Dell 3Q profit falls as PC spending slows

[November 21, 2008]  VIENNA, Austria (AP) -- Dell Inc.'s fiscal third-quarter profit sank 5 percent as concerns about the deepening economic crisis crimped corporate spending on computers and other technology products.

What began in August as a period of "reasonable growth" for Dell soured in September and October, Chief Financial Officer Brian Gladden said. The drop-off was more severe than could be offset by growing consumer PC sales or extensive cost-cutting efforts.

"We expect the challenging environment to continue," Gladden said Thursday.

Wall Street, it seems, was expecting worse.

The PC maker's earnings dipped to $727 million in the quarter that ended Oct. 31, down from $766 million a year ago. However, earnings per share rose 9 percent to 37 cents, 6 cents better than analysts polled by Thomson Reuters expected, because of stock buybacks.

Investors cheered, sending shares up 5.4 percent to $10.34 in extended trading Thursday after the earnings report came out.

Slower IT spending by corporations pushed Dell's revenue down 3 percent to $15.2 billion. In the Americas, Dell's largest region for sales to businesses, revenue dropped 8 percent as companies scrutinized their budgets. Gladden also said that in some areas of the country, Dell decided not to follow some competitors who slashed prices deeply. The choice hurt the top line, but helped preserve profit.

"Dell managed its business well, but clearly, the overall economic environment is making it difficult for them," said Gartner Inc. analyst Charles Smulders.

In one bright spot, Dell's consumer PC revenue increased 10 percent worldwide as unit shipments jumped 32 percent. Dell does not break out U.S. consumer sales, but Gladden said that "the U.S. was a strong part of the good performance."

Smulders attributed at least part of that bump to Dell's move to sell PCs in retail stores -- about 20,000 outlets today. Those retailers order more computers in advance of the holiday shopping season, a level that isn't sustainable through the year, especially in an economic downturn.

"The issue is if consumer buying of PCs follows consumer sentiment, then that will mean that there will be lot of stock left in retail," he said.

Dell's consumer sales account for less than a fifth of the company's total, and the solid performance wasn't able to offset trouble in the corporate business. Dell also lacks the product diversity enjoyed by its biggest rival, Hewlett-Packard Co., which announced this week that it would exceed analysts' forecasts for its most recent quarter.

Retrenching as it tries to deal with the economic uncertainty, Dell has been on a cost-cutting campaign. The Round Rock, Texas-based company eliminated 2,200 jobs in the quarter and has slashed about 9 percent of its work force in the past year.

As part of an effort to save money, Dell is reviewing its supply chain and manufacturing costs, but did not give an update Thursday about possible factory closures.

Cutting employees helped Dell push operating expenses down 11 percent from last year, boosting the gross margin. Lower component costs also helped, as did a modest uptick in sales of software and services, which are more profitable than hardware.

Michael Dell, the chief executive officer, said Dell would continue to aggressively cut costs, and choose stronger profits over grabbing market share from its competitors by lowering prices.

[Associated Press; By JESSICA MINTZ]

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