PC maker Dell, Inc. (NASDAQ:DELL) is expected to face gross margin pressures from its PC business as hard disk drive constraints are not expected to recover at least until the second quarter of this year.
The company would also face revenue headwinds as it is shifting its business model to enterprise solutions from a hardware company. The transition would take time and Dell may buy a software company to boost its presence in the sector. Dell's software and peripherals revenue for the fourth quarter fell 4 percent from last year.
"We continue to see secular PC margin headwinds offsetting Dell's server/storage margin tailwinds," Jefferies analyst Peter Misek wrote in a note to clients.
Dell noted the weakness in GM was due to HDD-related issues and pressure in the U.S. Public business. Though the company were able to obtain enough HDDs, it faced HDD shortages after fulfilling enterprise contracts, leading to a downward mix shift in their consumer PC business.
Worldwide PC shipments fell a bigger-than-expected 1.4 percent to 92.2 million units in the fourth quarter of 2011, according to data released by market research firm Gartner. Gartner noted that the major impact from the HDD shortages is expected to materialize in the first half of 2012, and potentially continue throughout 2012. These shortages will temporarily lower PC shipment growth during 2012.
"Apart from NAND, component prices have been flat to slightly down over the past quarter, which poses a headwind to PC OEM margin expansion," Misek said.
Dell's quarterly profit fell 18 percent and missed Wall Street expectations by a penny. The company's gross margin of 21.7 percent came in below Street view of 22.6 percent.
Looking ahead, the company said it expects first quarter revenue to decline about 7 percent sequentially, implying revenue of $14.91 billion. Analysts expect revenue of $15.18 billion for the first quarter, according to Thomson Reuters.
Shares of Dell fell $1.10, or 6 percent, to $17.11 on the Nasdaq.
Our Take: It would be better to stay on the sidelines until Dell improves margins and expand in the software space.