Dell (Minutes): The company's value lies in the overall solutions at level L11 and above.

The following are the minutes of Dell's FY2026 Q3 earnings call organized by Dolphin Research. For earnings interpretation, please refer to "Dell DELL: Storage Price Hike Adds Pressure? AI Guidance Provides Support"

I. $Dell Tech(DELL.US) Key Financial Highlights

1. Cash Flow and Capital Return

a. Cash Flow: Operating cash flow of $1.2 billion, with an ending cash and investment balance of $11.3 billion (an increase of $1.6 billion quarter-over-quarter).

b. Shareholder Return: Returned $1.6 billion this quarter (repurchased 8.9 million shares + dividends paid). A total of $5.3 billion returned in the first three quarters, with over 39 million shares repurchased.

2. Q4 and Full-Year Guidance

a. AI Business Outlook: Q4 AI server shipments are expected to be approximately $9.4 billion (a record), driving full-year shipments to about $25 billion (over 150% year-over-year growth).

b. Q4 Specific Guidance:

- Revenue: Expected to be $31 billion to $32 billion.

- Segment Growth: ISG expected to grow around 65%, CSG to grow in low to mid-single digits.

- EPS: Non-GAAP EPS expected to be $3.50 (midpoint), a 31% year-over-year increase.

c. Implied Full-Year Performance (FY26): Revenue of $111.2 - $112.2 billion (midpoint growth of 17%), EPS of $9.92 (growth of 22%).

3. Preliminary Outlook for Next Fiscal Year (FY27)

a. AI Business: Strong confidence based on backlog and project reserves.

b. Other Businesses: Maintain the long-term framework presented at the securities analyst meeting.

c. Growth Confidence: Confident in driving EPS growth through market expansion, margin improvement, cost control, and share repurchases.

II. Detailed Content of Dell's Earnings Call

2.1 Key Information from Executive Statements

1. AI Business Performance: Growth Momentum: Significant acceleration in the second half, with exceptionally strong demand for AI server orders.

a. Order and Shipment Data:

- Q3 Order Value: $12.3 billion (a record). Year-to-date order value: $30 billion (a record).

- Q3 Shipment Value: $5.6 billion. Year-to-date shipment value: $15.6 billion.

- Backlog: $18.4 billion (a record).

b. Customer Base: Continuously expanding, covering emerging cloud service providers, secondary CSPs (cloud service providers), and sovereign state customers.

c. Competitive Advantage: Unique capability in designing, deploying, and maintaining large-scale AI factories.

d. Rapid Deployment: Operational within 24-36 hours post-delivery, uptime >99%.

e. Future Outlook: Project reserves for the next five quarters continue to grow, exceeding backlog multiples; AI server profitability improves quarter-over-quarter.

2. ISG

a. Traditional Servers: Demand shows double-digit growth, with accelerated growth in EMEA and North America. Customers prefer high-density, high-performance computing configurations (16th/17th generation platforms). AI drives broader IT modernization, boosting traditional x86 computing demand.

b. Storage Business: Revenue down 1% year-over-year, but strong demand for proprietary Dell IP products.

- Highlights: All-flash array product portfolio sees double-digit growth for two consecutive quarters; PowerStore demand grows for seven consecutive quarters.

- Profitability: Improved profitability with a higher proportion of high-margin product mix.

3. CSG: Revenue grows 3%.

a. Commercial Business: Revenue grows 5%. International business accelerates (double-digit growth), North America improves. Strong demand from small and medium enterprises.

b. Consumer Business: Revenue declines 7%, but demand environment turns to growth with market strategy adjustments.

c. PC Refresh Cycle: Driven by aging devices and Windows 11 upgrades, the refresh cycle remains persistent.

4. Supply Chain and Commodities: Deflationary trend in Q3, with Q4 outlook largely unchanged from the previous quarter. Looking ahead to next year, dynamic changes will need to be addressed, but confidence remains in ensuring supply and adjusting pricing as needed.

2.2 Q&A Session

Q: Given the current focus of investors, how does management expect customers to react to price adjustments across different product categories? Which areas in the overall product portfolio are more amenable to passing on costs through price increases, and which areas are relatively challenging?

