Guys, my name is Eric Woodring. I lead the hardware coverage here at Morgan Stanley. I am delighted to have Yvonne McGill, CFO of Dell Technologies, and Arthur Lewis, President of the ISG business, here with us. Yvonne has been a mainstay at Dell, for oh, you've been at Dell.
Yeah, 20, 26+ years.
Yeah, didn't wanna say, but obviously recently stepped into the CFO role. And Arthur, President of ISG, responsibility for sales, strategy, general management of the business. So both of you, thank you for joining us today.
Thank you for your time.
Thank you. Before we start, I have two things I need to read here. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Then from the Dell side, Dell Technologies' statements that relate to future results and events are forward-looking statements based on the company's current expectations. Actual results and events could differ materially due to a number of risks and uncertainties, including those discussed in the company's SEC filings. The company assumes no obligation to update its forward-looking statements.
Perfect.
Well, thank you guys very much for joining us. Yvonne, you're standing closer to me, so I'm going to start with you. I think what would be maybe most helpful to start this conversation is just a look back at your January quarter earnings report, fiscal 2024 as a whole, and maybe give us a bit of a postmortem on the year, obviously reported late last week. And then we'll get into it, but I'll follow up with kind of speaking more about the factors for 2025. Maybe let's just start with a postmortem on last year.
Sure. Well, you know, I think last year was a very exciting year for us, and it made a few things very clear to us. First, data and technology are critical, crucial to everything that's going on, right? And so that was a great validation year. And it was also that, you know, things don't always go as you expect them to during the year. And one of the things that I love about Dell and I love about how we navigate is our ability to navigate, right, and be successful regardless of what the environment is. You know, FY 2024, so the year we just finished, certainly was a great evidence point there. We delivered $88.4 billion in revenue, EPS of $7.13, $8.7 billion of cash flow from operations.
So, really great opportunity or great results there. In Q4, you know, we entered that quarter, you know, wondering exactly how it would come out, right, but really finished quite strong, delivering $22.3 billion of revenue and $2.20 of EPS. So, you know, again, a solid performance there. But I think, again, what was really exciting, in the fourth quarter and as we enter this year, is we saw some recovery, if you will, in some signs of recovery, like server. We saw a third quarter of traditional server growth. AI, we can certainly talk about AI, and I know we'll talk about AI. We've been talking about AI a lot. But, you know, it was great to see that traditional server growth, for the third quarter in a row.
We still haven't seen corporate and enterprise spending come back. And you all know from our portfolio where we play, we are more weighted towards that corporate and enterprise side of the business customer set. So we haven't really seen that yet. You know, when I look through to FY 2025, which we talked about, you know, we've just started. I guess we're in month two now of FY 2025. Really excited and really optimistic about the year that we're in. Now, why am I so optimistic? Well, AI is part of it, but it's great to return to growth. Growing is so much more exciting than not growing. So, you know, we are calling for growth this year and, you know, super excited to deliver against that expectation, holistically.
You know, we entered the year with $2.9 billion in AI backlog, and, you know, pipeline growing. That's just one indicator of the year that we're in right now.
Yeah. And.
Super exciting.
Arthur will be our guy to dig into that. So you stay put. We'll get you in a second. In terms of putting some numbers around fiscal 2025, you got into revenue growth of about 5%, EPS growth of about 5%. Compared to your long-term targets you laid out in October, that was about 3%-4% revenue growth, 8%+ EPS growth. So we're outperforming on the revenue side a little underperformance versus a long-term target, and again, long-term multi-year target on the EPS side.
Mm-hmm.
Based on what you just talked about, you know, why do you think kind of the shape of fiscal 2025 will turn out the way that it is that you guided it to?
