Dell Technologies Inc

NYSE:DELL

Q1-2026 Earnings Call

[Operator]

Good afternoon, and welcome to the Fiscal Year 2026 First Quarter Financial Results Conference Call for Dell Technologies Inc. I'd like to inform all participants this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited. [Operator Instructions]

I'd like to turn the call over to Paul Frantz, Head of Investor Relations. Mr. Frantz, you may begin.

[Paul Frantz, executive]

Thanks, everyone, for joining us. With me today are Jeff Clarke, Yvonne McGill and Tyler Johnson. Our earnings materials are available on our IR website, and I encourage you to review these materials. Also, please take some time to review the presentation, which includes additional content to complement our discussion this afternoon. Guidance will be covered on today's call.

During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP gross margin, operating expenses, operating income, net income, diluted earnings per share, free cash flow and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our press release. Growth percentages refer to year-over-year change, unless otherwise specified.

Statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and our SEC filings. We assume no obligation to update our forward-looking statements.

Now I'll turn it over to Jeff.

[Jeffrey Clarke, executive]

Thanks, Paul, and thanks, everyone, for joining us. This quarter, we executed very well, achieving growth across our core markets and experiencing unprecedented demand for our AI optimized servers. Our revenue reached $23.4 billion, up 5%, driven by growth across all of our core markets. ISG and CSG were up 8%. Earnings per share increased by 17% to $1.55, growing 3x faster than revenue. This resulted in a record cash generation for the first quarter and shareholder returns exceeding $2 billion.

Turning to AI. We experienced exceptionally strong demand for AI-optimized servers, building on the momentum discussed in February and further demonstrating that our differentiation is winning in the marketplace. We booked $12.1 billion in orders in the first quarter, surpassing the entirety of shipments in all of FY '25. We shipped $1.8 billion, leaving us with a backlog of $14.4 billion. Our 5-quarter pipeline continued to grow sequentially across both Tier 2 CSPs and private and public enterprise customers [ and remains ] multiples of our backlog.

Enterprise AI customers grew again sequentially with good representation across key industry verticals, including web tech, financial services industry, manufacturing, media and entertainment and education. AI momentum continues to remain strong. That said, given the scale of these opportunities, the variability and timing and choices around technology, the inherent nonlinear nature of demand and associated shipments is likely to persist. This quarter is a clear indicator that Dell offering resonates with customers. We are innovating at breakneck speed, designing bespoke custom solutions for customers while being agile to respond quickly to evolving next-generation architectures.

Our ecosystem in the space is unmatched, with key partners such as NVIDIA, AMD, Hugging Face, [ Coherent ], Meta, Mistral and Google and so many others. Our execution continues to be a key differentiator. We've built a strong reputation for deploying large-scale clusters quickly and reliably, significantly reducing the time to first token and accelerating time to value for our customers. Beyond deployment, we provide ongoing comprehensive support, including managed services that ensure system reliability and performance in customer data centers. And finally, our ability to offer flexible financing solutions enables customers to scale their AI infrastructure with confidence and efficiency. Looking ahead, we remain focused on expanding our leadership in this space by continuing to invest in innovation, deepening customer partnerships and delivering the infrastructure and software solutions within our AI factories that will power the next wave of AI transformation.

In traditional servers, revenue increased double digits, and we now have 6 consecutive quarters of year-over-year demand growth. TRUs increased alongside the mix of our 16th generation servers as customers prioritize consolidation and modernization of their data centers. A significant portion of the installed base remains on 14th generation servers or older, presenting a substantial refresh opportunity with our 16G and 17G servers.

In storage, revenue increased 6%, making it the third consecutive quarter of P&L growth along with margin improvement year-over-year. We continue to execute on our areas of focus, Dell IP in the mid-range, software-defined, unstructured and data protection as more and more customers move to disaggregated architectures.

PowerStore demand rose double digits, growing for 5 consecutive quarters. Customers value our 5:1 data reduction guarantee, and we are integrating more security into PowerStore using advanced AI analytics. We are gaining traction in data protection, with demand up double digits in both our next-generation target appliances as well as our software.

Our mix of Dell IP storage continues to grow, and we are capturing more value from our platforms, expanding the margin rates within our products. And CSG momentum increased in commercial PCs or demand strengthened. Overall, CSG revenue rose by 5%, driven by strong commercial revenue growth of 9%. We now have 3 consecutive quarters of P&L growth and 5 consecutive quarters of demand growth in commercial. We saw double-digit demand growth across small business, medium business and large enterprise. Commercial demand was strongest in North America, with EMEA and APJ up double digits.

While the PC refresh remains behind prior cycles, we are seeing indicators that the installed base is upgrading to new Windows 11 PCs, many of them AI PCs. The consumer market remains challenged. Consumer revenue declined 19%, and the industry pricing remained competitive. Over the past 3 months, we've made significant advancements to the Dell AI Factory. From industry-first AI PCs to the edge and data center enhancements, we are pushing the boundaries with dense, powerful energy-efficient AI infrastructure, leading the industry pace of innovation, some examples of our recent end-to-end AI announcements.