A: The costs of DRAM, NAND, and advanced process chips are rising rapidly, with overall demand far exceeding supply. As a company that has experienced similar cycles over the past 40 years, our primary task is to leverage our experience to ensure component supply and product mix to meet the strong demand for computing power from customers. While cost increases will impact all product lines from PCs to servers, we will make every effort to respond agilely to market signals and adjust pricing by configuring adjustments, optimizing the mix, and leveraging the advantages of the direct sales model to minimize the impact on customers. For Q4, although the cost outlook remains largely unchanged, we are confident in achieving sequential profitability improvement while managing rising costs. We will continue to rely on a strong supply chain and execution to navigate this situation.

Q: Despite headwinds such as rising storage costs, should we still use the "mid-teens EPS growth" long-term investment target as a benchmark for next year's performance forecast?

A: Although the current planning is still in its early stages, the long-term framework presented at the securities analyst meeting remains a good starting point, with EPS growth expectations within this general range. We will continue to leverage differentiated market entry engines, strong supply chain management, and significant operating expense scale effects. At the same time, we are firmly committed to executing the capital return plan, including share repurchases and dividend payments. Although it is too early to make specific predictions now, we have a wealth of tools and means to remain agile and are confident in achieving the EPS target.

Q: I would like to ask about NVIDIA's recent statement that it may strengthen vertical integration and become more deeply involved in the supply chain. What impact might this trend have? How is Dell currently responding to this potential change?

A: In the face of the evolution of new technologies, we are confident in our differentiated advantages. Large-scale AI deployments are extremely complex, and our value lies in providing comprehensive solutions at the rack level and above (L11 and above), which will remain significant in the next few cycles. We can work with customers early on to deliver complex solutions quickly and at scale, ensuring higher uptime (over 99%). Especially as we move towards single-rack power densities of 500 kilowatts or even megawatts in the future, our early layout in energy efficiency optimization, engineering capabilities, service deployment, and financial support will further expand our leading edge.

Q: Could you elaborate on the order structure of AI servers? For example, has there been a significant change in the proportion of enterprise customers in AI server orders?

A: In terms of order structure, this quarter's backlog has significantly shifted towards GB300; at the same time, our project reserves for sovereign states and enterprise customers continue to grow over five quarters, with an encouraging outlook.

Q: Given that management mentioned that AI server margins have achieved sequential growth, could you specify the extent of this growth? Will this trend continue into Q4? Additionally, are we beginning to see more high-margin products or services being sold alongside AI servers?

A: As we previously anticipated, the one-time costs faced in Q2 (such as expedited freight and supply chain adjustments) have been eliminated in Q3, and the early low-margin aggressive GB200 orders have been completed, collectively driving margin recovery. Currently, our AI server margins have returned to the mid-single-digit range (around 5%), and we expect to maintain this level, which aligns with our previously released long-term value creation framework. This improvement is also due to our differentiated advantages in GB200 and GB300 design and the optimization of customer structure—delivering more diverse solutions to a more diverse customer base, all of which contribute to enhancing overall profit performance.

Q: Could you please explain which stage of the refresh cycle we are currently in? Is the main driver still the upgrade demand before the Windows system end-of-service, or are there new factors that might extend this growth cycle to 2026?

A: We are optimistic about the PC market outlook, mainly based on two major drivers. First, the transition to Windows 11 is not yet complete, currently lagging 10-12 percentage points behind the same period for previous operating systems. Out of an installed base of approximately 1.5 billion devices, 500 million are hardware-compatible but not upgraded, and another 500 million are over four years old and unable to run Win11, creating significant refresh potential. Second, AI PCs, edge-side small models, MPU applications, and enhanced operating system functions will continue to invigorate the market. After achieving mid to high single-digit growth this year, we expect the overall PC market size to remain roughly flat next year, and we have planned accordingly, aiming to achieve growth by capturing more market share in this environment.

Q: The company has raised its AI business guidance from $20 billion to $25 billion and is confident about FY2027. What impact do the financing difficulties faced by Neo-cloud have on this? To what extent does the company's growth expectations rely on these vendors successfully securing financing, or is it more driven by demand from other visible customers?

