Dell reports soaring performance—why are traditional servers experiencing an unexpected boom?

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The key signal released by Dell’s "strongest ever" financial report is: the growth engine is no longer just AI servers; traditional servers have once again become a driving force.

Bernstein’s May 29 report pointed out that traditional servers have become the most unexpected variable in Dell’s latest round of growth. The fundamental reason is that Agentic AI is driving demand for computing power from AI servers toward CPUs, memory, storage, and other traditional hardware, prompting the market to reassess its growth elasticity.

Specifically, Agentic AI workloads rely on CPUs for task orchestration, while significantly increasing the demand for DRAM and storage. This trend has already taken hold in Neo-cloud and large enterprise environments and is spreading to secondary cloud service providers. Management has clearly positioned Agentic AI as an incremental market for traditional servers, not a replacement for existing stock.

In terms of demand sources, current growth mainly comes from regular updates to computing environments by large enterprises as well as expansion for growing workloads. Considering the ongoing expansion of AI inference and subsequent Agentic applications, this cycle is still at an early stage, and traditional servers have the potential for sustained growth.

Beating expectations across the board: Server business drives revenue and profit

Dell’s Q1 financial report exceeded expectations across the board. Revenue reached $43.8 billion, up 88% year-on-year, far above the company's previous guidance range of $34.7–$35.7 billion. Gross margin was 18.1%, higher than the market’s expectation of 17.3%. Operating profit margin was about 9.7%, up 260 basis points year-on-year, with a slight quarter-on-quarter decrease of 90 basis points.

The server business remains the biggest growth engine. The ISG division’s revenue hit a record $29 billion, up 181% year-on-year, significantly beating the market consensus of $22.3 billion. Among this, traditional server and networking revenue reached $8.5 billion, up 92% year-on-year—almost double the $5.2 billion expectation; AI server revenue came to $16.1 billion, up 757% year-on-year, also above the anticipated $13.1 billion.

Bernstein commented that Dell’s revenue, profit margin, and earnings per share for the quarter all far exceeded company guidance and market expectations; growth is not reliant on a single product line, but displays broader business momentum.

Traditional servers reigniting growth: Agentic AI drives CPU orchestration and memory demand

The explosive growth of traditional servers was unexpected because the market previously did not see them as Dell’s core growth variable. The company's full-year growth forecast has been raised from mid-single-digits to just above 60%, while Q1 revenue grew 92% year-on-year, clearly changing the demand slope.

Bernstein indicated that the growth of traditional server business is attributed to increased unit shipment, higher memory per machine, rising prices, and expanded market share. The main demand comes from large enterprise customers refreshing their computing environments and expanding workloads; AI inference also brings incremental demand.

Agentic AI is key to understanding this change. These workloads require CPUs for orchestration, along with more DRAM and storage, making traditional servers the foundational computing layer for new AI workloads.

AI server backlogged orders hit historical highs, enterprise customers become new growth pole

The AI server business is also strong. Orders increased by $24.4 billion this quarter, with backlogged orders rising to $51.3 billion, a record high; demand growth is consistently faster than supply release.

Against a backdrop of high demand, customer structure is also changing. Emerging cloud service providers remain the largest demand source, but sovereign and enterprise customers are quickly catching up, with enterprise customer growth now surpassing all other types.

Further observation shows that the customer expansion paths for the two types of servers are distinctly different. Traditional servers are currently mainly driven by enterprise customers, with future extension to Tier 2 cloud service providers; while AI servers are first propelled by emerging cloud service providers. Although enterprise customers currently hold a small share, they are likely to become the main demand drivers in the future.

Based on the above demand trends and structural changes, Dell has raised its FY27 AI server revenue forecast by $10 billion to $60 billion, and adjusted ISG overall revenue growth expectations from the mid-40% range to about 80%.

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