(Reuters) -Dell forecast current-quarter profit below market estimates on Thursday, and signaled that higher costs to build servers that meet heavy AI workloads would dent annual margin, sending its shares down more than 17% in extended trading.
The Round Rock, Texas-based company expects adjusted gross margin rate to decline about 150 basis points in fiscal 2025. It expects adjusted profit per share of $1.65, plus or minus 10 cents, in the current quarter, compared with an analysts’ average estimate of $1.84, according to LSEG data.
“Given inflationary input costs, the competitive environment and higher mix of AI optimized servers, we do expect our gross margin rate to decline,” Chief Financial Officer Yvonne McGill said on a post earnings call.
A surge in demand for high-performance computing and large-scale data centers to support growing adoption of generative AI has spurred investments in AI-capable products, triggering demand for servers offered by companies including Dell.
“Their margin decline reflected the competitive pricing environment as the market had not fully recovered yet and Dell’s competitors tried to grab share in this tight market,” Mikako Kitagawa, director analyst at Gartner said.
Shipments of the company’s AI-optimized servers more than doubled to $1.7 billion, and the backlog grew more than 30% to $3.8 billion, Chief Operating Officer Jeff Clarke said in a statement.
Dell’s stock has more than doubled this year and hit a record high earlier this week.
It forecast second-quarter revenue between $23.5 billion and $24.5 billion, versus an average estimate of $23.21 billion.
In response to the declining profit margin and shares slump, Dell may need to reassess its AI investment strategy.
Additionally, Dell must explore cost-saving measures and operational efficiencies to mitigate the impact of higher AI costs.
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