10-Q: Dell Technologies Reports Strong Q3 FY26 Growth

Dell Technologies reported an 11% increase in net revenue and a 32% rise in net income for Q3 FY26, driven by strong demand for AI-optimized servers and commercial PCs.

Summary

• Net revenue for the three months ended October 31, 2025, increased by 11% to $27.01 billion, up from $24.37 billion in the prior year.
• Net revenue for the nine months ended October 31, 2025, increased by 12% to $80.16 billion, up from $71.64 billion in the prior year.
• Product net revenue grew 16% for the quarter and 18% for the nine months, primarily due to increased demand for AI-optimized servers and commercial offerings.
• Services net revenue decreased 5% for both the quarter and nine months, mainly due to the termination of the VMware Resale agreement.
• Operating income for the quarter rose 23% to $2.12 billion, and for the nine months, it increased 24% to $5.06 billion.
• Net income for the quarter increased 32% to $1.55 billion, and for the nine months, it grew 21% to $3.68 billion.
• Diluted earnings per share (EPS) for the quarter was $2.28, a 39% increase, and for the nine months, it was $5.34, a 26% increase.
• Cash flow from operating activities for the nine months ended October 31, 2025, was $6.51 billion, a 65% increase from $3.94 billion in the prior year.
• Infrastructure Solutions Group (ISG) net revenue increased 24% for the quarter and 28% for the nine months, driven by a 37% and 43% increase in servers and networking, respectively, largely from AI-optimized server offerings.
• Client Solutions Group (CSG) net revenue increased 3% for both the quarter and nine months, with commercial net revenue up 5% in both periods due to increased units and richer configurations.
• The company repurchased approximately 39 million shares of Class C Common Stock for $4.2 billion during the nine months ended October 31, 2025.
• The quarterly dividend rate was increased by 18% to $0.525 per share, with $1.1 billion paid in dividends and dividend equivalents during the nine months.
• Total debt principal amount increased by $6.7 billion to $31.5 billion, primarily due to the issuance of $8.5 billion in Senior Notes.
• Yvonne McGill resigned as Chief Financial Officer effective September 9, 2025, with her employment ending on October 31, 2025. David Kennedy is now the Executive Vice President and Chief Financial Officer.

Sentiment

Score: 8

Explanation: The company reported strong financial results, significantly exceeding prior year performance across key metrics like revenue, operating income, net income, and EPS. The robust growth is primarily fueled by high demand for AI-optimized servers, positioning the company favorably in a critical and expanding market segment. Despite some margin pressures due to product mix and anticipated component cost inflation, the company's disciplined cost management, substantial cash flow generation, increased dividend, and ongoing share repurchase program demonstrate strong financial health and a commitment to shareholder returns. The strategic focus on AI and the ongoing PC refresh cycle provide clear growth drivers. The risks, while present, appear manageable in the context of the strong operational performance and strategic positioning.

Positives

• Significant growth in net revenue (11% for Q3, 12% for 9 months) driven by strong demand for AI-optimized server offerings and commercial PCs.
• Substantial increase in operating income (23% for Q3, 24% for 9 months) and net income (32% for Q3, 21% for 9 months).
• Robust diluted EPS growth (39% for Q3, 26% for 9 months).
• Strong cash flow from operating activities, increasing 65% to $6.51 billion for the nine months.
• ISG segment showed strong performance with 24% net revenue growth in Q3 and 28% for the nine months, primarily from servers and networking (AI-optimized servers).
• CSG commercial offerings experienced 5% net revenue growth for both periods, indicating a healthy PC refresh cycle.
• Continued disciplined cost management led to a 5% decrease in total operating expenses for both the quarter and nine months.
• The company increased its quarterly dividend rate by 18% to $0.525 per share, demonstrating confidence in financial health and commitment to shareholder returns.
• Successful divestiture of Secureworks, resulting in a $0.2 billion gain on sale.
• Effective tax rate for the nine months was 17.6%, lower than the U.S. federal statutory rate of 21%, partly due to tax holidays in Singapore and China.

Negatives

• Services net revenue decreased by 5% for both the three and nine months, primarily due to the termination of the VMware Resale agreement.
• Storage net revenue in the ISG segment decreased by 1% for the three months, mainly due to lower demand in hyper-converged infrastructure offerings.
• Consumer net revenue in the CSG segment decreased by 7% for the three months and 11% for the nine months, indicating weaker consumer demand.
• Gross margin percentage and non-GAAP gross margin percentage decreased for both periods, primarily driven by a shift in mix towards lower-margin AI-optimized server offerings.
• ISG operating income as a percentage of net revenue decreased by 90 basis points for the quarter and 70 basis points for the nine months, reflecting margin pressure from the AI-optimized server mix.
• CSG operating income decreased by 6% for the nine months, and its operating income rate declined due to a change in mix within offerings.
• Increased interest expense contributed to a less favorable "Interest and other, net" for the quarter, despite gains on investments.
• Higher financing receivables and working capital levels, primarily impacted by increased demand for AI-optimized server offerings, partially offset cash flow from operations.
• The company faces anticipated margin rate pressure from the continuing shift towards AI-optimized servers and a competitive environment.
• Anticipated increased inflation for component costs, with a modest increase expected for the remainder of Fiscal 2026 and more notable dynamics expected for Fiscal 2027.

