The Six Five Team discusses Dell Tech Q2 2024 earnings.
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Transcript:
Patrick Moorhead: Dell Tech absolutely had smashing earnings. They were up 10% the day after and they’ve kept that going. The interesting part is their business was way off. Data center was off 11%, PC was off 16%, but they absolutely… 53% EPS beat and a 10% revenue beat. Again, folks, if you don’t cover the markets, don’t get confused by investor expectations versus guidance. They’re two very different things. What this basically said is they outperformed on what Wall Street analysts thought that they would do. The interesting part here is they not only crushed it but they gave a really good and positive forecast.
One thing I wanted to highlight was this was Dell’s first time really drilling down into what they’re doing in AI. Dan and I have talked about this many times on the show. I think there’s different tiers of companies who will be taking advantage of AI in different ways, but also different timeframes. You have your data center play, you could even split that into hyperscaler and on-prem. You have the data center edge, let’s say a drive-through of some sort, and then you have the far edge, which are things like devices, smartphones, IoT PCs and tablets. And each one of those has a different way that they’re going to be able to take fuller advantage of generative AI. What Dell Tech did, in fact specifically Jeff Clark, by the way, was joking, hey, you should have Jeff Clark talk about every earnings, the stock goes up 11%. I’m sure he would find that funny.
But what Dell did is they did bring out an AI TAM that said it’s going to increase 19% CAGR over the next few years to $90 billion. They also created a new classification called AI servers, which is nothing more eloquent than saying the servers that have giant GPUs in them, said it was a 20% of their server mix in the first half. They also said they have a $2 billion worth of backlog of a specific server. This is one you could put four H100s in. It’s called the XE9680. They said their pipeline is significantly higher. So, I’m thinking five billion, is it 10 billion? Then they went over in the different ways, a macro view, Dell validated designs for AI. Dan, you and I have had two guests on The Six Five that talked about this.
Then there’s the Dell Professional Services and then there’s the Dell Precision workstations that in many ways, shape or form is doing the initial programming, but also as we’ve seen with ML and DL, workstation programs are capable of taking advantage of that. Finally, to make a long story longer, they went through six customers that are all about AI. The one big surprise to me was Workday because thinking interesting, Workday thought that was a SaaS play. And they would plug into IaaS and then I remember, oh, okay, Workday timing actually was built before the cloud, but was part of internet very similar to Salesforce. It started with Web 1.0. But anyways, the market loved what they heard up over 10% and they’re sustaining it even when they got downgraded yesterday.
Daniel Newman: Yeah, I think the overall market reaction was very positive. I think what you said in the beginning, Pat was probably the most important nuance.
Patrick Moorhead: I should have just stopped there.
Daniel Newman: Well, it’s just the most important nuance and the nuance is there’s an argument because Dell had a great quarter relatively. Someone said to me once, “When you put the bar on the ground, it’s easy to hop over it.”
Patrick Moorhead: That’s good.
Daniel Newman: I’m not saying…
Patrick Moorhead: That’s your second one of the day. Do I need to start having a tally for the-
Daniel Newman: Yeah, I’m a funny guy.
Patrick Moorhead: … smart, funny things you said?
Daniel Newman: But this by the way, isn’t unique to Dell, so don’t take that as a knock on Dell. What I mean is the market largely saw the pullback for Dell. The market was very aware and so was Dell of the PC pullback. They knew that there were many quarters of lower demand, and so the guidance has been largely reset, and that’s part of the process of a market moving from an upturn to a downturn back to an upturn is going to be readjusted guidance. Of course, everybody evaluates a company based on future earnings. That’s how valuations are done for businesses. So, seeing that the company can now perform means higher multiples in the future, but then there’s all the extraneous factors that could be higher for longer interest rates.
We’re seeing Fed policy continue to indicate that we may see a longer lag, but then the market’s also largely very strongly associating value right now with AI. So, I think Dell’s announcements around AI providing classification clarification around how it’s going to monetize AI was encouraging. And of course, I think what we learned from looking at Lenovo, HPE, from Dell and others was all of them have pent-up demand because basically right now, any company that can get their hands on A100, H100 inventory from NVIDIA can sell it through. And it’s also a margin enhancement because everybody’s got a ton of price elasticity right now where they can get it. If they can get it, they can sell it and if they can sell it, they can sell it at a premium, which offset the fact that quietly the CPU market has just tanked. It just absolutely tanked.
This is what’s really happened there, for anybody that’s curious about why that happened, it’s because there hasn’t been more budget enabled for IT. What’s happened is all of the budget has been moved over to the GPU spend or for AI spend. And this is going to be what I believe is going to be a short-term to midterm trend. It’s going to go over four to six quarters, maybe a little bit more. And I’m not saying at that point it’s going to be a huge reversal, but what’s going to happen is we’re going to realize a lot of inference is going to be done still on a CPU. It’s still going to be done on an edge device on a PC. Pat, you’ve written about this. I’ve written about this. We are in this major flux of investment around training, but we know a lot of inference for applications can and will be done on lower cost CPUs and that should eventually swing a pendulum back somewhat that way.
The most interesting thing, Pat, that I think we are going to watch, which is a little bit less related to Dell, and I realize I’m talking more macro, but you really hit the Dell stuff well, is that will NVIDIA see a steep cliff? Meaning you’re seeing these numbers and these guides of just these extraordinary highs and at some point… Remember with Zoom Pat, when Zoom had that high from the pandemic and then remember they were still growing, but people saw the stock value, it dropped by like 80%, 80% because what ended up happening was it was growing at a much more moderate pace, but it was growing at a pace over the huge post-pandemic surge of demand.
What I’m saying is you might see a point now where NVIDIA sustains the size of revenue that it is or even is growing at mid-single double digits for GPUs and data center AI. And people are going to say, “Well, that growth has really slowed down.” But remember, it grew at X hundreds of percent for multiple quarters. That’s going to be really interesting, Pat is what’s going to happen when more and more AI moves, when we see the pendulum swing from training to inference once these companies have fully built out at least their immediate needs for capacity for AI training. That’ll be interesting, but you know what the good-
Patrick Moorhead: It is going to be interesting. NVIDIA either has to find another next thing, which I think they’ve done a pretty good job going from ML gaming to ML to DL to generative AI, or they go vertical integration and go after Intel and AMD on CPUs, which this new grace is really optimized for a CPU plus a GPU. But it would be interesting to see if they could field a competitive generic processor, which by the way, still you can get a hundred percent margins on. That’s a very good business.
Daniel Newman: By the way, I know this was a segment on Dell, so let me just close out the loop. Dell will benefit on all ends of this because they have the low end to the highest end and they’ll be putting the NVIDIA parts inside their highest end AI servers. But of course, they also have a huge line of servers for just traditional compute, which can handle a lot of acceleration for traditional AI inference or at the edge. That’s part of the beauty of Dell, why they do a hundred billion in revenue is because it has one of the broadest portfolios on the planet, but this will be an interesting thing to watch.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
