Dell posts sharp drop in profits

 

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Posted on 29 Aug 2008 at 07:50

Dell has posted a surprisingly steep drop in quarterly earnings, sending its shares tumbling and sparking fears of weakness in the whole tech sector.

The world's second-largest computer maker, which had cautioned in May that big US companies had become more conservative with technology spending in the face of a weak economy, said slow demand had spread to Europe and Asia.

"It is conservatism that has been relatively consistent for the last six months or so, but it is somewhat spreading," claims Dell's chief financial officer Brian Gladden.

"The thing that is making the stock go down is they're starting to talk about demand destruction in Western Europe and in Asia," says John Menzies, a portfolio manager with Pacific Growth Equities in San Francisco.

"Up until this point the large tech companies, like the IBMs of the world, have done pretty well in holding up their earnings because they've had strong and consistent international demand," Menzies adds. "This shows international economies are slowing down and Dell cited that specifically."

The computer maker's profit fell 17% in the second quarter ended 1 August, to $616 million, from the restated net income of $746 million in the second quarter of 2007.

"Each geography saw profit growth well below revenue growth," Goldman Sachs analyst David Bailey writes in a note to clients, referring to results in the company's core US commercial business and operations in Europe and Asia-Pacific.

Strong revenues

Revenue offered a bright note for Dell as it rose 11% to $16.43 billion and topped all analysts' expectations.

But Dell also posted a disappointing drop in profit margins, to 17.2% of gross profit, from 19.9% a year earlier and 18.4% in the previous quarter. Operating margins also fell.

"Strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter," Gladden claims in a statement. Cost cutting, changes to its portfolio of products and an effort to push sales outside of US and European markets would also hurt future operating margins, Gladden adds.

Dell has cut 8,500 jobs so far out of a planned 8,900, and at least one analyst said the results could lead to further cutbacks. Officials said an ongoing three-year plan to cut $3 billion in costs would show benefits in the second half of its current fiscal year, which ends in January 2009.

Gladden claims pricing actions to restructure how Dell sells computer services in Europe hurt the company's quarterly profit.

The Dell financial executive says its moves in Europe were "self-inflicted" rather than in response to competitive pressures in the region but cautions that revenue deferrals tied to the restructuring of its European services business could serve as a drag on reported results later this year.

"It's a really tough tech market and Dell is obviously cutting costs, but it wasn't enough to offset the pressure on gross margin," says Shannon Cross of Cross Research.

"What people on the Street wanted to see was revenue growth and a solid gross margin number. Because if you sell things for no profit, to some extent, what's the point? This indicates that it might have to streamline even more now," she says.

Author: Reuters