Dell (DELL.N) provided a current-quarter profit outlook below market expectations on Thursday, citing higher costs associated with building servers tailored for heavy AI workloads, which would impact its annual margin. Consequently, its shares plunged over 17% in after-hours trading.
The Round Rock, Texas-based company anticipates a decline of approximately 150 basis points in adjusted gross margin rate for fiscal 2025. For the current quarter, it projects adjusted profit per share of $1.65, with a margin of plus or minus 10 cents, compared to analysts’ average estimate of $1.84, as per LSEG data.
Chief Financial Officer Yvonne McGill mentioned during an earnings call that inflationary input costs, competitive pressures, and an increased mix of AI-optimized servers are expected to contribute to the decline in gross margin rate.
The surge in demand for high-performance computing and large-scale data centers, driven by the growing adoption of generative AI, has led to increased investments in AI-capable products, including servers offered by Dell.
Mikako Kitagawa, director analyst at Gartner, noted that Dell’s margin decline reflects the competitive pricing environment and attempts by competitors to gain market share.
Dell reported a significant increase in shipments of AI-optimized servers, reaching $1.7 billion, with backlog growing over 30% to $3.8 billion, according to Chief Operating Officer Jeff Clarke.
The company recently unveiled AI-enabled PCs powered by Qualcomm (QCOM.O) processors and announced the availability of a new server supporting Nvidia’s (NVDA.O) latest chips in the second half of 2024.
Despite its stock doubling this year and reaching a record high, Dell forecasted second-quarter revenue between $23.5 billion and $24.5 billion, exceeding the average estimate of $23.21 billion.
Additionally, Dell raised its revenue forecast for fiscal 2025 to a range of $93.5 billion to $97.5 billion, up from the previous projection of $91 billion to $95 billion.
In the first quarter ended May 3, revenue increased by 6% to $22.24 billion, ending a streak of six consecutive quarters of declines. Adjusted profit aligned closely with analysts’ estimates.
The revenue for the infrastructure solutions group, encompassing storage, software, and server offerings, surged by 22% to $9.23 billion, while the client solutions group, comprising PCs, remained flat.
