Dell Issues Warning on Revenue

Computer maker Dell Inc. on Thursday forecast fiscal third-quarter revenue below market expectations, citing weakness in U.S. government sales and low-priced consumer PCs, sending its shares tumbling 8% after hours.

The disappointing forecast from the world’s largest PC maker overshadowed a 28% increase in second-quarter profit, which was helped by a surge in U.S. notebook computer demand and market share gains.

The drop in Dell shares was its largest single-session decline since September 2001.

Dell Chief Executive Kevin Rollins said its results and the current-quarter forecast were hampered by weakness in two U.S. segments: government and the low end of the consumer PC market, in which the company had been too aggressive in cutting prices.

“That is taking the edge off of what we were expecting in terms of higher growth rates,” Rollins told reporters in a conference call after the quarterly report.

In addition to Dell, shares of Intel Corp., which counts Dell as its largest customer, fell nearly 2% in after-hours trading. Dell’s comments about a slow government market echoed those by Cisco Systems Inc., which in reporting its earnings Tuesday also cited slower federal government spending.

“The guidance is a disappointment,” said Cindy Shaw, an analyst at Moors & Cabot Capital Markets in San Francisco. “They’re apparently not expecting revenue growth really to pick up.”

Dell, based in Round Rock, Texas, forecast revenue growth of 13% to 16% year over year in the current quarter, lower than the 17% growth expected by Wall Street analysts, according to Reuters Estimates.

Net income for its quarter ended July 29 rose to $1.02 billion, or 41 cents a share, from $799 million, or 31 cents, a year earlier.

Excluding a tax benefit, Dell said, the company earned 38 cents a share. That was what analysts on average were expecting, according to Reuters Estimates.

Revenue for the second quarter rose 15% to $13.4 billion from $11.7 billion. Analysts on average were expecting $13.7 billion.

Dell forecast revenue for the current quarter of $14.1 billion to $14.5 billion and earnings per share of 39 cents to 41 cents.

Analysts were expecting Dell to forecast 41 cents a share in the third quarter on revenue of $14.6 billion, according to Reuters Estimates.

Rollins said overall pricing in the industry remained within historical norms.

“The industry is not experiencing a pricing problem any more than it has in the past year or two,” he said. “The problem of pricing a little more aggressively was our problem.”

Rollins said Dell cut prices more aggressively than competitors to gain market share, but the number of customers drawn by the offers failed to pick up as much as the company had hoped.

He said Dell had no plans to stop advertising consumer desktop PCs for as little as $299 and notebook PCs for $499. But he said the company would more actively encourage consumers attracted by the “hot prices” to buy more expensive PCs.

Dell shares, which declined 15 cents to $39.58 in regular trading, fell to $36.45 after hours.