UPDATE 2-Dell profit rises, outlook cautious; shares drop

Thu Nov 29, 2007 5:44pm EST

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(Adds analyst comment, revenue details, updates shares)

SAN FRANCISCO Nov 29 (Reuters) - Dell Inc DELL.O warned on Thursday that the costs of restructuring and investment could "adversely impact" its performance, sending shares of the world's second-largest personal computer maker down 8 percent.

While the company reported greater-than-expected quarterly revenue growth and a 27 percent rise in profit, investors zeroed in on its rising costs and the cautious outlook.

Net income for its fiscal third quarter ended Nov. 2 grew to $766 million, or 34 cents per share, from $601 million, or 27 cents per share, a year earlier.

Revenue rose to $15.65 billion from $14.42 billion, whereas analysts, on average, had expected revenue of $15.36 billion, according to Reuters Estimates.

Dell booked costs of $50 million, or 2 cents per share, related to job cuts and asset disposals, plus $28 million, or 1 cent per share, for a year-long accounting audit.

Several analysts said its earnings were in line with expectations after factoring out one-time items, a disappointment given the strong revenue performance.

"The bottom line is that people were disappointed. People expected more than they got," said Roger Kay, president of Endpoint Technologies Associates of Concord, Massachusetts.

Revenue from servers used by businesses to run networks and Web sites rose 8 percent to $1.6 billion. Data-storage system revenue also rose 8 percent, to $600 million.

Revenue from laptop computers rose 19 percent to $4.7 billion while desktop revenue fell 1 percent to $4.8 billion.

Industrywide, global PC shipments grew 16 percent in the third quarter, helped by rising notebook sales at retailers outside the United States, researcher IDC said in October. Dell is facing increasing competition from Asian rivals including Acer Inc (2353.TW) and Lenovo Group Ltd (0992.HK) in the United States, which accounts for the majority of Dell's sales.

The company, hoping to compete better with larger rival Hewlett-Packard Co (HPQ.N) and Asian competitors, in June began selling PCs in stores for the first time after 23 years of direct-only sales via phone or Internet.

It has started selling PCs in Wal-Mart Stores Inc (WMT.N) in North America and GOME Electrical Appliances Holding Ltd (0493.HK) in China, and announced this week plans to sell computers in France, Spain and Belgium through France's Carrefour SA (CARR.PA), the world's second-largest retailer.

Like rivals, Round Rock, Texas-based Dell has been helped by falling prices for computer memory and other components and by strong PC demand in U.S. back-to-school sales and pre-holiday gift spending.

But Dell said restructuring costs related to ongoing job reductions, investments in the business and acquisitions "may adversely impact the company's performance."

Also, a slowing decline in component costs and a seasonal product-mix shift to U.S. consumer and international regions may also hurt results, Dell said.

Dell shares fell 7.8 percent to $25.93 in extended trading following the earnings report, after adding 1.6 percent to close at $28.14 on Nasdaq.

The stock, up 10 percent in 2007 through Wednesday, trades at 19 times estimated earnings per share for its fiscal year ending in January, compared with 17 for HP's fiscal year ended in October and IBM's (IBM.N) 2007 multiple of 15. (Reporting by Philipp Gollner, with additional reporting by Lisa Baertlein and Nichola Groom in Los Angeles; Editing by Braden Reddall)

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