Dell Fails to Delight

The PC maker meets estimates, but its U.S. business was sluggish.
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Updated from 4:42 p.m. EST

SAN FRANCISCO --

Dell

(DELL) - Get Report

grew its bottom line 27% in the third quarter, but the PC makers' first public discussion of its comeback plan left investors feeling cold.

Rising operating expenses and weakness in its U.S. consumer business belied Dell's talk of restructuring and refocusing the company for growth.

And while Dell executives were vague about the financial outlook -- promising only to "grow faster than the industry" -- their comments suggested the road to recovery will be long and bumpy.

"There's more work to be done and our results will not be completely linear," CEO Michael Dell said in a post-earnings conference call.

Big Day for Dell? Hard to Say

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Shares of Dell, which were up in the two days prior to Thursday's earnings report, plunged 10%, or $2.83, to $25.31 in extended trading.

In the three months ended Nov. 2, Dell grew its revenue 9% year-over-year to $15.6 billion, ahead of the $15.3 billion expected by analysts.

Dell reported net income of $766 million, or 34 cents a share, vs. $601 million, or 27 cents a share, at this time last year.

Excluding items, the company earned 35 cents a share, meeting analysts' consensus estimate.

The company's operating profit rose to only 5.3% of revenue from 5.1% a year ago, while its income tax rate dropped in the quarter to 18.2% from 24.9% a year earlier.

"We embarked this year on a long-term strategy to reignite growth and our Q3 results indicate we're making solid progress," Dell said.

He highlighted five key areas that Dell will build its comeback on: consumer, emerging countries, notebooks, enterprise and small/medium business.

The company has already taken various steps to accelerated its growth in some of these areas, including striking retail distribution deals to sell PCs at

Wal-Mart

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and

Staples

(SPLS)

.

But Dell acknowledged that its U.S. consumer business revenue declined 6% during the quarter.

Dell's gross margin also declined 140 basis points sequentially to 18.8%, despite the fact that the prices of key PC components, such as DRAM memory, continued to be under heavy pressure during the quarter.

Dell said notebook PC sales jumped 19%, while its server and storage revenue each increased 8%.

Meanwhile, Dell's operating expenses increased to 13.5% of revenue from 11.5% at this time last year. And while Dell has previously talked of cutting its headcount by 10%, management indicated the layoffs may not equate to a net reduction of 10% given recent acquisitions and growth priorities.

"We're making solid progress in operating expense discipline, but at same time we're evolving the business model to a more value added services and products model," said finance chief Don Carty.

Dell ended the quarter with almost $15 billion of cash on its balance sheet. But the company provided no clues about the magnitude of its frozen-stock buyback program, which is expected to resume in December.

"We recognize we have a lot more cash on our balance sheet than we believe to be ideal," said Carty.