Dell Profits Tumble As Customers Tighten Purse Strings - InformationWeek

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Infrastructure // PC & Servers

Dell Profits Tumble As Customers Tighten Purse Strings

CEO Michael Dell does not offer a forecast for the current quarter, saying "indicators of global IT demand remain mixed."

Dell on Thursday reported a 63% drop in profits in the fiscal first quarter, as businesses continued to hold back on buying PCs in the economic recession.

Nevertheless, the computer maker said it believed the hard times would eventually end, and that it would continue to focus on reducing expenses to weather the economic storm. "Signals about the demand environment are mixed, but we're preparing for what we believe will be a powerful replacement cycle," chairman and chief executive Michael Dell said in a statement.

Net income for the quarter ended May 1 fell to $290 million from $784 million the same period a year ago. Revenue fell 23% to $12.3 billion from $16.1 billion.

While profits and revenue have fallen, Dell has focused on reducing costs. Operating expenses for the quarter were down $101 million from the previous quarter and $312 million from a year ago. The company is on track to reduce annual costs by $4 billion by the end of the 2011 fiscal year, Dell CFO Brian Gladden said.

Sales were down across the board for the PC maker. Revenue from large corporations and small and medium-sized businesses was fell 31% and 30%, respectively, from a year ago. Revenue from consumer PCs dropped 16% and sales to the public sector decreased 11%.

Dell did not offer a forecast for the current quarter, saying "indicators of global IT demand remain mixed."

Despite efforts to grow its services business, Dell remains primarily a computer maker. As a result, the company has been hit hard as PC sales in general have dried up globally in the economic downturn. In the first quarter, shipments of desktops and laptops fell 7.1% from a year ago, according to IDC.

"Dell is stuck in a position where customers are deferring hardware purchases," John Spooner, analyst for Technology Business Research, told InformationWeek. Rather than buy new PCs, businesses are spending money on essential IT items, such as software maintenance and extended warranties. The latter gives them some protection in holding on to older hardware.

As the economy improves, Dell is expected to benefit from pent-up demand. But the question is when. "It's tough to read the tea leaves, because you don't know when the economy is going to improve," Spooner said.

In the first quarter of this year, Hewlett-Packard, which has a far more diverse product portfolio, toppled Dell from the No. 1 spot in the U.S. PC market, a position Dell hung onto after losing the crown for the world's largest computer maker to HP several years ago.

HP's success and the latest results are an indication that Dell is still struggling to revitalize its business through a major overhaul that started with the return of founder Dell in early 2007.

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