We lead the industry with the broadest portfolio of Copilot+ capable AI PCs shipping since March. Strategically timed with the Windows 11 refresh, this allows our customers to move to the latest technology and future-proof on-device AI workloads. We announced new Dell Pro Max notebooks and desktops equipped with the NVIDIA RTX Pro Blackwell GPUs, Intel Core Ultra processors and AMD Ryzen Threadripper processors.

At GTC, we announced the future of deskside AI development with the Dell Pro Max with the GB10 and GB300, with the latter touting 784 gigabytes of unified system memory and the power to run a 1 trillion parameter model. At DTW, we announced the Dell Pro Max notebook with the industry's first enterprise grade discrete [ NPE ] capable of running a 109 billion parameter model, setting a new bar for edge inference in a mobile form factor.

On the server side, the XE9780 and 9780L, our air-cooled and liquid-cooled platforms supporting up to 256 NVIDIA HGX B300 GPUs per rack. The XE9712 supporting NVIDIA GB300 NVL72, which we have the world's first led at GTC in March, the XE7745 supporting the NVIDIA RTX Pro 6000 Blackwell GPUs with support for up to 8 GPUs in a 4U chassis, the launch of our PowerCool platform, starting with our [ rear door heat exchanger ] that captures, cools and recirculates 100% of the rack heat, reducing the cooling energy costs by up to 60%.

We introduced the Dell AI data platform, which showcases fast, powerful, scalable storage with significant software and hardware enhancements to PowerScale and ObjectScale that also features cutting-edge technologies like Project Lightning, a large-scale [ cashing ] solution [ continued ] with NVIDIA and end-to-end data management with the Dell Data Lake House. We expanded our ecosystem of partners and announced our collaboration with Google to bring Gemini on-prem exclusively for Dell customers, an industry first. And additionally, we announced our partnership with the innovative [ Coherent ] to simplify the deployment of agentic technology on-prem.

We also announced the Dell Private Cloud and the Dell Automation Platform designed to make deploying, managing and scaling private cloud environment simple. We are not only innovating today, we are defining the future architecture of the intelligent enterprise.

In closing, I'm confident in our position and the ability to execute. We are leading in AI and pushing the boundaries of innovation. We had over $12 billion in AI orders this quarter alone, which will drive significant revenue growth and EPS. We are enabling data center modernization and consolidation with our 16th and 17th generation servers, enabling lower TCO while reducing physical footprint.

Our Dell IP storage portfolio targets faster-growing, higher-margin segments of the market. Our commercial PC portfolio is ideally suited for enterprises with a wider range of offerings and AI-capable devices. Our industry-leading supply chain is a unique advantage in the dynamic environment we are operating in today. We are leveraging the agility and resilience we have built over the past 4 decades, enabling us to navigate numerous challenges over the years and allows us to minimize the impact on our customers and shareholders.

We are using GenAI internally to increase the competitiveness and capability of the company. For example, our Digital Service Assistant has increased our diagnostic and resolution ability while increasing customer satisfaction. We are well positioned today as AI accelerates and becomes more pervasive in all of our lives. There is so much more to come, and we will be ready.

Now over to you, Yvonne, for more details on Q1.

[Yvonne McGill, executive]

Thanks, Jeff. Let me begin with an overview of our Q1 performance, then I'll move to ISG, CSG, cash and guidance. In the first quarter, we saw continued P&L growth across all of our core markets and record Q1 cash flow from operations. Our total revenue was up 5% to $23.4 billion. Our combined ISG and CSG business grew 8%. Gross margin was $5.1 billion, or 21.6% of revenue. This was down 80 basis points due to a more competitive pricing environment, predominantly in CSG, and geographical mix within traditional servers.

Operating expense was down 2% to $3.4 billion or 14.5% of revenue as we continue to unlock efficiencies and modernize our processes. Now let's look at operating income. We delivered a 10% increase to $1.7 billion or 7.1% of revenue. This was driven by higher revenue and lower operating expenses. Q1 net income was up 13% to $1.1 billion, primarily driven by stronger operating income. And our diluted EPS was up 17% to $1.55, growing 3x faster than revenue.

Now let's move to ISG, where we delivered another quarter of strong performance. ISG revenue was $10.3 billion, up 12%. [ Servers ] and networking revenue was a Q1 record of $6.3 billion, up 16%. We saw very robust demand in AI servers, with $12.1 billion of orders in the first quarter, and we shipped $1.8 billion of AI servers.

In traditional servers, we saw continued P&L growth, but the demand environment moderated compared to the last quarter. Additionally, we saw a lower mix of North America in traditional server, which is a higher-margin geography. Storage revenue was up 6% to $4 billion, our third consecutive quarter of growth. We saw strong demand in our Dell IP portfolio, specifically with PowerStore and data protection.

