Dell’s profit, margin hurt by higher AI costs, shares slump

By Jaspreet Singh

(Reuters) -Dell forecast current-quarter profit below market estimates on Thursday, and signaled that higher costs to build servers that meet heavy AI workloads would dent annual margin, sending its shares down more than 17% in extended trading.

The Round Rock, Texas-based company expects adjusted gross margin rate to decline about 150 basis points in fiscal 2025. It expects adjusted profit per share of $1.65, plus or minus 10 cents, in the current quarter, compared with an analysts’ average estimate of $1.84, according to LSEG data.

“Given inflationary input costs, the competitive environment and higher mix of AI optimized servers, we do expect our gross margin rate to decline,” Chief Financial Officer Yvonne McGill said on a post earnings call.

A surge in demand for high-performance computing and large-scale data centers to support growing adoption of generative AI has spurred investments in AI-capable products, triggering demand for servers offered by companies including Dell.

“Their margin decline reflected the competitive pricing environment as the market had not fully recovered yet and Dell’s competitors tried to grab share in this tight market,” Mikako Kitagawa, director analyst at Gartner said.

Shipments of the company’s AI-optimized servers more than doubled to $1.7 billion, and the backlog grew more than 30% to $3.8 billion, Chief Operating Officer Jeff Clarke said in a statement.

Dell recently unveiled a range of AI-enabled PCs powered by Qualcomm processors and said that a new server, which supports Nvidia’s latest chips, will be available from the second half of 2024.

Dell’s stock has more than doubled this year and hit a record high earlier this week.

It forecast second-quarter revenue between $23.5 billion and $24.5 billion, versus an average estimate of $23.21 billion.

The company also raised its revenue forecast for fiscal 2025 to between $93.5 billion and $97.5 billion, compared with its prior forecast of $91 billion and $95 billion.

Revenue for the first quarter ended May 3 rose 6% to $22.24 billion, breaking a streak of six-quarters of declines. Adjusted profit was largely in-line with analysts’ estimates.

The company’s revenue for infrastructure solutions group – which includes its storage, software and server offerings – rose 22% to $9.23 billion, while that of the client solutions group – home to PCs, was flat.

(Reporting by Jaspreet Singh in Bengaluru; Editing by Alan Barona and Sayantani Ghosh)