Dell (DELL) Lower On Q2; Cautious Comments On Enterprise Was A Surprise Following CSCO Bullishness

2:45 pm Friday, August 26th, 2022

Dell (DELL) is computing some losses despite reporting upside with its Q2 (Jul) earnings report last night. It was not the monster EPS beat we saw in Q1, but it was still pretty good upside. Revenue was more in-line, but it was a record at $26.4 bln with growth in both operating segments. The problem has more its more cautious outlook heading into the second half of the fiscal year, which was a bit surprising following Cisco’s relatively upbeat outlook last week.

What stood out to us is that both of Dell’s operating segments posted good revenue growth rates: Infrastructure Solutions Group (ISG) grew 12% yr/yr to $9.54 bln, while its much larger Client Solutions Group (CSG) segment grew 9% yr/yr to $15.49 bln. Most people know Dell for its consumer PCs, but it has much higher exposure to the enterprise market.

However, what is really weighing on the stock was some bearish commentary on the call. Specifically, management says that the 2H demand environment has worsened since its last earnings call in May. Demand has slowed, particularly in CSG. Dell saw PC demand decline as it went through the quarter. Fortunately, higher ASPs were able to partially offset a decline in unit sales.

Overall, Dell posted a solid Q2 despite multiple headwinds. It was mainly the cautious outlook heading into the second half of the year that is spooking investors a bit. Also, while the PC market slowing was expected, we think investors are reacting more to the somewhat cautious comments on the ISG side, which is more enterprise-based. It was a bit of a surprise because Cisco (CSCO) was more bullish with its demand outlook last week.

Cisco specifically said it had not seen a material change in demand related to enterprise spending. So to hear Dell talk about enterprises being more cautious surprised investors a bit. Finally, we think this report makes us more cautious on Ciena (CIEN) and HP (HPQ), which are both set to report next week.