We had ISG operating income of $1 billion, up 36%. This was driven primarily by higher revenue. Our ISG operating income rate was up year-over-year to 9.7% of revenue. The rate improvement of approximately 170 basis points was driven by revenue scaling and slightly lower operating expense and higher mix of Dell IP storage.

As Jeff mentioned, we are focused on further increasing our mix of Dell IP versus partner IP storage and are also driving continued product profitability improvement within our storage business. Now let's turn to CSG. CSG revenue was up 5% to $12.5 billion. Commercial revenue was up 9% to $11 billion, while consumer revenue was down 19% to $1.5 billion. CSG operating income was $0.7 billion, or 5.2% of revenue.

PRUs remained stable sequentially, and we continue to see customers prioritize richly configured AI-ready devices. As Jeff mentioned, we saw strong performance across small and medium business and large enterprise. In consumer, the demand environment remains soft and profitability remains challenged. We are focused on executing within CSG, leveraging our leading go-to-market engine and broader portfolio of offerings to capture the PC refresh.

Now let's move to cash flow and the balance sheet. We had a strong cash quarter with record Q1 cash flow from operations of $2.8 billion. This was primarily driven by profitability and working capital improvement. We ended the quarter with $9.3 billion in cash and investments, up $4.2 billion sequentially. Our core leverage ratio was up sequentially to 1.6x given our recent debt issuance.

We returned $2.4 billion of capital to shareholders, with 22.1 million shares of stock repurchased at an average price of $90 per share, and paid a dividend of roughly $0.53 per share. Our significant share repurchases this quarter reflect our continued confidence in the business, our ability to act opportunistically during periods of price dislocation and commitment to disciplined capital allocation. Since our capital return program began at the beginning of FY '23, we've returned $13.2 billion to shareholders through stock repurchases and dividends.

Turning to Q2 guidance. In CSG, we expect the PC refresh cycle to continue as the installed base upgrades to new devices, resulting in improved profitability sequentially. In ISG, we expect to ship roughly $7 billion of AI servers as we fulfill some of our large deals. We are expecting sub-seasonal performance in traditional server and storage, our larger profit pools that provides scale, as customers evaluate their IT spend for the year, given the dynamic macro environment.

Given that backdrop, we expect Q2 revenue to be between $28.5 billion and $29.5 billion, up 16% at the midpoint of $29 billion. ISG and CSG combined are expected to grow 19% at the midpoint, with ISG growing significantly and CSG up low to mid-single digits. OpEx will be down low single digits year-over-year. We expect operating income to be up roughly 8%. We expect our diluted share count to be roughly 685 million shares, and our diluted non-GAAP EPS is expected to be $2.25, plus or minus $0.10, up 15% at the midpoint.

Moving to the full year. It is early in what has been a very dynamic year. We're optimistic on our portfolio and our ability to execute. However, we want to be thoughtful on how customers think through their IT spend relative to the macro environment. Against that backdrop, we are reiterating our full year revenue guidance and expect FY '26 revenue to be between $101 billion and $105 billion, with a midpoint of $103 billion, up 8%. We expect ISG to grow high teens, driven by over $15 billion in AI server shipments and continued growth in traditional server and storage. And we expect CSG to grow low to mid-single digits. We expect the combined ISG and CSG to grow 10% at the midpoint.

Given what we expect for the first half, the full year guide reflects slightly lower profitability expectations within CSG, traditional server and storage. As our modernization efforts continue, we expect operating expense to be down low single digits year-over-year. We expect operating income to be up roughly 9%. We expect [ INO ] to be between $1.4 billion and $1.5 billion. We are increasing our diluted non-GAAP earnings per share guidance to $9.40, plus or minus $0.25, up 15% at the midpoint, assuming and annual non-GAAP tax rate of 18%.

In closing, we had another strong quarter with EPS growth significantly outpacing revenue and record Q1 cash generation. We are focused on executing our strategy, expanding our lead in AI and modernizing our business, all driving increased EPS growth. This will be an exciting year, and I look forward to the growth we see above our long-term framework and the value we will continue to deliver to our customers and our shareholders. Now I'll turn it back to Paul to begin Q&A.

[Paul Frantz, executive]

Thanks, Yvonne. [Operator Instructions] Let's go to the first question.

[Operator]

We'll take our first question from Amit Daryanani with Evercore ISI.

[Amit Daryanani, analyst]

I guess my question was just on the AI server revenues. You folks had some really impressive performance in Q1. I think the backlog at $12.1 billion was up over $3 billion from 90 days ago. Can you just touch on kind of what are you seeing? And how should we think about the fiscal '26 AI server revenue target, which I think was $15 billion before, especially as you've seen a bigger uptick in engagement from the [ sorbent ] side and also some of the [ neo clouds ] that are raising the CapEx? So just any framework on how to think about the AI server market as you go forward would be really helpful.

