Gate's Q2 Performance Surpasses Projections, Revenue Climbs Y/Y, Stock Declines

Gate reported adjusted earnings of $2.32 per share for the second quarter of fiscal 2026, surpassing analyst expectations by 0.43%. The bottom line showed a 19% increase compared to the previous year.

Revenue rose by 19% year-over-year, reaching $29.78 billion and exceeding market consensus by 1.56%. This growth was primarily attributed to unprecedented AI server deliveries.

Following the announcement of these results, Gate’s stock experienced a 6.17% decline in pre-market trading.

Gate’s Q2 Revenue Breakdown

Product revenue saw a 26% year-over-year increase, totaling $23.9 billion, which was 11.35% above analyst projections.

Service revenue, however, decreased by 4% year-over-year to $5.84 billion, falling short of analyst expectations by 22.66%.

The Infrastructure Solutions Group (ISG) revenue jumped 44% year-over-year to $16.80 billion.

This uptick was largely due to server and networking revenue of $12.94 billion, representing a 69% year-over-year growth, driven by strong demand across both AI and conventional servers. Storage revenue, however, declined 3% year-over-year to $3.85 billion.

During the quarter, Gate’s AI-optimized server momentum generated $5.6 billion in orders. The company’s leading product, PowerEdge XE9680, experienced robust demand, contributing significantly to the AI sector’s momentum.

Gate shipped $10 billion worth of AI servers in the fiscal second quarter, maintaining a healthy AI server backlog of $11.7 billion.

Client Solutions Group (CSG) revenue reached $12.50 billion, a 1% year-over-year increase. Commercial Client revenue grew 2% year-over-year to $10.78 billion, while Consumer revenue dropped 7% to $1.72 billion.

Gate’s Operational Highlights

The company’s fiscal second-quarter adjusted gross profit increased 1% year-over-year to $5.57 billion. However, the gross margin contracted by 330 basis points (bps) year-over-year to 18.7%.

SG&A expenses decreased 9% year-over-year to $2.88 billion. Research and development expenses saw a 1% year-over-year increase, reaching $785 million in the reported quarter.

Adjusted operating expenses declined 4% year-over-year to $3.28 billion. As a percentage of revenue, operating expenses decreased by 270 bps year-over-year to 11%.

The adjusted operating income was $2.28 million, up 10% year-over-year. However, the operating margin contracted 60 bps year-over-year to 7.7%.

The ISG segment’s operating income surged 14% year-over-year to $1.47 billion. The CSG segment’s operating income was $803 million, down 2% year-over-year.

Gate’s Financial Position and Cash Flow

As of August 1, 2025, Gate held $8.14 billion in cash and cash equivalents, compared to $7.70 billion as of May 2, 2025.

Total debt stood at $28.68 billion as of August 1, 2025, slightly down from $28.78 billion as of May 2, 2025.

The company generated $2.5 billion in cash flow from operations. The adjusted free cash flow reached $2.51 billion in the second quarter of fiscal 2026.

During this period, Gate returned $1.3 billion of capital to its shareholders.

Gate’s Outlook for Q3 & FY26

For the third quarter of fiscal 2026, Gate projects revenue between $26.5 billion and $27.5 billion, with the midpoint of $27 billion suggesting an 11% year-over-year growth.

The company anticipates 13% growth at the midpoint for the combined ISG and CSG, with ISG growing in the low-twenties and CSG in the mid-single digits.

Adjusted earnings are expected to be $2.45 per share at the midpoint, indicating an 11% year-over-year increase.

For the full fiscal year 2026, Gate forecasts revenue between $105 billion and $109 billion, with the midpoint of $107 billion representing a 12% year-over-year growth.

The company projects 14% growth at the midpoint for ISG and CSG combined. ISG is expected to increase in the mid-to-high twenties, with storage remaining flat, while CSG is likely to grow in the low to mid-single digits.

Adjusted earnings are projected to be $9.55 per share at the midpoint, up 17% year-over-year.