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

By Jaspreet Singh

(Reuters) -Dell on Thursday forecast current quarter profit below market estimates and signaled that higher costs to build servers capable of handling heavy AI workloads would reduce annual margin, making dropping its shares more than 17% in extended trading.

The Round Rock, Texas-based company expects the adjusted gross margin rate to decline by about 150 basis points in fiscal 2025. It expects adjusted earnings per share of 1 $.65, plus or minus 10 cents, for the current quarter, compared to the average analyst estimate. of $1.84, according to LSEG data.

“Given inflationary input costs, the competitive environment and a greater mix of AI-optimized servers, we expect our gross margin rate to decline,” said CFO Yvonne McGill, during a post-results call.

An increase in demand for high-performance computing and large-scale data centers to support the growing adoption of generative AI has spurred investments in AI-enabled products, triggering demand for servers offered by enterprises like Dell.

“The decline in their margin reflects the competitive pricing environment, as the market has not yet fully recovered and Dell’s competitors have attempted to grab share in this tight market,” Mikako Kitagawa said. , managing analyst at Gartner.

The company’s AI-optimized server shipments more than doubled to $1.7 billion, and the order backlog grew more than 30% to $3.8 billion, the executive said. of operations, Jeff Clarke, in a press release.

Dell recently unveiled a line of AI-enabled PCs powered by Qualcomm processors and announced that a new server, supporting Nvidia’s latest chips, would be available starting in the second half of 2024.

Dell shares have more than doubled this year and hit a record high earlier this week.

It forecast second-quarter revenue of between $23.5 billion and $24.5 billion, compared to the average estimate of $23.21 billion.

The company also raised its fiscal 2025 revenue forecast to between $93.5 billion and $97.5 billion, up from its previous guidance of $91 billion and $95 billion.

Revenue for the first quarter ended May 3 increased 6% to $22.24 billion, ending a six-quarter streak of declines. Adjusted profit was largely in line with analyst estimates.

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

(Reporting by Jaspreet Singh in Bangalore; editing by Alan Barona and Sayantani Ghosh)