[Unknown Executive]

Sure, Amit. Thanks for the question. First of all, we're 91 days into the year. We got 273 more to go, but I'd like to start. $12.1 billion of orders in Q1, more than all of last year. We're off to a good start, but we have much in front of us. The customer deployments that we have in front of us are large. They're complex. They have very detailed scheduled deliveries. There's lots of dependencies on this. We've talked about this business being lumpy and nonlinear. The dependencies in this business are waiting for data centers to be built, power to be provided, direct liquid cooling infrastructure put in place. We're orchestrating a highly complex supply chain. You've probably seen the reference that a GB200 NVL72 rack has 1.2 million parts in it. Coordinating and orchestrating that across our value add, whether that be in CDUs, cold plates to rack cells, power shelves, what have you. That's what we're working here. It's driven the backlog. We love where the backlog is, it's healthy. It's reflected. I believe the backlog is $14.4 billion on top of that $12.1 billion of orders.

And probably the interesting thing -- what I think is the most interesting thing is that we converted our 5-quarter pipeline, obviously, to generate the $12.1 billion in the growing backlog and the 5 quarter pipeline improved. It grew sequentially. It's up significantly year-over-year. It's filled through lots of multiple types of technology versions of Blackwell, and it now contains software. You may have seen an announcement earlier today from the Department of Energy around the Windows 10 and our design win there, an example of Sovereign AI. We're very excited about that. Also, got lots to know, 3 quarters in front of us. I can really tell you were on the plus side of $15 billion and feel pretty good about it, but we'll update you on how the full year goes in another quarter.

[Operator]

And our next question will come from Ben Reitzes with Melius Research.

[Benjamin Reitzes, analyst]

Make this concise from Paul there. So I'll do my best, Jeff. The -- I wanted to talk about second half guidance. I mean, Amit went there a little bit. But if you do the $15 billion plus, let's call it, and including $8 billion in the first half for AI servers, that implies, I don't know, $3.5 billion each quarter in the back half. And I think Amit was getting at this, that -- is that indicative of demand? And Yvonne and Jeff, do you mind just talking about -- is that the kind of lumpiness we're really getting, 7 going to 3.5? Or are you just being conservative?

And then just sorry for the multipart, but Yvonne, do you mind just saying again what you're looking for in ISG, what level of moderation for the second half of demand in both ISG and CSG? Is it really significant in order to kind of keep your guidance, we actually have to slow down AI servers, but I'm not so sure Street numbers for the other 2 segments go down very much. In the back half, I mean.

[Jeffrey Clarke, executive]

Let's see if we can parse our way through that. So I believe, first of all, Yvonne made reference that we expect to ship $7 billion of AI servers on top of the $1.8 billion that I referenced, so we're closer to $9 billion in the first half. I made the reference that the 5-quarter pipeline continues to grow and grow significantly. It remains multiples of our backlog. The enterprise component of that continues to grow. In fact, it's growing at a faster rate than the CSP part of that pipeline. And we're optimistic.

It's early in the year. We're 91 days in. We have a couple of technology shifts in front of us. We're very excited about that. We continue to win and differentiate ourselves with our engineering and innovation, our ability to deliver and deploy, deliver and deploy and turning on our racks in 24 hours and they're operating and in business for our customers. We continue to focus on what differentiates us. I like our prospects of converting more pipeline in the second half. But at this point, we're in the 15-plus side. Our annual guidance that we just delivered us suggests that's exactly where we are and I'll let Yvonne work her way through the ISG question that you had.

[Yvonne McGill, executive]

Yes. So from an ISG perspective, as I think through the full year guide, we are early -- early on, right? And so we have been thinking that as we are, I'd say, historically a bit conservative in how we look at the year, we have held holistically on the year right now given what we're seeing in the dynamic environment.

I am really excited about the AI opportunity. Obviously, we have a significant backlog already, and that will continue to expand. But at this juncture, we think we should remain on what we have put out for the guide and not do any dynamic increases there.

[Operator]

And the next question comes from Erik Woodring with Morgan Stanley.

[Erik Woodring, analyst]

Jeff, obviously -- Ben and Amit have touched on it, really strong commentary on AI servers. I would love to just get a little bit more color from you on the potential the storage and services attach opportunity alongside AI servers. Obviously, there was commentary more than a year ago about a pretty big opportunity there. And I'm just wondering, as you've kind of seen this market evolve with CSP customers, enterprises, sovereigns, when can we think about that attach opportunity really starting to materialize? Any way to size how to think about the attach? And anything that you could help us understand for margin impact there? Just some more context would be helpful there.

[Jeffrey Clarke, executive]

Sure. And I think part of it is -- part of the answer lies in what we announced at Dell Technology World, which is an expansion of our storage portfolio, the storage capability, our Data Management Platform, the Dell Automation Platform. Those things are all important as we're building out the portfolio of pluses around the specific AI server node in the rack. We made reference to Project Lightning last week. I continue to be excited about the opportunities there.

