Dell revenue and profit drop, but stock rises

Dell Inc, the second-largest personal-computer maker after Hewlett-Packard, reported a 3 per cent drop in quarterly sales at $15.16 billion ago and fell wide off analysts' expectations. However, net income rose 5 per cent at $727 million in the quarter, from $766 million in 2007, or around 37 cents per share.

Citi scrip rose as much as 6.5 per cent in early trading after profit beat analysts' estimates, signaling that job cuts are paying off. 

However, the numbers were much better than those reported three months earlier when its fiscal second-quarter earnings fell 17 per cent even though sales had increased. (See: Dell reports earnings drop in spite of increased sales; blames self-inflicted price cuts)

Dell has cut 13 per cent of its workforce since its high point last year, helping bolster earnings even as sales missed analysts' estimates by more than $1 billion. Earlier this month, the company asked employees throughout the company to consider taking off as many as five days without pay over the next three months. In addition, it announced a hiring freeze, scaling back of some projects, and newer offerings of voluntary retirement. (See: Dell looks to employees to cut costs, asks them to go on unpaid leave)

Founder Michael Dell, who returned as chief executive officer two years ago, is trying to shore up sales amid an economic slowdown that has crimped corporate and consumer spending on technology. Dell is aiming to save $3 billion a year by 2011, while expanding sales to almost 20,000 retail outlets, including Wal-Mart Stores Inc and Best Buy Co.

Speaking on last quarter's results, he noted that customers want more for their money in the economic slowdown. "We're simplifying IT, reducing costs and maximizing productivity for customers," he said in a statement.

"The range of the global economic challenge is obvious to everyone," Dell said. "Customers of all types are still buying technology, but they're doing so at slower rates, and want to save money when they're buying and using IT."

He also expounded his strategy for further growth. ''Given the choice between profits and growth, we are going to go for profits. With the changes we are making in our cost structure, we think we are going to be able to do both of those together.'' The contrast between the numbers of the last two quarters amply demonstrates this philosophy.

Operating costs fell 11 per cent, helping Dell to expand gross margins to 18.8 per cent from 18.5 per cent a year earlier. Gross margin is the percentage of sales left after deducting the cost of production. The company cut almost $1 billion in annual operating expenses from the year-earlier period, CFO Brian Gladden said.

In a written statement, Gladden said that Dell has been working for several quarters to reduce costs. "Since the second quarter of last year we reduced global employment by close to 11,600, net of acquisitions," he said. "We're on track to achieve our goal of $3 billion in annualized cost reductions by 2011."

The company said it ended the quarter with 2,200 fewer jobs than in the second quarter, and that its head count decreased 9 per cent from the year-ago period. Dell also overhauled its manufacturing, limiting the number of options for custom computer orders, and now relies on contractors to make a quarter of its products, mimicking the production strategy of larger rival Hewlett-Packard Co.