Dell disappoints with 17% decline in income

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Dell, the world’s second-biggest personal computer maker, on Thursday sounded a sour note on the economy, warning that the slowdown in information technology spending that has gripped the US in recent months has begun to spread to Europe and parts of Asia.

The warning came as the company reported worse-than-expected profits for the second quarter, sending its shares down more than 10 per cent in after-hours trading. It came two weeks after Hewlett-Packard, Dell’s bigger rival, trimmed its sales guidance for the coming months.

Wall Street had been expecting an improved performance from Dell after a wave of restructuring that has seen the company shed jobs and expand its retail operation to thousands of stores round the world.

But Dell reported a 17 per cent drop in net income for the second quarter, as pricing moves and an increased emphasis on retail sales ate into profits.

“The big surprise here is gross margin,” said Brent Bracelin, an analyst at Pacific Crest Securities. Mr Bracelin said that aggressive pricing may have contributed to a drop in margins that accounted for the profits shortfall.

But sales rose 11 per cent as the company continued to push an expanding array of products into new sales channels in the US and Europe, and in fast-growing markets in Asia.

“All their metrics look really good,” Mr Bracelin said. “They’re gaining share and they had their best revenue growth in two years. They’re doing all the right things, except on the gross margin line.”

Dell reported a net profit of $616m, down from $746m in the same period a year ago. Sales were $16.4bn, up from $14.8bn last time. Earnings per share were 31 cents, down 6 per cent from 33 cents a share last year.

Operating expenses fell to 12.2 per cent of sales – their lowest level in 18 months – indicating that some of its cost-cutting measures have begun to take hold.

The company said that currency fluctuations, with the dollar moving higher against the euro and the pound in recent weeks, could also weigh on demand. It did not issue a specific forecast for the coming quarter or its expectations for the full year.

Dell said it expected to continue to incur costs related to its restructuring in the near term. At a meeting with Wall Street analysts earlier this year, it set a goal of carving out $3bn over the next three years in savings through job cuts and changes to its manufacturing practices.

Dell’s shares fell 1.6 per cent to $25.21 before the earnings announcement. However, they have gained more than 20 per cent since January.

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