Shares of Dell Tumble on Margin Talk, Despite Fervent Ai Demand

Dell Technologies Inc. surpassed expectations for its latest quarter, driven by surging demand for artificial intelligence. However, analysts focused on the potential impact of this growth on margins, causing shares to drop in after-hours trading.

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Management projected that Dell's gross-margin rate would decrease by approximately 150 basis points in fiscal 2025, attributing this to "inflationary input costs, a competitive environment, and a higher mix of AI-optimized servers."

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In the recent quarter, overall operating income fell by 14% to $920 million, and operating income within the infrastructure solutions segment, despite significant revenue growth, declined by 1% to $736 million. This segment includes the server business, which saw substantial revenue increases.

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Dell's stock extended its decline from record highs, plummeting 18% in after-hours trading on Thursday. This followed a 5.2% drop during the regular session, breaking a six-day winning streak that had pushed the stock to a record close of $179.21 on Wednesday. Despite these setbacks, the stock is up 122% year-to-date and has surged 259% over the past year.

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Management expressed optimism about the potential for margin recovery in the infrastructure solutions business, which encompasses servers. Dell also noted that while AI servers might dilute the margin rate, they could enhance margins on a dollar basis.

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This focus on profitability overshadowed Dell's impressive top-line performance in the latest quarter. The company achieved record revenue in its servers and networking business during the fiscal first quarter, with AI-optimized server orders totaling $2.6 billion. Shipments of AI servers more than doubled sequentially to $1.7 billion, and Dell's backlog for this category grew over 30% to $3.8 billion.

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Jeff Clarke, Dell's vice chairman, emphasized the company's strong position in bringing AI to enterprises, stating, "No company is better positioned than Dell to bring AI to the enterprise."

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During the earnings call, Dell provided a full-year revenue forecast of $93.5 billion to $97.5 billion, compared to the $94.6 billion consensus from FactSet. CFO Yvonne McGill highlighted the ongoing AI momentum, predicting continued revenue growth throughout the year.

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For the second quarter, Dell anticipates revenue between $23.5 billion and $24.5 billion, exceeding analysts' expectations of $23.3 billion.

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In the most recent quarter, Dell reported overall revenue of $22.2 billion, a 6% increase from the previous year, beating the $21.7 billion estimate from analysts tracked by FactSet.

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The company's servers and networking sales reached a record $5.5 billion, underscoring significant growth in the infrastructure solutions business. Servers and networking revenue rose by 42%, and the overall segment revenue climbed 22% to $9.2 billion, surpassing Wall Street's expectation of $9.0 billion.

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Dell's client solutions group, which includes personal computers and displays, maintained flat revenue at $12.0 billion, exceeding the $11.7 billion projected by analysts. Within this group, commercial client revenue grew 3% to $10.2 billion, beating the $9.7 billion consensus.

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Dell's greater exposure to the commercial PC market, compared to its peers, has positively impacted its average selling prices.

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Overall net income rose 65% to $955 million, or $1.32 per share. On an adjusted basis, Dell posted earnings of $1.27 per share, aligning with analysts' expectations.

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