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Dell Dinged by Earnings Miss

Shares fall as turnaround hopes take a hit.

Updated from Fed. 28

SAN FRANCISCO --

Dell

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returned to double-digit sales growth for the first time since 2005, but its results fell short of Wall Street expectations, and the company warned that it could face slower customer spending.

One year into founder Michael Dell's return to the chief executive role, the company's fourth-quarter earnings report suggests its turnaround remains a work in progress.

"Clearly, we have significant work to do in our cost structure," said Dell in a post-earnings conference call Thursday. Shares were falling 2.1% to $20.44 in premarket trading Friday.

While the company reduced its headcount by 3,200 employees in the past eight months, Dell's fourth-quarter operating expenses increased year over year, and its 4.9% operating margin was down from 5.7% at this time last year.

Dell recorded $164 million in acquisition-related charges, restructuring and legal expenses, which dragged net income down to $679 million, or 31 cents a share, from $726 million, or 32 cents a share at this time last year.

Excluding the charges, Dell would have earned 34 cents a share, 2 cents shy of the average analyst expectation, which called for 36 cents EPS.

Dell's shares were off 1.5%, or 32 cents, at $20.55 in extended trading Thursday.

To be sure, the Round Rock, Texas, PC maker showed some signs of progress. Overall unit shipments were up 19% year over year, whereas units were down 11% at this time last year.

Notebook PC sales increased 23% in the three months ended Feb. 1, and U.S. consumer sales increased 12% -- a nice improvement from the 6% decline that Dell's U.S. consumer business suffered in the third quarter.

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As it mounts a counterattack against rival

Hewlett-Packard

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, the world's No.1 PC maker, Dell is overhauling many aspects of its business. Last year, Dell abandoned its longtime practice of selling PCs exclusively through online and phone orders, striking deals with retailers like

Wal-Mart

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and

Best Buy

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.

"We were very pleased with the acceleration of our growth, particularly in notebooks, emerging markets and in the consumer segment," said CFO Donald Carty.

Growth in other areas was less impressive however, with desktop PCs, servers and storage all growing at a more modest 2% clip. And while Dell's overall sales grew 10% year over year to $16 billion, the top line fell short of Wall Street's expectation of $16.2 billion.

The company didn't provide specific financial guidance, but said that it will continue to incur costs as it realigns its business to improve growth and profitability, warning that expenses may hurt near-term performance.

"In addition the company's results could be adversely impacted by more conservative spending by its customers," Dell said in a statement, adding that it was currently benefitting from a better selection of products and accelerating growth, leading to substantial improvements in costs and productivity.