Dell's AI Forecast Isn't Exciting, Susquehanna's Hosseini Says

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00:00When we talk about the last earnings report that we got out of Dell and more importantly that

00:04investor day that they had a few weeks ago, there are a lot of question marks, not just about their

00:09bullishness, but when we would see actual numbers applied to that. What you learned today out of

00:15this earnings release, did that give you any additional confidence? No, I think the 25 billion

00:20of AI server booking was expected. We still don't know how they're going to hit the 50% EPS CAGR.

00:28The problem I have with Dell is they're well positioned for AI storage and also a notebook,

00:35but it's the margin and the cost. Cost is going up, especially higher cost of DRAM, SSDs and other

00:42components. For every dollar of increasing cost, Dell could pass 60 cents to customer, but there's

00:48a 40% of the cost increase that they have to absorb. On top of that, AI servers are 5% gross margin.

00:54That doesn't get me excited. So until we know how the margins are going to be able to stabilize and

01:01how Dell will be able to have some operating leverage, I remain neutral. Well, on that margin

01:07point, I mean, they did have somewhat decent margins for that unit that specifically includes the

01:12servers, more than 12%, and that was above street estimates. What does that say to you?

01:17I think we actually published on this a week and a half ago. I think there was an end of the year

01:24budget flush among enterprise customers. I think that uptick in margin has to do with a better

01:31enterprise server, which in my opinion is a one-time event, is not sustainable,

01:37and therefore gross margin pressure will resume.

01:39I also do want to talk a little bit about the consumer PC business as well, because of course,

01:46there's a lot of focus on what they're doing with AI there. But when you take a look at that point

01:51of the business, what does it tell you, taking a look just at these numbers that have crossed

01:55in the past few minutes?

01:58Well, 75% of Dell's PC business is commercial. We have already gone through some corporate upgrade

02:04due to the expiration of Windows 11. What I want to see looking into next year is what

02:09will be the catalyst for enterprises to upgrade notebook deployed by professionals. I don't see

02:16it crystal clear, and AI is not really a factor when it comes to notebook. So we need better visibility

02:23in order to expect the growth acceleration in the notebook business.

02:28And of course, we do have the earnings call starting at about 4.30, it looks like. What would

02:32you like to hear from the C-suite on this call?

02:36I'm going to repeat what I wrote after the analyst day, which took place in October. Give

02:40us details. Give us the building blocks, how earnings would grow to 15% CAGR over the next

02:48couple of years. Without details, there's always going to be a skepticism around margins, and

02:53we need to better understand the details behind the strategy.

02:56I am curious, Manny, when we start to talk about longer term and this AI infrastructure build

03:01out, particularly when it comes to the more of the server side rather than the PC side

03:05here. And this isn't really specific to Dell. But overall, is the pace that we've seen in

03:12this, is that going to be sustainable at least through next year? Or should we start to think

03:15about a ratcheting down of that growth rate?

03:17I actually expect Dell to see growth acceleration because pretty soon we're going to migrate from

03:26AI training to AI inferencing. Enterprises deploy AI servers in the edge. And Dell, given their brand name

03:34and their channel, could definitely be a beneficiary. What I don't know is how they're going to be able to

03:39scale services. They have been lowering their op hacks, and this is how they have been able to try to offset

03:45lower gross margin. But when you cut op hacks, you also limit your server, how you can scale

03:50services. So the extent that Michael Dell and the team could help us understand how services could

03:55be scaled given the current op hacks could be a huge factor in changing our mindset. And again, Dell

04:02could be a significant beneficiary as AI deployed among enterprises, but we need to know how.

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