Dell has gone through the recession by chasing profits from market segment, so investors were understandably unimpressed when the company declared on this week that it expects to report lower second quarter gross margins.
The company gave investors a hazy update to its business one day ahead of a meeting with financial analysts at its Round Rock, Texas, headquarters. Overall, the company said that demand for computers appears to have stabilized. In addition, Dell predicted that revenue in the second quarter, ending July 31, should be slightly higher than its first quarter revenue of US$12.3 billion.
Meanwhile, Dell warned of a moderate decline in gross margins during the second quarter. It reported second quarter revenue last year of US$16.4 billion. Investors digested these disclosures and knocked close to 4% off Dell’s shares in after-hours trading, placing its stock price at U$12.52.
The company continue to believe that customers are deferring IT purchases and will see demand return to more typical levels at some point. In the meantime, it will continue focusing its our energy and resources on the operating initiatives that will improve the company, and position it for future success.
The global economic recession has proved challenging for Dell with the company losing large amounts of market share to rivals like Acer and Hewlett-Packard. Dell depends on sales of computers to businesses more than its competitors, and businesses have been more reluctant than consumers to purchase new laptop computers.
Like many laptop computers makers, Dell is waiting for Microsoft to release its new Windows 7 operating system in October, which could spur business sales.
Dell executives have explained away the market share losses by saying the company intended to place a premium on keeping profits as high as possible during these tough times. As a result, analysts have kept a close eye on Dell’s margins to gauge the effectiveness of its strategy.
Dell attributed the lower margins to “higher component costs, a competitive pricing environment, and an unfavorable mix of product and business-segment demand.” The company tends to make more money off business laptop computers, so slow sales to corporate customers can hurt its profits.
Analysts polled by Thomson Reuters expect Dell to post revenue of US$12.5 billion in the second quarter. Such a total would mark Dell’s first sequential increase in revenue in a year. It reported US$16.4 billion in revenue during last year’s second quarter.
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