June 14, 2024

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Dell profits, margin hit by higher AI costs, and stocks decline

Dell profits, margin hit by higher AI costs, and stocks decline

Written by Jaspreet Singh

(Reuters) – Dell Inc forecast current-quarter earnings below market estimates on Thursday and noted that higher costs of building servers that cater to heavy AI workloads would impact annual margin, sending its shares down more than 17% in trading. Extended.

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

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

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

“The decline in profit margin reflects a competitive pricing environment, as the market has not yet fully recovered, and Dell's competitors have tried to grab share in this narrow market,” said Mikako Kitagawa, director of analysts at Gartner.

The company's AI-optimized server shipments more than doubled to $1.7 billion, and its backlog increased more than 30% to $3.8 billion, Chief Operating Officer Jeff Clark said in a statement.

Dell recently unveiled a range of AI-enabled PCs powered by Qualcomm processors, and said a new server, powering Nvidia's latest chipsets, will be available from the second half of 2024.

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

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It expects second-quarter revenues to range between $23.5 billion and $24.5 billion, versus an average estimate of $23.21 billion.

The company also raised its revenue expectations for the fiscal year 2025 to between $93.5 billion and $97.5 billion, compared to its previous expectations of $91 billion and $95 billion.

Revenue for the first quarter ended May 3 rose 6% to $22.24 billion, breaking a six-quarter streak of declines. Adjusted earnings were largely in line with analyst estimates.

The company's revenue from its Infrastructure Solutions group — which includes storage, software and server offerings — rose 22% to $9.23 billion, while revenue from its Customer Solutions group — home to personal computers — remained flat.

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