Dell (DELL) warns of lower profit margins

Dell (DELL) shares are off more than 7% after announcing yesterday that “higher component costs, a competitive pricing environment, and an unfavorable mix of product and business-segment demand” will eat away at its profit margins for its current quarter ending July 31.

On the bright side, Dell did suggest that computer sales may be stabilizing after declining for more than 20 months and they expect a “slight” sequential increase in the current quarter. Still, the comments spooked investors, whose high expectations for technology companies have helped the sector outpace the broad market since the March 9 bottom.

The technology sector benefits from the idea that businesses spend first on technology improvements, which tend to increase efficiency and productivity. Thus, technology improvements allow companies to produce more with fewer workers, which lead to lower costs and expanded margins. Even more, technology companies sport pristine balance sheets, which is especially attractive in this tight credit environment.

It’s true that PC sales have dropped during the recession as consumers have shifted to cheaper netbooks in favor of the more traditional (and more expensive) notebooks and desktops. Not only do netbooks sell for less, but they have smaller profit margins. However, gauging the sector’s health by these statements from Dell’s may be a bit premature, especially when bellwethers like Intel and IBM report earnings later this week.

As for Dell, the company issued longer-term guidance of 5% to 7% annual sales growth and operating margins above 7%. However, these targets have no time-frame and are dependent on a market recovery including higher worldwide IT spending and a sustained double-digit growth rate in demand for computer systems.
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Peter J. Lazaroff