Dell... Stabilization and Lower Margins Seen As Disappointing (DELL)

Dell Inc. (NASDAQ: DELL) has preempted the entire tech earnings season by offering some guidance of its own.  The PC-centric tech giant has said that year-over-year demand for IT products appears to have stabilized, and that it expects to report a slight sequential revenue increase in its quarter ending on July 31. Dell expects a modest decline in Q2 gross margins due to higher component costs, a competitive pricing environment, and an unfavorable product mix.   Today’s update is ahead of Tuesday’s analysts meeting in Austin.

The company is noting that while demand for Dell’s products and services seems to have stabilized, it varies significantly by customer segment and geography.

The CFO is focused on optimizing liquidity, profitability and growth in the midst of what it is calling “a still-challenging operating environment, and is on course to reduce annual costs by more than $4 billion by the end of fiscal 2011. Further noted was that reductions are coming from a combination of greater efficiencies in design and procurement, optimization of manufacturing and supply chain logistics, and ongoing reductions in operating expenses.

For the long-term, Dell is targeting 5% to 7% compounded annual sales growth.  Furthermore, it expects  operating income at or above 7% of revenue, and that cash flow from operations will exceed net income.  Of course, these targets are dependent on “broad global economic improvement accompanied by higher worldwide IT spending, including a sustained double-digit growth rate in demand for computer systems.”  The company’s stance is that customers are deferring IT purchases, and believes that demand will return to more typical levels at some point.

While this all sounds good, it seems that the targets ahead are based upon an economy and a market that does not reflect the current environment of today.  Shares closed down 1.5% at $13.02 today, and shares are down around $12.50 to $12.60 in the after-hours session.

JON C. OGG