Dell Technologies server sales hit a record high last quarter and the long-projected PC refresh is finally showing up on the balance sheet, but investors were disappointed by Dell’s margins on its market-leading servers and the stock plunged more than 20 percent by Friday morning.

Sales were up six percent year over year to US$22.2 billion in its fiscal 2025 first quarter, which ended May 3. Revenue on the infrastructure side of the business was US$9.2 billion, up 22 percent year on year, while sales of PCs and peripherals came in flat at US$12 billion.

Chief Operating Officer Jeff Clarke for the Round Rock, Texas-based tech giant told investors that orders for its AI-optimised servers are growing US$900 million quarter to quarter, and the pipeline is several multiples of the current US$3.8 billion backlog in those servers.

“We are uniquely positioned to help customers with artificial intelligence and our strong AI momentum continued in Q1,” Clarke said on the call. “In ISG, our AI-optimised server orders increased to US$2.6 billion, with shipments up more than 100 percent sequentially to US$1.7 billion. We have now shipped more than US$3 billion of AI servers over the last three quarters.”

Dell Technologies executives have been predicting a PC refresh since last year, when its prior co-COO, Chuck Whitten, said the installed base was overdue for new devices. Sales, however, refused to budge around the projections until this quarter. Commerical PC and peripheral revenue rose to US$10.2 billion, up 3 percent year-over-year, with demand improving as the quarter progressed, Dell executives said. Consumer sales of Dell PCs slipped 15 percent year over year.

But analysts zeroed in on the margins that Dell had produced on its infrastructure products, with Toni Sacconaghi, managing direstor and senior research analyst at Bernstein asking if there was zero operating margin in AI servers.

“If I just look at the year over year at the ISG business, storage was perfectly flat. AI servers went from zero to US$1.7 billion, which would suggest that traditional servers were flat,” he said. “So really the only thing that changed was you added US$1.7 billion in AI servers and operating profit was flat. So does that suggest that operating margins for AI servers were effectively zero? And if that’s not the case, how do you square the circle with what I just outlined?”

Dell Technologies CFO Yvonne McGill responded saying that ISG income is expected to improve as the year goes on, and as historic storage sales cycles begin to kick in. She said traditionally Dell storage sales are low in the first quarter and tend to pick up throughout the year and as an attached spend to servers.

“When I look to Q2 and to FY 25 I can tell you we expect ISG (operational income) to improve as we talked about in the guide, over the year and really deliver against our long-term framework that’s up to 14 percent,” she said. “I think what we saw in the first quarter was multifaceted. We do continue to expect a recovery as the year goes on. Those AI-optimised servers. We’ve talked about being margin-rate dilutive and margin-dollar accretive. You’ll continue to see that evidenced in the results also.”

Dell Technologies executives had previously told analysts that the services and consulting attached to the sale of AI servers, including storage, should lead to higher gross margins, and analysts wanted to know when that would be reflected in the company’s earnings.

“Our view of the broad opportunity hasn’t changed around each and every AI server that we sell,” Clarke responded. “We think there’s a large amount of storage that sits around these things. These models being trained require lots of data. That data has to be stored and fed into GPUs at a high bandwidth. The opportunity around unstructured data is immense here. We think that opportunity continues to exist.”

From the network to the server to the storage to the services, Clarke outlined where Dell and its partners fit into the construction of AI systems.

“We think the opportunity around NICs and switches and building out the fabric to connect individual GPUs to one another. To take each node, racks and racks across the data center to connect with that high-bandwidth fabric is absolutely there and needed. We think the opportunity to extend in doing the deployment of the rack itself is an opportunity. Whether that’s installing cables, heat exchangers, rear door heat exchangers, cooling units, power units, the cabling. We think the deployment of this gear in the data center is a huge opportunity.”

Clarke said there are a few areas of AI services Dell Technologies is building for itself and partners around implementing the technology, all of which could lead to future growth.

“They basically hit the categories of helping our customers with their AI strategy,” Clarke said. “How do they implement AI, which is all around the data and getting the data prepared to be consumed and ingested. Putting the AI infrastructure in place and getting AI adopted inside an enterprise. Then how do we help them scale it? We’re pretty excited about the full stack opportunities we have.”

Clarke namechecked the Dell AI Factory unveiled last week at Dell Technology World 2024, which is a product that brings together several AI vendors including Nvidia and HuggingFace in a validated platform that has been stress tested by engineers running workloads. He also called out the shift in storage from traditional direct sales to the new Partner First For Storage model that went into effect this year.

“We can do better in both our traditional servers and our storage products in terms of margins,” Clarke said. “We had a mix shift in storage that was from our Dell IP to partner IP. That impacts us. We had a customer shift and a geographic shift. That pushed margins down. Our most profitable area is Dell IP sold in North America to the largest customers. That was a lower mix this past quarter.”

He said while Dell Technologies acquired several new large customers during the quarter, the competition for those deals was fierce and ate into margins.

“We’ll take that deal every time because we know over time winning a new customer we can sell the breadth of our portfolio,” Clarke said. “That’s exactly what we did and we will continue to look for new opportunities to grow our customer base.”