The disappointing margin, which reflects Dell's dependence on the computer hardware market, sent its shares down 5 percent in extended trading on Thursday and overshadowed its stronger-than-expected profit and revenue for the quarter.
Larger rival Hewlett-Packard Co
Dell has been in cost-cutting mode, focusing on profitability over growth during the downturn. It stayed clear of a price war in the PC market, and posted big market share losses as it protected its overall margin profile.
But Dell reported an adjusted gross margin of 17.4 percent in the January quarter, down from 18.2 percent last year and below Wall Street's expectations.
What people are trying to figure out with Dell is the balance between revenue and profit, said Cross Research analyst Shannon Cross. They continue to cut costs, but people were expecting a bit more leverage. The question becomes how much profit can they get out of their revenue stream.
Stifel Nicolaus analyst Aaron Rakers noted that margin concerns were overshadowing a huge upside surprise of roughly $1 billion on Dell's top-line. He said investors feared losing the profitability gains seen over the past few quarters.
It's the notion of giving it back that is spooking people, Rakers said.
Chief Financial Officer Brian Gladden said gross margins were hurt by a larger mix of lower-cost PCs for consumers, and some higher component costs, including DRAM memory. He said the company was also locked into some holiday retail deals with fixed pricing.
But Gladden said there were positive overall signs in the technology industry, and that Dell is cautiously optimistic about how the new fiscal year is starting.
We saw some very encouraging market demand growth return to the business in the fourth quarter, he said.
HARDWARE REFRESH CYCLE
Dell, whose results had missed Wall Street targets for three of the previous eight quarters, said net profit fell to $334 million, or 17 cents a share, in its fiscal fourth quarter ended January 29, from $351 million, or 18 cents a share, in the year-ago period.
Excluding items, profit was 28 cents a share, a penny above the average Wall Street forecast, according to Thomson Reuters I/B/E/S.
Revenue rose 11 percent to $14.9 billion, also beating the average estimate of $13.8 billion.
Cross also said Dell's operating expenses did not fall as much as some investors had hoped. Dell reported adjusted operating expense at 12.1 percent of revenue, versus 12.8 percent a year ago.
Dell is heavily dependent on selling PCs to U.S. businesses, so it suffered during the economic downturn but is expected to improve this year as tech spending recovers and corporations replace aging hardware.
Dell fell to No. 3 in the PC market last year after it was passed by Acer Inc <2353.TW>.
But Chief Executive Michael Dell said he sees the hardware refresh cycle already getting underway.
I think customers are spending with a lot more conviction at this point in the year than they were certainly at this time last year.
At the same time, Round Rock, Texas-based Dell is pushing into higher-margin businesses such as services and mobile devices as it looks to boost overall margins.
Laptop revenue rose 16 percent from a year ago, while revenue from servers and networking climbed 26 percent. Services revenue rose 51 percent, due to Dell's $3.9 billion acquisition of Perot Systems.
Shares of Dell closed 1.98 percent higher at $14.43 on Nasdaq, and fell to $13.65 in extended trading following the results.
(Reporting by Gabriel Madway; Editing by Richard Chang, Tiffany Wu, Leslie Gevirtz)