We've made -- I would probably cast it as a modest improvement in our storage and networking attach. We've made significant improvement in our deployment and installation services attach. It is what's actually differentiating us in the marketplace, our ability to do L11, L12, did it, deployed, installed and ultimately operational in a short period of time. That continues to differentiate. It's being valued by our customers.

And if I extrapolate that to what can be done in enterprise, it's the same sort of opportunity. In fact, we think the opportunity to attach storage, particularly as the data structure needs [ some more ] object storage and our assets in the unstructured space, we have a differentiated advantage. We're going to continue to invest in that portfolio. The opportunity in networking is there. And obviously, the services that I just mentioned are equally important in an enterprise as they are in the largest clusters in the world.

So we remain optimistic. We have work to do. I'd be -- I would not be, I mean, truthful if I said we were satisfied. We are not satisfied with the attach to date. I think that there's all upside and opportunity. Our sales team is focused on that, and we continue to find opportunities to differentiate our portfolio, look at some of the subsystems in our performance and the attributes that it brings to what's being done in these modern workloads, and we're very optimistic about that. I think I've made reference in the past, as these modern workloads evolve, it's clear that the disaggregated storage architecture is the path to the future, and I think we have the best portfolio in that and we'll continue to focus on that with our customers.

[Operator]

And the next question will come from Wamsi Mohan with Bank of America.

[Wamsi Mohan, analyst]

Maybe a quick clarification. Are you assuming any impact from tariffs in your numbers at all? And for my question, given the significant ramp of AI servers and sort of what you're guiding incrementally for next quarter, I'm calculating a low single-digit operating margin on the AI servers. Would you agree with that? And how should we think about the progression of gross margin?

[Jeffrey Clarke, executive]

Well, maybe a couple on sound bites, then Yvonne can add to this. Our guidance for the year and for Q2 includes everything that we know about tariffs as of today. We were able to navigate that, I believe, successfully. I think we view the input cost to our business as deflationary in Q2. That's inclusive of tariffs. And we're very confident that what we conveyed in the form of our outlook is very inclusive of our costs associated with tariffs.

We did not make any price moves in the quarter. We were steady. We have been through this before. And I think we weathered the storm quite well and ultimately took care of our customers and served them quite well.

When I think about AI and the numbers that we gave, the $7 billion of incremental revenue. When you look at it, I believe it's roughly $4 billion on a year-over-year basis. It's roughly $5 billion on a quarter-over-quarter basis, and it drives significant gross margin dollar growth on both a year-over-year and quarter-over-quarter basis, and it drives significant operating income dollar growth on a quarter-over-quarter and year-over-year basis. I'll put that over to Yvonne, and she can add more color.

[Yvonne McGill, executive]

Yes. I'd say embedded within the guide is a 10% quarter-over-quarter increase in gross margin dollars. As Jeff mentioned, we're seeing what we're seeing in ISG quarter-over-quarter is [ about ] $5.3 billion more revenue with roughly $0.5 billion more in operating income, which is being driven by AI server profitability and, to a lesser extent, improvement in the profitability within our storage portfolio.

[Operator]

And the next question will come from Michael Ng with Goldman Sachs.

[Michael Ng, analyst]

Just have 2 on AI servers. I was just wondering if you could comment on the AI server profit outlook for the full year? I think you reiterated the revenue and OpEx outlook despite the lower profit assumptions on CSG, traditional servers and storage. So does that imply that the AI server profit outlook was raised? Are you still expecting ISG margins to be flat year-over-year in fiscal '26?

And then secondly, I was just wondering if you could talk a little bit about some of the AI server orders that happened in the last 2 months after you gave that update at the end of February. Were there any kind of key customer types or kind of texture to the orders that you could just help to characterize?

[Yvonne McGill, executive]

Why don't I start with the guidance and the ISG profitability. So for the full year, I just talked on it, we are expecting rates to be down going forward, but we're seeing that reflective of what we saw in the first half, right? So what we saw in the first quarter, plus what we're expecting in the second quarter. And overall, it's driven by lower profitability in traditional service and CSG.

So holistically, when we're talking about AI, we're seeing those dollars being accretive into our P&L. Storage margins are also improving nicely, and we expect that to continue over the year as we lean more into our Dell IP mix. And so that's good to expect also. So ISG margins will expand throughout the year as we see the typical seasonality within that part of the portfolio. So I don't know, Jeff, is there anything you'd add to that?

[Jeffrey Clarke, executive]

I would reemphasize the point that we made that it's our -- it's the driving behavior in our AI business. It's driving gross margin dollar accretion and operating income dollar accretion. There's a sizable AI business [ that with the ] overall rate, of course it does. We're looking at it in absolute dollars in every scenario that we've now conveyed to you in our guidance for both the quarter and the year, which drives operating income dollar growth and gross margin dollar growth. So I think it's something we continue to focus on. That's important to us. And that is the driving behavior of how we're running this business.

