UPDATE 4-Dell margins miss; plagued by supply shortage

* Q1 EPS ex-items 30 cents, Wall St view 27 cents

* Q1 revenue $14.87 bln vs Wall St view $14.27 bln

* Adjusted margins 17.6 pct, lower than Street expected

* Warns of continued components shortage, volatile dollar

* Shares fall 3 pct after-hours
(Adds interview with Dell consumer business chief)

By Ritsuko Ando

SAN FRANCISCO, May 20 (BestGrowthStock) – Dell Inc’s (DELL.O: )
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 (HPQ.N: ) 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.

Investing Advice

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

UPDATE 4-Dell margins miss; plagued by supply shortage