Dell to Cut 8,800 Jobs in Bid for More Profit Earnings Beat Hopes, but Doubts Remain

Jun 03, 10:23 AM

Current Headlines: By Laurie J. Flynn

Dell said it would lay off 10 percent of its 88,100 employees over the next 12 months as it tries to increase profit.

The computer maker also said Thursday that lower component costs and higher selling prices helped it produce stronger-than-expected earnings in its first quarter.

Dell surprised investors by reporting net income of $759 million, or 34 cents a share, on $14.6 billion in revenue for its first quarter that ended on May 4. In the quarter last year, Dell reported net income of $762 million, or 33 cents a share, on revenue of $14.2 billion.

Wall Street analysts had been expecting Dell to report earnings of 26 cents a share on revenue of $13.95 billion, according to a survey by Thomson Financial. As a result, shares of Dell rose 5.9 percent in after-hours trading, to $28.49. It had closed at $26.91, up 2.6 percent in regular trading before Dell's earnings announcement.

Although Dell has been losing market share to its competitors worldwide, the company said that the average selling price of its computers increased 14 percent during the quarter. It was also helped by particularly strong sales of computer servers, it said. Dell's server revenue grew 19 percent, to $1.6 billion.

"It was a very strong performance, but there are still questions," said A.M. Sacconaghi, a securities analyst at Sanford C. Bernstein. "Dell is not off to the races quite yet."

Sacconaghi, like other analysts, is still waiting for Dell to disclose the nature of its accounting problems that are under investigation by the Securities and Exchange Commission. Dell has said it might have to restate earnings from prior quarters. The company said it incurred approximately $46 million, or two cents a share, in costs associated with the investigations during the quarter.

Some Wall Street analysts noted that the benefit Dell received from lower component prices in the first quarter might not prove sustainable.

"The key surprise here is the upside in average selling price," said William Shope, an analyst with JP Morgan. "But this is a quarter where there are so many anomalies."

This was also the first full quarter that Michael Dell, the company's founder, had been back in charge. The Dell chairman took back the title of chief executive in January. He began orchestrating a turnaround strategy that has included a shake-up of Dell's executive team, an increased openness to customer suggestions and, most recently, a shift in Dell's direct-sales model.

"Our strategic intent is to simplify information technology for our customers by removing cost and complexity," Dell said in a prepared statement.

Dell has been rapidly losing market share, particularly to Hewlett-Packard, now the world's largest maker of personal computers.

During the first three months of the year, Dell's share of the worldwide PC market dropped to 15.2 percent from 18.2 percent last year, according to IDC, a market analysis firm. Dell's decline came in sharp contrast to the overall PC market, which grew 10.9 percent.

To start growing again, Dell has said it would depart from the direct sales business model that helped it achieve phenomenal growth in the 1990s. Dell executives said last week that the company would sell a limited selection of its computers at Wal-Mart.

Dell executives suggested that the deal with Wal-Mart was just the start of its plan to overhaul its sales strategy. In a further departure from the direct model, Dell has also been working more closely with value-added resellers, which sell systems to small businesses and corporations.

Dell has been counting on growth in overseas markets like China and India to help it compensate for weakening sales growth in the United States. Dell's international shipments exceeded domestic shipments during the first quarter, for the second consecutive quarter.

Dell announced in August that the SEC was conducting an investigation into its financial practices of the last few years.

Dell executives said in March that they had uncovered "evidence of misconduct" through an internal investigation of financial operations, involving accruals, reserves, and other balance-sheet items.

The company released no new information about that investigation.

Since the start of the SEC investigation, Dell executives have not held their customary conference call with Wall Street analysts and reporters.

In a statement, Dell executives cautioned that the first-quarter earnings statement was preliminary and subject to possible change.

Earnings from the second, third, and fourth quarters of 2006 remain preliminary pending results of the inquiry.

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