In terms of orders, clearly, I won't talk about specific customers. We saw [ TSP ] customers, we saw enterprise customers. The number of enterprise customers grew, the number of repeat enterprise customers grew as well. Our enterprise growth is exciting with over 3,000 customers now buying various forms of our Dell AI Factories. You saw a mix from Hopper technology and Blackwell technology across those. We saw it with [indiscernible] and x86, so a great cross representation there. Maybe that's the color and context, I guess, texture that part with in what we saw in Q1.

[Operator]

And moving on to Samik Chatterjee with JPMorgan.

[Samik Chatterjee, analyst]

Maybe just more broadly, in terms of your customer behavior, just curious if you've seen any sort of pull forward? I know you're managing the tariff environment pretty well, but not so much as everyone in the industry. So have you seen customers pull forward some demand? And particularly when we think about the caution that you have related to traditional servers and CSG, are you treating that more as customers just being cautious about the macro or more being in digestion after a pull forward of demand from your customers?

[Jeffrey Clarke, executive]

I -- certainly, we had some customers pulling demand. They certainly saw what was happening in the marketplace and how dynamic things were. And there's no way to say that that didn't happen. I'm sure it did. To what degree, I don't know.

What we know is that, for example, if I separate the businesses, we're in the middle of a race to refresh. We have the Windows 10 expiration in the PC business. We see good traction or clearly in the refresh cycle. It's certainly behind others. But indications are we are seeing good growth. I think I mentioned in my remarks that North America and EMEA and APJ all grew double digits from a demand perspective. We did see a slowdown in Month 3. Month 1 was greater than January, Month 2 was greater than February. Month 3, slowed in Weeks 10 through 12. And actually all 3 U.S. businesses, commercial PCs, traditional servers and storage. So clearly, there is a bump along the journey there. Yvonne made reference to that with a slowdown in our traditional server business.

So a pull ahead. We are still optimistic about the year. We have all of the businesses growing. We are maybe a little more muted in what we think in those businesses. They may be down 1 point in terms of our absolute market growth. I don't think anyone knows. But when you look at traditional servers, you look at storage, the other 2 businesses that I was referring to, again, both were growing nicely. North America speed bump, Week 10 through 12 in Month 3, worked our way through that. We now have that reflected in our guidance in Q2.

[Operator]

And the next question comes from Asiya Merchant with Citi.

[Asiya Merchant, analyst]

Great. If you could just talk a little bit about the competitive dynamics, just given the macro environment, a little bit of slowdown that you're seeing here, the fact that you didn't raise prices. Just help us understand how the competitive responses were and if some of the guidance that you're providing reflects maybe a heightened competitive intensity? Or is this more just macro and just being prudent given your customer behavior that you just outlined?

[Jeffrey Clarke, executive]

Here, let me take a run at that. And CSG, specifically commercial PCs -- look, ASPs remain relatively stable in the marketplace. There are certainly some complications or some dynamic behavior associated with tariffs that we certainly weathered through. We did not raise list price. We saw an actual increase of AI PCs as we're ramping our new products to help us stabilize our ASPs. I talked about the speed bump that we had in month -- or excuse me, Weeks 10 through 12 and Month 3 of the quarter. That was really the United States.

Commercial bids, they're no different than they were in Q1 or they were in the latter part of last year, large bids are typically aggressive. We see transactional pricing much more stable and disciplined. Consumer PCs remains aggressive with a promotional bent to it. So a high percentage of commercial -- excuse me, consumer PCs remain in the promotional pricing kind of price bands. And that's how important business is. I don't see it changing in Q2. We are in this race to refresh in commercial PCs. We launched a whole new series of products that are AI PCs that we're excited about. We're actually seeing an uplift in those customers that buy AI PCs and uplift in ASPs, as I mentioned, that's stabilized overall ASPs. And the cost environment we're going to operate in, we believe, is deflationary inside our CSG business.

If I move over to ISG, again, large deals, large customers, they are aggressive. It's not different. It's always been the case. It continues to be the case. Some of the -- there might have been a slight increase of some of more aggressive deals, but nothing really to write home about, if you will. Core server margins were relatively stable. The issue we had that Yvonne and I have both tried to talk about is the slowdown of that traditional server business in North America in the quarter. We didn't see any change from our side or our competitors' behavior. We did not make a mispricing on all of the tariff work, all the tariff work that we can mitigate and when others did. And in storage, no major price moves. It's been pretty benign, pretty consistent. Big wins are aggressive, that's not unusual. So that's the competitive environment.

[Operator]

And we'll take a question from Krish Sankar with TD Cowen.

