Dell Inc (NASDAQ:DELL) 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 8 percent in morning trade, 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 analyst meeting on Tuesday that Dell expects hardware unit growth of 10 percent or more from fiscal 2010 through 2012, but sees hardware revenue growth of 0 to 5 percent.

Resource Library:

"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," he said.

"This is the world we live in with the business we have today, and we fully understand these dynamics."

Like others in the PC 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 has been shedding jobs and cutting costs to realign its business to a lower-demand environment. The company says it is on track to reduce annual costs by more than $4 billion by the end of fiscal 2011.

"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," Gladden said. "They do not appear to be deteriorating ... but not necessarily getting a lot better either."

Chief Executive 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.

Dell said the company was "focused on winning in the most profitable segments" rather than taking market share.

The company also said demand appeared to be stabilizing. Gladden said there are clearly signs of sequential improvement, and noted that the company is benefiting from back-to-school sales.

Dell shares fell 8 percent, or $1.05, to $11.97 on Nasdaq. The Nasdaq composite index .IXIC was down 0.4 percent. Rival Hewlett-Packard Co (NYSE:HPQ) was down 1.4 percent and IBM (NYSE:IBM) was down 0.8 percent. (Reporting by Gabriel Madway; editing by Tiffany Wu and John Wallace)