February 29, 2008 / 12:36 AM / 12 years ago

Dell profit misses estimates, shares fall

SAN FRANCISCO (Reuters) - Dell Inc DELL.O, the world’s second-largest personal computer maker, on Thursday posted a lower-than-expected quarterly profit and cautioned that customers may rein in spending, sending its shares lower.

Dell CEO Michael Dell passes a screen projection in a file photo. The world's second-largest personal computer maker on Thursday posted a lower-than-expected quarterly profit and cautioned that customers may rein in spending, sending its shares lower. REUTERS/Will Burgess

Dell said it would continue to incur costs as it sheds jobs and shakes up its business to improve profitability, which may “adversely impact” near-term results. The stock fell 1.4 percent to $20.58 in extended trading on the earnings report.

Net income in the three months to February 1 fell to $679 million, or 31 cents per share, from $726 million, or 32 cents per share, a year earlier. Revenue rose to $16 billion from $14.5 billion, but average selling prices fell 7.5 percent to $1,480 per unit from a year earlier.

“They ended up selling a lot of low-end machines” said Shaw Wu, an analyst at American Technology Research who has a “neutral” rating on Dell. “They priced aggressively.”

It made 34 cents a share excluding the effect of job cuts, acquired research and development, legal costs and other items. Analysts expected 36 cents per share on that basis and revenue of $16.3 billion, according to averages on Reuters Estimates.

“The top line is a little disappointing, but delving further into the numbers, the gross margins were better than anticipated,” said Kim Caughey, senior analyst at Fort Pitt Capital, which manages $1.2 billion, including Dell shares.

Gross profit margin widened to 18.8 percent from 18.5 percent in the third quarter. But operating margin narrowed to 4.9 percent from 5.3 percent over the period, as costs rose.

Dell is more dependent than Hewlett-Packard Co (HPQ.N) and International Business Machines Corp (IBM.N) on the United States, which economists say is in or near recession.

Chief Financial Officer Donald Carty told Reuters Dell had seen “a little bit of holding back” among large U.S. corporate clients, particularly financial services companies hurt by the mortgage and credit crisis.

Dell earns about half its revenue in the United States, while HP and IBM each generate two-thirds of revenue abroad.

“This report does not give me any confidence yet about their ability to compete with HP,” Caughey said.

Founder Michael Dell retook the helm in January 2007, after a string of disappointing results under his predecessor. The company in 2006 lost the top PC-seller ranking to HP, which sold more laptop computers and printers in stores.

Dell last year abandoned a long-standing direct-only sales model and started selling PCs in retailers including Wal-Mart Stores Inc (WMT.N) and Best Buy Co (BBY.N) in North America, Carrefour SA (CARR.PA) in Europe and China’s GOME Electrical Appliances Holding Ltd (0493.HK).

Dell now sells computers in more than 10,000 stores, many fewer than HP, but CEO Dell told analysts on a call to expect “continual announcements that expand the range of partners.”

Dell said the retail expansion is generating $1 billion of annualized revenue and helped drive revenue growth in its U.S. consumer business to 12 percent in the fourth quarter.

Dell, based in Round Rock, Texas, said last May it planned to cut about 10 percent of the work force, or 8,800 staff.

Dell has cut a net 3,200 jobs of those planned, eliminating 5,300 positions but hiring 2,100 people, Carty said.

“We will get to the 8,800,” Carty said, adding that Dell expects one-time costs from the job cuts “that might leave us with a little bit more volatility in the next quarter or two.”

He told analysts on a conference call that Dell let costs climb faster than revenue because it expected stronger growth. “We weren’t as prudent about cost control as we should have been,” he said. “We should not have let it get this high.”

But Cross Research analyst Shannon Cross said its gross margins showed “commodity pricing was still favorable.”

Rivals including HP and Apple Inc (AAPL.O) have benefited recently from falling prices for computer components such as memory, monitors and disk drives.

Dell’s revenue from laptop computers rose 24 percent in the fourth quarter and revenue from server computers, data storage gear and desktop computers all increased by 2 percent.

Dell shares have fallen 26 percent since its last earnings report on November 29, more than twice the Nasdaq Composite index's .IXIC decline and worse than HP's 5 percent drop. Dell trades at 12.8 times expected 2008 earnings, a discount to HP's 14.

Additional reporting by Duncan Martell; Editing by Braden Reddall

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