Update: Dell cuts workforce by 4%, warns of uncertain outlook

Dell Computer Corp. today disclosed that its workforce is being reduced by 4% through a layoff of 1,700 employees in the face of lowered revenue growth forecasts at the PC maker.

The cutback announcement, which had been widely rumored to be on the way, came just hours before Round Rock, Texas-based Dell reported financial results for its fiscal fourth quarter ended Feb. 2 that increased comfortably year-to-year but were well below the company's original forecast.

Dell said the layoffs will mostly affect administrative, marketing and product support workers in its central Texas operations. Despite the cuts, a company spokesman said, users who buy Dell's PCs and servers "should see no blips in service." The jobs being eliminated are "positions that do not touch the customers," he added.

During a conference call that was broadcast via Dell's Web site this evening, company executives declined to comment on their business outlook beyond the just-started quarter. James Schneider, Dell's chief financial officer, said only that all computer makers "will be challenged this year" because of the economic slowdown in the U.S.

"We just need to be very cautious with what our approach is for the first quarter," Schneider said. "There's a lot of uncertainties out there with our customers themselves relative to what the economic impact is going to be on their businesses."

Dell had already warned last month that profits in its fiscal fourth quarter would likely be about 33% less than expected (see story). When the warning was issued, CEO Michael Dell said the company would continue to aggressively manage its internal cost structure as a result of the fourth-quarter showing.

The company reported today that net income totaled $508 million in the fourth quarter, up 16% from $436 million from the same period a year ago. Revenue came in at $8.7 billion, up 28% from the year-earlier total of $6.8 billion. But Michael Dell noted that industrywide demand for computers "was far softer than anyone expected when we entered the fourth quarter."

The 1,700 employees who are being let go will get two months' worth of severance pay and continued benefits for the next 60 days, according to the Dell spokesman. This is the first time the company has laid off a significant number of workers, he said, adding, "It's been a hard day."

But analysts said the layoffs had to happen.

PC prices continue to spiral downward due to soft demand from users and competition from wireless and handheld devices. Coupled with the rapid slowdown in the U.S. economy, that means Dell and other PC makers have to be able to compete at lower price levels, said Martin Reynolds, an analyst at Gartner Group Inc. in Stamford, Conn.

"All the PC companies, including Dell, are too large for the level of business happening now," said Roger Kay, an analyst at market research firm IDC in Framingham, Mass. "There's overcapacity in the industry."

Many of the jobs being cut by Dell became redundant because of a recent internal reorganization, the company said. But the layoffs were also attributed to reduced expectations for PC demand in general and Dell's revenue growth in particular. The cutbacks are being made at all levels of the company, Dell added.

The layoffs follow another cost-cutting move earlier this month in which Dell shut down a business-to-business exchange that had been launched with great fanfare last October. The company pulled the plug on the Dell Marketplace venture after only three suppliers signed up to offer goods through the B2B exchange (see story).

Dell is just one of many PC vendors being affected by a softening of demand that started late last year. For example, rival Compaq Computer Corp. last month reported financial results in line with a reduced-expectations warning it issued in December (see story). And San Diego-based Gateway Inc. overhauled its senior management and laid off 10% of its workers after reporting a $94.3 million fourth-quarter loss (see story).

Other computer makers are also being hit by lower-than-expected sales. Hewlett-Packard Co. today reported results for its fiscal first quarter ended Jan. 31 that were in line with a reduced-expectations warning it issued last month (see story).

Revenue grew just 2% year-to-year, and HP said pro forma net profits fell from $825 million in last year's first quarter to $727 million. "Clearly, this was a tough quarter, and our results reflect that," said Carly Fiorina, the company's chairman, president and CEO. She added that HP executives "are not counting on a return to double-digit revenue growth this year."

(Evans is a reporter at the IDG News Service.)

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