Dell earnings show fervent AI demand, but margin talk sends stock sliding

By Emily Bary

Shipments of AI servers more than doubled sequentially to $1.7 billion

Dell Technologies Inc. blazed past expectations for its latest quarter as it continued to benefit from explosive artificial-intelligence demand, but analysts keyed in on the margin impact of that growth and shares slid after hours.

Management shared an expectation for Dell's (DELL) gross-margin rate to decline roughly 150 basis points in fiscal 2025, due to "inflationary input cost, the competitive environment and a higher mix of AI optimized servers."

Overall operating income declined 14% to $920 million in the latest quarter, while operating income within infrastructure solutions slipped 1% to $736 million despite the big rise in revenue for that segment, which houses the server business.

The stock extended its pullback from record highs, dropping 18% in Thursday's after-hours session despite upbeat revenue guidance for the fiscal second quarter as well. The stock had dropped 5.2% during the regular session, to snap a six-day win streak to a record close of $179.21 on Wednesday. It's up 122% so far this year and ahead 259% over a 12-month span.

Management talked up the potential for margins to recover in the infrastructure solutions business, which includes servers, as the fiscal year goes on. Dell also highlighted that AI servers may dilute the margin rate but help margins on a dollar basis.

The more profit-focused discussion overshadowed Dell's better-than-expected top-line performance in the latest period.

The company racked up record revenue in its servers and networking business during the fiscal first quarter, while AI-optimized server orders came in at $2.6 billion. Shipments of AI servers more than doubled sequentially to $1.7 billion, and Dell's backlog for the category increased more than 30% to $3.8 billion.

"No company is better positioned than Dell to bring AI to the enterprise," Jeff Clarke, the company's vice chairman, said in a release.

The company issued a full-year forecast on its earnings call, projecting $93.5 billion to $97.5 billion in revenue. That compares with the $94.6 billion FactSet consensus.

"We expect the AI momentum we've seen over the past three quarters to continue, driving incremental revenue for the year," Chief Financial Officer Yvonne McGill said on the earnings call.

For the second quarter, Dell expects revenue of $23.5 billion to $24.5 billion, while analysts were modeling $23.3 billion.

Overall revenue for the latest quarter amounted to $22.2 billion, up 6% from a year before, whereas analysts tracked by FactSet were modeling $21.7 billion.

Dell's record $5.5 billion in servers and networking sales highlighted a big quarter of growth for the infrastructure solutions business. Servers and networking revenue increased 42%, while overall segment revenue rose to $9.2 billion, up 22%. That cleared Wall Street's bar of $9.0 billion.

The client solutions group, which includes personal computers and displays, saw flat revenue of $12.0 billion, but that came in ahead of the $11.7 billion analysts had been modeling. Commercial client revenue rose 3% to $10.2 billion and exceeded the $9.7 billion consensus on the metric.

Dell has greater exposure to the commercial PC market than peers, which benefits average selling prices.

Overall net income increased 65% to $955 million, or $1.32 a share. On an adjusted basis, Dell posted $1.27 in earnings per share, matching what analysts were expecting.

-Emily Bary

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05-30-24 2019ET

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