Dell reports lower profit margins

Dell quarterly gross margin missed Wall Street expectations, hurt by sales of lower-priced personal computers for consumers and…

Dell quarterly gross margin missed Wall Street expectations, hurt by sales of lower-priced personal computers for consumers and a rise in costs for memory chips and other components.

The disappointing margin, which reflects Dell's dependence on the computer hardware market, sent its shares down 5 per cent in extended trading late yesterday and overshadowed its stronger-than-expected profit and revenue for the quarter.

Larger rival Hewlett-Packard, which posted stronger results on Wednesday, had benefited from a more diversified revenue base than Dell, with income from software and services as well as hardware.

Dell is heavily dependent on selling PCs to businesses, so it suffered during the economic downturn but is expected to improve this year as tech spending recovers.

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The company, which counts on desktop and laptop sales for more than half of overall revenue, has stressed profitability over growth and stayed clear of the PC price war waged by HP and Acer, which displaced Dell as the world's Number three PC maker last year.

Chief financial officer Brian Gladden said average selling prices "held up pretty well" in the fourth quarter compared with the third, but added that gross margins were hurt by a larger mix of lower-cost PCs for consumers, and some higher component costs, including DRAM memory.

He said there were positive overall signs in the technology industry, and that Dell is "cautiously optimistic" about how the new fiscal year is starting.

"We saw some very encouraging market demand growth return to the business in the fourth quarter," he said.

Dell, whose results had missed Wall Street targets for three of the previous eight quarters, said net profit fell to $334 million, or 17 cents a share, in its fiscal fourth quarter ended January 29th, from $351 million, or 18 cents a share, in the year-ago period.

Revenue rose 11 per cent to $14.9 billion, also beating the average estimate of $13.8 billion. But adjusted gross margin was 17.4 per cent, compared with the average estimate of 18 per cent. HP's margin was 22.8 per cent in the January quarter.

CEO Michael Dell said he sees the start of the hardware refresh cycle and is looking at smaller M&A deals. Dell and other hardware vendors are expected to benefit from an uptick in technology spending this year and next, as corporations replace older hardware.

At the same time, Round Rock, Texas-based Dell is pushing into higher-margin businesses such as services and mobile devices as it looks to boost overall margins.

Laptop revenue rose 16 per cent from a year ago, while revenue from servers and networking climbed 26 per cent. Services revenue rose 51 per cent, due to Dell's $3.9 billion acquisition of Perot Systems.

Before the results, Dell's stock was up about 65 per cent from a year ago, versus a nearly 50 per cent rise for HP and a 40 percent gain for IBM.

Shares of Dell closed 1.98 per cent higher at $14.43 on Nasdaq, and fell to $13.65 in extended trading following the results.

Reuters