[Sreekrishnan Sankarnarayanan, analyst]

I just want to follow up on an earlier question on the historic attach rate. Last week at Dell Technology World, you introduced the ObjectScale platform, which can do up to 1,000 nodes. I'm kind of curious, a, number one, do you think some of these private storage companies which have higher nodes are kind of eating shares from the legacy storage companies? And number two, do you need to be designed in on AI training to get the AI inference business? Or do you think they're kind of like agnostic to each other?

[Jeffrey Clarke, executive]

I'll start with the latter one first. There are 2 different use cases or 2 different applications in AI. Clearly, we're trying to win both. When you look at -- I think I've even made references on this call before that AI devours data. And trained large models devours data. And quite frankly, even the example that I was on stage last week at DTW, talking about our Digital Service Assistant. It consumes a lot of data inside our company. Around 5 specific data sources are prepared data, our dispatch data, our telemetry data, our knowledge base and our call logs. That's very representative of an enterprise-class use case, lots of data.

In that case, it is an object file system. And serving up that information quite fast to the computational mentions to make the recommendation. And I think the same thing happens when we talk about large data sets and the enterprises being consumed by AI inference, which ultimately becomes AI inference [indiscernible] and ultimately becomes agentic technology going forward. So I'm very optimistic about the storage opportunities on enterprise.

And then these fast subsystems, whether that's a true parallel file system like Project Lightning that's designed for AI first, what we've done with our scale, ObjectScale, building up the portfolio, the number of announcements we've made last week, we are building the high-performance file systems and storage systems in this disaggregated storage world, where it is really new to a flexible, agile, high-performance storage system to meet the needs of these AI workloads. That's what we're building. That's what we're focused on. You got a big glimpse of that last week at Dell Technology World. And back to the attached conversation, we think that's the bridge for us to continue to improve our attach rate going forward.

[Operator]

And we'll take a question from David Vogt with UBS.

[David Vogt, analyst]

So Jeff, on AI, to keep it very simple, what is the type of demand that you're seeing in the quarter from an order perspective and what you're shipping? And the reason I'm asking is you've got this fairly well documented GPU transition out there that has sort of plagued maybe some of your competitors. So what are you doing differently? What are you seeing from customers? And when you think about that backlog that you're sitting at 14 spot 4, how would you characterize sort of the flavor of that backlog from a technology perspective?

[Jeffrey Clarke, executive]

Well, the backlog is primarily Blackwell. And it has a combination of GB or ARM-based Blackwell with x86 Blackwell and have some Hopper in it as well. And yes, these systems are complex. They're not for the faint hearted. This is where real engineering, I believe, matters, where innovation matters. The custom design nature in some of these very large deployments are unique, pushing the envelope, working with our partner NVIDIA, and specifically, they are customers to design a custom solution that meets these needs. And now they're designing it, delivering it and having it work at volume or at scale is equally as difficult.

And then when you deliver it, as I made referenced earlier, it actually works. We are moving towards when we deliver and it is delivered at our customer site, it's upfront operational within 24 hours, challenge anybody to see if they're close to that. I think we continue to differentiate ourselves.

This is the opportunity. Blackwell challenges many engineering principles. We think we're working our way through them. We're excited about new versions of Blackwell as they come out later in the year. And then obviously, next year's design that we made reference to in the press release this morning on Windows 10, where it's going to provide 10x more performance than the current implementation, and that's the next generation platform between Dell and NVIDIA. So we're excited.

[Operator]

And moving on to Simon Leopold with Raymond James.

[Simon Leopold, analyst]

Great. I want to see if maybe you could help us bridge the trends in your ISG operating margin in that -- I know there's some seasonal aspects to it that we saw, but last quarter, you did have significant operating margin improvement and less year-over-year improvement this quarter? So if you could unpack the trends there and included in that, did you have any inventory write-downs or any excess inventory like Hopper or anything like that that might have affected the operating margins in ISG?

[Yvonne McGill, executive]

So in ISG, the operating rate was down quarter-over-quarter, and that's seasonally what happens, right, going from Q4, our highest performing quarter. In fact, we had record operating income of 18.1% in Q4. So normal seasonality there coming in, but slightly more than in Q1, slightly more than what we were expecting because of a few things.

Traditional servers were impacted by lower North America mix, which we've already talked about, which is higher margin, as well as more large deals. And again, we've talked about that, and those large deals continue to be competitive. We did improve our operating income rate though, 170 basis points, and we're going to maintain that. All that while driving up our Dell IP mix within our storage portfolio. And I've mentioned also lower operating expense.

So I think we're on the path normal seasonality in -- from Q4 to Q1, and then we'll see that as our storage portfolio continues to build across the year. Now in Q2, we've already talked about how we're going to have a high mix of AI servers that we're expecting to be shipped. So if you're going to focus on rates, we will have a rate impact there, but we will be driving significant margin dollars and operating income dollars quarter-over-quarter based upon how we're guiding, and that's coming from the entire portfolio inclusive of our AI servers.

[Operator]

And the next question will come from Mehdi Hosseini with SIG.