That we've guided it to it. You know, our strategy's consistent, right? So we did lay it out in our Securities Analyst Meeting in October, right? So good news. We haven't changed our strategy since October. But you know, we're starting to see it play out already. And I would say in October, we were even newer into AI and the opportunity ahead of us and how fast it was gonna ramp. And so, you know, really feel confident about that. I feel confident about our strategy. We've been consistent with that over a number of years, right? So leveraging our advantages and taking, you know, and extending our competitive advantages holistically. You know, I think the tailwind, you know, I could say AI like 1,000 times, and it probably wouldn't be enough. We've probably said AI 1,000 times already today.
You know, I think that's just a great opportunity. But it's more than just the AI-optimized servers. It's really a change. It's a dynamic change in how companies are thinking about the future.
Mm-hmm.
Enabling the future. So that's really what I'm super excited about for FY 2025, the year we're in right now, but for many years to come because this isn't a one-and-done. This everyone won't be through an AI transformation, this fiscal year. So it's just the beginning.
Perfect. Perfect. So, why don't we start with you and talk about the PC, the business, the CSG business, then we'll eventually transition to ISG and kind of round out the conversation. But, PCs, well, despite the fact, how much everybody's using the term AI this week, PCs are still, at least in my conversations, top of investor minds. Can you help us understand how Dell is thinking about the PC TAM this year and what drives that kind of 2%-3% CSG growth in 2025? And, you know, there's a number of factors that go into that, right? It's demand. It's pricing. It's catalysts. It's channel inventory. It's seasonality. It's where you're seeing spend kind of ebb and flow right now. But help us think about the CSG business for this year, again, 2%-3% growth.
Sure. So, you know, we think of, you know, that this is the year that we'll start to see growth in the PC business. We've been in the longest digestion cycle, so eight-quarter digestion cycle, in the history of PCs, right? And so, you know, we know it's back-to-back years of double-digit decline, right?
Mm-hmm.
So, pretty, pretty amazing, never-seen-before results. But it's time for a refresh, right? We've got drivers out there, whether it's, you know, Win 10 refresh, whether it's AI, and I think that's less of a driver right now. I think it's more the age of the install base. But, you know, it's time to get the capabilities and get the environment refreshed for productivity. That's the primary productivity driver.
Mm-hmm.
For employees, for companies. And so we wanna make sure that, you know, we're on top of it. We're expecting it to start in the second half of the year. And that's what's embedded within our holistic OP.
And then just the last one was in terms of pricing there.
Mm-hmm.
Just how we should be thinking about CPC pricing, you know, consumer versus commercial, how that impacts and how.
Yeah. I think from a pricing standpoint, we have a number of influential areas there. We have commodity component costs we're expected to increase.
Mm-hmm.
That's certainly one of the drivers to price.
Mm-hmm.
We have a competitive environment. So what we've seen is less opportunities in, let's say, the large corporate and enterprise space. We've seen, you know, lots of competition for there. So I've got increased input costs. I've got more competition.
Mm-hmm.
you know, that's some of the drivers that we're expecting to see in PCs. So I think that will have an impact on margins, holistically. That is embedded and expected within our guide.
Okay.
But you have, then, you know, other areas that could drive change and influence, like, you know, maybe AI. Maybe you need, if you're thinking forward, which I hope all companies are, about what capabilities they need within their device, you know, two years from now, three years from now, they need to make sure that they're buying the most, you know, ready technology for the future.
Perfect. So you mentioned margins. So I figured maybe we go there for a second. So can you talk about the kind of cost and margin landscape, how that evolves over the next 12 months? You told us last week gross margins in fiscal 2025 will be down 100 basis points year-over-year. You know, that kind of implies low incremental margins, kind of below your normal model. So how should we all be thinking about those most significant headwinds that you're facing in light of growing and, you know, that includes some of the more cyclical stuff? But what would you do to try to offset those factors?
Well, you know, I mentioned some of it already, right? The higher input costs. We will expect to pass those on to our customers, right? And usually, we talk about a cycle that takes us, you know, 90 days or so to get that all priced.
