August 16, 2011 11:54 pm

Falling confidence dents Dell forecasts

Dell has slashed its revenue forecast for the rest of this year in the latest sign that a in consumer confidence and delays in government spending are eating into the prospects for leading computer hardware companies.

Shares in the US PC maker slid by nearly 8 per cent in after-market trading on Monday after it also reported sales and earnings that fell just short of Wall Street’s already downbeat expectations for the latest quarter.

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Nevertheless, Dell executives claimed further progress in making the company less dependent on its traditional PC business and said it was in a stronger position to withstand an economic downturn than it had been in 2008.

With a fiscal quarter ending in July, a month later than most technology companies, Dell’s earnings provide a more recent insight into the state of the broader industry. The company said it had seen a slowdown start to take hold in the middle of June and continue through the quarter.

Brian Gladden, chief financial officer, said: “It’s a more uncertain demand environment that we’re seeing now than we saw at the beginning of the year”.

The pressure was being felt mainly in the consumer and federal government markets in the US, he said. While there had been a robust pipeline of potential government contracts, “those transactions are having a tendency to push out” as customers held off from signing off on deals, he added.

With the outlook weakening, Dell cut its forecast for sales in the current fiscal year, which ends in January, to 1 to 5 per cent, from the 5 to 9 per cent range it had predicted. It also reduced its outlook for the third quarter, forecasting that sales would be in line with the $15.66bn it had seen in the second quarter.

Wall Street analysts had been expecting sales of $15.8bn in the second quarter, rising to $16.2bn in the following three months.

Dell executives said the weaker revenues also reflected a deliberate decision to cut back on sales that carried low profit margins, including some consumer PCs, storage equipment and software sales.

That helped the company to report a gross profit margin of 22.3 per cent for the quarter, broadly in line with forecasts despite what Mr Gladden said had been smaller reductions in component prices than the company had been anticipating.

However, despite a 63 per cent increase in net income, to $890m, Dell’s earnings per share for the period of 48 cents fell a cent short of expectations.

Defending higher spending in some areas of its business, Mr Gladden called Dell’s higher operating costs a “deliberate set of investments” to support its long-term growth.

The company raised its operating income target for the current year, forecasting profits on this measure would rise by 17 to 23 per cent, compared with its earlier forecast of 12 to 18 per cent.

This article is subject to a clarification.

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