Dell results miss expectations,shares drop

The weak performance reflected the growing divide between Dell and its larger rival Hewlett-Packard Co,which had posted higher-than-expected preliminary earnings.

8220;It was universally expected they would beat because pretty much everyone else in the PC space has posted strong numbers,8221; Kaufman Bros. analyst Shaw Wu said of Dell. 8220;So the conclusion is that they lost share 8212; lost a lot of share.8221;

Despite the report,Dell executives spoke optimistically about demand trends and expectations for a wave of new spending next year as companies update aging equipment.

PC sales had weakened ahead of the October 22 launch of Microsoft Corp8217;s Windows 7 operating system,before surging afterward,said Chief Financial Officer Brian Gladden,adding that the backlog at the October 30 close of the quarter was larger than normal.

8220;I think it8217;s going to be a pretty powerful cycle,8221; Chief Executive Michael Dell said,repeating earlier assertions.

Dell reported a net profit of 337 million,or 17 cents a share,for its fiscal third quarter,down from 727 million,or 37 cents a share,in the year-ago period.

Revenue fell 15 per cent to 12.9 billion,missing the average analyst estimate of 13.2 billion,according to reports.

While the revenue shortfall was troubling,some analysts also expressed concern about Dell8217;s margins,particularly because the company had stressed profitability over growth amid a 4 billion cost-cutting effort.

Dell said it saw pressure on component costs,a trend that has continued into the current quarter. Its gross margin was 17.3 per cent in the third quarter,down from 18.7 per cent in the second quarter and 18.8 per cent in the year-ago period.

On an adjusted basis,it reported a margin of 18.3 per cent. The company said it walked away from deals during the quarter in order to prop up average selling prices.

8220;Certainly,the gross margin pressure is an issue. If they8217;re having to let business go because of price and gross margin pressure,that8217;s going to severely limit their ability to generate profit off any kind of PC refresh cycle,8221; said Pacific Crest Securities Andy Hargreaves.

Acer Inc supplanted Dell as the world8217;s second largest maker of personal computers in the calendar third quarter,fueled by sales of cheap notebooks and netbooks.

Dell,which relies primarily on sales of PCs to businesses,has suffered as companies dialed back spending during the economic downturn. Acer and HP have also been waging a price war,analysts say,particularly in consumer laptops.

Sales in Dell8217;s large enterprise business fell 23 per cent in the quarter,the most of any unit. Sales of desktop PCs,which make up around a quarter of revenue,slid 26 per cent.

Dell did not provide a formal outlook for the critical holiday-season quarter,though it said it expects revenue to be better than the third quarter,with its consumer business showing seasonal improvement.

Dell said it was seeing improved signs from commercial customers,which make up 80 per cent of its sales.

8220;We have seen share losses that,frankly,should reverse themselves when commercial comes back in a refresh cycle. So I think just by nature of our mix you will see our overall share position improved,8221; said Gladden.

Excluding restructuring and amortization charges,profit per share was 23 cents in the third quarter. Analysts were expecting earnings per share of 28 cents,excluding items,but it was not immediately clear if that was directly comparable.

Shares of Round Rock,Texas-based Dell,which are up around 50 per cent this year,fell to 14.91 in extended trading,after closing at 15.87 on Nasdaq.