Dell (DELL) Q2 2026: AI Server Backlog Swells to $11.7B, Powering Upgraded $20B Shipment Target
Dell’s record AI server shipments and a swelling $11.7 billion backlog drove a sharp upgrade to its full-year AI shipment target, as the company balanced margin pressures from mix shift with aggressive cost controls and renewed focus on storage and PC share gains. The second half outlook leans on improved profitability as Dell pivots toward higher-margin Dell IP storage and commercial PC refreshes, underscoring a strategic push to convert a vast AI pipeline into durable enterprise and sovereign growth.
Summary
- AI Pipeline Momentum: Dell’s AI backlog and pipeline expansion anchor its raised shipment targets and future growth bets.
- Operational Leverage: Cost discipline and mix management offset margin dilution from rapid AI server growth.
- Profitability Inflection: Second-half margin improvement hinges on storage seasonality and PC refresh execution.
Performance Analysis
Dell delivered record Q2 revenue of $29.8 billion, up 19% year-over-year, with ISG (Infrastructure Solutions Group) surging 44% and CSG (Client Solutions Group) returning to growth. AI servers led the charge, with $8.2 billion shipped in the quarter and an $11.7 billion AI backlog at quarter end. The company’s combined ISG and CSG businesses grew 22%, demonstrating broad-based strength despite mixed results in traditional storage and consumer PCs.
Gross margin rate compressed to 18.7%, reflecting a pronounced mix shift toward AI servers, which are accretive in dollars but dilutive in rate. Operating expenses fell 4% year-over-year, underscoring Dell’s ongoing modernization and efficiency programs. Operating income rose 10% to $2.3 billion, with net income up 13% and EPS up 19%. Cash flow from operations was robust at $2.5 billion, supporting $1.3 billion in capital returns to shareholders via buybacks and dividends.
- AI Server Mix Shift: Nearly half of ISG revenue derived from AI servers, tripling the business mix versus Q1 and driving rate dilution even as dollar profit grew.
- Storage Headwinds: Storage revenue declined 3% due to large account softness, especially in North America, but PowerStore and all-flash offerings posted double-digit growth.
- PC Refresh Tailwind: Commercial PC demand grew, aided by Windows 10 end-of-life, though consumer revenue remained pressured.
Overall, Dell’s quarter was defined by AI-driven growth, aggressive cost management, and a strategic pivot toward higher-margin product areas to offset mix-driven margin headwinds.
Executive Commentary
"We continue to see strong demand for AI servers, building on the exceptional demand observed in Q1. We booked $5.6 billion in orders in the second quarter and shipped a record $8.2 billion, resulting in an ending backlog of $11.7 billion. For context, we have shipped more AI servers in the first half of this year than all of last."
Jeff Clark, Vice Chairman and Co-Chief Operating Officer
"Gross margin rate was driven primarily by a mixed shift to AI servers due to record AI shipments. Operating expense was down 4% to $3.3 billion, or 11% of revenue, as we continue to unlock efficiencies and modernize our processes."
Yvonne McGill, Chief Financial Officer
Strategic Positioning
1. AI Infrastructure Scale and Pipeline
Dell’s AI business is now the central growth engine, with $17.7 billion in AI orders booked in the first half and a five-quarter pipeline growing double digits across enterprise, sovereign, and CSP (cloud service provider) customers. The backlog is “multiples” of the current $11.7 billion, positioning Dell as a key supplier for large-scale and enterprise AI deployments. The company’s rapid rollout of NVIDIA Blackwell-based systems and turnkey “AI factory” solutions underscores its ability to deliver at scale and speed, a differentiator in a market where deployment timelines hinge on customer readiness for power, cooling, and facility buildouts.
2. Margin Management Through Mix and Modernization
The explosive growth in AI servers brings a complex margin dynamic: while absolute profit dollars rise, the lower margin profile of early, highly competitive AI deals dilutes overall rates. Dell is countering this with value engineering, scaling, and a focus on higher-margin enterprise deals and service attach. Simultaneously, cost discipline—evidenced by a 4% reduction in operating expenses—has been key to decoupling revenue growth from cost growth, protecting profitability even as business mix evolves.
3. Storage and Server Portfolio Evolution
Storage results were mixed, with overall revenue down but PowerStore and all-flash portfolios growing double digits. The company is leaning into its proprietary Dell IP storage, which carries higher margins than partner solutions, and expects seasonal and mix-driven margin gains in the fourth quarter. Traditional server demand softened in North America but grew internationally, and Dell’s new 17th generation server line targets consolidation and efficiency upgrades, with 70% of the installed base still on legacy systems.
