Dell's earnings slip despite rising sales
PC maker says second-quarter profit fell as sales rose 11%. Shares sink as investors fret over the company's future profitability.
NEW YORK (CNNMoney.com) -- Personal computer maker Dell Inc. reported fiscal second-quarter earnings that fell from a year ago and missed Wall Street's expectations while sales in the quarter topped forecasts.
Shares of Dell plunged after-hours on the news.
The Round Rock, Texas-based company reported net income of $616 million, or 31 cents per share, in the quarter. That's down 17% from a profit of $746 million, or 33 cents per share, that the company reported a year ago.
Dell said sales in the quarter rose 11% to $16.43 billion from $14.77 billion in the same period last year.
Analysts were expecting Dell to report sales of $15.95 billion and earnings per share of 36 cents, according to consensus estimates by Thomson Reuters.
Michael Dell, chairman and CEO, highlighted the company's strong quarterly sales. "We are positioning Dell to win in a new era of global IT spending," Dell said in a statement.
But investors appeared to overlook the sales gains and focused more on Dell's (DELL, Fortune 500) lower-than-expected earnings.
Shares of the PC maker fell about 10% in electronic trading following the announcement. The stock slipped 1.6% in regular trading on the Nasdaq Thursday.
Before Thursday's report, Dell's stock had been climbing steadily as investors appeared to be warming to the company's turnaround efforts. The stock was up about 38% since mid-April.
In addition to the slide in profits, Wall Street is also concerned about the company's dwindling margins.
Dell's gross margin was 17.2% in the quarter, down from nearly 20% a year ago. Gross margins measure a company's profit after subtracting the cost of sales as a percentage of total revenue, and are widely used by tech analysts as a benchmark for a company's financial health.
"Revenue was strong but margins were poor," said Shaw Wu, an analyst at American Technology Research.
Wu said Dell's margins are probably being squeezed by a "lower-end mix," as the company used special promotions and other price reductions to entice customers to buy their computers.
Indeed, Dell's CFO, Brian Gladden, said in a statement that "strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter."
Looking ahead, Gladden told analysts during a conference-call that technology spending in the United States would be "conservative." He added that Dell will continue to incur higher costs in the near-term as the company tries to move toward a more profitable long-term business model.
"The company is continuing to grow," said Richard Kugele, an analyst at Needham & Co. in Boston.
Kugele pointed out that rival computer maker, Hewlett-Packard (HPQ, Fortune 500), offered upbeat guidance in its most recent quarterly earnings report, suggesting that "the IT environment is consistent."
Once investors have digested Thursday's report, they will see that "nothing has really changed," Kugele said. 
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