Dell Technologies Inc. dropped a lump of coal into investors’ stockings today with third-quarter financial results that beat analysts’ estimates on earnings per share but fell far short of revenue expectations on continuing weak PC demand.

Dell’s stock dropped more than 4% in extended trading.

Adjusted earnings of $1.88 a share beat Wall Street forecasts of $1.46 a share, but revenue of $22.25 billion was down 10% from $24.7 billion a year ago and below estimates of $23 billion. It was Dell’s fifth straight quarter of declining year-over-year sales.

Executives said they’re confident fiscal year 2025 will see Dell return to growth, although Sanford C. Bernstein & Co., LLC analyst Toni Sacconaghi pointed out that they said the same thing last quarter. Dell Chief Operating Officer Jeffrey W. Clarke (pictured) admitted that the company was surprised by the slowdown it saw in PC sales in the fall.

“We began to see customers becoming more selective, particularly enterprise customers in North America,” he said. “The big change was that the number of large deals slowed over the course of the quarter as our customers became more cautious. As the market slowed, we saw increased pricing pressure.”

Sales in Dell’s Infrastructure Solutions Group, which sells servers, storage and networking equipment, fell 12%, to $8.5 billion. The Client Solutions Group, which PCs, saw sales drop 11%, to $12.3 billion.

AI to the rescue?

Dell executives pointed to artificial intelligence as the company’s salvation, saying demand for AI servers nearly doubled sequentially and remains well ahead of supply. Although Dell’s server business was down 10%, the high-margin units targeted at AI applications grew 9%.

“Customers are turning their operations upside down to see how they can use AI in new ways,” Clarke said. “We are at the front of a significant [total addressable market] expansion.”

He called the AI-optimized PowerEdge XE9680 server, which was announced a year ago, “the fastest-ramping solution in Dell history. The long-term spending framework and every part of the AI-optimized portfolio grew quarter-over-quarter and we saw significant growth among enterprise customers,” Clarke said. “We have early positive signs that there is a change in the demand profile for traditional servers.”

In the PC business, the buying surge and subsequent bust triggered by COVID-19 has left a lot of machines in the field nearing their fourth birthday, “and that is a market that is right for upgrading,” Clarke said. Dell is also expecting the surge in interest for AI to carry over to desktop and portable devices since “you don’t want to be using a PC that can’t run AI software,” he said.

Uncharted territory

Steve McDowell, principal analyst and founding partner of NAND Research LLC, said the impact of AI on equipment purchases is hard to estimate because a similar phenomenon is never been seen before. “There’s really not an analog for this sort of offset in recent memory,” he said.

Dell’s server business should benefit from the demand for high-priced AI-optimized units. “Dell doesn’t have to move a lot of them to impact its top-line revenue number,” McDowell said.

The storage picture isn’t as bright since many AI training models work on unstructured data stored in low-cost data lakes. “Storage for AI doesn’t command the same premiums that the server business enjoys,” he said.

A bright spot for Dell is that it has shown more interest in working with software partners, McDowell said. A collaboration with Meta Platforms Inc. is aimed at making it easier for customers to deploy Meta’s Llama 2 models with Dell’s GenAI IT infrastructure. A similar collaboration with Hugging Face Inc. helps customers create, fine-tune and implement their own open-source generative AI models on Dell infrastructure.

Dell’s business isn’t exactly in jeopardy. Cash flow from operations for the third quarter was $2.2 billion, and the company has generated $9.9 billion of cash flow from operations during the last 12 months. The company’s cash and investment balance ended the quarter at $9.9 billion.

Photo: SiliconAngle