Mm-hmm.
We have visibility. We are expecting an inflationary cycle right now. So we're being thoughtful about the, you know, pricing that we're putting out there. You know, I think of another element I already talked about too is the competitive environment, right? So, you know, everyone's going after the same transactions. And so, you know, we leverage the strong relationships we have with our customers. But, you know, there's you know some price aggression that we're expecting. And that's also embedded into our guide. You know, so I think those are probably, you know, two of the key drivers holistically that we're seeing. And then, you know, I think of you know around AI servers, for example. We've talked about them being margin dollar accretive but rate dilutive. So.
Mixed.
You know, yeah. So mixed shift there. So you'll see that pressure holistically on, on our operating margin rate.
Mm-hmm.
you know, I think that's probably the bigger areas.
Bigger issues.
Yeah. The bigger areas.
Okay. So maybe, Arthur, I'll turn to you and dive into the ISG business a bit here. You know, there's a lot to unpack between kind of the traditional business and AI. You know, if we go back to October, you guided ISG to 6%-8% annual revenue growth. That's up from 3%-5%, from your analyst day three years ago. Last week, you told us it was gonna grow mid-teens in fiscal 2025. So there's a clear tailwind. What's interesting is that the shift of workloads to the cloud has historically been a headwind for a business that sells into on-premise data centers. But clearly, there's strength in ISG. So why is this business perhaps better positioned than history and expected to see stronger growth this year than maybe you even talked about longer term?
Yeah. Good, good question, Eric. And, and thanks for having us. You know, when we met back in October, we talked about the fact that the ISG TAM was roughly $265 billion and, and growing at 7%. And embedded in that outlook was an AI TAM of about $124 billion, projected out to calendar year 2027. Since we met, not surprisingly, IDC has recast their forecast and now have it at $152 billion, growing at a 20% CAGR, obviously going faster than the average and obviously a lagging indicator, right, because customer demand continues to grow. And we would expect that demand to grow. And therefore, AI is the significant tailwind that we called back in October, which really underpins the mid-teen growth, that we're calling for FY 2025.
You know, in terms of deployments, I think it's important to start with the fundamental fact that 83% of the world's data sits on-premises. And there's gravity to that data. And the reason why there's gravity to that data is because of cost, performance, and security. 82% of the customers that we've surveyed definitely trend towards a preference on-prem for the deployment of generative AI. When you have information that touches proprietary company information, proprietary financial information, proprietary IP, CIOs and CEOs and boards really don't want to adjust their data strategy. So I think there's probably a stronger argument to make for repatriation.
Mm-hmm.
Then for, you know, more data going to the cloud because of cost, security, and performance. You know, what we see is a lot of customers are testing out, you know, workloads in the cloud just to prove out concepts. But when it comes to putting AI in production, they're coming to us to help them think through an on-prem solution. And given the breadth of our portfolio, our services capability, and our other durable advantages, we feel like we're very well positioned to capture the opportunity. And you heard a little bit about that last Thursday.
Perfect. And then so maybe let's start on the traditional business. Then we'll get into everything GenAI related. So, you know, Jeff has told us a number of times that the kind of typical historical cycle for storage and servers is kind of four to six quarters. You know, this down cycle has been one of the longest in history for the traditional business. But as you mentioned, Yvonne, you are seeing green shoots. Traditional servers have grown sequentially for three consecutive quarters. You had a strong ending to the year in the storage business. So maybe simplistically, my question is, are we past the worst of the down cycle?
You know, what gives you confidence that the traditional business can grow this year just given something you started the conversation with, which was large enterprise spending is still weak at the moment?
Yeah. I mean, look, there's no question that we've been in an elongated period of digestion. Eight quarters, you know, we started to see this period begin in, you know, Q1, Q2 of calendar year 2023. You know, we've navigated, you know, geo conflicts. We've navigated, you know, global downturns. The beauty of our model is that, you know, we never let a good crisis go to waste.
