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Tech Spending Slows, Dell Protfits And Shares Drop

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Slashing computer prices helped Dell Inc. boost sales in its fiscal second quarter, but the No. 2 PC maker's bottom line took a hit when efforts to cut costs failed to make up the difference.

Investors punished the stock Thursday on word that Dell missed Wall Street's expectations for earnings and gross margin, calling into question the Round Rock, Texas-based company's turnaround efforts.

Dell's quarterly sales rose 11 percent to $16.4 billion, beating Wall Street's view, and Dell said operating expenses fell to their lowest point in six quarters.

But for the three months ended Aug. 1, Dell's profit plunged 17 percent to $616 million, or 31 cents per share. Excluding amortization and business realignment charges, Dell said it would have earned 33 cents per share, still short of analysts forecast of 36 cents per share, according to a Thomson Reuters survey.

In a conference call, Michael Dell, who returned as chief executive in 2007, acknowledged that Dell may have been overzealous in cutting prices to challenge its larger competitor, Hewlett-Packard Co., in Europe, the Middle East and Africa.

"If I look at the situation in the second quarter, we would have to say it was more self-inflicted," Dell said. "Whenever you're restarting growth, what I can tell you is, it's an imprecise process. (There were) some parts of the business where we were probably too aggressive."

The company also deferred some services-related profit from that region to a later quarter.

Analysts had hoped Dell's margin would hold steady at last quarter's level of 18.4 percent, but instead it sank to 17.2 percent.

Sharon Cross, an analyst for Cross Research, said she wasn't surprised.

"It is going to cost a lot of money to expand their business," said Cross, who rates the stock a sell. Bullish investors had hoped cost-cutting would offset the aggressive pricing, Cross said, but "that obviously is not the case."

Cross said she thought Dell cut prices in other regions, too. In a conference call, Chief Financial Officer Brian Gladden indicated that as part of Dell's increased presence in retail stores, the company using price cuts to win back-to-school shoppers.

Shaw Wu, an analyst for American Technology Research, also noted that Dell sold more low-end computers in the quarter, adding to margin woes.

In a tough consumer economy, companies such as HP can make up for weaker PC sales with better results from high-end servers or printers, but Wu said Dell's business is so tied to PC sales that it has little choice but to cut prices.

"When you look at their arsenal, price is really their only weapon," he said.

Dell, once the world's largest PC maker, fell behind HP in 2006, but has been striving to reclaim the title. The company has cut more than 8,500 workers since it began a program of layoffs last year, and said it's on track to cut 400 more by the end of the current third quarter.

Dell also said it still expects log more than $3 billion in cost savings by 2011.

The company did not give specific guidance for the current quarter, but said slower information-technology spending has spread from the U.S. to Western Europe and parts of Asia, and added that it expects that trend to continue.