A: We are confident in the AI business and have directed our full-year revenue expectations to $25 billion. Current demand is very strong and broad-based, covering Neo-cloud, sovereign state projects, and enterprise customers. The data shows that year-to-date order value has reached $30 billion (including $12.3 billion in Q3 orders and $5.6 billion in shipments). More importantly, our project reserves for the next five quarters are several times the current backlog, fully reflecting the market's urgency and willingness to cooperate. Although we cannot win every order, we are optimistic about the upcoming new scale and are well-prepared to meet customer demand with the current strong momentum.

Q: Regarding the rising cost base of the product portfolio, to what extent can this cost pressure be passed on through price increases? How much needs to be offset by reducing operating expenses (OpEx)?

A: Our AI business is growing rapidly, with revenue expected to reach $25 billion this year (150% year-over-year growth), and Q4 shipments will be close to the total for last year. This is mainly due to strong demand for computing power and token generation from all types of customers (emerging cloud, sovereign, and enterprise), and this momentum will continue into Q4. In terms of cost response, although we can typically recover about 2/3 of the rising costs within 90 days, in the current special period, we have taken unconventional measures in advance. By leveraging demand signals obtained through the direct sales model, long-term capacity agreements with storage manufacturers (DRAM/NAND), and highly flexible pricing and product configuration strategies, we are managing this challenge in real-time. Drawing on supply chain response experience from the COVID and tariff periods, we are confident in achieving cost recovery performance superior to historical norms through active management (such as high-frequency pricing adjustments).

Q: ISG's margins improved significantly by about 350 basis points quarter-over-quarter. What factors drove the improvement in margins from Q2 to Q3? Given that Q4 AI server revenue is expected to exceed $9.4 billion, how will this impact the P&L? Should we expect gross margins to remain at Q2 levels, or will there be further changes?

A: We are pleased with ISG's execution in Q3, with operating margins improving by 350 basis points quarter-over-quarter to 12.4%. This improvement is mainly due to the strong performance of the storage business: favorable product mix driven by demand growth for proprietary IP storage portfolios (especially PowerStore), strict pricing discipline, and product-level optimization. At the same time, AI server margins also remained in the mid-single-digit range as expected, unaffected by previous one-time costs. Looking ahead to Q4, we will continue to rely on the growth of the storage business (expected to achieve four consecutive quarters of growth) to solidify profits, with overall performance expected to be slightly better than normal seasonal trends, thereby driving further improvement in operating margins.

Again, we emphasize that our AI shipments are expected to increase significantly from $5.6 billion to $9.4 billion quarter-over-quarter. Although the scale of AI deliveries is significantly expanding, our Q4 performance will be based on a clear strategy combination: focusing on Dell's proprietary IP storage business to enhance product mix and margins while accelerating the growth of traditional server business, the combination of which is key to achieving expected performance.

Q: Jeff mentioned that traditional server demand achieved double-digit growth, but revenue growth does not seem to be synchronized. What stage is the current installed base of old equipment and upgrade cycle in? As demand gradually translates into revenue, can we view double-digit growth as a baseline expectation for FY2027?

A: Double-digit growth is mainly reflected on the demand side, although not fully synchronized to revenue, it has driven an increase in backlog. Regionally, the North American market improved quarter-over-quarter, while the international market maintained double-digit growth for two consecutive quarters. Data centers are currently undergoing modernization and integration, with single-machine configurations (core count, DRAM, and NAND) driving price increases. The market potential remains significant, as approximately 70% of the installed equipment is still old servers, with urgent upgrade and replacement needs. This longer consumption cycle is expected to continue into next year and FY2027, and is already reflected in the Q4 guidance, where we will strive to convert this sustained momentum into actual orders.

Q: Do you expect to benefit from inventory obtained through strategic procurement at below-market costs? How long is this cost advantage expected to last? Regarding the possibility of repricing, does this mean you will renegotiate long-term commercial contracts in response to rising costs, or do some existing long-term contracts limit your ability to flexibly adjust prices?

A: For long-term contracts, we will honor our commitments; however, the current core challenge is not only rising costs but also component shortages. Our primary task is to ensure an uninterrupted supply chain and price based on the value brought by scarcity. Leveraging the flexibility of the direct sales model and experience from past cycles, we are adopting strategies such as adjusting configurations (e.g., reducing low-price segment configurations), dynamically adjusting product mix, and quickly adjusting pricing in transactional business. Our team is managing this in real-time based on future cost and supply data, and considering that supply shortages have instead strengthened our pricing power, we expect this cost recovery performance to be better than during normal periods.

