Dell's quarterly profit plummets as PC sales shrink

By Edwin Chan

SAN FRANCISCO (Reuters) - Dell Inc, the PC maker embroiled in a takeover battle between its founding CEO and activist investor Carl Icahn, on Thursday reported a 72 percent slide in quarterly earnings as PC sales extended their downward spiral.

Dell once led the world in computer sales and was held up as a model of production-chain innovation, but in recent years has become one of the more prominent victims of PC market erosion from mobile devices.

Sales from its end-user computing division, which incorporates computers, slid 5 percent to $9.1 billion.

The world's No. 3 PC maker reported sales of $14.5 billion in the fiscal second quarter, flat from a year earlier and surpassing the $14.2 billion analysts on average had expected.

But net income fell sharply to $204 million or 12 cents a share in the fiscal second quarter, compared to $732 million or 42 cents a share in the year-earlier period. Excluding items, it earned 25 cents a share, barely edging past a 24-cent average forecast, according to Thomson Reuters I/B/E/S.

Gross margins slid a percentage point from the previous quarter to 19.6 percent.

"It was predictably bad. It's not a big surprise that margins compressed to the degree that they did, when they're prioritizing sales volume over profitability," Morningstar analyst Carr Lanphier said.

Dell has been embroiled for months in a bitter contest over its future, with founder and CEO Michael Dell proposing a $25 billion buyout to take the PC maker private, and Icahn leading shareholder opposition on the basis that the offer is too cheap.

The uncertainty hanging over Dell's future may have played a part in crumbling profitability. Analysts say Dell has had to aggressively cut prices to win over enterprise customers that may be nervous about long-term contracts with a company in the middle of a complicated restructuring, and must compete in enterprise services with better-established rivals like Hewlett-Packard Co and IBM .

"They can't compete on a level playing field when you have a wrestling match over the future of the company," Lanphier said.

Shares of the company dropped 1 cent to $13.69 in after hours trade, following a brief rise. (Reporting by Edwin Chan; Editing by Bernard Orr)