Dell Inc's quarterly profit plunged 54 percent on lower-than-expected sales as it lost market share to competitors engaged in a budding price war in the PC market.

Shares of Dell, the No. 3 maker of personal computers, tumbled 6 percent following the results, which also show a decline in gross margin that disturbed Wall Street analysts.

The weak performance reflected the growing divide between Dell and its 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.

Despite the report, Dell executives spoke optimistically about demand trends and expectations for a wave of new spending next year as companies update aging equipment.

PC sales had weakened ahead of the October 22 launch of Microsoft Corp's Windows 7 operating system, before surging afterward, said Chief Financial Officer Brian Gladden, adding that the backlog at the October 30 close of the quarter was larger than normal.

I think it's going to be a pretty powerful cycle, Chief Executive Michael Dell said, repeating earlier assertions.

Dell reported a net profit of $337 million, or 17 cents a share, for its fiscal third quarter, 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 troubling, some analysts also expressed concern about Dell's margins, particularly because the company had stressed profitability over growth amid a $4 billion cost-cutting effort.

Dell said it saw pressure on component costs, a trend that has continued into the current quarter. Its 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.

On an adjusted basis, it reported a margin of 18.3 percent. The company said it walked away from deals during the quarter in order to prop up average selling prices.

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.

Acer Inc <2353.TW> supplanted Dell as the world's second largest maker of personal computers in the calendar third quarter, fueled by sales of cheap notebooks and netbooks.


Dell, which relies primarily on sales of PCs 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. Sales of desktop PCs, which make up around a quarter of revenue, slid 26 percent.

Dell did not provide a formal outlook for the critical holiday-season quarter, though it said it expects revenue to be better than the third quarter, with its consumer business showing seasonal improvement.

Dell said it was seeing improved signs from commercial customers, which make up 80 percent of its sales.

We have seen share losses that, frankly, should reverse themselves when commercial comes back in a refresh cycle. So I think just by nature of our mix you will see our overall share position improved, said Gladden.

Excluding restructuring and amortization charges, profit per share was 23 cents in the third quarter. Analysts were expecting earnings per share of 28 cents, excluding items, but it was not immediately clear if that was directly comparable.

Shares of Round Rock, Texas-based Dell, which are up around 50 percent this year, fell to $14.91 in extended trading, after closing at $15.87 on Nasdaq.

(Reporting by Gabriel Madway and Ian Sherr; Writing by Tiffany Wu; Editing by Richard Chang, Phil Berlowitz)