Risks

• Macroeconomic Environment: Operating results can be impacted by fluctuations in foreign currency exchange rates, trade protection measures, tariffs, trade barriers, changes in government policies, international trade arrangements, geopolitical volatility, and global macroeconomic conditions.
• AI-Optimized Solutions Demand Variability: The scale of AI opportunities, varying stages of customer readiness, and frequency of component part updates or transitions create inherent non-linearity in the timing of demand and shipments for AI-optimized server offerings, driving revenue variability.
• Supply Chain Constraints: While lead times have shortened, the next generation of high-demand AI components is anticipated to be subject to supply constraints.
• Increased Component Costs: Anticipated increased inflation for component costs, with a modest increase expected for the remainder of Fiscal 2026 and more notable dynamics expected for Fiscal 2027.
• Competitive Environment: Competitive dynamics remain an important factor in the CSG business and continue to impact pricing and operating results, and margin rate pressure is expected in the overall market.
• Strategic Investments Risk: Investments in early-stage companies through Dell Technologies Capital may never have commercial value, potentially resulting in substantial losses.
• Customer Credit Risk: AI-optimized solutions are purchased primarily by a small number of larger customers and cloud service providers, which generally involve larger amounts of credit and could impact overall credit risk in trade and financing receivables.
• Legal Proceedings: The company is involved in various claims, suits, assessments, investigations, and legal proceedings (consumer, antitrust, tax, intellectual property). Unfavorable outcomes could materially affect business, financial condition, results of operations, or cash flows.
• Tax Audits: The IRS is examining federal income tax for fiscal years 2018-2019 (with proposed adjustments the company disputes and is appealing) and 2020-2022. Unfavorable outcomes could materially impact results.
• Internal Control Changes: Ongoing business modernization initiatives involve modifying internal control processes, which could introduce risks during transition.
• Debt Interest Rate Risk: Exposure to interest rate risk related to variable-rate debt portfolios could lead to variations in future interest expense.
• Global Minimum Tax (Pillar Two): While not expected to be material for Fiscal 2026, the global minimum tax could increase the effective income tax rate and cash income tax payments in future years.

Future Outlook

The company expects continued net revenue growth for both ISG and CSG in the fourth quarter and full fiscal year, with ISG growth primarily driven by increased demand for AI-optimized server offerings. Modest CSG net revenue growth is anticipated due to the ongoing PC refresh cycle. Margin growth is expected for both periods, despite anticipated margin rate pressure from the shift towards AI-optimized servers and a competitive environment. The company monitors commodity supply and anticipates increased inflation for component costs, with a modest increase for the remainder of Fiscal 2026 and more notable dynamics for Fiscal 2027. The company remains committed to disciplined cost management, ongoing business modernization initiatives, and expects additional reductions in overall headcount. Changes to the international tax framework under OBBBA are expected to be effective in Fiscal 2027 but are not anticipated to have a material impact on results in future periods.

Management Comments

• "We executed our strategy with strong operating results, generating overall net revenue and operating income growth."
• "Our ISG business continued to benefit from significant increased demand for AI-optimized solutions as customers continue to adopt and further integrate AI, which resulted in significant backlog levels that remained elevated as we exited the quarter."
• "Given the scale of the AI opportunities, the varying stages of customer readiness, and the frequency of component part updates or transitions, there is inherent non-linearity in the timing of demand and subsequent shipments for our AI-optimized server offerings, which continues to drive variability in our revenue."
• "Within our CSG business, the PC refresh cycle is underway as customers continue to upgrade their devices, which has contributed to increased demand for our commercial offerings and modest CSG net revenue growth."
• "We expect that ISG net revenue growth will be driven by increased demand across our servers and networking offerings, largely in our AI-optimized server offerings."
• "We expect modest CSG net revenue growth to be driven in part by the continuation of the PC refresh cycle."
• "We expect margin growth for both the fourth quarter and the full fiscal year, while balancing anticipated margin rate pressure resulting from a continuing shift in mix towards our AI-optimized servers and a competitive environment."
• "We continue to monitor the commodity supply environment and anticipate increased inflation for component costs, with a modest increase in input costs expected for the remainder of Fiscal 2026 and more notable dynamics expected for Fiscal 2027."
• "We remain committed to disciplined cost management in coordination with our ongoing business modernization initiatives, and expect to continue to scale operating expenses as we take targeted measures to reduce costs, including employee reorganizations, limitation of external hiring, and other actions to align our investments with our strategic priorities and customer needs."
• "We anticipate these actions will result in additional reductions in our overall headcount."
• "We believe our unique operating advantages provide a foundation to foster business growth, enable innovation, drive efficiencies, and continue to position us for long-term success."
• "We continue to see opportunities to create value and grow as we respond to long-term demand for our IT solutions driven by a dataand AI-enabled world."
• "We have demonstrated our ability to adjust to changing market conditions with complementary solutions and innovation across both segments of our business, an agile workforce, and the strength of our global supply chain."

