Dell Technologies Inc reported better-than-expected revenue due to an increase in sales of its servers to handle artificial intelligence (AI) workloads.

Orders of AI-optimised servers were US$3.2 billion in the fiscal second quarter, up from US$2.6 billion in the previous period, Dell said on Thursday in a statement. The sales backlog for the equipment was US$3.8 billion, with the pipeline of deals “several multiples” of that, chief operating officer Jeff Clarke said in the statement. 

Most AI server business is with smaller cloud service providers, but enterprises and governments are an emerging opportunity, Clarke said on a conference call with analysts after the results.

Revenue jumped 9% to US$25 billion in the period ended Aug 2. Analysts, on average, estimated US$24.5 billion, according to data compiled by Bloomberg. Sales in the unit containing servers was US$11.6 billion, compared with the average projection of US$10.9 billion.

In the fiscal third quarter, Dell expects sales of about US$24.5 billion, in line with analyst estimates.

The shares rose about 3% in extended trading on Thursday, paring earlier gains of as much as 8.7% after executives provided the forecast on the call. The stock has jumped 45% this year after closing at US$110.74 in New York.

The Texas-based hardware technology company has enjoyed a renaissance of investor interest over the past year due to its high-powered AI servers. Still, there is increasing concern about the profitability of the equipment sold by Dell and peers like Super Micro Computer Inc, and Hewlett Packard Enterprise Co because it needs expensive computer chips made by companies like Nvidia Corp.

Profit, excluding some items, was US$1.89 a share, while analysts expected US$1.71. The operating margin of Dell’s business unit containing servers and other infrastructure was 11%, a step up from 8% in the prior quarter and ahead of the average analyst estimate of 10.7%. That improved figure “should lessen AI-server margin concerns”, wrote Woo Jin Ho, an analyst at Bloomberg Intelligence.

Still, margins were negatively impacted by a higher mix of AI servers and a more-competitive pricing environment, chief financial officer Yvonne McGill said on the call.

For its better-known business of selling personal computers, Dell reported US$12.4 billion in revenue, down 4% from the same period a year earlier and slightly missing estimates. Sales of business PCs was little changed while revenue from consumer-oriented PCs declined 22% from a year earlier. The results contrasted with rival HP Inc, which on Wednesday reported that its enterprise PC sales gained 8% in the quarter.

The PC market has seen a historic decline over the last two years after many consumers, businesses and schools purchased laptops in the early months of the Covid-19 pandemic. A long-awaited rebound began to materialise this year. In the second quarter, industry-wide shipments picked up 3% - the second increase since the end of 2021 - research firm IDC said in July. 

Still, recovery in the PC market for Dell “is a little further out” than previously thought, Clarke said during the call.

In June, Dell cut jobs primarily in sales without disclosing how many workers would be affected. The company took a US$328 million charge for severance expenses in the quarter. 

“A big part of this optimisation effort is leveraging AI to reimagine our business processes and drive higher productivity,” McGill said of the workforce reduction.

Separately, Dell is exploring the possible sale of SecureWorks Corp, a cybersecurity company, Reuters reported earlier. Dell, which owns a majority of SecureWorks stock, unsuccessfully explored the sale of the company in 2019. SecureWorks has a market value of about US$772 million. 

  - Bloomberg