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Strong demand for servers customized for artificial intelligence workloads and a rebound in small and midsized business demand helped Dell Technologies Inc. smash expectations for both revenue and earnings in its second fiscal quarter.

Its smaller but similar rival, Nutanix Inc., also blew past expectations on strong demand for purpose-built AI hardware and subscription renewals for its hybrid cloud software.

Dell’s quarterly revenue actually fell 13% from a year ago, to $22.9 billion, but that was up 10% from the previous quarter and $2 billion above the consensus forecast of $20.9 billion. Earnings of $1.74 a share blew past Wall Street consensus estimates of $1.14.

Nutanix reported fiscal fourth-quarter revenue of $494.2 million, up 28% from $385.5 million in the same quarter a year ago and comfortably ahead of analyst consensus estimates of $475 million. Adjusted earnings of 24 cents a share also beat the Wall Street estimate of 16 cents.

Nutanix raised its first-quarter revenue estimate to a range of between $495 million to $505 million compared to analyst estimates of $487 million. Dell raised its full-year revenue estimates to between $89.5 billion and $90.5 billion, a figure that it said implied sequential growth in the fourth quarter.

In after-hours trading, Dell shares climbed 8%, while Nutanix stock shot up more than 15%. Update: Investors sent Dell’s shares soaring a stunning 21% on Friday, while Nutanix stock rose 12%.

Dell said demand is strengthening in the consumer and small business segments while enterprises continue to tread carefully. “We were cautious coming into the quarter, but demand improved more than expected,” said Jeff Clarke (pictured), Dell’s vice chairman and chief operating officer. “We are encouraged by some of the signs we see in the macro environment as we move into the second half.”

Strengthening demand

The strong results build on top of positive earnings news reported yesterday by Salesforce Inc., Pure Storage Inc., Okta Inc. and CrowdStrike Holdings Inc. and indicate that the tech industry may be emerging from the doldrums of the past 18 months, though some companies such Hewlett Packard Enterprise Co. and Box Inc. still appear to be struggling.

“Considering the disappointing sales of client PC devices in prior quarters, the sequential growth in Dell’s PC and infrastructure revenues is heartening,” said Charles King, chief analyst at Pund-IT Inc. “It wouldn’t be appropriate to call it a trend yet, but it could well be an indicator that enterprises may be ready to be more aggressive in their IT investments.”

Dell said growth in servers optimized for artificial intelligence training workloads was especially strong, with AI-related hardware accounting for about 20% of server revenues in the quarter, led by the PowerEdge XE9680, a server with up to 56 CPU cores and eight graphics processing units.

“Artificial intelligence is a strong tailwind for all things data and compute as well as client solutions when you think about the potential for workstations and eventually all PCs,” Clarke said. “We have the world’s broadest generative AI infrastructure portfolio that spans from the cloud to the client.”

“Given the youth of the AI market and continuing interest in AI solutions, I won’t be surprised if Dell’s AI-related sales continue to grow in future quarters,” King said.

Dell’s Infrastructure Solutions Group, which addresses large enterprises, reported quarterly revenue of $8.5 billion, down 11% year-over-year but up 11% sequentially. Storage revenue contributed nearly half of that total with Dell citing continued demand growth for its PowerStore midrange storage array and PowerFlex software-defined storage. Revenue in the Client Solutions Group was $12.9 billion, down 16% year-over-year and up 8% sequentially.

Dell said it is seeing signs that the volatility of the last 18 months has abated. “We’re seeing signs of stability across a number of areas of our business including small business and government, but our largest enterprise customers are still cautious,” said Chief Financial Officer Yvonne McGill.

AI influencing product plans

Clarke said the demand for AI model training is already affecting the company’s development plans. “AI workloads are distinctly different, the architectures are distinctly different, and we would build different kinds of systems for AI versus how we have built them in the past,” he said.

Like all hardware makers, Dell has been frustrated by the shortage of GPUs, whose delivery times are running up to 39 weeks, but he expects the situation to improve in the near future. “There are at least 30 different accelerator chips in the pipeline,” he said.

For its part, Nutanix attributed its strong results to high customer renewal rates as it completed its transition from a licensing to a subscription revenue model. Annual recurring revenue grew 30%, to $1.56 billion in the quarter, and annual contract value bookings jumped 44%. The company also improved its gross margins to 85.8%, up from 82.6% a year ago.

Nutanix trumpeted the $207 million in free cash flow it reported for the full year, up more than 11-fold from $18.5 million in fiscal 2022 when it turned free cash flow-positive for the first time. Chief Executive Officer Rajiv Ramaswami attributed the growth to improvements in operational efficiency and efforts the company has made to simplify its product portfolio for its channel-led sales strategy

“One of the biggest drivers of operational efficiency is the growing base of renewals,” he said. “We think we can process those for 85% less [than licenses]. We don’t have to put in a lot of effort.”

Ramaswami also pointed to a deal the company inked with Cisco Systems Inc. earlier this week that will see the networking giant sell Nutanix’s hybrid multicloud software on top of its managed computing and network infrastructure.

“We have about 25,000 customers; with Cisco, our addressable base expands to 100,000,” Ramaswami said. “We look at this as a significant expansion path for us.”

Photo: Dell/livestream