The price pressures Dell ( DELL) is feeling in its markets are about to show up in its stock. Shares of the No. 1 PC maker were 8% lower Friday, dragging down much of the technology space, after the company slightly missed Wall Street's second-quarter sales target and offered third-quarter targets below expectations. Dell said price pressures hurt the second quarter, but the Round Rock, Texas-based company also claimed to gain market share. "Our strategy is unchanged, and we believe it is the right one for current industry dynamics," said CEO Kevin Rollins during a post-release conference call. He acknowledged pricing pressure on low-end consumer products and sluggish spending by the U.S. federal government. "I don't think the competitive environment has changed a lot," Rollins said. "The lower
average selling price was our fault: We got a bit more aggressive than we needed to." Still, Dell's results spooked technology investors hoping for a glowing report and bullish predictions heading into the strongest part of the year. Intel ( INTC), the sole microprocessor supplier to Dell, was down 1.5% Friday to $26.43, a one-month low. Applied Materials ( AMAT), the world's largest maker of chip manufacturing equipment, dropped 0.8% to $17.65. For the quarter ended July 29, Dell reported net income of $1.02 billion, or 41 cents a share, on sales of $13.4 billion. During the same quarter last year, the company earned $799 million, or 31 cents a share, on sales of $11.71 billion. Excluding a 3-cent-a-share revision due to a reserve for repatriated taxes, Dell earned 38 cents a share, flat with what the consensus earnings estimate on Wall Street. For sales, analysts had predicted $13.7 billion, on average, according to Thomson First Call. The tax provision helped lower Dell's tax rate, which in turn helped its bottom line. Dell's tax rate in the quarter was 20.8%, down from 24% in the previous quarter and 26% in the same quarter last year. Also helping the bottom line: Dell spent $1.8 billion to buy back 47 million shares of its stock, below the previous quarter's $2 billion in repurchases. At the quarter's start, Dell had predicted earnings between 37 cents and 39 cents a share and sales between $13.6 billion and $13.8 billion.
Gross margin held flat sequentially at 18.6%, but was up from 18.2% in the same quarter last year. By product line, desktop PC sales rose 2% to $5.1 billion from the same quarter last year, mobile sales rose 20% to $3.4 billion, server sales rose 9% to $1.3 billion, software and peripheral sales expanded 35% to $2 billion, enhanced services sales rose 41% to $1.2 billion and storage sales rose 26% to $400,000. From the first quarter, desktop and storage revenue dropped while other products booked increases. For the third quarter, Dell predicted earnings between 39 and 41 cents a share on sales of $14.1 billion to $14.5 billion. Analysts had predicted third-quarter earnings of 41 cents a share and sales of $14.6 billion. Rollins said the company's light targets are due in part to uncertainty about what spending will be like by the federal government. He said the company plans to focus more during the quarter on upselling into profitable price points.