Dell's net income dives 63 percent in Q1

Dramatic drop in income blamed on restructuring charges and falling PC sales

Dell on Thursday reported a 63 percent fall in net income during the first quarter of 2010, triggered partly by reduced PC sales and a restructuring charge related to cost cutting.

The company posted net income of $290 million for the quarter ending on May 1, falling from the $784 million it reported in the first quarter of last year. Dell reported earnings per share of $0.15. Excluding one-time items, earnings per share was $0.24, slightly over the consensus forecast of $0.23 per share from analysts polled by Thomson Reuters.

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The company reported a charge of $185 million related to restructuring expenses.

Dell's quarterly revenue fell to $12.3 billion during the first quarter, a 23 percent drop from the previous year. Revenue was short of analyst expectations of $12.6 billion.

Despite the reduced earnings, Dell tried to stress that it was taking steps to maintain profitability during the challenging economic environment. The company continues to cut costs and is looking to get deeper into sustainable markets such as data centers, services and software.

"Signals about the demand environment are mixed, but we're preparing for what we believe will be a powerful replacement cycle, with virtualization and managed services playing larger roles in what customers want and Dell provides," said Michael Dell, chairman and chief executive officer of the company, in a statement.

The company said earlier this year that it plans to reduce costs by $4 billion by the end of fiscal 2011, a change from the original target of $3 billion announced in May.

Revenue for mobile products -- which includes laptops -- was $3.88 billion during the quarter, a drop from the $4.85 billion it reported last year. Desktop PC sales were $3.16 billion, a massive drop from the $4.87 billion reported last year. Other business units -- including servers, storage, software and enhanced services -- also had declines in revenue.

PC shipments are slowing down as consumers and enterprises hold back on spending during the recession. Dell's PC shipments fell by 16 percent in the U.S. year-over-year during the first calendar quarter of year. Rival Hewlett-Packard surpassed Dell as the number-one PC vendor in the U.S. during the quarter, according to IDC.

Despite a fall in revenue, consumer laptop unit shipments went up 32 percent year-over-year, partly driven by demand for low-end laptops such as netbooks, said Brian Gladden, chief financial officer at Dell, during a conference call. Consumer desktop unit shipments fell by 20 percent.

Despite the impact of low-end laptop prices on Dell's revenue during the quarter, products such as netbooks are becoming more relevant to the company's mix of products, and Dell is adapting to the changing demand environment, Gladden said.

"We're confident we can improve margins over time" on laptops, Gladden said.

Dell also sees an opportunity to sell its products through more retail stores, officials said. Dell now sells its products through 30,000 retail stores worldwide.

Demand for enterprise products such as servers and storage was muted during the quarter as companies froze IT budgets, especially in the U.S. and Europe, Michael Dell said during the conference call. That could continue into the upcoming quarters, Dell said. IT budgets may open up once companies start turning profits.

"We're seeing a big deferral of purchases among corporations," Dell said. Enterprises are planning a 2010 client refresh around Microsoft's Windows 7 OS after having passed on Windows Vista, which failed to gain traction among corporate enterprises. Desktops and workstations are getting old and users are getting restless as their machines get into their fourth or fifth year, he said. "That can't go on forever," Dell said.

Server refreshes may happen as managed services and emerging technologies such as virtualization play a larger role in data centers, Dell said. The company's infrastructure consulting side is growing as it sells more complex server and data center products, Dell said.

Though Dell couldn't predict when enterprise IT spending might pick up, he said it would first happen in the U.S. and then slowly expand worldwide.

Sales outside the U.S. made up 48 percent of revenue, and revenue from the "BRIC" emerging countries -- Brazil, Russia, India and China -- made up 9 percent of the company's total. BRIC revenue declined 21 percent from a year earlier but increased 11 percent from the previous quarter. China showed signs of growth, with unit shipments up 13 percent sequentially.

Copyright © 2009 IDG Communications, Inc.

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