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Dell Hurt By Weakening PC Demand

Dell's earnings are a sharp contrast to rival and market leader Hewlett-Packard, which issued last week a stronger-than-expected full-year profit forecast.

Dell on Thursday reported a drop in third-quarter revenue and profits, the latest sign that demand for servers and PCs was slowing across the globe.

The world's second-largest computer maker said net income in the quarter ended Sept. 30 fell to $727 million from $766 million the same period a year ago. Earnings per share, however, rose to 37 cents from 34 cents, because of stock buybacks that reduced the number of shares outstanding by 14%.

Revenue fell 3.1% to $15.16 billion, as the company continued to see a slowdown in demand that started at the end of the second quarter. The company did not offer a forecast for the current quarter, but said it believed that demand for its products "will continue to be challenging."

Dell's performance was in sharp contrast to rival and market leader Hewlett-Packard, which issued last week a stronger-than-expected full-year profit forecast and preliminary results. The difference between the two competitors had at least one analyst wondering whether Dell was losing share to HP.

"Given that HP is forecasting growth, it makes it a little more difficult for Dell to hide behind the economic news completely," Ken Dulaney, an analyst for Gartner. told InformationWeek. "HP is probably taking some share from them."

Without HP's diversity in products and services, Dell is more dependent on the PC market, which is certainly weakening. The company released earnings the same day market researcher iSuppli slashed its 2009 forecast for PC shipments by nearly two-thirds because of rapidly deteriorating conditions in the global economy and financial system. The market researcher said shipments would increase next year by 4.3% compared with 2007. In 2010, shipments would rise by 7.1%. ISuppli had previously forecast increases of 11.9% and 9.4%, respectively.

Intel, which makes the microprocessors that drive PCs, lowered last week its fourth-quarter earnings forecast, as lower-than-expected sales struck across the globe and in every PC market segment. The bellwether for the tech industry dropped its outlook to $9 billion, plus or minus $300 million. The company had projected revenue of between $10.1 billion and $10.9 billion.

In meeting the slowdown, Dell said it would continue to cut costs. Operating expenses fell 11%, as Dell ended the quarter with 2,200 fewer jobs than in the second quarter, and down 9% from a year ago. Dell said more than a year that it would cut its workforce by 10%, or about 8,900 jobs.

Gross margins improved to 18.8% from 18.5%, helped by lower component costs and a boost in sales of higher margin products.

Revenue from businesses in North America fell 8% on a 14% drop in shipments. Revenue was down 5% in Europe, the Middle East and Africa, while shipments were flat. Dell saw a 2% revenue increase in the Asia-Pacific region and Japan on a 15% rise in shipments.

Dell saw its highest revenue increase in emerging markets of Brazil, Russia, India, and China, where total revenues rose 20% and shipments 43%. The so-called BRIC countries accounted for 9% of Dell's global revenue. Revenue from Dell's worldwide consumer business increased 10% over last year.

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