Dell margins miss as plagued by supply shortage

 @ibtimes
on May 21 2010 4:40 AM

Dell Inc's quarterly sales and profit beat expectations but its gross margin fell short of analysts' forecasts and the computer maker warned that components supply will remain tight.

Dell, whose shares fell 3 percent after the results on Thursday, has been struggling to boost profitability due to both sales of lower-cost personal computers and higher costs of components, including memory.

Analysts said the results show Dell still had a ways to go in shifting to higher-margin businesses, despite its recent acquisition of technology services company Perot Systems.

They delivered on revenue, but the Street was expecting a stronger margin recovery, said Ashok Kumar, analyst at Rodman & Renshaw.

Dell's quarterly gross margin, excluding special items, rose to just 17.6 percent in its fiscal first quarter, from 17.4 percent in the previous three months. The market had expected 17.7 percent, according to Thomson Reuters I/B/E/S.

Clearly there are issues with commodity pricing, said Shannon Cross at Cross Research. But they need to show more leverage in the model. Dell needs to find a way to drive more margins.

Dell Chief Financial Officer Brian Gladden told analysts on a conference call that the supply of components would continue to be relatively tight.

I think from our perspective and I think from the market's perspective, what you would hear is that that will continue to be a challenge for the next couple of quarters.

Stephen Felice, president of consumer, small and medium business for Dell, said at the Reuters Global Technology Summit in San Francisco that the consumer business currently generates an operating margin of about half a percent, but he expects that to rise to 2 percent by the end of the year.

One of the ways that Dell can boost margins is by getting retailers to sell PCs with higher prices. The company is now getting ready to expand distribution of its high-end Alienware line of gaming PCs through retailers around the globe, he said.

Dell used to be the world's largest maker of PCs in terms of units sold but has since fallen to third place, behind Hewlett-Packard Co and Acer Inc <2353.TW>.

Felice said Dell was not fixated on gaining share in terms of PC units, noting that the company does rank second in the world in terms of PC revenue share. But he added that being No. 1 has its benefits.

A unit leader has good purchasing advantages on components and allows you to stay very competitive from a cost standpoint, he said, noting, however, that rival Acer has gained share by selling low-priced netbook computers. We are going to be balanced about it and not rush to unit leadership.

CURRENCY RISKS AHEAD

Gross margin aside, analysts said the results for the quarter that ended April 30 appeared healthy. Revenue rose 21 percent to $14.87 billion, slightly above the average Wall Street estimate of $14.27 billion.

Net profit was $441 million, or 22 cents a share, compared with $290 million, or 15 cents a share, a year earlier. Excluding items, profit was 30 cents a share, compared with the average Wall Street forecast of 27 cents.

But Dell also appeared to temper expectations for the rest of the year, saying that the second quarter and early part of the third quarter typically experience slower demand from larger commercial customers in the U.S. and Europe.

It also warned of the risk of volatile global currencies, especially the euro, for the coming quarters.

Dell shares fell to $13.89 in extended trade after closing at $14.32, extending their intraday decline of 4.41 percent.

While the shares were affected by the sell-off in the overall market, investor reaction to Dell's results was a sharp contrast to the enthusiasm following HP's report on Tuesday.

HP's results beat expectations and it raised its full-year earnings outlook on demand for personal computers and servers, as well as a resurgence in its printing business.

Analysts often compare Dell, which is heavily dependent on selling PCs to U.S. businesses, to HP's more diversified model, a result of a series of acquisitions.

Chief Executive Michael Dell said his company was also open to buying more companies.

We'll continue to be acquisitive, and there are certainly capabilities that we'll want to add to our portfolio, he said.

(Reporting by Ritsuko Ando; Editing by Richard Chang, Gary Hill)

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