UPDATE 2-Dell calls enterprise demand "very weak"
* Sees FY10-12 hardware unit growth 10 pct or more
* Sees FY10-12 hardware rev growth 0-5 pct
* Says exposure to CIT much less than a year ago
* Says won't rush into acquisitions
* Shares fall as much as 8 pct in Nasdaq trading (Adds more executive comments from meeting)
AUSTIN, Texas, July 14 (Reuters) - Dell Inc (DELL.O) said demand from businesses large and small is still very weak and the company faces a big challenge long-term in its hardware business, where falling PC prices will pressure margins.
Shares of Dell, the No. 2 maker of personal computers, fell as much as 8 percent, a day after it forecast lower gross margins in the July quarter due to higher component costs, a competitive pricing environment and an unfavorable product mix.
Chief Financial Officer Brian Gladden told an analysts' meeting on Tuesday that Dell expects hardware unit growth of 10 percent or more from fiscal 2010 through 2012, but only sees hardware revenue growth of 0 to 5 percent.
"The large enterprise and SMB (small and medium-sized business) businesses we would say are still very weak, and we'll see them down similar to what we saw in the first quarter in terms of year-over-year growth rates," he said. "They do not appear to be deteriorating ... but not necessarily getting a lot better either."
PCs make up roughly 60 percent of Dell's revenue. Like others in the sector, Dell has suffered from the sharp drop-off in technology demand due to the global recession, as well as the shift toward cheap PCs like netbooks that offer lower profit margins.
Dell is in danger of being passed by Acer Inc (2353.TW) in the global market. But Chief Executive Michael Dell and other executives said a number of times on Tuesday that the company is more focused on "profit share" -- or winning in the most profitable segments -- than market share.
He said much of Acer's gain is coming in lower-margin PCs.
Dell signaled that demand appeared to be stabilizing, with Gladden saying there are clearly signs of sequential improvement, noting that the company is benefiting from back-to-school sales and that the consumer business is strong.
The company reiterated its expectation for a strong corporate refresh cycle starting in 2010, with the refresh coming first in storage and servers, and then PCs.
"When you look at the projected market dynamics that we face through this business, we see relatively strong unit growth projections at 10 percent plus, but you see declining prices and margin pressure," Gladden said.
"This is the world we live in with the business we have today, and we fully understand these dynamics."
Gladden also downplayed the company's exposure to imperiled commercial lender CIT Group Inc (CIT.N), saying Dell's vulnerability is "significantly less" than a year or two ago.
FOCUS ON ACQUISITIONS
Dell has been shedding jobs and cutting costs to realign its business. The company says it is on track to reduce annual costs by more than $4 billion by the end of fiscal 2011.
Michael Dell said the company will look to shift its product base to higher-margin offerings and recurring revenue streams through partnerships and a "portfolio" of acquisitions.
Analysts think Dell could do a deal in services, software or storage technology, citing Acer, Palm Inc (PALM.O), NetApp Inc (NTAP.O) and Computer Sciences Corp (CSC.N) as potential targets.
Dell has $10 billion in cash and short-term investments. It recently sold $1 billion in notes and hired International Business Machines Corp's (IBM.N) mergers chief.
But Dell did not tip its hand on M&A on Tuesday. Michael Dell said the company would be disciplined and would not rush into any deals. "Transactions take willing sellers and willing buyers and take time to percolate," he said.
Analysts have also speculated that Dell plans to sell a smartphone, though the company has not announceed this.
Consumer division president Ron Garriques, formerly of Motorola Inc (MOT.N), said there is a need in the marketplace for a player which can bring an integrated solution to handsets and other complementary devices.
"The door's very open for us with the operators around the world; they're laying what the needs are," he said.
Dell shares were down $1.04 or 8 percent at $11.98 in afternoon trading on Nasdaq. The Nasdaq composite index .IXIC was up 0.3 percent. Rival Hewlett-Packard Co (HPQ.N) was down 0.4 percent and IBM was down 0.4 percent. (Reporting by Gabriel Madway; editing by Tiffany Wu and Gerald E. McCormick)
