Dell shares dip despite jump in profits

Shares in Dell fell as much as 5 per cent in after-hours trading on Thursday, in spite of a 52 per cent jump in first-quarter net income, after the computer maker reported a thinner profit margin and warned of a coming seasonal slowdown in purchases by large businesses.

Earnings rose to $441m, or 22 cents a share, and revenue climbed 21 per cent to $14.9bn, paced by a 25 per cent boost in sales to big companies. Net income before severance and facility closure costs and amortisation of intangible assets rose 20 per cent to $584m or 30 cents a share, topping analyst expectations.

But investors zeroed in on Dell’s profit margin, which has been slipping even as the company says it prefers to give up market share and hold the line on computer prices.

Gross margins fell to 17.6 per cent of revenue from 18.1 per cent a year earlier. The operating margin came in at 5.5 per cent, off the low of 4.9 per cent in the same quarter of the prior year but not much improved from the fourth quarter’s 5.4 per cent.

The company had set a target of a 7 per cent operating margin, but executives told analysts on a conference call that such a level was more of a “long-term” goal and that they would continue to aim primarily for the most operating income.

They said they would continue to invest to build out the company’s capabilities to serve large business, which expanded with the acquisition of Perot Systems, a services company also based in Texas.

Dell’s outlook was notably cautious given that the company said it was at the beginning of a big refresh cycle for corporate PCs and servers. “The second quarter and the first part of the third quarter typically experience slower demand from larger commercial customers in the US and Europe,” Dell said in a written statement.

“Overall, Dell expects a normal, seasonal sequential demand pick-up in the low single digits in its second quarter.”

On the supply side, Dell said it continued to face stiff prices for memory and other components. That helped keep the operating profit margin for sales to consumers below 1 per cent.

Brian Gladden, Dell chief financial officer, said that the goal of 7 per cent profit company-wide implied that Dell had to get to a 2 per cent margin in the consumer side, which he said was feasible.

Michael Dell, chief executive, shrugged off a question about the surge in demand for Apple’s iPad and smartphones and rival Hewlett-Packard’s pending purchase of Palm, saying that Dell was benefiting from the mobile sector’s accompanying need to build out data centres for content providers and telecom companies.

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