Dell Technologies on Thursday (Oct 5) reiterated that it expects revenue to grow at a compounded annual rate of 3 per cent to 4 per cent over the long term, disappointing some investors who expected AI to drive a bigger sales jump and sending its shares down 4 per cent.
The company, which makes PCs and servers that are used to support technology like ChatGPT, also forecast long-term adjusted earnings per share growth of 8 per cent or more and said it would buy back another US$5 billion in stock on top of a similarly sized repurchase plan launched in 2021.
The revenue outlook suggests that the boost from generative AI could take longer to materialize for the company whose shares have rallied nearly 20 per cent since a strong earnings report in August on optimism about its role in enabling the new technology.
“The unchanged revenue CAGR (forecast) seems conservative given the recent AI tailwinds, which are expected to not only build but persist in the future,” Evercore ISI analysts said.
Like other tech firms, AI demand has recently emerged as a bright spot for Dell after several quarters of sales declines due to lower digital spending. Its main revenue generator – the PC market – has been in a slump since the pandemic ended.
Dell said it expects to raise its quarterly dividend by 10 per cent or more annually through fiscal 2028, as part of a plan to return over 80 per cent its of adjusted free cash flow to shareholders through a combination of share repurchases and dividends.
The figures were shared at the company’s meeting with Wall Street analysts on Thursday.
Slowing demand has pushed Dell to cut costs, including a layoff round that impacted 6,000 jobs earlier this year. It had also paused hiring and put limits on employee travel.
Dell’s shares have risen 65 per cent so far this year, after dropping nearly 30 per cent in 2022.
AI Boom and Hardware Demand Stabilization Fuels Growth
Dell raised its full-year forecast for both revenue and profit, citing benefits from the artificial intelligence (AI) boom and stabilizing demand for computer hardware and server products. The news follows a months-long slump, and the new forecast has resulted in an 8% rise in the company’s shares in extended trading. This positive shift signals a potential end to the downturn in tech spending that has been witnessed over recent months.
Major networking equipment provider, Cisco, also recently beat quarterly revenue estimates, further strengthening the belief in a tech spending recovery. Dell expects increased demand for its PowerEdge servers and generative AI designs with Nvidia, fueled by Big Tech companies’ rising investments in artificial intelligence. “AI is already showing it’s a long-term tailwind, with continued demand growth across our portfolio,” said Dell’s Chief Operating Officer, Jeff Clarke.
Q3 Revenue and Earnings Per Share Forecast Beats Estimates
The company’s forecast for third-quarter revenue falls between $22.5 billion and $23.5 billion, surpassing analysts’ estimates of $21.67 billion, according to Refinitiv data. Dell also expects earnings per share of $1.45, plus or minus 10 cents, which is higher than estimates of $1.38. For the full year, Dell now expects revenue between $89.5 billion and $91.5 billion, and earnings per share of $6.30, plus or minus 20 cents.
Dell reported its second-quarter revenue and EPS above analyst estimates, with servers and networking revenue for the second quarter coming in at $4.27 billion. This figure is up 11% from the first quarter, driven by higher demand for AI-optimized servers. The revenue at the company’s client solutions group (CSG), which includes its consumer and enterprise PC business, rose 8% from the first quarter to $12.94 billion.
Dell’s Profitability First Approach in Challenging Market
Gartner analyst Mikako Kitagawa highlighted Dell’s impressive ability to retain 7.5% of operating profits vs revenue (CSG) in a challenging market environment, illustrating the company’s “profitability first approach.” This approach starkly contrasts with Dell’s rival HP Inc, which recently reduced its annual forecast due to a slump in PC demand and weakness in China.
Moreover, Dell also raised its share buyback plan by $5 billion, adding to its current $5 billion plan. It plans to raise its quarterly dividend by 10% or more annually through fiscal 2028.
