Dell Q2 Sales Huge, Profits Lousy, I.T. Spending Weakness "Extending"

A lousy quarter for Dell: The computer maker reported higher than expected sales, but profits missed by a long shot as gross margins dropped. And Dell said conservatism in I.T. spending is spreading beyond the U.S., extending into Western Europe and "several countries in Asia." Shares dropped 10% in after-hours trading.

Dell laptops continue to sell well -- unit sales increased 44% -- but revenue only increased 26%, meaning people are buying cheaper computers. And Dell shot itself in the foot by dropping prices too aggressively in Europe -- or as it calls it, taking "advantage of strategic growth opportunities in advance of cost improvements."

CEO Michael Dell and CFO Brian Gladden took a lashing from analysts during their conference call: One wondered why they were bothering to grow market share with no regard for profitability; another compared the current Dell administration to an old HP executive team. Ouch.

Key Stats:

Revenue: $16.4 billion vs. $15.95 billion consensus
EPS: $0.31 vs. $0.36 consensus

LIVE Conference call notes:

5:06 Know we can improve performance on profitability. Many concerned that growth initiatives will come at expense of long term profitability. Took strategic pricing movements in EMEA ahead of cost improvements, shift to retail.

5:07 Excluding acquisitions, headcount was down 8500 from last year. Will reach goal of 8900 this quarter. Over time, will continue to scale headcount and improve productivity.

5:09 About $5 billion left in current share repurchase authorization.

5:10 Rev increased 5% on 7% unit increase in Americas. More numbers from release.

5:13 Storage revenue up 11%, improved profitability.

5:15 Designing to value! Pricing to value!

5:18 Going over look-ahead from release. Working aggressively on cost initiatives.

5:19 More nonsense about innovation and value. Will update when something of substance.

5:20 Strongest solutions portfolio in history!

5:24 Q&A to begin.

5:25 Gross margins: How much GM decline came from deferrals vs. pricing. Europe deferrals forced us to defer more. 2-3 cents per share impact in quarter. How play out rest of year? As continue to grow services business, some continued impact. A potential issue for us.

5:26 Why so aggressive interest in EMEA in July? Whenever restarting growth, imprecise process. See some parts of business where probably a bit too aggressive, modulating for that now.

5:28 Would have to say problems more self-inflicted than competition-driven.

5:32 Dramatic falloff in July? Aggressively pricing, tactfully to accelerate growth rate? One possible thing you left out: Dell has high share of commercial space in Europe, very low share of consumer. Gained share in commercial segment in Europe. Biggest difference relative to industry is we have small consumer business, not participating it in Europe. Prioritizing Asia, U.S.

5:35 Going forward answer a combination of better pricing and execution.

5:38 Holy hell! Analysts are GOING NUTS on this call about going for market share over profits. Just compared Dell to old HP administration. Consumer profitbility "in the next four quarters," Dell says.

5:40 What management system putting in place? Look at every week as leadership team. Sometimes hard to judge when pushing it too far.

5:44 $3 billion commitment between now and 2011. You'll see more in second half than first half. Accelerating and momentum is good.

5:57 Focused on executing strategy, focused on improving profitability over time. Expect more to happen in second half of the year. Expanding solutions portfolio.