Dell Technologies Inc. beat Wall Street’s estimates for its July quarter earnings today, but it warned that it’s seeing growing signs of customers becoming more cautious amid a challenging economic environment.

As a result, the computer giant cut its full-year outlook, sending its stock down more than 5% in extended trading.

The company reported second-quarter earnings of $1.68 per share, toward the high end of its projected range of $1.55 to $1.70 per share. Revenue for the period came to $26.4 billion, up 9% from a year earlier and in line with its forecast of $26.1 billion to $27.1 billion. Operating income for the period rose 25% from a year ago to $1.3 billion.

Wall Street had been targeting earnings of $1.64 per share on revenue of $26.5 billion.

Dell Vice Chairman and Co-Chief Operating Officer Jeff Clarke (pictured) said the company continued to execute well in an “increasingly challenging environment.” He noted that the $26.4 billion in revenue was a company record for the second quarter. “We also advanced our long-term strategy — growing the core while innovating for our customers and enabling their opportunities in the data era,” he said.

The company reported that its Client Solutions Group, which sells personal computers and related hardware, delivered revenue of $15.5 billion, up 9% from a year ago. Within that group, commercial revenue came to $12.1 billion, up 15%, while consumer revenue fell 9%, to $3.3 billion. Those numbers are consistent with the recent signs of weakness seen in consumer industries at companies such as Intel Corp., Micron Technology Inc. and most recently Nvidia Corp., whose gaming business suffered badly in its most recent quarter.

As for the Infrastructure Solutions Group, which encompasses information technology hardware such as computer servers, storage systems and networking gear, this delivered $9.5 billion in sales, up 12% from a year earlier. Breaking it down, we can see that storage revenue rose 6%, while server revenue jumped 16%.

Dave Vellante, chief analyst with SiliconANGLE Media market research firm Wikibon, said Dell did well to hit expectations once again, delivering predictable revenue and margin growth in the high single digits. Dell has made a long-term promise to shareholders to consistently grow at 3% to 4%, the analyst said, and it’s hitting that mark easily.

“Dell is so large that you’re always going to have pockets of strength and pockets of weakness,” Vellante added. “This quarter, consumer PCs were weak but commercial PCs and the enterprise-focused infrastructure business performed well, and that throws off better margins — storage especially. During the pandemic it was the PC business that powered the company’s growth.”

Part of the reason for the infrastructure businesses’ strength is its newer APEX portfolio of “as-a-service” offerings, which sees the bulk of its servers and storage products made available via a cloud console on a consumption-based model. Today, Dell disclosed that the APEX business now generates annual recurring revenue of more than $1 billion, with second-quarter order growth rising by 78% from a year earlier.

“This is a signal that the company is successfully transitioning its installed base to a subscription model,” Vellante said. “Longer-term this will make the company’s offerings even stickier.”

Dell needs sticky offerings because it’s unlikely to be unable to escape the consequences of an economic downturn that has affected most of the other major players in the IT hardware business. For the third quarter, the company offered a revenue forecast of $23.8 billion to $25 billion, the midpoint of which is down 8% from its previous guidance of $26.3 billion.

It’s also far below Wall Street’s guidance of $26.4 billion. In terms of earnings, Dell is forecasting a range of $1.53 to $1.79 per share, more or less in line with Wall Street’s forecast of $1.65 per share. For the full year, Dell said it now sees revenue ranging from flat to 2% growth, down from an earlier forecast of 6% growth.

Dell’s other co-COO Chuck Whitten offered an explanation for the lower forecast, pointing out that the company had “observed more cautious customer behavior” as the previous quarter progressed. Dell Chief Financial Officer Tom Sweet added: “We remain focused on what we can control, staying flexible and opportunistic, and delivering revenue and earnings per share growth with strong free cash flow to our shareholders over time.”

Clarke said later in a call with analysts that the company saw its demand environment slow during the previous quarter, particularly within its PC business, but also on the infrastructure side.. He said the company had increased some prices to offset this lower demand. “The Q2 and second-half macro dynamics have become more challenging as customers are taking a more cautious view of their needs given the uncertainty,” Clarke added. “We have responded swiftly by managing inventories down and reducing our expenditures.”

Despite the after-hours stock drop, analysts remained optimistic about the company’s prospects. Vellante voiced his opinion that the company’s current valuation is some way below its real worth.

“Dell’s reliance on hardware continues to suppress its valuation,” Vellante said. “Basically, investors value Dell at roughly 35 cents on the revenue dollar. That’s low, reflecting its lower-margin business, and that’s the upside for Dell. If it can get more margin out of its subscription business and add more software to the mix, it can significantly increase its value.”

Holger Mueller of Constellation Research Inc. said even though Dell might miss expectations in the next quarter, it is on track to bring in $100 billion in revenue this year. “It is growing nicely and has reduced its costs substantially,” he said. “As a consequence, its profit and earnings per share are both up. This is something customers and investors alike will appreciate, and shows a good new trend curve for Michael Dell and team.”

Photo: SiliconANGLE