Q: How do you view the storage business outlook for next year in the face of commodity headwinds? Additionally, compared to expectations during Analyst Day, will the growth inflection point for Dell's proprietary IP storage (high-margin business) accelerate to offset the decline in HCI storage business more quickly?

A: Regarding Q4, we expect Dell's proprietary IP storage to continue growing, with quarter-over-quarter performance better than normal seasonal levels, coupled with strict pricing discipline, effectively driving margin improvement. On the server side, benefiting from strong demand and backlog in Q3 (especially at the end of the quarter), we expect high single-digit growth in Q4 and a peak at the end of the quarter. As for FY2027, given the current early stage and volatile market, it is recommended to still use the previous long-term framework as a benchmark, and we will remain agile to respond to developments, without providing more specific details for now.

Strategically, we are firmly shifting towards Dell's proprietary IP storage, which not only increases its share of revenue but also continuously improves margins. Specifically, the all-flash business has achieved double-digit growth for two consecutive quarters, with all product lines such as PowerMax and PowerScale growing, and PowerStore achieving seven consecutive quarters of growth (including six quarters of double-digit growth) and effectively expanding the new customer base. Currently, we are focusing on three core areas through sales incentives: open automation Dell private cloud, AI data platform, and network resilience solutions, and this strategy is yielding significant results.

Q: Could you break down the specific factors that contributed to the approximately $5 billion increase in full-year AI revenue? Is this mainly due to improved access to key components, increased new orders, or earlier delivery times for existing orders? What specific factors drove the upward revision of the AI business forecast?

A: From a macro perspective, this is mainly due to $12.3 billion in new orders, a growing backlog, and our unparalleled supply chain material integration capabilities. The performance fluctuations actually depend on the readiness of the customer side (including site, power, and liquid cooling facilities) and our delivery capabilities. At the same time, our extensive expansion in the Neo Cloud, sovereign cloud, and enterprise customer markets also played a key role. Specifically, in Q4, with the locking of GB200 and GB300 orders, the supply side perfectly matches the customer reception conditions, driving a significant increase in delivery volume.

Q: Can we view your "procurement commitments" as a barometer for predicting next year's margin trends? Besides the impact of the AI server business, do these commitment amounts reflect your judgment on DRAM and NAND price trends? Could you update the procurement commitments entering FY2027? Compared to the previous quarter's level of over $5 billion, how should we interpret this as an indicator?

A: Our procurement commitment model and inventory strategy have not changed significantly. For the AI business, despite a year-to-date demand surge exceeding $19 billion (including the aforementioned $12.3 billion orders), our inventory value has instead decreased by about $300 million quarter-over-quarter and remained flat year-over-year. This demonstrates the effective operation of our regular supply chain procurement processes. Currently, there are no significant changes in the relevant data compared to the previous quarter.

Q: As the customer mix shifts towards Neo Cloud, sovereign cloud, and enterprise customers, is the current "mid-single-digit" operating margin likely to improve further? How significant will the positive impact of this mix change be?

A: Regarding AI business, we will adhere to the mid-single-digit margin target. Although large transaction competition may cause high and low fluctuations in specific order margins, we will prudently manage within this range to ensure consistency in overall performance. Additionally, our cornerstone strategy is to ensure that each transaction achieves added value in absolute terms, always placing cash flow at the core of our operational decisions.

Q: Regarding the strategy mentioned on Analyst Day to "maintain high-end commercial advantages while regaining market share in other segments," will this put downward pressure on the overall operating margin of the PC business?

A: In response to the previous issue of declining market share in non-high-end segments, last quarter we focused on scale effects by promoting Dell Pro Essential and education products to deepen the commercial market and actively expand the consumer market during the holiday season. This strategy has been effective: international market demand achieved double-digit accelerated growth year-over-year, and the consumer business returned to growth for the first time in three years. In the future, we will continue to optimize the cost structure and adjust the product roadmap to ensure coverage of all price segments with the right products and costs, striving to achieve a balance of growth and profitability within the established margin range.

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