Dell (DELL.N) projected lower-than-expected profit for the current quarter on Thursday, citing increased costs associated with building servers optimized for heavy AI workloads. This announcement led to a more than 17% drop in its shares during 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. It forecasts adjusted profit per share of $1.65, give or take 10 cents, for the current quarter. This falls short of analysts’ average estimate of $1.84, according to LSEG data.
Chief Financial Officer Yvonne McGill noted during a post-earnings call that inflationary input costs, competitive pressures, and a higher proportion of AI-optimized servers are expected to contribute to the gross margin rate decline.
A surge in demand for high-performance computing and large-scale data centers to support the increasing adoption of generative AI has led to investments in AI-capable products, driving demand for servers from companies like Dell.
Mikako Kitagawa, director analyst at Gartner, commented that Dell’s margin decline reflects the competitive pricing environment as competitors vie for market share in a recovering yet tight market.
Chief Operating Officer Jeff Clarke reported that shipments of Dell’s AI-optimized servers more than doubled to $1.7 billion, with the backlog growing by over 30% to $3.8 billion.
Dell recently introduced a series of AI-enabled PCs powered by Qualcomm processors and announced that a new server supporting Nvidia’s latest chips will be available in the second half of 2024.
Despite this news, Dell’s stock has more than doubled this year and reached a record high earlier in the week. The company forecasts second-quarter revenue in the range of $23.5 billion to $24.5 billion, surpassing the average estimate of $23.21 billion.
