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Saturday, March 01, 2008

Profit Falls as Dell Tries to Grow and Limit Costs

Slashdot It! The midterm grades are in, and Dell says it has a lot more work to do. For more than a year, the computer company has been trying to make a fundamental strategic shift in order to restore its reputation for strong growth and high profit margins. But some investors say Dell has not been clear enough about how it will reach more consumers, sell more products in emerging markets, and increase its sales among businesses without drastically cutting into profits. Thursday, the skeptics got more ammunition. Dell reported that its fiscal fourth-quarter net income declined — more than Wall Street analysts expected — even though company executive said that they had taken important steps toward transformation during the quarter. “We still have a lot to do,” said Donald J. Carty, the company’s chief financial officer. “However, the good news is that our performance in the fourth quarter has increased the confidence we have.” For some investors, the question is whether Dell can succeed on a transformation that includes two competing goals: the need to expand its business — which requires expensive investment — and the need to keep costs down. The initiatives Dell has proposed include increasing sales in overseas markets and in retail chains, both of which are expensive propositions. It also has designed new lines of computers for consumers and enterprises, and it is trying to build its services business for its corporate customers, a segment that can offer higher profit margins. Dell has argued that it can reconcile the goals of costly initiatives and cost control by fundamentally reworking the way it spends money. And the company is urging patience among investors. “We won’t grow at all costs,” Michael S. Dell, the chief executive, said to analysts Thursday after the company released its financial results. “Improvements in profitability will take some time.” It reported that its net income in the quarter ended Feb. 1 fell 6.5 percent to $679 million, or 31 cents a share. Revenue, however, rose 10.5 percent to $15.99 billion. A consensus of industry analysts had expected the company to report net income of 36 cents a share, not including one-time charges, and revenue of $16.2 billion. Dell’s shares have been in a steep slide from around $30 a share in November. The stock closed Thursday at $20.87, up 10 cents, ahead of its earnings report. In after-hours trading, shares fell 30 cents, or 1.4 percent, to $20.57. Shaw Wu, an analyst with American Technology Research, thinks that Dell can afford to spend a little money because it has a relatively low cost structure already. But other analysts agree with Dell that the company must keep pushing on the cost side of its balance sheet. Chris Whitmore, an analyst at Deutsche Bank Securities, who has a buy rating on the stock, said he would like to see the company’s operating costs at 11 percent of revenue. But Dell said that in the fourth quarter that was closer to 14 percent. Dell said that to get its costs down, it has, among other things, reduced its work force, cutting 3,200 jobs over the last eight months. One example of the delicate balancing act Dell faces is in its effort to increase sales to consumers. To do so, it has moved into retail stores, including Best Buy. The company said that more than 10,000 stores worldwide were selling Dell products. The company has also introduced new notebook computers, a fast-growing category in which it had been weak. The strategy, at least on the revenue side, is paying off. Among consumers in the United States, sales grew 12 percent in the fourth quarter and Dell said that it gained market share. But at the same time, the company said, that segment of its business showed a 2 percent operating loss. Another challenge is Dell’s efforts to expand overseas. Around two-thirds of sales by one rival, Hewlett-Packard, come from overseas. That diversification cushions the company against a decline or a slowdown in any particular region. Dell said sales were up 16 percent outside the United States and accounted for 49 percent of the company’s total revenues in the fourth quarter. In Brazil, Russia, India and China, collectively, revenue grew 36 percent and unit shipments increased 50 percent, from the quarter a year earlier. In its Asia-Pacific and Japan region, revenue grew 28 percent on a 41 percent increase in shipments. But such diversification costs money, analysts said. In the fourth quarter, Dell announced a partnership to sell in China through a major retailer, Gome. That provides a new channel for Dell, but also one that — unlike its direct-to-consumer sales channels in the past — requires the company to pay a cut to the retailer. In addition, Dell faces a tough marketing war against other PC makers who are using discounts or added features to win consumers in the emerging markets. Get Daily Updates via Email Protect your computer with Windows Onecare Get paid $7.50 for reviewing my post Ad Space

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