Dell profits hit by lower selling prices of PCs

Shares in Dell, the world's largest personal computer maker, slumped 8 per cent yesterday - their biggest fall in four years - after it said deep discounts on its products had hurt profits in its second quarter.

The computer giant's shares were trading at $36 in New York yesterday morning after it released the disappointing results, which reinforced the picture that hardware manufacturers are engaged in a fierce price war.

Bright points came in Europe and Asia, where Dell's sales surged. Both regions have historically lagged US growth and had thinner profits. Dell said its unit sales in Europe climbed 35 per cent and jumped 45 per cent in China.

Dell sold a desktop PC for $299 (£165) in the past quarter that was nearly identical to a PC that cost $499 a year earlier. Dell said the price drops have helped lift its share in emerging markets such as Asia, but have cut average selling prices by 8 per cent from last year.

Lower selling prices reduced profit margins. Dell said its gross margin - profits after manufacturing costs - was 18.6 per cent, up from a year ago but down compared with the first quarter's 18.8 per cent.

Kevin Rollins, Dell's chief executive, said the company miscalculated the effects of its price cutting and failed to ease back when sales did not rise as quickly as expected. He added that sales to US government agencies, which have been weak for a year, fell even further. "We got a bit more aggressive than we needed to, and the elasticity wasn't there," Mr Rollins said. "Frankly, we executed poorly on managing overall selling prices, particularly in consumer PCs, but across the board."

Dell cut prices to widen its lead over Hewlett-Packard. Sales growth in the desktop PC business, Dell's biggest moneymaker, slowed to 2 per cent from 6 per cent in the first quarter. Shipments of the more-profitable laptops rose 47 per cent, while sales growth rose 20 per cent. Revenue at the Round Rock, the Texas-based company, rose 15 per cent to $13.43bn. The results, reported after the market closed on Thursday, matched analyst forecasts of 38 cents a share but fell below projected revenue of $13.71bn.

Quarterly profit climbed to $1.02bn, or 41 cents a share, from $799m in the same period in 2004. Results included a 3-cent tax benefit, without which it would have earned 38 cents a share in the latest quarter.