Dell (DELL.US) 24th fiscal year Q4 performance briefing: Q4 traditional server business is recovering, with a 40% increase in orders quarter-on-quarter after AI optimization.

Recently, Dell (DELL.US) held its 24th fiscal year Q4 performance meeting. Dell pointed out at the performance meeting that the company will release a large number of new AI products and solutions in May at Dell Technologies World. There are signs of improvement in Q4 business, but enterprise and large customer spending remains cautious. Regarding AI, Dell stated that orders optimized with AI grew by 40% compared to the previous period, delivering $800 million worth of AI-optimized servers; backlog orders doubled to $2.9 billion; demand continues to exceed supply, but the delivery cycle for H100 has improved, and customers have a high interest in H200 and MI300X products. In traditional servers, Dell stated that Q4 traditional server business grew year-on-year, showing consecutive growth for three quarters, as the market is going through the longest digestion period in history. The scenarios for traditional servers and AI servers are different, with Dell seeing a recovery in demand for traditional servers from customers. The question is only the pace of recovery, but the tasks of traditional servers remain important, and growth is expected to be maintained. Q&A: Q: Outlook for storage? A: AI is driving growth opportunities for storage, with the company enhancing read performance and corresponding performance for high concurrency low latency tasks in its latest release of Powerscale F710 and XF690. The company is undergoing Ethernet certification, which is a critical capability in enterprise storage scenarios as most enterprises are Ethernet-based. Q: Characteristics of backlog orders? A: 1) Demand increased by 40% compared to the previous period, with growth in CSP and enterprise numbers, so the structure is not as concentrated as the previous quarter; 2) This demand spans across H100, H800, H200, and MI300X, so the structure is complex; 3) The company expects shipping volume to increase in Q1. Q: Outlook for traditional servers? A: Q4 traditional server business grew year-on-year, showing consecutive growth for three quarters, as the market is going through the longest digestion period in history. The scenarios for traditional servers and AI servers are different, with Dell seeing a recovery in demand for traditional servers from customers. The question is only the pace of recovery, but the tasks of traditional servers remain important, and growth is expected to be maintained. Q: Reasons for the decline in gross margin? Is the profit margin on AI servers higher or lower than average? A: 1) The company expects a 2 percentage point decline in gross margin quarter-on-quarter, due to reasons including: 1) lower storage mix seasonally; 2) a higher proportion of AI servers compared to the previous quarter; 3) costs from inflation. Q: With Gen AI being widely used by customers, what opportunities does the company have? A: The company believes that the component market will have a CAGR of 20% by 2027, but this is a lagging indicator, with demand continuing to grow and significantly exceeding supply capacity. In the enterprise sector, the company has the ability to help customers integrate AI into their business processes, which is a great opportunity. As 83% of data is kept locally, there will be much more data created outside data centers than inside in the future, happening at the edge, such as in smart factories, oil platforms, etc. The company sells products to educational users, manufacturing users, government agencies, financial institutions, and proves the effectiveness of the products, allowing customers to realize the need for running AI locally. Q: Pricing environment for PCs? View on AI and non-AI business in ISG? A: 1) PC competition remains intense, especially in the low-price segment where profits are lower for markets below $500, so the company is cautious about market share. The company has a significant share in the mid-range and high-end price ranges in mature markets. 2) The company's profit margin is increasing quarter by quarter with the help of AI, although it is lower than traditional servers, it is improving quarter by quarter; 3) The competitive environment for traditional servers in Q4 is growing quarter-on-quarter, a trend that will continue, but is not uncommon. 4) In the Q1 server portfolio, strong growth is driven by AI, while traditional servers did not exceed expectations year-on-year. The market competition remains fierce, but the company sees more space for enterprise services. On the other hand, storage will continue to grow over time. Q: Impact of memory price increases on gross margin? A: The company has considered all factors and reflected them in the guidance, and expects an inflationary environment in the future. The company has adjusted pricing accordingly to maximize profitability. Q: With a backlog of $2.9 billion, how quickly do you expect to convert it into revenue? A: The situation is complex, with different order structures for products like H100, H200, etc., each with different delivery cycles and commitments. Shipping volume in Q1 will exceed Q4, and the company has made the most reasonable estimates for supply capacity, reflected in the annual guidance; the delivery cycle for H100 has improved, while other components are expected to take longer. In other business aspects, traditional servers are expected to have moderate growth, AI servers strong growth, storage lagging a bit, but there will be tailwinds this year. Q: Is storage demand coming from AI or non-AI? How much incremental expenditure does AI bring for each server? A: 1) Storage is exceeding normal seasonality, a good indicator, where in the context of AI, file and object types are usually AI data types, requiring better read/write performance, consistency performance, density performance to support data requirements. 2) Progress in traditional storage is also good, better than normal seasonality, with mid-range and high-end storage products performing better than expected in Q4 quarter-on-quarter; 3) In the long run, the company believes networking will also see incremental expenditure. Overall, for every $1 increase in AI server investment, there will be $2-3 spending on professional services, networking, and storage, with the company not specifically breaking down these costs. The company's value proposition is to provide all types of infrastructure capabilities, forming differentiation. Q: Why does the company forecast storage to lag? A: Current text data is not very dense and can be efficiently compressed. Opportunities for non-structured data will arise when the data structure and data sets become complex. The company is in the early stages of enterprise deployment and concept validation, with many customers understanding this and developing roadmaps. Q: Is the AI TAM for 2027 $150 billion? How much share does the company expect to gain? A: The company's goal is to achieve a higher share compared to the traditional market, including PC. As the largest multinational company, the company can provide hardware to CSP and services.Server, AI to PC, edge computing, as well as networking and storage products. The company is able to provide services in more than 180 countries and regions, which helps expand the company's influence.Q: What are the differences between traditional servers and storage in different vertical markets? A: 1) PC is expected to perform better in 2024 than in 2023, with the second half of the year better than the first half, opportunities in the second half come from the aging installation base and the end of support for Windows 10. 2) Traditional servers are showing strong momentum, with consecutive growth in sales for three quarters across all regions. 3) Storage performed better than expected, with increasing demand for unstructured products, and mid-range and high-end products exceeding expectations. 4) In vertical markets, medium and small enterprise customers are recovering, education is strong, and the company is waiting for demand from large customers and multinational enterprises to pick up, as these customers are currently being cautious. Q: Will the company be able to obtain enough GPUs? What opportunities does the B100 bring? A: The company's goal is to obtain a supply that meets demand. Although demand is expected to exceed supply into next year, the company is making every effort to meet customer demands, with no major changes in allocation and strategy. Last year was mainly focused on H100, this year there are 4 main products, and some customers are transitioning faster. The company will make management adjustments to meet changing demands and fulfill delivery requirements for different customers. The company is confident in H100, B100, and B200, with opportunities to showcase capabilities in liquid cooling, connectivity, telemetry, power management. Additionally, there are opportunities in storage, networking, and services. Q: Regarding the full-year guidance, how will the profit margins vary among the different divisions? A: The company has considered the cost environment, competitive environment, and the dilution of ISG by AI servers. The situation is expected to improve with AI development this year, but there is still some uncertainty in the cost and competitive environments.