Dell results miss expectations, shares drop

The weak results from the No. 3 PC maker reflect the growing divide between it and larger rival Hewlett-Packard Co, which had posted higher-than-expected preliminary earnings.

"It was universally expected they would beat because pretty much everyone else in the PC space has posted strong numbers," Kaufman Bros. analyst Shaw Wu said of Dell. "So, the conclusion is that they lost share - lost a lot of share."

Dell reported a net profit of $337 million, or 17 cents a share, for its fiscal third quarter ended Oct. 30, down from $727 million, or 37 cents a share, in the year-ago period.

Revenue fell 15 percent to $12.9 billion, missing the average analyst estimate of $13.2 billion, according to Thomson Reuters I/B/E/S.

While the revenue shortfall was bad, some analysts were more concerned about Dell's margins, particularly because the company had stressed profitability over growth.

Acer Inc had supplanted Dell as the world's second largest maker of personal computers in the third quarter, fueled by sales of cheap notebooks and netbooks.

Dell said gross margin was 17.3 percent in the third quarter, down from 18.7 percent in the second quarter and 18.8 percent in the year-ago period.

"Certainly, the gross margin pressure is an issue. If they're having to let business go because of price and gross margin pressure, that's going to severely limit their ability to generate profit off any kind of (PC) refresh cycle," said Pacific Crest Securities Andy Hargreaves.

Dell, which relies primarily on sales of personal computers to businesses, has suffered as companies dialed back spending during the economic downturn. Acer and HP have also been waging a price war, analysts say, particularly in consumer laptops.

Sales in Dell's large enterprise business fell 23 percent in the quarter, the most of any unit.

Dell Chief Financial Officer Brian Gladden said PC sales had weakened ahead of the Oct. 22 launch of Microsoft Corp's Windows 7 operating system. But he said sales surged afterward until the Oct. 30 close of the quarter.