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Tech industry bellwether Dell Technologies Inc. beat Wall Street expectations for its third quarter today thanks to what it said were improved conditions in its supply chain that helped to offset weakness in the personal computer market.

Even so, the company’s guidance for the next quarter came in shy of analysts’ expectations, sending its stock down slightly in extended trading Monday. Dell’s shares, which fell just over 2% in the regular trading session, dropped by another 2% after hours.

Update: But shares were up more than 3% mid-morning Tuesday, the day following its earnings release. At the same time, the tech-heavy Nasdaq was up 0.5%, indicating a positive reception for Dell’s profitability news.

Dell reported earnings before certain costs such as stock compensation of $2.30 per share, easily beating the consensus estimate of $1.60 per share. Revenue for the period fell 6%, to $24.7 billion, but still came in above Wall Street’s target of $24.37 billion.

Dell’s operating income, meanwhile, rose to $1.76 billion, up from $1.05 billion a year earlier. All told, Dell delivered net income of $241 million in the quarter, down 93% from a year ago because of its $1 billion settlement paid out over a disputed 2018 stock swap involving its former interest in VMware Inc.

As expected, Dell’s Client Solutions Group, which includes sales of PCs and related gear, experienced some weakness, reporting revenue of $13.78 billion, down 6% and below Wall Street’s $13.93 billion forecast. Within that segment, consumer sales fell more than 29%, to just $3.03 billion, compared with $4.26 billion in the same quarter a year earlier. Commercial PC sales came to $10.74 billion, down from $12.29 billion a year ago. On the bright side, both numbers came in just ahead of the Street’s targets.

What saved Dell in the quarter was the strong performance of its Infrastructure Solutions Group, which generated revenue of $9.63 billion, up 12% from a year earlier. The business unit, which includes sales of servers, storage arrays and networking hardware, benefited from an improved supply chain that eased pressure on component and freight costs, Dell officials said.

According to Holger Mueller of Constellation Research Inc., Dell’s quarter was an impressive feat. “It’s a rare thing when you see a tech vendor suffer a 6% revenue shrinkage, but still manage to deliver record operating income for the quarter,” he said. “The question now is, can Dell maintain that growth? With a lot of growth in ISG coming from backlog, and the general enterprise investment appetite dwindling, it will be a tough Q4 for Dell.”

Dave Vellante, chief analyst with SiliconANGLE Media market research firm Wikibon, said the performance of ISG had saved Dell from the decline in the PC market. “It’s a flip from the pandemic business, where the client business was a drag,” he explained. “Now it’s ISG that’s the driver of revenue– that’s the benefit of an end-to-end portfolio.”

The analyst explained that Dell had benefited in the quarter by chewing into a $1.2 billion backlog in orders, which boosted its profit to a record earnings per share despite a decline in overall sales. “That’s a signal that the supply is getting better, but it also means it ate into its backlog, so we’ll see how that dynamic plays out going forward” the analyst said.

Analyst Charles King of Pund-IT Inc. said Dell’s ability to ease its supply chain constraints was not surprising because the company has a long history of maximizing its supply chain value and performance. “The company’s infrastructure solutions group was a standout, showing that strength in data center-related sales that we’ve seen from some other server, storage and networking vendors,” he said.

Dell Vice Chairman and Co-Chief Operating Officer Jeff Clarke (pictured) said the company played its hand “exceptionally well” during the quarter to beat expectations. “We reduced backlog to meet customer needs and deliver record business results, including record third-quarter ISG revenue,” he said. “At the same time, our innovation engine is operating at full throttle in strategic areas like edge, multicloud and as-a-service.”

What isn’t clear is if Dell will be able to hold it together going forward. In a conference call, Dell Chief Financial Officer Tom Sweet presented a mixed forecast, saying the company expects earnings of $1.50 to $1.80 per share on revenue of between $23 billion and $24 billion in the fourth quarter. That would represent declines of 4% and 16%, respectively, at the midpoint of the forecast range.

Sweet also said ISG sales are expected to be “roughly flat.” For its part, Wall Street is targeting earnings of $1.63 per share on revenue of $24.87 billion.

“We expect ongoing global macroeconomic factors, including slowing economic growth, inflation, rising interest rates and currency pressure to weigh on our customers and as a result, their IT spending intentions even as they continue to digitize their businesses,” Sweet told analysts on the call. “These dynamics are creating a broader range of financial outcomes for our upcoming fiscal year, particularly as we think about the second half of the year. With what we know today, it’s likely next year’s revenue is below historical sequential, using our Q4 guidance as a starting point.”

Vellante indicated that Dell’s problems are likely to follow the macro economy. It’s moving through a good portion of its backlog. “ISG sales were helped by pent-up demand for equipment people couldn’t get before,” he said. “It feels like the market is going to get worse before it gets better, but Dell’s double-digit growth in this challenging market is notable.”

King said he was a little more optimistic about Dell’s prospects, noting that the company is playing well defensively. “It reduced its operating expenses by 5% sequentially and by 12% from the year-ago quarter,” he pointed out. “Though no vendor is immune to the kinds of macroeconomic pressures impacting companies and consumers globally, Dell seems better-positioned and prepared to successfully address those issues than many other businesses.”

Dell’s full-year forecast doesn’t look all that promising though, with the company offering revenue guidance of between $100.26 billion and $101.26 billion, below Wall Street’s target of $101.84 billion.

The forecast doesn’t come as a huge shock, though. Three months ago, Dell executives warned they were dialing back their expectations on the PC market after analyst firms such as Gartner Inc. and International Data Corp. predicted that PC sales will likely see their worst decline in at least a decade.

Photo: SiliconANGLE