Industry Context

The company's strong performance is largely aligned with and benefiting from major industry trends. The significant increase in demand for AI-optimized server offerings reflects the broader industry-wide acceleration in AI adoption and integration across various customer segments. The ongoing PC refresh cycle is a key driver for the modest growth in the Client Solutions Group, indicating a healthy demand environment for commercial computing devices as businesses upgrade their technology. The termination of the VMware Resale agreement highlights a shift in the company's strategy regarding third-party software distribution, potentially focusing more on integrated solutions like VxRail. The anticipated increase in component costs and inflation reflects broader supply chain and macroeconomic pressures affecting the technology sector.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business, consisting of matters involving consumer, antitrust, tax, intellectual property, and other issues on a global basis.
• The company does not currently anticipate that any of the legal proceedings it is involved in will have a material adverse effect on its business, financial condition, results of operations, or cash flows.
• The IRS issued a Revenue Agents Report for the federal income tax examination of fiscal years 2018 through 2019, proposing adjustments primarily relating to certain transactions completed as part of business integration efforts. The company disagrees with these proposed adjustments and will contest them through the IRS administrative appeals procedures.
• The IRS is also currently conducting a federal income tax examination of fiscal years 2020 through 2022.
• The company is currently under income tax audits in various U.S. state and foreign taxing jurisdictions and is undergoing negotiations, and in some cases contested proceedings, relating to tax matters with the taxing authorities in these jurisdictions.
• Net unrecognized tax benefits were $1.0 billion as of October 31, 2025, and $0.9 billion as of January 31, 2025, included in other non-current liabilities.

Related Party Transactions

• Transactions with related parties were immaterial for the three and nine months ended October 31, 2025, and November 1, 2024.
• Under the Separation and Distribution Agreement with VMware, Inc. (now VMware LLC) upon completion of its spin-off on November 1, 2021, Dell Technologies agreed to indemnify VMware for liabilities allocated to Dell Technologies, and VMware similarly agreed to indemnify Dell Technologies for liabilities allocated to VMware. Net income tax indemnification receivables from VMware were immaterial as of October 31, 2025, and January 31, 2025.

Stakeholder Impact

• Shareholders: Positive impact from strong financial performance, increased dividends (18% increase), and ongoing share repurchase program ($11.5 billion authorized remaining).
• Employees: Negative impact from anticipated additional reductions in overall headcount due to disciplined cost management and business modernization initiatives. Positive impact for remaining employees from continued R&D investments and strategic growth.
• Customers: Benefit from continued innovation and new solutions, especially in AI-optimized offerings and the PC refresh cycle. Flexible payment and consumption solutions offered by DFS provide operational and financial flexibility.
• Suppliers: Increased purchase obligations, particularly for AI-optimized components, indicate higher demand from the company. The Supply Chain Finance Program offers flexibility for eligible suppliers.
• Creditors: Increased debt principal amount ($6.7 billion increase) but the company believes it can meet debt obligations and maintains an investment grade credit rating.

Next Steps

• Continue to monitor the commodity supply environment and manage anticipated increased inflation for component costs.
• Execute ongoing business modernization initiatives to achieve greater efficiencies and streamline processes.
• Continue making strategic investments to enable growth and innovation, including in R&D initiatives.
• Implement targeted measures to reduce costs, including employee reorganizations and limitation of external hiring, which are expected to result in additional headcount reductions.
• Monitor developments and guidance related to the One Big Beautiful Bill Act (OBBBA) and its potential impact on future tax rates, especially international tax framework changes effective Fiscal 2027.
• Contest proposed adjustments from the IRS federal income tax examination for fiscal years 2018-2019 through administrative appeals procedures.
• Continue to evaluate opportunities for strategic investments through Dell Technologies Capital, focusing on emerging technology areas.
• Potentially make targeted acquisitions of businesses that advance strategic objectives and accelerate innovation.
• Continue returning capital to stockholders through share repurchase programs and dividend payments.

Key Dates

Recommendation

The company delivered exceptionally strong financial results, significantly exceeding prior year performance across key metrics like revenue, operating income, net income, and EPS. The robust growth is primarily fueled by high demand for AI-optimized servers, positioning the company favorably in a critical and expanding market segment. Despite some margin compression due to product mix and anticipated component cost inflation, the company's disciplined cost management, substantial cash flow generation, increased dividend, and ongoing share repurchase program demonstrate strong financial health and a commitment to shareholder returns. The strategic focus on AI and the ongoing PC refresh cycle provide clear growth drivers. The risks, while present, appear manageable in the context of the strong operational performance and strategic positioning.

Keywords

Dell Technologies, Q3 FY26, Earnings Report, Financial Results, AI-optimized servers, Infrastructure Solutions Group, Client Solutions Group, Commercial PCs, Revenue Growth, Operating Income, Net Income, EPS, Cash Flow, Share Repurchase, Dividends, Debt Issuance, SEC Filing, Technology Industry, Corporate Governance, Yvonne McGill, David Kennedy, Supply Chain, Risk Factors, Taxation