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Dell (DELL +1%) is making a move higher after reporting Q2 (Jul) earnings. After a rare in-line EPS result in Q1, Dell got back to its usual double-digit beats in Q2. Revenue rose a healthy 9.1% yr/yr to $25.03 bln, which also was better than expected and was a record for its servers and networking business. And this was despite the headwind from the exit of its VMware Resale business. After six consecutive declines, Dell has now posted back-to-back revenue growth quarters. The only real trouble spot was Dell guiding Q3 (Oct) EPS below consensus, but in-line revs.

• Infrastructure Solutions Group (ISG) segment revenue jumped 38% yr/yr to $11.65 bln with 11.0% segment operating margin vs 12.4% last year. Server and networking revenue jumped 80% yr/yr to a record $7.67 bln. Server demand continues to outpace shipments, with strong growth across traditional and AI servers. Dell shipped $3.1 bln of AI servers in Q2 and its AI server backlog remains healthy at $3.8 bln.
• Dell noted that its AI server pipeline expanded across both tier 2 CSPs and enterprise customers again in Q2, and now has grown to several multiples of its backlog. Dell said that Enterprise remains a significant opportunity as many are still in the early stages of AI adoption. Dell is also excited about its emerging sovereign AI opportunity.
• Storage revenue was down 5% yr/yr to $3.97 bln. Storage saw double-digit demand growth across its core storage portfolio. However, this was offset by headwinds in the partner IP portion of its HCI portfolio.
• Turning to Client Solutions Group (CSG), segment revenue declined 4% yr/yr to $12.41 bln with 6.2% op margin vs 7.5% last year. Commercial revenue was flat at $10.56 bln while Consumer revenue was $1.86 bln, down 22% yr/yr. Dell saw modest commercial PC demand growth in Q2. Dell expects CSG growth in 2H, particularly in Q4 (Jan) as the coming PC refresh cycle and the longer-term impacts of AI will create tailwinds for the PC market.
• In terms of the Q3 guidance, when you see in-line revs but weak EPS that means weak margins. Dell's margins have been impacted by higher input costs due to inflation, a competitive environment, and a higher mix of AI optimized servers. In Q3, Dell expects ISG revs up in the low-30s and CSG flat to up low-single-digits.

Overall, investors were pleased to see Dell return to healthy EPS beats. Also, the stock has pulled back quite a bit since its Q1 report in May. As such, sentiment was not sky high as it was last quarter. That is helping the stock today. Bigger picture, investors are rightly excited about Dell as an AI-play. It AI servers are in huge demand and Dell sees good runway for growth as many enterprises are still early in their AI adoption. However, they are still a relatively small part of Dell's total sales. Also, investors often associate Dell with PCs, but its Consumer business is small for them, so do not get worried about the sales decline in Q2. Also, it seems like there is an attractive PC upgrade cycle on the horizon.