Dell Set to Reveal Whether Soaring Memory Costs Are Eating Into Its Server Profits

Key Points

• Dell will release its fiscal 2027 second-quarter results on Tuesday, followed by a conference call at 3:30 p.m. Central time.

• The infrastructure segment’s operating margin dropped from 14.8% in the fiscal fourth quarter to 10.5% in the fiscal first quarter.

• Management has projected approximately 75% growth in the infrastructure segment for the second quarter, including roughly $15.5 billion in AI server revenue.

Dell Technologies (NYSE:DELL) is scheduled to report its fiscal 2027 second-quarter results on Tuesday, September 1, with a conference call beginning at 3:30 p.m. Central time. While revenue figures, earnings, and AI order backlogs will draw attention, one specific metric will be especially telling: the operating margin of Dell’s infrastructure solutions group, which builds the servers driving the AI expansion.

Memory prices have been rising across the semiconductor industry, and AI chip designers have recently shared how these costs are affecting their own margins.

Dell operates further along the supply chain, purchasing memory in large volumes and assembling it into finished servers. When component costs rise, the assembler typically feels the margin pressure first.

Tuesday’s report will provide investors with their first clear indication of how Dell is managing this challenge.

Image source: Getty Images.

The margin already stepped down once

Dell’s infrastructure solutions group achieved record first-quarter revenue of $29 billion, representing a 181% increase year over year. AI-optimized servers, built around graphics processing units and high-performance memory, led the surge, generating $16.1 billion in revenue—nearly double the $9 billion recorded in the fiscal fourth quarter. The company also secured $24.4 billion in new AI server orders during the quarter. Other areas within the segment also grew: traditional server and networking revenue climbed 92% year over year to $8.5 billion, while storage revenue increased 8% to $4.3 billion.

Profitability presented a more nuanced picture. Segment operating income reached $3.1 billion, up 206% year over year, and the segment’s operating margin of 10.5% exceeded the year-ago quarter. However, this represented a significant decline from 14.8% in the fiscal fourth quarter.

Seasonal factors account for part of this decline. A similar drop occurred between the same two fiscal quarters the previous year, when margin fell from roughly 18% to below 10% and AI servers comprised less than a fifth of the segment. Much of the remaining pressure stems from product mix rather than memory costs alone. AI servers carry substantially thinner margins compared to Dell’s traditional servers and storage offerings. Chief Financial Officer David Kennedy noted that the AI server business is operating in line with expectations of a mid-single-digit operating margin.

In essence, when a low-margin product line expands from a small portion of the segment to more than half, the blended margin naturally declines even without operational issues.

This makes Tuesday’s report particularly informative. The mix effect is already understood, and management has established expectations: Kennedy guided to sequential improvement in the segment’s operating margin for the current quarter. A margin increase from the first quarter’s 10.5% would indicate Dell is successfully passing higher memory costs to customers. A flat or declining margin would suggest Dell is absorbing some of these increased costs.

Management is already repricing

Dell has openly acknowledged the cost pressure. On the fiscal first-quarter earnings call in late May, Chief Operating Officer Jeff Clarke described an inflationary environment affecting memory and other components, noting that the company has been adjusting prices frequently in response.

Clarke also highlighted specific commodity constraints, particularly in DRAM and NAND—the two primary memory chip types—as part of a challenging demand and supply landscape.

Demand remains strong. Dell guided second-quarter revenue to $44 billion to $45 billion, representing approximately 50% growth at the midpoint. The infrastructure segment is expected to grow roughly 75%, including about $15.5 billion in AI server revenue. Adjusted earnings per share guidance of $4.80, plus or minus $0.10, implies year-over-year growth exceeding 100%.

Growth, therefore, is not the question for Tuesday. The report will clarify how much of that growth Dell retains as a key input becomes increasingly expensive.

What would a good answer look like?

Three metrics deserve close attention. First, the segment margin itself: a figure above 10.5% suggests pricing power remains intact, while a result at or below that level indicates otherwise. Second, the companywide gross margin, which declined to 17.8% in the first quarter from 21.1% a year earlier, primarily due to AI product mix. A further significant decline would indicate costs are outpacing pricing adjustments. Third, any updated guidance on memory costs, since Dell’s outlook for the remainder of the year assumes continued successful repricing.

Shares are trading near $461 as of this writing, at approximately 26 times the adjusted earnings management has guided for this fiscal year—a premium valuation for a hardware business that presumes AI growth remains profitable.

Dell will likely pass this test. Management identified the memory cost challenge early and began repricing months ago. However, the margin figure will provide the definitive answer on Tuesday, and there is no reason to speculate prematurely.

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