Dell reports earnings drop in spite of increased sales; blames self-inflicted price cuts

Computer hardware manufacturer Dell Inc. reported yesterday that its fiscal second-quarter earnings fell 17 per cent from a year ago even as revenue topped $16 billion and that its margins were hurt by efforts to build out its consumer product lines and overseas markets.

For the three-month period that ended 1 August, Dell's earnings dropped to $616 million, or 31 cents per share, from $746 million, or 32 cents per share in the same period last year.

Excluding amortisation and business realignment charges, Dell said it would have earned 33 cents per share. Wall Street analysts had forecast a profit of 36 cents per share. Sales rose 11 per cent to $16.4 billion, ahead of the Street's view for $15.9 billion in sales.

Investors sent Dell shares down $2.55, or 10 per cent, to $22.66 in after-hours trading. Earlier, the stock dropped 42 cents to close at $25.21.

But the company slashed computer prices too sharply in the quarter, offsetting its attempts to cut costs and its eroding gross margin. Analysts had hoped Dell's margin would hold steady at last quarter's level of 18.4 per cent, but instead it sank to 17.2 per cent.

On a conference call, Chief Financial Officer Brian Gladden said Dell's earnings were affected by "strategic actions" to expand in areas such as its global consumer business. Dell has made the consumer market one of its main businesses for growth and has launched retails efforts in the US and overseas.

Dell's global consumer business saw its revenue rise 28 per cent from a year ago to $2.8 billion, as shipments rose 53 per cent. However, the division reported an operational loss of $5 million, compared to a profit of $5 million a year ago, as the company expanded its retail presence and competed on pricing with established rivals such as Hewlett-Packard Co.

Gladden also said Dell's margins were affected by an increase in deferred revenue in its Europe, Middle East and Africa regions that the company will recognize in future quarters. "There really was a mix of [revenue] growth, with margin rates being lower," he said. "We're still working on improving our cost [structure]."

Gladden said Dell's margins would likely see some irregular patterns as the company continues to cut costs as part of its goal to lower its expenses by $3 billion by the end of its 2011 fiscal year.

"If I look at the situation in the second quarter, we would have to say it was more self-inflicted," CEO Michael Dell said in a conference call.