Mm-hmm.
And we prepare for the eventual rebound. And that's what we've been doing. And, you know, as we look to FY 2025, you know, we exited the year with three consecutive quarters of sequential growth on the server business and the first year-on-year growth. And I wanna, you know, reiterate what Yvonne said. Growing is a lot better than not growing. We see really strong adoption with our 16G portfolio given the performance, security, and embedded intelligent automation that we have in that. And we finished strong in storage above our seasonality. And it was good to see growth in our PowerScale portfolio and triple-digit sequential growth in our PowerFlex portfolio. And look, I mean, at the end of the day, I know we're talking about the core business. But, AI generally and generative AI specifically is going to drive our modernization around infrastructure.
Mm-hmm.
That is not only relevant to generative AI systems but is also gonna bode very well for our core server and storage business.
Okay. Perfect. And, you know, Yvonne, I'll turn quickly to you because, obviously, as the CFO of Dell, you manage the finance department. You have your own internal conversations about what can maybe unlock spend in your business. And so as a business leader, as a large enterprise leader, what are the catalysts again, as we think about weak near-term enterprise spending, what are the catalysts that you think or would help you unlock spending within Dell, again, as kind of a corollary to what we could see from the larger enterprise community?
Yeah. When I think of that, I really, you know, start with the macro environment. You know, I think there's uncertainty in the macro environment. And that's not helpful to.
Mm-hmm.
You know, for people to lean into spending. So, you know, I think that, that would be, that would be one area, a little bit more clarity with, with the macro environment. You know, customers are cautious. And, you know, especially in, in the large, large customers, large enterprises. And so, you know, we're working through that with them. We are them.
Mm-hmm.
And so, you know, we're navigating through it together. And so that's been really helpful in really being more thoughtful about how to spend and when to spend and where to spend. How do you prioritize all of that? You know, the you know, I and that has been lengthening the sales cycle.
Mm-hmm.
I do joke about, you know, they've inserted finance people into the approval process that didn't used to be there. I love that kind of.
Mm-hmm.
But it's, you know, it does elongate the process, right, when you put more approvals in there. So, you know, I don't think it's lost on anyone that refreshes are coming, that, you know, we all need more technology to deliver on the future. So it's a matter of when, not if.
Right.
And, you know, we're working on, you know, we're ready when our customers are ready. And we're trying to help them see that, you know, now is the time to get started and get moving forward on their technology journey. So, you know, that's kind of what I would think. You know, AI has been.
Mm-hmm.
You know, top of mind. You have to allocate your capital spend. So, you know, I feel very comfortable with our holistic portfolio.
Mm-hmm.
That regardless of where our customers prioritize their spend, we will benefit from that holistically.
Okay. So let's turn to the topic du jour, with you, Arthur, generative AI. Maybe if we before we go into each specific opportunity, you know, you mentioned the TAM earlier from IDC, originally $124 billion by 2027, $124 billion by 2027. Now, excuse me, $152 billion by 2027, probably going to go higher than that. For you guys, Dell, you've recognized about $1.5 billion of AI server revenue in the year that just ended. You have a $3 billion backlog of AI servers at the end of the quarter. You have a pipeline that's even larger. I guess my long lead-in to this question is, are we really, like, only in the first inning of this opportunity? Like, where is this growth coming from for you guys?
I know it's a hard question to answer because it's such a fast-moving market. But take a step at it. Where is this opportunity today?
Yeah. I think, you know, as we kind of, you know, take a look at what's happening in the business, the way I think about it is there's, you know, to keep the baseball analogy going, there's sort of two games that are being played right now. I think in the Tier II CSP community and these are, you know, the CoreWeave, the Denvr Dataworks of the world that are building out large training and inferencing infrastructure to support GPU as a service to their end customers, we're in the early innings of the baseball game. But when it comes to the enterprise, we're in the car pulling up into the stadium. And the teams are still trying to figure out the rules of the game.
