In a challenging market, Dell announced its fiscal year 2026 outlook on Thursday, projecting a decline in adjusted gross margin. This is primarily due to increased costs associated with producing artificial intelligence (AI) servers. Additionally, Dell's personal computer business underperformed amid weak demand.
The Round Rock, Texas-based company saw its stock price dip approximately 2% in after-hours trading, despite announcing a $10 billion increase to its stock repurchase program. Dell's AI servers, equipped with powerful Nvidia chips, are designed to meet the high computational demands of training large language models (like those powering the ChatGPT chatbot). Dell projects AI server annual revenue of $15 billion, a 53% increase from the $98 billion reported through January 31. However, high production costs are eroding profit margins, with adjusted annual gross margin expected to decline by approximately 100 basis points.
Furthermore, Dell stated that its AI server backlog stands at approximately $9 billion and that it has partnered with Elon Musk's xAI startup. Despite cost pressures, Dell projects adjusted earnings per share of $9.30, exceeding analyst expectations of $9.23. The company anticipates a median annual revenue of $103 billion, aligning with market projections.
However, Dell also acknowledged the risk of potential price increases stemming from the widespread US tariffs on Chinese goods. Dell stated it is reviewing tariff executive orders to assess their impact on its operations and customers, emphasizing that these announcements haven't yet affected its pricing strategy. Dell's Chief Operating Officer, Jeff Clarke, noted: "Any tariffs we can't mitigate will be considered input costs. When our input costs go up, price adjustments may be necessary."
According to recent research from IDC, the forecast for the traditional PC market in 2025 and beyond has been further downgraded, impacted by US tariffs and weak market sentiment.
In the fourth quarter ended January 31, Dell's revenue totaled $23.93 billion, falling short of the market expectation of $24.56 billion; adjusted earnings per share were $2.68, exceeding the anticipated $2.53. Revenue for Dell's Infrastructure Solutions Group grew 22% to $11.35 billion, while revenue for the Client Solutions Group increased by 1% to $11.88 billion.
