IT spending slowdown hits Dell's revenue, profits

Sales and income both drop in Q3, though latter tops Wall Street expectations due to cost cuts

Dell Inc. reported Thursday that revenue and net income dropped in its fiscal third quarter, leaving the company trying to cope with a global IT spending slowdown and reduced demand for its products.

Revenue for the quarter that ended Oct. 31 totaled $15.16 billion, down 3% compared with the third quarter a year ago. It also fell well short of the consensus estimate of $16.2 billion from financial analysts polled by Thomson Reuters.

Dell announced that its Q3 net income dropped 5% year over year to $727 million, although that beat the average external forecast of $616 million. Meanwhile, earnings per share increased by 9% over the year-ago level.

"Given the choice between profits and growth, we will go for profits," CEO Michael Dell said during a conference call with analysts yesterday. Dell and other company officials added that they expect the global IT environment to continue to be challenging and that the hardware vendor is working to adapt its operations accordingly.

Dell is in the midst of a concerted effort to cut costs. In April, the company said it hoped to save $3 billion in annual expenses by 2011 through measures such as reducing its head count and buying less expensive materials and components. The cost-cutting plan includes the layoffs of at least 8,800 workers, and potentially more than that.

Brian Gladden, Dell's chief financial officer, said on yesterday's conference call that the company has become the latest IT vendor to implement a temporary hiring freeze, although he added that some new employees will still be hired to meet specific needs. Dell also has shut down some manufacturing plants and customer service centers in various parts of the world to reduce costs, and The Wall Street Journal reported in September that the company was looking to sell off its manufacturing facilities.

In addition to the cost-cutting actions, Michael Dell said that the company will take a cautious and conservative approach in the months ahead. Product lines that deliver higher margins will be emphasized over lower-margin ones, he said.

Meanwhile, the company has decided to keep its Dell Financial Services LP unit, which had been put up for sale earlier this year. That operation is profitable despite the gloomy economic conditions, Gladden said.

Dell, the No. 2 PC maker worldwide, released its earnings report two days after market leader Hewlett-Packard Co. said that it will report better-than-expected results for its fiscal fourth quarter and that it expects to top earlier profit projections in its 2009 fiscal year. Dell is more dependent on PC revenues than the much larger HP is — a problem at a time when PC-shipment growth forecasts are being sharply reduced.

In the third quarter, Dell's consumer business had 10% revenue growth globally, while its commercial business saw revenue decline by 8% in the Americas region and 5% in Europe, the Middle East and Africa. Commercial laptop shipments were flat year over year, while server shipments dropped by 4%. Commercial revenue grew in Japan and the Asia-Pacific region, but by only 2%.

One bright spot: Dell is finding that customers in some emerging countries are still willing to spend money on new products. The company said that in the so-called BRIC countries — Brazil, Russia, India and China — third-quarter revenue increased 20% year over year, while unit shipments grew by 43%.

Copyright © 2008 IDG Communications, Inc.

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