Skip to main content

Dell's Profit Pinched (Update)

A move to grow sales hits the bottom line.



blew past Wall Street's revenue estimates in its fiscal second quarter, but the company's efforts to stoke sales dented the bottom line, pushing net income down 17%.

Dell said the profit pressure was a result of decision to expand its sales to consumers across the globe as well as to customers in the Europe, Middle East and Africa region, where Dell said it grew unit shipments of servers faster than any of its major competitors.

"Strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter and there will likely be some non-linearity in the improvements in our operating income margins as we rebalance our portfolio, make cost improvements and drive growth," said CFO Brian Gladden in a statement.

Shares of Dell were off 9%, or $2.23, to $23 in extended trading Thursday.

In the three months ended August 1, Dell had sales of $16.4 billion, up 11% year-over-year and ahead of the average analyst expectation of $15.9 billion, according to Thomson Reuters.

Sales of notebooks -- the fastest growing segment of the PC market -- were up 26% year-over-year to $4.8 billion, roughly matching the growth rate posted by rival



, which reported its quarterly earnings results earlier this month.

Dell posted net income of $616 million, or 31 cents a share, vs. net income of $746 million, or 33 cents a share at this time last year.

Dell said its earnings included $52 million in restructuring and amortization costs, equal to 2 cents a share. Even after backing those costs out, however, Dell fell short of the Street's EPS expectation of 36 cents.

The latest results

underscore the tug-of-war between Dell's operating profit margin and its gross profit margin that has become evident as founder Michael Dell attempts to turn the company around.

While Dell has taken various steps to keep its operating expenses in line, the PC maker's gross profit margin is under pressure as the company increasingly sells PCs in retail stores and slashes prices for many of its products in order to gain market share.

Dell's gross margin was 17.2% in the fiscal second quarter, vs. 20% at this time last year, and 18.4% in the previous quarter.

As usual, Dell did not provide specific financial guidance for the current quarter. But the company noted that the continued "conservatism" in U.S. technology spending has spread to Western Europe and several countries in Asia.

Dell said it expects to benefit from its improving performance in areas such as emerging countries, notebook PCs and technology services, which Dell said have diversified its business. And Dell said it continues to work aggressively on "cost initiatives."

The company said it will attain its goal of reducing headcount by 8,900 employees in the current quarter.