August 28, 2009

Dell’s 2nd Quarter Shows Industry Slowly Gaining Momentum

Dell's poor second quarter proved the PC industry is still slowed by the recession, but analysts say it is slowly gaining momentum due to bargain prices and little "netbook" laptops for surfing the Internet, The Associated Press reported.

Dell reported on Thursday that profit fell 23 percent and sales fell 22 percent in the May-July period, but they were slightly better than what some analysts projected.

The recent quarter's results suggest that consumers are coming back to the stores to buy PCs, but corporations are still being stingy with big purchases. It might not be until 2010 that businesses open their wallets again, Dell officials added.

But next year could be the big turnaround the industry needs, since companies will have new budgets and will likely need new PCs for the new version of Microsoft Windows that will be available.

The anemic corporate PC buying has hurt Dell more than HP, since about 80 percent of Dell's business comes from sales to businesses, government agencies and other institutions. Dell's sales to corporations fell 32 percent from last year to $3.3 billion.

Consumer PC shipments increased 17 percent over last year, while Dell's revenue in that category was down 9 percent to $2.9 billion due to price-cutting -- PC makers have been slashing prices to preserve market share.

Meanwhile, many consumers have been favoring netbooks, which generate lower profit margins for manufacturers.

Dell expects better revenue in the second half of the year compared to the first half, if current demand trends continue. But profits will continue to be pressured by "aggressive" pricing and higher costs for components like LCD screens and memory chips, according to Michael Dell, the company's CEO.

Dell's profit was $472 million, or 24 cents per share, in the three months ended July 31, compared to the year-ago period's profit of $616 million, or 31 cents per share. The latest profit figure includes 4 cents per share in pretax expenses connected to Dell's ongoing restructuring.

Dell stock jumped 6.7 percent to end regular trading up 98 cents at $15.65. They added 48 cents, or 3 percent, to $16.13 in after-market trading.

Most analysts said the steep revenue and profit erosion was still troubling even though the numbers were ahead of Wall Street's forecasts.

Charles Smulders, a vice president with market research firm Gartner Inc, said it was hard to say something positive when you have such a significant revenue decline.

"It was not a great quarter. HP had a tough time too, but clearly they have a stronger focus on consumer PCs, so that plays in their favor, since much of the demand is coming from the consumer market," he added.

"Dell is managing the business well and cutting costs effectively, but said clearly you can only do that for a certain length of time. You have to drive revenue. That's what we're looking for in the next few quarters," Smulders said.

In an effort to hold its ground against mounting threats from rivals, Dell is trying to save $4 billion a year in a major makeover. Dell's market share has slipped where HP and No. 3 PC vendor Acer Inc.'s have both gained.

Dell is even trimming employees to save money. The company's head count fell by 9,300 last year to 78,900 at the end of January after massive layoffs.

Dell is also changing the way its computers are designed, made and sold, relying now more on contract manufacturers and retailers. The company has also restructured how its business units are organized.


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