Dell's Profits Hurt By Restructuring Costs - InformationWeek
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2/28/2008
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Dell's Profits Hurt By Restructuring Costs

EqualLogic and Everdream acquisition costs also hinder Michael Dell's quest to regain the company's one-time position as the world's largest PC maker.

Dell on Thursday reported a decline in fourth-quarter profits, as the company struggled with the high cost of turning its business around.

Dell reported a 6% drop in net income in the quarter ended Feb. 1 to $679 million from $726 million the same period a year ago. Contributing to the decline was $83 million in expenses related to research and development stemming from the recent acquisitions of EqualLogic and Everdream, and $54 million in expenses related to severance costs and facility closures from the company's restructuring efforts.

Since the return of company founder Michael Dell as chief executive in January 2007, the company has been rebuilding in an attempt to regain its one-time position as the world's largest PC maker. Over the last few years, Dell has lost market share to Hewlett-Packard, which displaced Dell in the top slot.

Besides increased spending on acquisitions to expand its business into other areas, such as support services, Dell also is spending more on higher-end computers for the consumer market and on selling products through retailers, which costs more than Dell's original model of selling online and over the telephone. As a result, the company has been working at cutting expenses.

Over the last eight months, Dell has reduced its head count by 3,200 employees. Nevertheless, more cuts are needed. "While Dell continues to drive towards a world-class cost structure and competitiveness we have much work to do," Michael Dell said in a statement.

On the positive side, Dell increased its gross margin, an indicator of profitability, to 18.8% from 17.1% a year ago, and from 18.5% from the previous quarter. In addition, revenue from U.S. consumer PCs increased 12% as shipments from a year ago rose 25%. Dell's longtime strength has been in business market, and it has been working hard at increasing its share of the consumer market.

Dell's overall revenue rose by 10% from a year ago to $15.99 billion.

Dell did not provide guidance for the current fiscal year, but said it would continue to incur costs as it restructures its business. In addition, the company said it could see a slowdown in customer spending.

"While the company believes these actions are necessary to drive long-term sustainable value, they may adversely impact the company's near-term performance," the company said. "In addition the company's results could be adversely impacted by more conservative spending by its customers."

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