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Dell Technologies Cuts Near-Term Forecast Amid Looming Economic Headwinds

Revenues for Dell’s fiscal third quarter will be 8% lower than the company estimated in May.

Jeffrey Schwartz

August 26, 2022

4 Min Read
Financial forecast
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Dell Technologies has lowered its near-term revenue forecast as customers slow their IT spending in reaction to escalating economic headwinds. Revenues during Dell’s current fiscal third quarter will be 8% lower than forecast in May, the company warned on Thursday.

The warning came on Thursday when Dell reported second-quarter earnings that beat expectations. However, revenues of $23.8 billion narrowly missed consensus estimates of nearly $25.55 billion. For Dell’s current third quarter, the lowered forecast calls for revenues in the range between $23.8 billion and $25 billion.

In May, Dell had anticipated 6% growth for the entire year, with diluted earnings per share growing 12%, according to Dell CFO Tom Sweet. Now, Dell expects earnings growth to be flat, or up 2%. Customer demand deteriorated during Dell’s second quarter, leading the company to cut its forecast.

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Dell’s Jeff Clarke

“We can’t underestimate the impact of the macro environment that we’re operating in, and companies are being cautious,” Dell’s vice chairman and co-COO, Jeff Clarke, said during the company’s earnings call. “And that cautionary view is impacting how fast things will be built out in the future. I think our characterization would be that companies are buying to their urgent and immediate needs. I won’t say they’re postponing their longer-term buildouts, but they’re actually re-evaluating the timing of those.”

During the call, Bernstein senior research analyst Toni Sacconaghi asked why Dell’s demand outlook seems “strikingly more cautious than some other enterprise peers like Cisco and NetApp.” Sweet responded that Dell has a clear view of customer sentiment, given its large direct sales force.

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Dell’s Tom Sweet

“All we can tell you is what we see,” Sweet responded. “As a reminder, since we have the largest direct selling organization of all of the technology companies, we feel like we have a pretty good pulse on current demand and environment. And we’re just seeing more cautiousness on behalf of the customers as they’re sorting through spend, as they’re thinking through projects. We are seeing projects come to fruition or taking longer to close, and the size of the projects are somewhat reduced from what we’ve seen in the past.”

Weaker Demand for Commercial PCs

Dell had previously warned that consumer PC demand was falling, but commercial sales are also decelerating, Clarke noted. Dell’s Client Solutions Group (CSG), which includes the company’s PCs and displays, is expected to experience the sharpest decline. Softening the impact, Clarke said higher average selling prices (ASPs) partially offset unit sale declines.

“Our supply chain execution was excellent throughout the quarter, and we were able to offset CSG demand weakness with backlog reduction in CSG,” he said.

During Dell’s second quarter, CSG’s revenue of $15.5 billion rose 9%, with operating income at 6.3% of revenue. Commercial revenue grew 15%, while consumer revenue declined 9%. Demand for servers and storage from Dell’s Infrastructure Solutions Group (ISG) has begun slowing, though not as severely as CSG. ISG revenues of $9.5 billion rose 12% year-on-year during.

“We are seeing more cautious spending within our ISG business,” Sweet said.

Co-COO Chuck Whitten said the dynamics for Dell’s ISG business are different.

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Dell’s Chuck Whitten

“We saw demand growth in both servers and storage but at a moderating rate with more caution,” Whitten said.

Apex ARR Exceeds $1 Billion

Whitten called out the momentum of Apex, the “infrastructure as-a-subscription” offering Dell launched last year. Orders grew 78% year-on-year during the quarter, with Dell adding nearly 200 new customers, he said. Whitten said Apex’s annual recurring revenue (ARR) topped $1 billion this quarter.

“We’re excited to see the momentum,” he said. “In the current macro environment, we’re naturally seeing lots of interest from customers who are looking to manage cash outlay by pivoting to a pay as they go scale on demand type model.”

Want to contact the author directly about this story? Have ideas for a follow-up article? Email Jeffrey Schwartz or connect with him on LinkedIn.

 

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About the Author(s)

Jeffrey Schwartz

Jeffrey Schwartz has covered the IT industry for nearly three decades, most recently as editor-in-chief of Redmond magazine and executive editor of Redmond Channel Partner. Prior to that, he held various editing and writing roles at CommunicationsWeek, InternetWeek and VARBusiness (now CRN) magazines, among other publications.

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