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Cutting Costs Paying Off For Dell

May 18, 2011

Dell Inc., the second-place PC manufacturer, passed Wall Street expectations on its profitability, raising its fiscal 2012 outlook for operating income, citing expectations for a robust back-to-school season and strong government spending, Reuters is reporting.

“We’re off to a solid start in our fiscal year 2012,” said Dell chief executive Michael Dell. “Our substantial profit increase demonstrates that our strategy is working and our execution is improving.”

The positive results from the Round Rock, Texas-based Dell are in contrast to its rival Hewlett-Packard, which reported strong profits in the recent fiscal quarter but saw its stock sink with word that the US computer colossus was bracing for tough times later in the year, AFP reports.

HP reported that it made $2.3 billion in profit on $31.6 billion in revenue during the fiscal quarter that ended April 30 in a showing that bested the same period a year earlier by five percent and three percent respectively.

Dell’s consumer segment makes up about 20 percent of its revenue and so is much smaller than the portion of its revenue that comes from sales to businesses, which dropped 7 percent to $3.0 billion.

Chief Financial Officer Brian Gladden attributed some of falling consumer demand to the consumer PC market being saturated in developed countries. He added that while tablet computers are still a small portion of the PC market, there’s “clearly an impact” from them on the demand for desktop PCs, AP reports.

Actively seeking to diversify into higher-profit markets, Dell has been seeking to increase the proportion of server computers, data storage devices and technology consulting services. Those areas are more profitable than the company’s basic PC business.

Compared with a year ago, however, most of Dell’s product categories accounted for about the same percentage of revenue, and computers for consumers and businesses continued to make up more than half of Dell’s revenue.

Still, Dell’s gross margin, an indicator of how efficient Dell’s business is, came in at 22.9 percent, higher than the 20.4 percent that analysts polled by Thomson Reuters were expecting. Dell’s strategy of focusing on more profitable areas of its business and pruning lower-margin offerings “is working well,” Gladden said.

For the full fiscal year, Dell continues to expect revenue to grow 5 percent to 9 percent, implying a total of $64.6 billion to $67.0 billion. Analysts expect annual revenue of $64.4 billion. Dell shares rose 86 cents, or 5.4 percent, to $16.76 in extended trading. The stock finished regular trading down 10 cents at $15.90.

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