We’ve been keeping a hawk eye on the major OEMs to see how they’re generating revenue and revenue from the sale of GPU-accelerated systems. These OEMs provide the best indicator of the health of the GenAI revolution and efforts to democratize the massively parallel—and massively expensive—type of computational AI training and inference systems require.
Until now, companies like Dell haven’t really played around with GenAI due to the lack of GPU accelerators, mostly from Nvidia. These shortcomings were not only due to the complexity of manufacturing a modern GPU platform, but also to the anomalous behavior of hyperscalers and cloud builders – along with more than a few national HPC centers. However, in the long run, the revenue and profits of Dell and its OEM counterparts will depend on normal companies in all industries and geographies paying the normal OEM premium for both AI servers and general-purpose machines with CPUs.
In its latest financial report, which is for the quarter ended August 4, which is the second quarter of fiscal year 2025, Dell is starting to show some signs of commercializing GenAI, starting with Tier 2 service providers and clouds and large enterprises that have a case for Nvidia NvyTM now really bad.
AI server sales are certainly starting to impact the bottom line and may finally help the bottom line, but that’s less clear.
In the second quarter, Dell’s commercial PC business stagnated and its consumer PC business (which is a relatively small part of that PC business) fell 22.2 percent, causing total PC sales to fall 4.1 percent to 12.41 billion dollars. Operating income was really huge for the Client Solutions Group in Q2, falling 20.8 percent to $767 million.
Total revenue from Dell’s products, including PCs and data center equipment, rose 11.9 percent to $18.95 billion, and services revenue rose just 1.2 percent year over year to $6.07 billion. Product sales rose a healthy 17.5 percent year-over-year from the fiscal first quarter, while services fell seven-tenths of a percentage point.
We only care about client business at Dell to the extent that it helps pay some of the bills for being an IT vendor, and if it’s a hindrance to business to the point that belts have to be tightened.
Dell’s total revenue rose 9.1 percent to $25.02 billion, operating income rose 15.2 percent to $1.34 billion, and thanks to cost-cutting and a shift away from stores that don’t have enough power for Big Mike, net profit rose income. by 84.8 percent to $841 million.
Still, that net income represented just 3.4 percent of sales, compared to an average of 4.7 percent of sales in the previous three quarters. We think you can blame the PC business, not Infrastructure Solutions Group, which sells servers, storage and switches to data centers.
In Q2, Dell Infrastructure Solutions Group posted revenue of $11.65 billion, up 37.6 percent year-over-year and up 26.2 percent year-over-year. A record $7.67 billion in servers and storage was achieved this quarter, an increase of 79.5 percent compared to Q2 last fiscal year. Storage revenue fell 5.1 percent to $3.97 billion, and we have no reason to believe it will fare any better in the next two quarters. We also don’t think storage will be much worse off, as you’ll see in a moment in the financial model we’ve created for the remainder of fiscal 2025.
In any case, in Q2, ISG’s operating income grew 22.4 percent, which was a pace that was well below server and network growth and more than fifteen points below ISG’s overall revenue growth. This is obviously not the direction Dell wants the operating income numbers to go. But that’s an OEM racket for you. The only thing worse than playing is quitting. . . . And this is exponentially true as we are in the early stages of the GenAI boom.
“We’re still in the early stages, and our AI opportunity with Tier 2 CSPs, enterprises and emerging sovereign customers is huge,” explained Jeff Clarke, Dell’s chief operating officer, on a call with Wall Street analysts. “Our view supports AI hardware and services TAM of $174 billion, up from $152 billion, with a CAGR of 22 percent over the next few years. We are competing in all the big AI businesses and getting significant deployments at scale.”
“Progress won’t always be linear in the early stages, but we’re winning in the market with strong feedback from repeat customers while acquiring new customers every quarter. We have the right AI portfolio with more to come, the right service capabilities and optimizing sales coverage to take advantage of this once-in-a-generation opportunity. With the upcoming IT hardware refresh cycle and our position in AI, I really like our hand.”
Dell had a backlog of $3.8 billion in unfulfilled AI server sales at the end of the first quarter of 2025, and achieved the $3.1 billion in sales it booked in the second quarter and ended the backlog of AI servers in the amount of 3.8 billion USD. Based on past trends, we would expect a much larger backload, perhaps $4.5 billion, given the demand for AI servers and limited inventory. But it looks like Dell struck a balance in that it did $3.1 billion in new business and sold $3.1 billion in old business and had the same AI server backlog of $3.8 billion, which is as the 2nd quarter of F2025 drew to a close.