But what's incredibly exciting is that there's something different that's happening here, because, you know, one of our differentiators is our capability and understanding of all things artificial intelligence.
Mm-hmm.
So we're having conversations with enterprise customers that start way before the infrastructure conversation. We're talking about, "Hey, Dell, what use cases are you guys seeing? Hey, Dell, how do you think about model selection? Hey, Dell, how do you think about data preparation? How do you think about fine-tuning? How do you think about RAG?" And then you get into an architecture conversation. And then you get into an infrastructure conversation. And what's really cool about that is we're way up the stack in the conversation, which gives us great opportunity, a much higher opportunity in order to capture, you know, that system that the enterprise customer is deploying. And we're able to leverage what we're doing inside of Dell and Dell Digital and use that externally with customers to let them know, "Hey, we understand exactly what you're going through.
And this is what we're doing about it." In fact, Dell Digital is customer zero for us from an ISG perspective. Everything that we do, we consult with Dell Digital. We understand what they're doing. And, you know, we're all learning as we go. Every day, we learn something new. And we impart that information to a lot of the enterprise customers. And they really appreciate it. I mean, at the end of the day, you know, this technology, you know, we believe is a once-in-a-lifetime opportunity, one of the most significant advancements probably in human history. And so you see these productivity numbers that are, you know, atmospheric in nature. And so this now becomes a board-level, CEO-level conversation. And the aspirations are incredibly high.
So folks are crossing T's and dotting I's and running a lot of POCs against a, you know, a variety of different use cases to really understand where are the productivity benefits. And it's opening them up to a lot of other ideas around, "Hey, I should really be thinking about modernizing my operations of the business in order to make generative AI that much better," right? "I need to be thinking about streamlining my processes. I need to be thinking about automating my processes." And then, excuse me, I need to be thinking about generative AI. I think this is gonna drive a massive change in our industry. It's gonna drive a massive change in infrastructure. This goes well beyond, you know, AI-optimized servers that, you know, we're talking about today in the context of Tier II, cloud service providers.
Okay. You know, something I think we all are very interested in is, I'll make this question simple, you know, why is Dell winning, right? Your commentary obviously stands out very positively amidst the market. What is your competitive advantage in the market in this market? Again, why are you winning right now?
Yeah. I think it's. I would kinda boil it down to, you know, sort of five things. The foundation of it is the breadth of the portfolio and the thought that went into the creation of the portfolio. It all starts with the 9680. We, we spent a lot of time on the architecture of this product. We had some pretty aggressive design points. Design point number one, it had to be the densest platform in the industry. Design point number two, it had to offer silicon diversity for all of the various GPU suppliers. Design point number three is that it had to offer diversity for networking and connectivity. Design point number four, it had to offer complete flexibility for thermals, moving from air cooling to liquid-assisted to Direct-to-Chip Cooling, right?
And the team did a phenomenal job and hit every single one of those design points. And we were first to market when we launched the 9680 with the H100 in it, right? So it starts with that, the 9640, the 750xa, the 760xa, the AI fabric that goes along with it, and the diversity among that. And then we add the storage portfolio on top of it. And today, a lot of people like to talk about the unstructured portfolio because of text, video, imaging, and whatnot. And so, you know, we launched the new F210 and F710, which have increased performance, increased density, increased I/O, right, all of the things that provide for a very performant storage-class product for generative AI. But down the road, you can see how structured databases are also going to be very relevant.
So while people talk about unstructured storage today, structured databases are going to be there as well. And, you know, what's also important here is that, we have the ability to co-engineer this system, right, because GenAI is a system. It comprises compute, networking, and storage. And the ability to engineer that under one roof is incredibly important because if you're trying to create this system, you know, through a myriad of partnerships, that level of collaboration that is required assigns a very high beta to that project, right? So we have a very differentiated portfolio that we collaborate and design as a system. And then we take that portfolio, and we offer it as a solution. And we create Dell-validated designs that are targeted at a bunch of different use cases.
