Dell's Profit Drops As IT Spending Slowdown Spreads

The company has been cutting expenses for months to meet a promise to Wall Street to cut at least $3 billion in spending by the end of the fiscal year 2011.
Dell on Thursday reported a 17% drop in profit in its fiscal second quarter, as the computer maker saw the slowdown in U.S. IT spending spread to Europe and Asia.

In addition, the company said gross margins fell 5% from the previous quarter, because of more spending to boost sales in regions outside the United States. Dell also absorbed $27 million in expenses for the amortization of purchased intangibles and $25 million in "business realignments costs," which included ongoing job layoffs.

The company has been cutting expenses for months to meet a promise to Wall Street to cut at least $3 billion in spending by the end of the fiscal year 2011. Those cuts include reducing its workforce by 8,900 employees, a goal it set a year ago, by this year's fiscal third quarter. Dell says it has reduced its head count by more than 8,500 workers so far.

"We are making progress in improving productivity and reducing costs," Dell CFO Brian Gladden said in a statement.

Dell reported that net income in the quarter ended Aug. 1 fell to $616 million, or 31 cents a share, from $746 million, or 33 cents a share, the same period a year ago. Revenue increased 11% to $16.4 billion from $14.8 billion.

Dell's earnings failed to meet Wall Street estimates, which sent the computer maker's shares down more than 10% on Thursday. Also making investors jittery was the company's report that "conservatism in IT spending in the U.S." had spread into Western Europe and several countries in Asia.

The company also said in its forecast that it would continue "to incur costs as it realigns its business to improve competitiveness, reduce head count and invest in infrastructure and acquisitions."

Mark Stahlman, analyst for market researcher Gartner, said Dell's strategy is producing results, despite the drop in profit. "Dell is doing the right thing and is getting the results that they hoped for," he said.

Dell from April through June increased server shipments more than 24%, narrowing the gap with market leader Hewlett-Packard by 3.4 percentage points, according to Gartner. Furthermore, the company has been gaining share in the PC market for the last three quarters, after bottoming out in September 2007.

"So long as the market remains strong and they are gaining share, then they're prospects are good," Stahlman said.

Increasing sales overseas is a key element in Dell's strategy to regain market share it had lost to HP. This week, the company introduced business notebooks and desktops tailored for emerging markets in Asia, Africa, Europe, and Latin America.

Revenue outside of the United States surpassed U.S. revenue for the first time at Dell in the fiscal first quarter.

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