It’s interesting to note that Dell’s AI server business is now about the same size as VMware’s portfolio when Michael Dell decided to spin it off as an independent company, which inevitably led to Broadcom’s takeover a few years later.
With this Q2 ISG data, we can see the interplay of AI server sales and multi-purpose machine sales still dominating Dell’s installed base. And based on the numbers Dell provided for the third quarter and full-year 2025 sales, it looks like traditional server sales will stay roughly flat as AI servers stay flat or grow incrementally.
We made some guesses for past years based on comments Dell had previously made and made an educated guess as to where the data was missing.
Hard to say for sure, even for the top brass at Dell. In the long term, we think AI servers will account for roughly half of total server revenue worldwide, and there’s no reason to believe that this will be the case for Dell customers over time. Enterprises, governments and Tier 2 service providers may take years to catch up. But if the GenAI Boom is real, then it will happen just as web infrastructure has become something that all organizations on earth have done in some way eventually.
Guidance for Dell was quite broad for the full fiscal year 2025. Yvonne McGill, Dell’s chief financial officer, said on the call that the company expects revenue between $95.5 billion and $98.5 billion, with a median of $97 billion, representing 10 percent growth. (Actually, it’s 9.7 percent, and we’re the ones included who is counting.) McGill added that ISG’s revenue will grow “about 30 percent” for the year due to AI servers and “continued momentum” in the traditional server business. She added that Dell expected a 1.8% increase in gross margin for the year due to competition, higher component costs and a higher mix of AI servers, which leads us to believe that AI servers are still a drag on overall profits even though they are technically profitable. (It’s hard to imagine anything less profitable than PCs… but there you have it.) She added that ISG’s margins would be in Dell’s historical financial range of 11 to 14 percent.
For the 3rd quarter of this fiscal year 2025, Dell expects revenue in the range of $24 billion to $25 billion, with the midpoint apparently at $24.5 billion, up 10 percent compared to the third quarter of fiscal year 2024. It is expected that ISG to grow low 30″ and PC sales expected to stagnate. ISG’s operating profit is expected to improve.
Given all of these data points, here is a table that solves all of these equations in one particular way:
There are many ways to solve this set of simultaneous equations, especially with an error bar of $3 billion over the next two quarters. We use mids and we don’t think Dell is guiding a little lower to beat, but he’s telling the truth. The midpoints are conservative, so there is really only $1.5 billion of potential additional growth.
To constrain our own model, we choose to peg ISG’s operating income in 2025 to match ISG’s operating return in 2024, which is 12.6 percent.
As you can see, to even match last year’s profitability, Q3 needs to see 2.4 points of additional operating margin, and Q4 needs to add another 3.7 points on top of that. This seems highly unlikely, but if traditional server margins improve and Dell squeezes storage for more margins while moving away from bad deals, it could happen. We think AI server margins could also improve, especially with the addition of more support and services when Dell has some expertise to sell, even if the overall profit margin is lower than ISG as a whole. Doing less mid lane damage also helps.
If we do all the above calculations, then Dell will end 2025 with its AI server business bringing in $11.48 billion in revenue, up 6.34x from a relatively small $1.81 billion in fiscal 2024 and $118 million made in our opinion. did in fiscal year 2023.
As you can see in this chart, this math also shows the server recession at Dell, which turned around last quarter, and while choppy, is still growing and running north of $4 billion for the quarter, maybe normalizing to maybe $4.5 billion dollars. In our model, traditional server sales at Dell will grow 8.4 percent to $17.14 billion.
In this model, AI servers will account for 26.1 percent of Dell’s ISG server sales in fiscal 2025, up from 5.3 percent in fiscal 2024. That’s more than half at 50 percent. (These proportions are shown in blue in the lower right corner of the chart. Do not confuse these percentages with the growth rates used to the left of the gray separation bar.)
We did another thing for the AI server data perspective. First, we assume that Dell’s AI server data includes all of the networks it sells in-store, and we assume the same for traditional server sales data. But we backed up 20 percent of AI server data revenue, put in an average price of $375,000 for an eight-way GPU server configuration, and then converted that revenue to server units.
If you do this thought experiment, then in fiscal year 2024, Dell sold somewhere around 3,900 server nodes with around 31,000 GPUs. That’s all. Roughly equivalent to a single machine that can train GPT-5 or Llama 4 – and not that fast when people are trying to cobble together machines with 50,000 to 100,000 GPUs to do the job. If growth for fiscal 2025 continues as we expect, then Dell will sell around 24,500 eight-way GPU nodes with around 200,000 GPUs this year.
That’s a fraction of the many millions of data center class GPUs that will be sold worldwide during that time.
