Dell Technologies expects a decline in its adjusted gross margin rate for fiscal 2026 (FY26), as higher production costs for AI servers put pressure on profitability. While AI-driven infrastructure demand continues to grow, the company faces increased competition and rising expenses associated with manufacturing high-performance servers. Meanwhile, its PC business remains under pressure due to soft consumer demand.
The company has issued its financial projections for FY26, anticipating an 8% revenue growth. Dell expects revenue to be between $101bn and $105bn, with non-GAAP diluted earnings per share (EPS) projected at $9.3, exceeding analyst estimates. First-quarter fiscal 2026 revenue is forecasted between $22.5bn and $23.5bn, while non-GAAP EPS is expected to reach $1.65.
For the fourth quarter of fiscal year 2025, Dell reported revenue of $23.93bn, reflecting a 7% year-over-year increase but missing market expectations. Adjusted EPS stood at $2.68, surpassing forecasts. Despite reporting strong AI-driven growth, Dell’s stock initially climbed over 5% before declining about 2% in extended trading. Investors reacted to the company’s forecast of a decline in its adjusted gross margin rate due to the higher costs of producing AI servers.
AI infrastructure growth and challenges
Dell’s Infrastructure Solutions Group (ISG), which includes its server, networking, and storage businesses, reported fourth-quarter revenue of $11.35bn, a 22% increase year over year. Server and networking revenue rose by 37% to $6.6bn, driven by AI and traditional server demand. The company forecasted $15bn in annual revenue from AI server shipments, a 53% rise from the previous year’s $9.8bn.
“In Q4 we grew our Infrastructure Solutions Group revenue by 22%, and we’re well positioned to capture growth across every segment of our business,” said Dell’s vice chairman and chief operating officer Jeff Clarke. “Our prospects for AI are strong, as we extend AI from the largest cloud service providers, into the enterprise at-scale, and out to the edge with the PC. The deals we’ve booked with xAI and others puts our AI server backlog at roughly $9bn as of today.”
However, increased costs of AI server production are impacting margins. Dell expects its annual adjusted gross margin rate to decline by approximately 100 basis points. The company’s backlog for AI servers reached approximately $9bn as of 27 February. Dell also confirmed a deal with Elon Musk’s AI startup, xAI, to supply AI servers, with reports suggesting a contract valued at more than $5bn.
Dell’s Client Solutions Group (CSG), which includes its commercial and consumer PC business, generated $11.88bn in fourth-quarter revenue, marking a 1% year-over-year increase. While commercial client revenue grew to $10bn, consumer revenue fell 12% to $1.9bn. Full-year CSG revenue was $48.4bn, a slight decline from the previous year, while operating income dropped by 20%. The company cited weaker demand in the PC market as a contributing factor to the segment’s mixed performance. Dell also stated that it is reviewing the impact of recent tariff-related executive orders on its operations but noted that pricing has not yet been affected.
Read more: Dell’s Q3 FY25 revenue rises 10%, but stock dips following lowered full year guidance
