The hardware giant's disappointing results sent its shares falling. Shares were down $4.06, or 9.7 percent, to $37.69 at the close of regular trading today.
While several investment firms, including Bear Stearns, Lehman Brothers and Chase Hambrecht & Quist, maintained a "buy" rating on Dell, Salomon Smith Barney today dropped the computer maker to "outperform" from "buy."
Including gains from investments, the direct-sales PC giant said it earned $603 million, or 22 cents per share, on revenue of $7.67 billion. In the same quarter a year ago, Dell earned $507 million, or 19 cents a share, on sales of $6.14 billion.
"Our second-quarter results and expectations for strong industry demand in the second half of the year keep us on track toward our goal of 30 percent full-year sales growth," said chief executive Michael Dell. "There remains tremendous room for expansion in all product categories, customer groups and regional markets, and the fundamental advantages of our direct model are more compelling than ever."
Sales placed through Dell's Web site accounted for half of the company's revenue.
While most analysts had originally targeted Dell to come in with revenue near $7.8 billion, several had cautioned that sales could come in a little lower than expectations.
"Even though revenue is going to be a little light, I don't think it's going to be a disaster," Lehman Brothers analyst Dan Niles said this week. "The PC business is going to be the exact opposite from last year. The back half of the year is going to be absolutely terrific."
Dell blamed the revenue shortfall on weaker government sales, as well as on a slowdown in Europe, where sales were down 8 percent from the prior quarter.
"We did fall short of our original expectations by about $200 million," chief financial officer James Schneider said in a conference call following the announcement.
Bear Stearns analyst Andrew Neff said in a research note this week that a revenue shortfall in the range of what Dell reported would not ordinarily be that big a deal, except for the fact the company had already lowered growth expectations in January.
"The disappointment for investors is that the real expectation was not that they would hit the target, but that they had set a target they could surpass," Neff said. "That no longer looks to be the case."
Schneider said the company believes the second half of the year will be strong, with seasonal improvements in the coming quarter. Dell typically sees 10 to 13 percent sequential revenue growth in the third quarter.
"The lower end of that range is consistent with our view," Schneider said.
The company sees both positives and negatives for its profit margins but said they should improve in the second half of the year. The mix of products should improve in the coming quarters, but component costs, particularly memory, are volatile.
Sales of items other than base computer systems accounted for $1.3 billion of Dell's revenue, a company record. Sales of services worldwide were $577 million, up 35 percent from a year ago.
Notebook computers, workstations, servers and storage products accounted for 49 percent of total system sales, up 9 percentage points from last year's second quarter.