The headline figures from Dell Technologies in its latest quarterly report, issued Thursday after hours, suggested AI and server 'boom,' but on closer scrutiny, investors shouted 'gloom, gloom' as there was a warning of margin pressures from a senior executive in a post-results briefing.
So the shares, which were down more than 5% in regular trading after a weak day generally for all parts of the market, slumped more than 17% on a warning of a drop of 1.50% in gross margin this year because of rising costs.
Now, Wall Street’s after-hours market is thin and full of aggressive traders, but a 17% slump does suggest that the warning from Dell’s chief financial officer, Yvonne McGill, was worth heeding.
It's also a warning that all is not endless revenue rises and earnings growth in AI or the cloud and all the technologies feeding into these new boom sectors. Costly new staff, technologies, and energy costs are going to have to be borne by companies and their customers, and for investors, the real results will be in details like profit margins and costs data, not revenue growth alone and earnings numbers.
The headline report showed Dell had beaten estimates for first-quarter revenue, ending a streak of six quarters of decline, thanks to growing demand for its AI-powered servers.
The results come days after Dell showed off a range of AI-enabled PCs powered by Qualcomm processors and said that a new server, which supports Nvidia's latest chips, will be available from the second half of this year – so growth assured?
Dell's revenue for the first quarter ended May 3 rose about 6% to $US22.24 billion, beating analysts' average estimate of $US21.64 billion.
Revenue for Dell's growth area, its infrastructure solutions group – which includes its storage, software, and server offerings – rose 22% to $US9.23 billion, while that of the client solutions group – home to PCs – was flat at $US11.97 billion.
Shipments of the company's AI-optimized servers more than doubled to $US1.7 billion, and the backlog grew more than 30% to $US3.8 billion, which excited investors initially, and earnings surged to $US960 million from $US583 million in the first quarter a year ago.
But fears about profit margins were raised by comments in a post-result briefing by company executives who revealed Dell expects its adjusted gross margin rate to decline about 150 basis points in the new financial year.
"Given inflationary input costs, the competitive environment, and a higher mix of AI-optimized servers, we do expect our gross margin rate to decline,” Ms. McGill said in the post-earnings call.
And that led to this observation from an outside analyst: "Their margin decline reflected the competitive pricing environment as the market had not fully recovered yet and Dell's competitors tried to grab the shares in this tight market," Mikako Kitagawa, director analyst at Gartner, said.
