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Dell AI server costs drag down share price by 17%

In its latest quarterly results, Dell said that building servers catering for AI workloads was more expensive than predicted.

By Greg Noone

Dell has said that costs associated with building AI-friendly servers contributed to lower-than-expected revenues this quarter. Markets reacted poorly, with Dell’s shares declining by 17% in extended trading. This is despite the record demand for generative AI services that the computer hardware giant is well-positioned to meet and overall quarterly revenues of $22bn – up by 6% compared to last year.

“We again demonstrated our ability to execute and deliver strong cash flow, with AI continuing to drive new growth,” said Dell’s chief financial officer, Yvonne McGill. “Servers and networking revenue [were] up 42%, and we generated $7.9 billion of cash flow from operations over the last 12 months.”

The Dell logo atop an office building.
Dell’s share price fell in extended trading, despite massive demand for its AI-optimised servers. (Photo by Shutterstock)

Dell shares down, but server business sales up

Elsewhere, Dell’s data centre business appears to be thriving. Sales in its server business were strong, growing 42% to $5.5bn. Sales in its Infrastructure Solutions Group, meanwhile, rose 22% year-on-year to $9.2bn. “Servers and networking hit record revenue in Q1,” explained Jeff Clarke, Dell’s chief operating officer. “AI-optimised server orders [increased] sequentially to $2.6bn, [with] shipments up more than 100% to $1.7bn and backlog growing more than 30% to $3.8bn.”

The costs involved in building and shipping these AI-optimised servers, however, appear to have been higher than the computer hardware giant expected. “Given inflationary input costs, the competitive environment and higher mix of AI-optimised servers,” said McGill, “we do expect our gross margin to decline.” As such, the firm forecast a decline in its adjusted gross margin rate by 150 basis points. 

AI PC market made for a good year for the hardware giant

Dell’s latest quarterly results follow several months of good news for the firm, with its stock even outperforming Nvidia’s. This is mostly down to the hardware giant’s enthusiastic embrace of AI PCs, the first line of which Dell launched earlier this year. Since then, the company has been evangelical about these platforms’ potential to automate swathes of work for enterprise users. “Every PC,” the firm’s vice-president for commercial PCs and software told The Register recently, “is going to be an AI PC in the longer term.” 

Its recent results, however, indicate that championing such hardware has not made the firm immune to the whims of the market. And the bad news did not end there, In addition to announcing a $3.8bn backlog for its AI-optimised server orders, Dell also warned that the price of DRAM and SSDs would likely increase by up to 20%. “Every indication – the lack of capital expenditure, low factory utilization and not a lot of wafer starts – are going to lead to less supply than the market demand that will be out there,” said the firm’s COO, Jeff Clarke. 

Read more: Dell VMWare deal terminated over Broadcom

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