(Reuters) -Dell on Thursday forecast a decline in its adjusted gross margin rate for fiscal year 2026, hit by higher costs to build artificial intelligence servers in a fiercely competitive market, while its PC business also lagged amid soft demand.

The Round Rock, Texas-based company's shares fell about 2% in extended trading, even as it announced a $10 billion increase in its share buyback plan.

Dell's AI servers, which are equipped with Nvidia's powerful chips, are designed to handle intense computational demands of training large language models like those that power chatbots such as ChatGPT.

That has boosted demand for Dell and its rivals including Super Micro Computer. Dell forecast $15 billion in annual revenue from AI server shipments, 53% higher than the $9.8 billion revenue in the year ended January 31.

But costly production of these AI-driven servers are weighing on margins. Dell expects its annual adjusted gross margin rate to decline about 100 basis points.

The company said its AI server backlog jumped to roughly $9 billion as of February 27, as it also signed a deal with Elon Musk's xAI startup.

Dell forecast annual adjusted profit of $9.30 per share, above analysts' estimate of $9.23, according to data compiled by LSEG. The $103 billion midpoint of the company's annual revenue forecast came in line with estimates.

TARIFFS COULD TRIGGER PRICE INCREASE

A sweeping U.S. trade tariff on Chinese products also looms, with companies facing the risk of potential price increases on tech products, automotive manufacturing, and services.

Dell said it was reviewing the tariff executive orders to assess the impact on its operations and customers, adding that the announcements have not yet impacted the company's pricing.

"Whatever tariff we cannot mitigate, we view that as an input cost. As our input costs go up, it may require us to adjust prices," Chief Operating Officer Jeff Clarke said.

Research firm International Data Corporation on Thursday lowered its traditional PC forecast for 2025 and beyond, driven by U.S. tariffs on China and weakening market sentiment.

Revenue for the fourth quarter ended January 31 stood at $23.93 billion, missing estimates of $24.56 billion. It reported adjusted per-share earnings of $2.68, beating estimates of $2.53.

Dell's revenue from its infrastructure solutions group - which includes its storage, software and server offerings - rose 22% to $11.35 billion. Revenue from its client solutions group, which houses PCs, rose 1% to $11.88 billion.

(Reporting by Jaspreet Singh in Bengaluru; Editing by Shounak Dasgupta and Varun H K)