-over-year. This growth was primarily fueled by the Infrastructure Solutions Group (ISG), which saw its net revenue climb 12% to $10.32 billion. Within ISG, servers and networking revenue grew a robust 16% to $6.32 billion, driven by strong demand in both traditional and AI-optimized servers. Storage revenue also contributed positively, increasing 6% to $4.00 billion, marking its third consecutive quarter of growth. The Client Solutions Group (CSG) also contributed to the top-line expansion, with revenue up 5% to $12.51 billion, led by a 9% increase in commercial revenue to $11.05 billion, indicating the early stages of a PC refresh cycle. However, consumer revenue declined 19% to $1.46 billion, reflecting continued softness in that market segment. Revenue from Corporate and other declined significantly, primarily due to the cessation of standalone VMware offerings distribution.

Profitability demonstrated notable improvement. Operating income increased a substantial 21% year-over-year to $1.17 billion, while non-GAAP operating income rose 10% to $1.67 billion. This outperformance relative to revenue growth was largely attributable to an increase in ISG operating income, which surged 36% to $998 million, driven by growth and improved profitability in storage. The consolidated operating income margin expanded by 70 basis points to 5.0%, and the non-GAAP operating income margin increased by 30 basis points to 7.1%. This margin expansion occurred despite a decline in the gross margin percentage (down 70 basis points to 21.1%) and non-GAAP gross margin percentage (down 80 basis points to 21.6%), primarily due to a competitive pricing environment in CSG and shifts in geographical and offering mix within ISG. The positive operating income leverage was driven by strong revenue growth coupled with disciplined cost management, as total operating expenses decreased 3% year-over-year, with SGA expenses down 5% due to headcount reductions. R&D expenses, however, increased 6%, reflecting continued investment in innovation.

Financially, Dell maintains a solid liquidity position. Cash provided by operating activities was particularly strong in Q1 FY26, reaching $2.80 billion, a significant increase from $1.00 billion in the prior-year quarter. This was driven by profitability and favorable working capital dynamics, including increased accounts payable, other current assets, and inventory levels related to the ramp-up in AI-optimized server demand, alongside strong cash collections. Cash used in investing activities was modest at $0.10 billion, largely offset by proceeds from the Secureworks (SCWX) sale. Financing activities provided $1.20 billion in cash, primarily from net proceeds of Senior Notes and DFS debt issuances, partially offset by substantial capital returns to shareholders.

The outstanding principal amount of debt increased by $4.20 billion to $29.00 billion, primarily due to Senior Notes issuance, with core debt rising to $17.00 billion. Dell continues its commitment to shareholder returns, repurchasing 22.00 million shares for $2.00 billion and increasing its quarterly dividend by 18% to $0.53 per share. The company ended the quarter with $7.70 billion in cash and cash equivalents and believes its liquidity position is sufficient to meet future obligations.

Outlook and Risks

Management's outlook for Fiscal Year 2026 reflects confidence in the company's ability to capitalize on current market dynamics, particularly the strong momentum in AI. For the second quarter of FY26, Dell expects revenue between $28.5 billion and $29.5 billion, representing a 16% increase year-over-year at the midpoint of $29.0 billion. ISG and CSG combined are projected to grow 19% at the midpoint, with ISG growing significantly and CSG up low to mid-single digits. Operating expenses are expected to be down low single digits year-over-year, contributing to an anticipated 8% increase in operating income. Diluted non-GAAP EPS is guided to be $2.25 plus or minus $0.10, up 15% at the midpoint.

For the full fiscal year 2026, Dell reiterated its revenue guidance of $101 billion to $105 billion, with a midpoint of $103 billion, an 8% increase from FY25. This is expected to be driven primarily by ISG, projected to grow high teens, fueled by over $15 billion in AI server shipments. CSG is expected to grow low to mid-single digits, weighted towards the second half as the PC refresh cycle accelerates. The combined ISG and CSG growth is projected at 10% at the midpoint. Operating expenses are anticipated to be down low single digits year-over-year due to ongoing modernization efforts. Operating income is expected to be up roughly 9%, and the company increased its diluted non-GAAP EPS guidance to $9.40 plus or minus $0.25, up 15% at the midpoint, assuming an 18% non-GAAP tax rate. Management expressed confidence in exceeding the $15 billion AI server shipment target.

Despite the optimistic outlook, several risks warrant consideration. The AI-optimized server business is characterized by inherent non-linearity in demand and shipments due to the scale and complexity of deployments, customer readiness, and component availability, which can lead to revenue variability. While supply constraints have eased, the next generation of high-demand AI components is anticipated to face limitations. The competitive pricing environment, particularly in CSG, continues to pressure margins. Macroeconomic uncertainty could lead customers to reevaluate IT spending, potentially moderating demand in traditional segments. Dell is also subject to risks related to trade protection measures and tariffs, although its agile supply chain is a key mitigation. Furthermore, the timing and scale of the anticipated PC refresh cycle remain subject to market dynamics. Unfavorable outcomes in ongoing income tax audits could also materially impact financial results.

Conclusion

Dell Technologies is demonstrating strong operational execution and strategic alignment with the most significant trends shaping the technology landscape. The company's deep engagement in the AI infrastructure market, highlighted by its substantial order backlog and growing pipeline, positions it as a key beneficiary of this transformative wave. While the AI business presents complexities and margin dynamics, Dell's ability to deliver integrated solutions and services is enabling profitable growth within this segment. Coupled with an expected recovery in its core traditional server and storage businesses and an impending PC refresh cycle, Dell appears well-positioned for continued revenue and EPS expansion in Fiscal Year 2026, exceeding its long-term financial framework. The company's disciplined cost management and commitment to shareholder returns further strengthen the investment thesis. Investors should monitor the execution of large AI deployments, the timing and strength of the PC refresh, and the impact of the competitive environment, but Dell's current trajectory, driven by technological leadership and market positioning, suggests compelling upside potential.