(Bloomberg) -- Hewlett Packard Enterprise Co. reported weaker-than-expected margins, suggesting lower profitability than anticipated in its closely watched business of selling servers for artificial intelligence work.

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Fiscal third-quarter adjusted gross margins were 31.8%, a decline from the period a year ago, the company said Wednesday in a statement. Analysts, on average, estimated 33.4%. The decline was driven by a “higher mix of AI server revenue,” Chief Financial Officer Marie Myers said on a call with analysts after the results were released.

Hardware makers including HPE, Dell Technologies Inc. and Super Micro Computer Inc. have enjoyed a jump in customer demand for high-powered servers to handle AI tasks. HPE reported $1.3 billion in revenue from this business line in the quarter that ended July 31, a 39% increase from the previous period and higher than analysts’ average estimate.

Investors have become increasingly concerned about the lower margins of most AI servers, owing to the expensive semiconductors they contain made by companies such as Nvidia Corp. In an interview, Chief Executive Officer Antonio Neri said that over time HPE will sell more higher-margin products and services along with the AI servers.

The shares declined about 3% in extended trading after closing at $18.77 in New York. The stock has gained 11% this year through the close.

“Weak AI-server margin has been a theme for the sector, tripping up Super Micro and Dell over the past couple of quarters,” Woo Jin Ho, an analyst at Bloomberg Intelligence, wrote in a note. HPE’s soft margins “may overshadow its healthy AI sales momentum,” he added.

The majority of HPE’s AI server business continues to come from cloud service providers, but there is increasing momentum with enterprises and governments, Neri said.

HPE reported that total revenue increased 10% to $7.71 billion in the period, compared with the $7.66 billion average estimate. It’s the biggest year-over-year sales increase in six quarters. Profit, excluding some items, was 50 cents a share. Analysts, on average, projected 47 cents.

In the quarter ending in October, HPE projected sales of $8.1 billion to $8.4 billion. Profit, excluding some items, will be 52 cents a share to 57 cents a share. Analysts, on average, estimated profit of 54 cents on revenue of $8.15 billion.

HPE said it received about $2.1 billion from the partial sale of its stake in H3C Technologies Co. The financial impact of that transaction will be reflected in the current quarter’s results, the company said.

Neri said the cash will be used toward financing the company’s acquisition of Juniper Networks Inc., which is expected to close later this calendar year or in early 2025.

(Updates with comments from CFO in the second paragraph.)

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