So if a customer comes and says, "Hey, I'm looking at a sales chatbot," or, "I'm looking for customer service," or, "I'm looking for something content creation," we have the ability to talk to them about a validated solution that comprises compute, networking, and storage. That's the foundation of our differentiation. On top of that, we have the ability to build out the ecosystem. We have the only partnership, in the industry with Hugging Face. And we have the only partnership with Meta and Llama 2. And that's gonna become incredibly important as indexing data is incredibly important when you think about the generative AI system. On top of that, we're able to build out our professional and consulting services.
Professional services is what you would typically know Dell for in terms of support and deployment services, which are incredibly valuable not just to the enterprise but to the Tier II CSPs as well. But we've also taken the extra step of providing these consulting services to have the conversations that we talked about in the previous question. We also have the ability to provide financing through Dell Financial Services, one-stop shop for product and financing. And then lastly, but also extremely importantly, we have the industry largest sales team, not only largest, largest and most knowledgeable sales team. And we have a world-class supply chain that is wielding the power of Dell scale. You combine those five things together. And we very much like the hand that we're playing.
That was great. And maybe just to piggyback on that, you know, how do we think, you know, so in the traditional server business, you'll if we put the ODMs to the side and think about your TAM, the largest server provider in the world, how do we think about, you know, the market share in this specific opportunity with Dell in mind? I mean, there's only a few players in this market. You know, is this something where you can remain on the forefront, again, not just in 2023 and 2024 but beyond for the reasons that we just talked about?
Yeah. I mean, look, if you think about, you know, sort of my answer to the previous question, you know, we think that we've created a pretty strong barrier to entry for, you know, competitors to come in, including ODMs. You know, we are absolutely targeting equal to or greater share of this space that we have in our traditional server and storage market. And again, given all of the things that are working in our favor, the tailwind of the market, the progress we're making with the Tier II CSPs, what we're seeing in the enterprise, we're very comfortable with that.
Perfect. So something I've been trying to better understand is, you know, how many kind of CoreWeave and Imbue and Denvr Dataworks-like customers are out there? I mean, you know, these AI as a service companies are buying AI servers in large volumes. That customer base is expanding, like you told us last week. But how much kind of follow-on demand and sustainability is there really with these customers? I know you talked about the early innings. But if you could maybe give us a bit more detail on the sustainability and kind of follow-on demand, that would be helpful.
Yeah. I mean, it's tough because I don't have my crystal ball with me. But, I can tell you that.
Oh, that's right.
I can tell you that we had, you know, more of the Tier II CSPs customers in Q4 than we had in Q3.
Mm-hmm.
The customers that existed in Q3 that also existed in Q4 continue to tell us that they need more infrastructure because they don't have enough to support the needs of their customers. So I keep thinking that wave one is going to crest any moment. But it doesn't seem to be cresting anytime soon.
Okay. And then on the enterprise side, you said we're still driving to the cloud.
We're pulling into the stadium. Yeah.
Yeah. Yeah. Right. Can you talk about maybe qualitatively, again, within the backlog and the pipeline that you have, you know, how you've seen that enterprise either mix or spend trend, over the last couple quarters and what industries are buying these AI servers? What are the use cases that they're telling you that they need these servers for?
Yeah. So, you know, from a revenue perspective, the mix is not gonna change dramatically just because of the scale of the Tier II CSPs. So what we're looking for is the absolute number of customers that we're engaged with quarter-over-quarter, and the mix of customers that we see quarter-over-quarter, which would include enterprise customers versus CSP customers, right? And then sort of the percent of the bookings and the percent of the backlogs, everything we saw in Q4 was trending in a very positive direction. And it's really cool because we're seeing it across really every industry. I don't think there's any industry that stands out. It's financial services. It's manufacturing. It's retail. It's healthcare. There's a very healthy cross-section of vertical participation in really wanting to understand, you know, what's going on with generative AI.
