Tuesday, September 2, 2008

Dell 2Q Profit Sank 17 Percent

Slashing computer prices helped Dell Inc. boost sales in its fiscal second quarter. However, the No. 2 PC maker's bottom line took a hit when efforts to cut costs failed to make up the difference.

Dell's quarterly sales rose 11 percent to $16.4 billion, beating Wall Street's view. According to Dell, operating expenses fell to their lowest point in six quarters. However, for the three months ended Aug. 1, Dell's profit plunged 17 percent to $616 million, or 31 cents per share. Analysts had hoped Dell's margin would hold steady at last quarter's level of 18.4 percent, but instead it sank to 17.2 percent.

Investors punished the stock Thursday on word that Dell missed Wall Street's expectations for earnings and gross margin, calling into question the Round Rock, Texas-based company's turnaround efforts.

In a conference call, Michael Dell, who returned as chief executive in 2007, acknowledged that Dell might have been overzealous in cutting prices to challenge its larger competitor, Hewlett-Packard Co., in Europe, the Middle East and Africa. Moreover, the company also deferred some services-related profit from that region to a later quarter.

Shaw Wu, an analyst for American Technology Research noted that Dell sold more low-end computers in the quarter, adding to margin woes. In a tough consumer economy, companies such as Hewlett-Packard can make up for weaker PC sales with better results from high-end servers or printers.

Dell has once the world's largest PC maker, but fell behind HP in 2006. Dell has been struggling to reclaim the title back. The company has cut more than 8,500 workers since it began a program of layoffs last year, and said it's on track to cut 400 more by the end of the current third quarter. In addition, Dell expects log more than $3 billion in cost savings by 2011.

Dell did not give specific information for the current quarter, but said slower information-technology spending has spread from the United States to Western Europe and parts of Asia, and added that it expects that trend to continue.

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