Dell posted a surprise 17 per cent drop in profits for its fiscal second quarter, even though its revenues handily beat Wall Street estimates.

Round Rock said the earnings squeeze was a result of technology spending slowdowns and its expansion into Europe and Asia.

Net income was $616m in the quarter, down 17 per cent from a profit of $746m in the same period last year. Revenue grew 11 per cent to $16.43bn from $14.77bn year-over-year. Analysts were expecting sales of about $15.95bn.

"Strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter," said Dell's CFO, Brian Gladden. Gross margins were 17.2 per cent in Q2, down almost 20 per cent from a year ago.

Dell also warned it sees "continued conservatism" for IT spending in the US, which is spreading to Western Europe and Asia.

Revenues increased year-over-year in every segment except desktops, which was essentially flat. Laptops earned Dell $4.87bn, up 26 per cent from last year. Server revenue was up 5 per cent to $1.7bn. Storage grew 11 per cent, earning $681m. Service revenue was up 14 per cent to 1.46bn. Desktop PC revenue was down 2 per cent to $4.93bn.

Dell said it's on course to reduce costs by $3bn annually by fiscal 2011. Dell reduced its headcount by 8,500 people since Q1, not counting the employees who joined from acquisitions. It also consolidated company-owned sites in the US and Canada.

But for the near future, the hardware vendor still expects its bottom line to be hit by the costs of restructuring to improve profitability.

The profit drop seems to have unsettled investors. As of this publication, Dell shares are down nearly 10 per cent in after-hours trading. ®

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