Dell revenue growth for Q3 FY25 fell short of expectations, driven primarily by new AI and traditional servers.
In the quarter ended November 1, Dell missed the midpoint $24.5 billion of its outlook, bringing in $24.4 billion, with GAAP net income up 12.3 percent year-over-year at $1.13 billion. The year-ago numbers were $22.25 billion in revenues and $1 billion profit.
Vice-chairman and COO Jeff Clarke answered an earnings call question about the outlook shortfall, saying: ““The PC refresh continues to move out. It was the source of our underrun in Q3 … The second element … is the shift in demand in AI to Blackwell.” Nvidia Blackwell GPU shipments are now on backlog.
CFO Yvonne McGill stated: “We continued to build on our AI leadership and momentum, delivering combined ISG and CSG revenue of $23.5 billion, up 13 percent year-over-year. Our continued focus on profitability resulted in EPS growth that outpaced revenue growth, and we again delivered strong cash performance.”
The two main business groups fared differently. Infrastructure Solutions Group (ISG) revenue of $11.4 billion rose 34 percent year-over-year, although it declined sequentially from last quarter’s $11.65 billion. Servers and networking revenue was $7.4 billion, up 58 percent year-over-year, and down 3.5 percent sequentially.
Storage revenues increased at a much slower rate – just 4 percent year-over-year to $4 billion, up 0.7 percent sequentially. Demand for both the PowerStore and PowerFlex products grew in double digits. Clarke said: “The PowerScale F910 and F710 continue to ramp nicely, driving double-digit growth in the unstructured all-flash portfolio.” But, in storage overall, “the demand environment continues to trail traditional servers.”
Dell is well ahead of its competitors in the storage market:
Clarke said: “AI is a robust opportunity for us with no signs of slowing down. Interest in our portfolio is at an all-time high, driving record AI server orders demand of $3.6 billion in Q3 and a pipeline that grew more than 50 percent with growth across all customer types.
“Increasingly, enterprises see the disruptive nature and the innovation opportunities with GenAI resulting in growing GenAI experimentation and proof-of-concepts. … Beyond the AI servers, we like the profit pools that surround them, like power management and distribution, cooling solutions, network switches, network cables, optics, storage, deployment, maintenance, professional services and financial services … The opportunity in AI is enormous.”
Dell said ISG operating income improved to 13.3 percent of revenue, up 230 basis points sequentially, and traditional server demand improved double digits in the quarter, making the fourth consecutive quarter of traditional server demand growth.
The Client Solutions Group’s (CSG) revenue was $12.1 billion, down 1 percent year-over-year with client revenue up 3 percent at $10.1 billion, but consumer revenue down 18 percent year-over-year to $10.1 billion. People aren’t buying AI PCs in any great numbers yet but, Clarke said: “We are seeing an indication that customers are lining up their upgrade cycles with new AI PCs in the first half of next year – a clear signal that enterprises are balancing their need to refresh and their desire to future-proof their purchases.”
McGill mentioned: “Enterprise demand was promising, though less than expected as we saw some demand push into future quarters.” And: “Our Consumer business was weaker than expected as demand and profitability remain challenged.”
Dell experienced the third consecutive quarter of both year-over-year and quarter-over-quarter commercial PC demand growth. Clarke said: “We are optimistic about the coming PC refresh cycle as the install base continues to age, and with Windows 10 reaching end-of-life in 46 weeks.”
Dell has the number one share position in the commercial AI PC market, according to IDC.
The outlook for the fourth fiscal 2025 quarter is that revenues will be $24.5 billion +/- $500 million – a 9.8 percent increase year-over-year at the midpoint. Dell expects the combination of ISG and CSG to grow 13 percent at the midpoint, ISG to be up in the mid-twenties driven by AI and traditional servers, and CSG to be up low-single digits.
Its general expectations for next fiscal year are for more robust AI demand with a strong five-quarter pipeline going into next year. There will be an aged installed base in both PCs and traditional servers – prime for refresh. It expects ISG growth driven by AI servers, followed by traditional servers, then storage, and expects CSG to grow as enterprise companies refresh a large and aging installed base.
Bootnote
Storage for Dell is not seeing any AI-led demand increase, but Dell thinks it will happen. Clarke was pragmatic: “Look, we’re pretty excited about the opportunity in AI to expand beyond the individual node. I think … the opportunity is beyond the node into full rack scale integration. And in full rack scale integration, it’s the networking opportunity, the storage opportunity, mundane things like cooling.”
He added: “We expect the storage marketplace to grow next year and we expect to take share with our Dell IP storage portfolio as we’ve invested into new solutions, new capabilities, making it more competitive.”
Clarke expanded on this, saying: “The AI opportunity for storage is immense simply because GPUs devour data. I mean, you have to feed the beast, and they’re not very effective without a lot of information.
“Storage, it typically tends to be unstructured information. So we think scale out, file and object capabilities for training, tuning and inference are essential. We think parallel file systems for this kind of end-use transient data and these large training environments is essential. And remember, 80 percent of the data is on-prem. So we think AI is driving new needs in the storage architecture, which really drive to a three-tier architecture.”
Dell is well positioned, he claimed. “The Dell IP portfolio is a three-tier architecture moving towards disaggregated that allows us to scale CPU and storage and networking independently to optimize for performance. All that said, our PowerScale platform, we believe, is absolutely the right platform where we deliver high performance file, soon high performance object, the ability to take our Project Lightning that we announced at Dell Technology World, a parallel file system built exactly and purposeful for AI, and then take our Dell Data Lakehouse, which then allows us to do some data management and have the data platform around this and specifically metadata management. That combination of capability, we believe, is absolutely the future state of storage for AI and we’re very well positioned.”
Specifically, with regard to PowerScale, “the F710 and the F910. One has 614 terabytes of capacity. If I remember correctly, the 910 is 1.46 petabytes of capacity. Both of those double as we go to higher density drives in the first half of next year that will be first to market.”
