08/21/2012 07:04 EDT | Updated 10/21/2012 05:12 EDT

Dell's slump worsens in Q2 in face of mobile computing; outlook weakens

SAN FRANCISCO - Dell Inc.'s slump deepened in its latest quarter as the growing popularity of smartphones and tablets undercut sales of its desktop and laptop computers.

The fiscal second-quarter results announced Tuesday served as the latest reminder of the challenges facing Dell and other personal computer makers as they scramble to adapt to the technological upheaval unleashed by Apple Inc.'s line of sleek devices such as the iPhone and iPad.

The shift to more mobile computing has established Apple as the most valuable company in U.S. history, while businesses that revolved around selling traditional PCs.

Dell Inc., the second largest U.S. maker of personal computers, is trying to adjust by expanding into software, technology consulting, data storage and computer servers - all of which produce higher profit margins than selling PCs and printers.

"We're transforming our business, not for a quarter or a fiscal year, but to deliver differentiated customer value for the long term," Michael Dell, the company's CEO and founder, said in a statement Tuesday. "We're clear on our strategy and we're building a leading portfolio of solutions to help our customers achieve their goals."

As part of its makeover, Dell on Tuesday announced a new leader for its division that oversees many of its corporate products, including computer networking and data storage. Marius Haas is replacing Brad Anderson as president of Dell's enterprise solutions. Haas most recently worked at the investment firm Kohlberg, Kravis, Roberts & Co. after previous stints at Dell rival Hewlett-Packard Co. and Intel Corp.

"We are going to make what is a great business today an even larger and more successful business," Dell said of his plans for enterprise solutions during a Tuesday conference call with analysts.

Even if Dell's strategy is successful, the company's evolution will take time. That reality has caused Dell's stock to fall this year while the overall market has been climbing.

In a sign of further weakness ahead, Dell lowered its earnings target by 20 percent for its fiscal year ending in January. Dell trimmed its full-year guidance, even though its adjusted earnings for the just-completed quarter topped analyst projections.

The company, which is based in Round Rock, Texas, tied it its bleaker forecast to "the uncertain economic environment, competitive dynamics and soft consumer business."

Dell shares shed 55 cents, or 4.5 percent, to $11.79 in Tuesday's extended trading following the release of the earnings report.

In its latest quarter ending in July, Dell earned $732 million, or 42 cents per share. That represented an 18 percent decline from net income of $890 million, or 48 cents per share, at the same time last year.

If not for costs unrelated to its ongoing business, Dell said it would have earned 50 cents per share. On that basis, Dell topped the average estimate of 45 cents per share among analysts surveyed by FactSet.

Revenue for the period fell 8 percent from last year to $14.5 billion. That was nearly $200 million below analyst forecasts.

The weakest area was in Dell's mobility division, where revenue plunged 19 percent from last year. Sales of desktop PCs decreased 9 percent from last year. Combined, revenue from desktop and laptops fell 14 percent from last year, said Brian Gladden, Dell's chief financial officer.

"The revenue deterioration we saw during the quarter was clearly above anything we expected," Gladden told analysts during the conference call.

Dell is hoping the upcoming release of Windows 8, a radical makeover of Microsoft Corp.'s PC operating system, will compel more people to buy devices that aren't made by Apple. But Windows 8 won't hit the market until Oct. 26, and many corporate customers probably will wait until next year before switching over to the new system.

That means Windows 8 won't provide Dell much help during the final half the current fiscal year.

Dell now expects its adjusted earnings for the full fiscal year to come in at $1.70 per share, down from its previous forecast of $2.13 per share. Revenue in the current quarter ending in October is expected be 2 percent to 5 percent below the figure posted in the just-completed quarter. That implies Dell's fiscal third-quarter revenue could be down by as much as $1.6 billion, or 10 percent, from the same time last year.

Dell's lackluster performance is expected to be mirrored by HP Wednesday when the world's largest PC maker is scheduled to release its quarterly results. HP already has warned its quarterly loss will approach $9 billion because of an accounting charge to reflect the diminished value of a past acquisition.