4. PC Refresh and Share Ambitions
Commercial PC demand is supported by the Windows 10 end-of-life refresh cycle, with Dell launching new entry-level business notebooks to capture share. Management is dissatisfied with recent share performance and is taking aggressive action to win back momentum, emphasizing the PC business as a scale and customer acquisition lever within the broader portfolio.
5. Capital Returns and Balance Sheet Strength
Strong cash flow generation enabled $1.3 billion in capital returns this quarter, and Dell’s core leverage ratio remains at its 1.5x target. The company has returned $14.5 billion to shareholders since FY23, underscoring commitment to balanced capital allocation amid heavy investment in AI and modernization.
Key Considerations
Dell’s Q2 was shaped by the intersection of AI-driven demand, margin mix challenges, and a deliberate pivot toward higher-margin storage and PC opportunities.
Key Considerations:
- AI Backlog Visibility: The $11.7 billion AI server backlog and a pipeline “multiples” of this size provide rare forward visibility, but delivery timing is constrained by customer readiness and supply chain complexity.
- Margin Compression Risks: The sharp rise in AI server mix compresses gross margin rate, though management expects improvement from less competitive deal flow, supply chain normalization, and greater enterprise attach.
- Storage Mix Shift: Dell’s proprietary storage (Dell IP) is growing faster than market and is central to margin recovery, but overall storage demand remains subject to large account and HCI (hyperconverged infrastructure) customer uncertainty.
- PC Cycle Uncertainty: The Windows 10 refresh is a clear near-term tailwind, but the pace and duration of the cycle into 2026 remains a key variable for CSG growth and profitability.
- Ongoing Cost Discipline: Operating expense reductions and modernization are crucial levers for sustaining earnings growth amid volatile revenue mix and competitive pricing.
Risks
The main risk for Dell is the durability and conversion rate of its AI pipeline, with delivery dependent on both customer infrastructure readiness and evolving technology cycles. Storage demand remains uneven, particularly in North America and among large accounts, while PC growth is exposed to a potentially “pulled forward” refresh cycle. Margin improvement is contingent on successful mix management and continued cost discipline, with competitive pricing and supply chain volatility representing ongoing threats.
Forward Outlook
For Q3, Dell guided to:
- Revenue of $26.5–$27.5 billion (up 11% at midpoint)
- Combined ISG and CSG growth of 13% at midpoint
- Operating income up roughly 7%
- Diluted non-GAAP EPS of $2.45 plus or minus $0.10
For full-year 2026, management raised guidance:
- Revenue of $105–$109 billion (midpoint $107 billion, up 12%)
- ISG growth mid to high 20s, storage flat, CSG low to mid-single digits
- Operating income up roughly 10%
- Diluted non-GAAP EPS of $9.55 plus or minus $0.25 (up 17%)
Management highlighted several factors that will shape the second half:
- AI server shipments expected to be balanced between first and second half, with margin improvement from supply chain normalization and enterprise mix
- Storage margin recovery driven by Dell IP mix and fourth quarter seasonality
- PC revenue growth and share gains targeted via new product launches and execution focus
Takeaways
Dell’s results show a company at the center of the AI infrastructure buildout, rapidly scaling shipments and backlog while navigating margin headwinds and shifting mix. The ability to convert a vast AI pipeline into profitable revenue, alongside a disciplined approach to storage and PC share, will determine the sustainability of current momentum.
- AI Pipeline Conversion: The sheer size of Dell’s AI backlog and pipeline is unmatched, but the challenge will be converting orders into profitable shipments as technology and customer readiness evolve.
- Margin Management Critical: Mix-driven margin dilution is real, but Dell’s focus on higher-margin storage, enterprise AI, and cost control provides a credible path to second-half improvement.
- PC and Storage Execution: Share gains in PCs and proprietary storage will be essential offsets to any AI volatility, especially as the refresh cycle matures and storage demand remains lumpy.
Conclusion
Dell’s Q2 2026 results highlight the company’s transformation into an AI-first infrastructure leader, with record shipments and a deepening backlog anchoring its raised outlook. The second half will test Dell’s ability to balance growth with margin recovery as it leans on storage, PC refresh, and operational leverage to deliver on its upgraded profitability targets.
Industry Read-Through
Dell’s results reinforce the accelerating transition to AI-driven infrastructure across enterprise and sovereign sectors, with turnkey solutions and rapid deployment capabilities now table stakes for vendors. The sharp rise in AI server mix and backlog visibility signals sustained investment in data center modernization, but also highlights the margin complexity and supply chain agility required to compete. For storage and PC peers, Dell’s pivot to proprietary IP and aggressive PC share focus signal where margin and growth opportunities will cluster as legacy refresh and cloud migration cycles play out. Expect continued volatility in traditional storage and PC end markets as customers weigh hybrid architectures and future-proofing against near-term refresh needs.