What’s really interesting through this phase is the types of PCs we’re selling tend to be at a higher ASP. If you look at our ASP against the balance of the industry, we’re roughly 2x. Why is that? One, driven by commercial mix; two, the attach, the attach of our peripherals, our software and services. It generally drives a 2x ASP to the industry, also driven by the types of products we’ve built are focused to the profit pools that we build to commercial PCs, again, premium consumer and gaming. That recipe has served as well. That’s not where all the units have been in the first half of the year. There have been a lot of units, which is why, quite frankly, we’ve struggled with a bit of share challenge this year as many of the units have been in emerging markets, have been in a low price band, consumer, chrome, which were not particularly strong in.
We focused into the profit pools where we are very strong and a market leader. We think about next year and as we end this year with a new version of Windows with CoPilot, all of us building AI-enabled PCs, we think AI at the edge on the PC is a great, I’d call it the killer app. I think that killer app is going to drive a productivity increase. And any time we’ve seen new applications that drive productivity at the edge on the PC. We’ve seen the market rebound. And if you’re going to ask your PC to do more, it generally means it needs a bigger CPU, a little more memory, a little bit more storage, a better display, et cetera, et cetera, which is another proxy for driving ASPs. That was a mouthful. I think I covered it all. We’re going to weather the storm this year.
The market is down. That’s not going to change. It’s rate of decline slows in the second half ASP are holding the opportunities are in the profit pools, which we continue to focus on, and we’re optimistic about a modest growth in calendar ’24. Thanks for the question,
Operator: We’ll take our next question from Asiya Merchant with Citigroup.
Asiya Merchant : Great. Thank you for the opportunity and great results. Jeff, in terms of the PowerPoint, you guys talk about the long-term market growth opportunity. And clearly, you’re very excited about how AI and some of Dell’s core offerings are helping shape the market as well. So if you could just talk about — when you think about your growth, your market opportunity, how we should think about that in the face of AI? Is that something that we should expect to maybe edge higher just given the growing amount of workload, the higher ASPs on the computer side as well as — and is that something that we should expect for calendar ’24 to see an acceleration in growth relative to your long-term market growth forecast, especially coming off a down year in calendar ’23?
Jeff Clarke: Well, we tend to think about these growth opportunities in areas where our model really extends or expand. So if you think about our leadership position across PC storage compute side, you think about our large go-to-market presence, you think about our, I think, scale and advantage in the supply chain are very scaled service organization. How do you take those four attributes and apply it to new growth opportunities. We’ve clearly picked and talked about them in the past as telco, which is off to a good start. Edge. We just — we’ve been engaged through partners in the marketplace, but the NativeEdge product that I announced on stage at DTW ships here very shortly next week. We think about the opportunity in multi-cloud as we build out the multi-cloud platforms that I talked about on stage.
They get delivered later this year. They’re on schedule. And then there’s the fourth tailwind that we’ve talked about a bit already today, which is AI. And again, to be clear, we think it is an incremental opportunity. Is it wholly 100% a new category, not cannibalizing some of the data center? I don’t know. I don’t think that’s worth debating. I know the workloads are different. I know the architecture and the types of products that we have to build to serve that demand and need are different. I think that is pretty exciting. Our model plays quite well there. Given the backlog and allocation of parts, we will be carrying AI backlog into next year. It’s just — we won’t get enough parts to clear the backlog even the 39 lead time of today. And I think it continues to build momentum because the early adopters tend to be concentrated in this AI as a service and the hyperscalers.
And we’ve now talked about and firmly believe it’s going to be deployed on-prem and at the edge. We’ve said this before. We think there’s going to be AI factories everywhere, little ones and big ones and little ones on the edge and medium-sized ones in data centers and large ones at cloud scale. That paints a picture of a pretty significant opportunity for us, and we have to continue to build our portfolio of services, which I think is key with the hardware. So our hardware aligned with certification of the application, the open source community that’s out there today, making sure they run great on our portfolio of XE servers and then ultimately build services, both embedded services and professional services or the platforms themselves.
Operator: We’ll take our next question from Michael Ng with Goldman Sachs.
Michael Ng : Thank you very much for the question. I just had on AI servers and ISG. It’s encouraging to hear that server ASPs increase, the AI server mix increased, and we saw improving gross margins in ISG. Was that primarily storage mix? Or are AI servers accretive to margins. And I’m just wondering if you could talk about whether or not there are any things to discuss as it relates to how GPUs are accounted for in AI servers? Is it done on a consignment basis? Or does it just flow through normally? And then lastly, I was just wondering if the success of XE9680 improves your revenue visibility into next year, just given the backlog and whether we should think about seasonality very differently for next year?
Jeff Clarke: A few questions on pack there, Yvonne and I will try to make our way through that and maybe in a logical order. When we think about this, our improvement in the P&L in Q2 was driven by the sequential growth in both storage and in servers. And because we had a favorable cost environment, we saw margin expansion in both servers and storage, which was good. You saw that in our performance. When I think about the role of AI servers, AI servers from an ASP point of view are significantly greater than a data center or a general-purpose computer, if you will. They’re dilutive on a margin percentage. They are accretive on a margin dollar basis. That’s how Yvonne and I look at the business. That’s the backdrop of how we look at AI servers in our portfolio, continuing to drive gross margin dollars, making sure that it’s accretive from that point of view.
Given that this is the early innings, we are selling services around these. Much of the service is deferred on our balance sheet when we sell service around these. That’s an opportunity to collect that when we can build more services around the deployment of these things like Project Helix that we’ve talked about being able to help our customers across the entire ecosystem that provides more opportunity for us to grow our part of the AI hardware and service market which I believe I quoted in our remarks that we think is going to grow 19% over the next handful of years to $90 billion.
Yvonne McGill : And we’ll strengthen our balance sheet as that grows. So looking forward to that opportunity.
Operator: We’ll take our next question from Simon Leopold with Raymond James.
Simon Leopold : Great I wanted to see if maybe you could talk about some of the dynamics related to the supply chain for your enterprise storage in that I think you’ve had some margin benefits from lower prices for NAND, solid-state memory. And there are, I guess, some expectations that supply and demand shift, pricing will go up for the memory next year. And I’m just wondering how to think about the effects on both your revenue and margin in storage .
Jeff Clarke: Sure. As Yvonne mentioned in a couple of her remarks as well as to the questions thus far, we had a deflationary cost environment in Q2. Our view is that we’ll be deflationary in the second half, although the rate of deflation is slowing. And that clearly benefited our businesses from PCs to servers, the storage. The actual material content in storage as a percentage of the sales price is actually smallest of all of our businesses. The spread is the value we believe we bring by our differentiated assets, our capabilities and features, mostly in the software. Typically, when cost increase, we are able to pass that through in time. It isn’t 1 for 1 or on the nanosecond, the cost increase that we can change the price, given quotes and what’s in the system but we are generally efficient at passing through cost increases over time, and we’ll do that here.