I think, you know, sort of the leading use cases are kinda like the four that we're really focused on. Software development comes up a whole lot. "Hey, Dell, how are you thinking about software development? Where in the software development process do you think generative AI plays the best role?" They're thinking about it from a sales chatbot perspective. They're thinking about it from a customer service perspective. And, you know, something as mundane as content creation. You'd be surprised, and I certainly was surprised, how much money we at Dell spent on this and how much money customers say they spent on this and, you know, the amount of savings that they could realize through deploying generative AI. And then there's a lot of other, you know, core functions in the company like finance and supply chain that they're looking at, you know, deploying generative AI.
But, you know, this is where the cloud kinda comes into play because they got so many different use cases. They're running a bunch of different models to see, "Hey, where am I gonna get the biggest bang for the buck?" because, you know, they really want to think about, "I want to deploy this against the thing that's gonna provide the biggest return on my investment." But again, what's really cool, and I think I said this a little bit earlier, is, you know, there's a short-term, "Hey, I understand that generative AI is a system. And it's a different workload from sort of traditional workloads." But customers' eyes are starting to open to say, "Hey, generative AI is going to drive a different AI-optimized infrastructure going forward." You know, Jensen and NVIDIA refer to this as an AI factory.
And that's what we see transpiring over time. If you think about the majority of the world's data today is cold, you know, sitting in backup and archive, you know, we think the equation of that's going to flip where more of the data is hot, warm.
Mm-hmm.
is constantly circulating, feeding the AI the AI engine, which is going to cause a significant retooling of data centers around the world. Again, this is like, an incredibly exciting time to be in technology. I think we're extremely well-positioned to capture the opportunity.
Cool. And the last question I'll ask on this topic is, maybe the most important and maybe the most underappreciated, which is at earnings, you guys made the comment that for every dollar of AI server spent, there's $2-$3 of storage and services and networking attached that comes alongside of that. And so maybe help us better understand exactly what that means for your non-AI server solution because, you know, that could ultimately suggest the non-AI server TAM is bigger than the AI server TAM or that hardware TAM. And so, you know, how does the breadth of offerings that you guys have give you a chance to really supercharge what you've already talked about on the AI server side?
Absolutely. You know, today and not surprisingly, you know, as folks are really trying to understand how the system operates, a lot of the focus is really on the compute side because the model is sitting in memory, right? And they're trying to kinda like really figure out what the use case is. You know, the storage component, you're going to need attached storage that's highly performing. We talked about density, performance, and I/O. But ultimately, vector databases are going to sit there. And you're going to need a superior ingest engine to really get the benefit of the generative AI system, right?
Mm-hmm.
You can see that's a mid to near-term a near to mid-term solution. That's not going to scale, right? You're going to have to take that type of performance storage and basically kinda rethink your entire storage strategy, right? So as time goes on, you're going to see the generative AI really drag not just compute systems but the traditional core servers as well as traditional storage because everything is going to be optimized for AI.
Okay. Yvonne, I'll shift back to you. One more PC question.
Mm-hmm.
Again, PCs and AI will bring them together. But a number of your peers have said publicly AI PCs will be I think it's 50% of global shipments by 2026. Even as a PC bull, that seems high, given we've just really started the launches of these devices. We might not even be in the first inning. You know, how do you guys think about the progression of AI PC mix? And when we think about the real use cases to drive adoption, you know, there's some skepticism. So how should we think about those use cases? What's top of mind when it comes to these devices?
Yeah. I mean, I think it's interesting. And it's interesting to say what is an AI PC, right?
Mm-hmm.
You know, we think a PC with an accelerator is an AI PC. So it could be an MPU. It could be a GPU. You know, we have those now. We'll have more in the future, right? But you know, how do you really take advantage of it? What capabilities do you need?
