Dell’s Profit Margin Hurt by AI Costs

On Thursday, Dell estimated current-quarter profit below market projections and hinted that increasing expenses to develop servers for heavy AI workloads will reduce annual margin, sending its shares down more than 17% in extended trade

In fiscal year 2025, the Round Rock, Texas-based company anticipates a reduction of approximately 150 basis points in its adjusted gross margin rate.

According to LSEG data, the company expects an adjusted profit per share of $1.65 for the current quarter, with a standard deviation of 10 cents. This is in contrast to the analysts’ average estimate of $1.84.

“We anticipate a decline in our gross margin rate due to inflationary input costs, the competitive environment, and a greater proportion of AI-optimized servers,” said Chief Financial Officer Yvonne McGill on a call following the earnings release.

The increasing demand for large-scale data centers and high-performance computation to support the expanding adoption of generative AI has stimulated investments in AI-capable products.

As a result, demand has increased for servers provided by companies such as Dell.

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

According to Chief Operating Officer Jeff Clarke, the backlog of the company’s AI-optimized servers increased by more than 30% to $3.8 billion, and shipments of the servers more than doubled to $1.7 billion.

Dell recently introduced a lineup of AI-capable personal computers powered by Qualcomm (QCOM.O), opened new tab processors, and announced the availability of a new server in the second half of 2024 that utilizes Nvidia’s (NVDA.O) latest chips.

This year, the price of Dell’s stock has increased by over twofold and peaked earlier this week.

The company projected revenue for the second quarter ranging from $23.5 billion to $24.5 billion, as opposed to the average estimate of $23.21 billion.

Additionally, the organization increased its projected revenue for fiscal year 2025 from $91 billion to $95 billion to $93.5 billion to $97.5 billion.

The first quarter’s revenue increased by 6% to $22.24 billion as of May 3, breaking a six-quarter decline trend. The adjusted profit closely mirrored the projections made by analysts.

The infrastructure solutions group, encompassing the company’s storage, software, and server offerings, generated $9.23 billion in revenue, a 22% increase compared to the client solutions group, which deals with personal computers, which maintained a constant figure.