[Mehdi Hosseini, analyst]

Yes. One quick follow-up. Just going back to the backlog you reported for April quarter, based on a $12 billion booking, it's a huge number. Should we expect this booking in the backlog is good for like the entire fiscal year? And I'm asking this because just to better set the expectation, should we expect a sharp decline in orders into July and then a rebound? Or is this order enough for the entire fiscal year?

[Jeffrey Clarke, executive]

Well, we're 91 days into the year with $12.1 billion of orders to date with a 5-quarter pipeline that is significantly greater than the backlog of $14.4 billion. We're going to ship $7 billion of that backlog in Q2, and we're going to go try to convert -- that's our job, convert the pipeline in Q2 and second half into orders. Our best outlook is that we're in the 15-plus range of shipped revenue. We'll continue to work and drive backlog and convert pipeline into backlog.

The composition of the backlog does have orders that are delivered beyond Q2 based on customer delivery schedules, which is dependent on their buildings, power, cooling solutions, their ability to take it. And we're pretty -- I think, tied out. We are tied out with our customers there. We know our delivery schedules, and we've communicated delivery schedules, our ability to ship $7 billion in the quarter, and that's going to convert more revenue of that pipeline going forward. And we'll update you on what we think the entire AI year looks like if there's an update in Q2. But we're optimistic about the additional opportunity that's there.

[Unknown Executive]

15-plus -- capital use, capital. And the next question will come from Matt Niknam with Deutsche Bank.

[Matthew Niknam, analyst]

I had a quick follow-up on servers and a question on cash flow. On the server side, is there any indication that the incremental spend for AI servers may be crowding out or negatively impacting traditional server spend? Or is that softness more macro related? And then just on operating cash flow, very strong 1Q. Yvonne, maybe I'm curious if you'd call out any one-off or nonrecurring benefits in the quarter? And then maybe just directionally how to think about subsequent quarters.

[Jeffrey Clarke, executive]

Let me take the first question. And I think we said it in our prepared remarks, Q1 marked the sixth consecutive quarter of demand growth of our -- in our traditional server business. We expected -- we, the industry, we Dell expected growth to moderate in fiscal '25. And it clearly has. We've updated our market models. We believe the market is somewhere in that 4% to 5% revenue growth range for traditional service. We'll outperform that and take share.

Our guidance reflects our best understanding where the market is, our ability to grow against that. Yvonne made reference that our Q2 server revenue is below seasonality. I think that is prudent given what we've learned in Q1, specifically around the slowdown in Month 3, Weeks 10 through 12 in North America, specifically the United States.

We're still optimistic. We're going to continue to grow. We see server ASPs continue to rise. We continue to see core count go up. We continue to see memory content go up. We continue to see storage content go up, which continues to tell us that consolidation is well underway. Customers are looking to consolidate traditional workloads to find space, power and cooling to fuel new AI workloads.

And if you like the opportunity side of this, half of our installed base is 14G servers. And the opportunity to replace them at a 3:1, 4:1 with a 16G server or 6:1 to 7:1 with a 17 screen saver. It's right for the picking. That's what we're going to continue to focus on, and we think the opportunity is there.

[Tyler Johnson, executive]

Matt, so let me jump in. This is Tyler. Let me jump in on the cash flow question. So you said it, really strong quarterly cash flow. I'll remind you that when we ended Q4, on that call, I talked about the fact that when we saw a year like that with lower cash flow and working capital metrics where they were that typically that's followed by a fairly strong year. And I think that's just what we're seeing is the beginning of that. There is nothing unique. There is no one-off impact that generated that.

I will take the opportunity to point out that we did see an increase in payables. And that's a temporary increase. It's cash neutral because there's an offset. We're going to see that normalize this quarter. And the reason I want to point that out is because that large increase is not the driver of cash. And when you see that come back down and normalize, that's not going to be a negative impact to cash.

If you look at CCC, we normalize for that, we would have been in the low 30s, and that's compared to -- we ended negative 31 days in Q4. Net-net, there was a benefit from working capital. So that, plus profitability, is what drove cash flow. And a great job. We were able to use that to return $3.4 billion to our shareholders.

[Paul Frantz, executive]

Thanks a lot, Matt. That's the last question. I'll hand it to Jeff to close.

[Jeffrey Clarke, executive]

Thanks, Paul. Thanks, everyone, for joining us today. As we wrap up, I want to emphasize a few key points from today's call. First, our momentum in AI is unmet. We booked over $12 billion of orders this quarter alone, which will drive meaningful revenue and EPS growth going forward. Second, our supply chain is a unique advantage that enables us to respond with discipline and agility to minimize any impacts as demonstrated in the first quarter. Third, in a dynamic environment, we are reiterating our full year revenue guidance and raising our EPS guidance.

We will continue to do what we do: Drive growth, profitability and shareholder return. Thanks for your time today.

[Operator]

This concludes today's conference call. We appreciate your participation. You may disconnect at this time.