Dell profit tops Street view, shares rise

SAN FRANCISCO (Reuters) - Dell Inc, the world's No. 2 PC maker, posted a better-than-expected quarterly profit on Thursday as cost cuts offset lower revenue, sending its shares up about 6 percent.

Dell had been facing subdued expectations for the October quarter. The company warned in September, just weeks after reporting second-quarter results, that it was seeing "further softening" in global demand.

But Dell waged an aggressive campaign to control costs, cutting operating expenses by 11 percent from last year. Gross margin rose to 18.8 percent from 17.2 percent.

"We're clearly choosing profit over growth, but we also believe the changes we're making to our cost structure will allow us to achieve both over time," Chief Executive Michael Dell said on a conference call with analysts.

The unexpectedly strong results cheered Wall Street, although some worried about a revenue drop, and the after-hours share rise was close to the size of the drop during regular trade.

"It was certainly a surprise and what this shows is that cost-cutting initiatives are beginning to take effect," said Bill Kreher, a technology analyst at Edward Jones. "The slowdown in PC demand affected laptop sales and thus revenue."

PROFIT, REVENUE FALL

Net profit in the fiscal third quarter ended October 31 fell 5 percent to $727 million, or 37 cents a share, from $766 million, or 34 cents a share, in the year-ago period. Per share earnings rose as Dell bought back shares.

The average analyst estimate was 31 cents a share, according to Reuters Estimates.

Revenue in the period fell 3 percent to $15.16 billion, below the average analyst estimate of $16.3 billion, according to Reuters Estimates. Unit shipments rose 3 percent.

The company said it saw strength in Asia and emerging markets, while Western Europe and the United States continued to be slow. Commercial revenue in the Americas fell 8 percent, and 5 percent in Europe.

The company acknowledged that it faced a "challenging" demand environment. Many analysts see Dell as vulnerable to the global economic slowdown due to the company's sizable exposure to a weakening PC market. Its share of global personal computer shipments slipped below 14 percent in the calendar third quarter, according to IDC."

And despite success on the bottom line, the revenue decline worried some.

Gartner managing vice president Charles Smulders called it a "fairly disturbing quarter. On the one hand, they managed to increase earnings per share, but revenue was down."

Shannon Cross of Cross Research said, "It's all cost-reduction, and it seems like they walked away from selling lower-margin products...It's going to be a challenge for companies (like Dell) to cut costs as fast as sales have fallen off."

Dell said it would continue to incur costs as it realigns its business and reduces headcount. It has 2,200 fewer employees than the previous quarter, and has instituted a hiring freeze. It has shed 11,600 employees since the second quarter of last year, excluding acquisitions.