Mm-hmm.
I think that's really what, you know, what everyone's talking about and, you know, what we're expecting to accelerate going forward. But when is forward? And when does acceleration start? And so, you know, we're thinking that we'll start to see, you know, more of AI capabilities being embedded in PCs that are, you know, towards the starting the refresh cycle, right, which we, you know, I already said was we think is gonna be towards the latter half of this year. I think it's, you know, I expect, you know, a lot more capabilities. You're gonna want to have those capabilities embedded in your device because when the technology is delivered, you don't wanna have to refresh your PC again, right?
And so if you think of a notebook, I'm gonna give a three-year AI notebook should be a three-year refresh cycle. I know we're elongated right now. But I'm gonna plant the seed that it's a three-year refresh cycle. And so.
Make sure.
Yeah. I'm gonna make it.
Make sure.
I'm gonna make it. It's gonna happen 'cause we're gonna talk about it. But you're gonna have these devices. When you're refreshing them, all of the capabilities are gonna be delivered. You need to be able to take advantage of them with the investments you're gonna be making. And so I think that's part of, you know, what we're talking to our customers about is what capabilities do you need? And how can we make sure when you're refreshing your install base that you're refreshing it with the technology you need not just for today but for the future?
Sure.
Yeah.
Right. Okay. Perfect. So with the last time we have, I kinda wanna touch on another very important aspect of this story, which is capital returns and capital allocation. An important part of your analyst day last year was the new capital return commitment that the company made, returning 80%+, emphasis on the plus, of free cash flow to shareholders, you know, growing your dividend at least 10% annually. So if we rewind to last week, you announced a 20% annual dividend increase.
Mm-hmm.
You're gonna have to buy back a lot of stock as well. You obviously showed that in the January quarter. So first, obviously, just confirming that's the right way to think about capital returns in fiscal 2025. There's no change versus that long-term guide. And then, you know, second, how do you think about balancing dividends and buybacks and liquidity of the stock and some of the actions that we've seen Michael and Silver Lake take that he talked about in October in terms of.
Mm-hmm.
Trying to help increase the floor? How do we think of all of those together.
Yeah.
in terms of capital returns?
Yeah. It's certainly, certainly complex. But, you know, we, we did roll out our long-term framework. And, you know, with the pluses in there. So we, we didn't feel limited to that framework. We, we did announce the dividend increase of 20% last week, which was really to us a commitment and confidence in the capital returns we will be driving. And so we wanted to make that statement. Is 20 more than 10? Yes. And that's what we said we would do. And, you know, again, it's confidence. You don't take your dividend down after you after you raise it, right? So, you know, just wanting to speak to the confidence there. You know, as we look through since the dividend inception, right, we've delivered $7 billion return to shareholders, right? So that's a pretty sizable number.
You know, we see that continuing. You know, I think it's, you know, you talk about the stock, you know, the repurchase that we're doing. You know, certainly, you know, with the stock performing like it is right now, it's, you know, we'll navigate through it, right? We still think our stock is undervalued. And so it is to our advantage to continue the repurchase, the repurchase cycle. So, you know, we're very committed to that and to our overall, you know, capital framework.
Perfect. We have 30 seconds. But, I do, I know just to touch on free cash flow again, maybe I'm going this out of order. But, you know, you've talked about 100%+ free cash flow conversion. You know, it seems like you still have some working capital efficiencies you can capture. You know, maybe my question is, has anything structurally changed such that you couldn't capture some incremental working capital efficiencies? Does the emphasis on AI, does that change the capital intensity of the business at all? Or, how should we think about that conversion rate?
No. We're committed to our capital returns, to our cycle. I don't think of anything that's, you know, gonna change that going forward. I am confident that the AI momentum will only improve, that going forward.
Okay. We're out of time.
All right.
Yvonne, Arthur, thank you very much for joining us today.
Thank you.
Thank you.