Dell on Thursday posted a disappointing drop in quarterly earnings, citing slow IT spending in Asia and Western Europe, and increased spending to drive growth. The company's surprising 17 percent decline in quarterly profit sent the world's second largest PC maker's shares down more than 10 percent. Dell reported fiscal second quarter revenue of $16.4 billion, up 11 percent year-over-year and driven by a 19 percent increase in worldwide product shipments, but its $0.33 EPS, before one-time costs, was short of investors' expectations of $0.36 per share. After its one-time costs and amortization, Dell's profit fell to $616 million in the second quarter (ended August 1) or 31 cents per diluted share, from the restated year-ago net income of $746 million, or 33 cents per diluted share.
The company shipped said that its global consumer shipments increased 53 percent and share was up 1.6 points to 9.1 percent. It shipped more than twice as many consumer laptops this quarter as it did a year ago, driving revenue up 28 percent to $2.8 billion. In the US, revenue increased 5 percent to $8.1 billion on a 7 percent increase in units. Dell said remained the region’s No. 1 provider of systems and that while operating income declined, profitability improved sequentially by almost 20 percent.
The company continued to make strides in both the server and notebook markets, with server shipments grew 18 percent against what is said was flat industry growth and that its "mobility units" increased 12 percent. The company said it looked forward to continuing its success on notebook sales with its new line of Latitudes, new 15.6-inch Vosotro notebook, and upcoming line of XPS notebooks, as unit sales in the quarter by 44 percent with revenue growth of 26 percent.
In the quarter, Dell said it absorbed $27 million of expense for the amortization of purchased intangibles and $25 million in business realignment costs--each decreasing its EPS by $0.01. Dell said it remained committed to achieving annualized cost reductions of at least $3 billion by the end of fiscal year 2011, but said that cash flow from operations was $1.1 billion, leaving it with $9.5 billion in cash and investments. It spent $1.4 billion to reduce its outstanding shares by 60 million (12 percent) to 2 billion.
Operating income was $819 million, or 5 percent of revenue. Dell also noted that gross margins in the quarter were adversely affected by actions to drive growth in strategic areas like Global Consumer and EMEA, as well as an increase in deferred revenue from the sale of successful service offerings in EMEA, which will be recognized in subsequent periods.
Dell, however, said its productivity improvements gained momentum in the quarter with operating expenses at 12.2 percent of revenue, a decrease of 1.6 percentage points and the lowest level for Dell in six quarters.
“We are making progress in improving productivity and reducing costs,” said Brian Gladden, Dell CFO. “Strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter and there will be some non-linearity in the improvements in our operating income margins as we rebalance our portfolio, make cost improvements and drive growth.”
Looking forward, Dell said it will continue to incur costs as it realigns its business to improve competitiveness, reduce headcount and invest in infrastructure and acquisitions. It sees continued conservatism in IT spending in the U.S., which has extended into Western Europe and several countries in Asia.
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