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November 10, 2005

Dell profit tumbles on missed sales

The world's biggest PC maker Dell Inc said yesterday profit fell 28% during the third quarter as fewer US consumers bought its PCs and public-sector sales in the UK dragged down the company's quarterly growth.

By CBR Staff Writer

The company, which last month lowered profit and sales projections for the recent quarter, grew total revenue 11% to $13.9bn but missed its revenue targets, which CFO Jim Schneider called disappointing, during a conference call.

The Round Rock, Texas-based company rebalanced its consumer product mix during the quarter to include more high-end, higher-margin desktop and notebook PCs, said chief executive Kevin Rollins. Yet the recent back-to-school quarter saw many consumers buy lower-priced PCs instead, analysts said.

During the quarter, Dell consolidated its US consumer business unit with it small business segment and the company already is seeing improved efficiencies, Rollins said without providing details.

We’re still very hopeful and confident that we can take market share and make money [in the consumer business], Rollins said. He later said the company’s consumer business is roughly three to four times more profitable than its major competitors.

It is also too soon to tell whether consumers are willing to buy pricier products direct from the company’s Web site. This has been a successful strategy for Dell with its discount PCs. And Rollins was quick to point out this direct-model strategy still had cost advantages.

Asked whether Rollins had seen a marginal shift in the ability of its rivals to offer a marginally better value proposition, Rollins pointed out that Dell was offering $199 desktops back in 2002. And while there is some buzz around a rival selling $399 notebooks this holiday season, Rollins said Dell today sold a machine at that price.

So the notion of low price points is something we’ve lived with all along, he said. But we probably didn’t do that as well as we could in the past several years, he acknowledged.

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The company rejigged its product mix in the quarter to drive a better balance that optimized profit that provides sustainable top line growth, Rollins said.

Still, analysts said the company’s revenue already is suffering by this strategy to chase profit ahead of market share.

Rollins reiterated on the call that the company’s focus has always been on the corporate and enterprise market where its business is doing very well.

During the recent quarter, Dell made improvements to drive down operating expenses, ensure pricing consistency across customer segments and improve customer support, Rollins said. We still have to do, but we already are seeing some results, he said.

And there were, of course, bright spots during the quarter, including a 21% year-over-year increase in server order units and a 25% increase in software revenue and peripherals, buoyed by laser printers.

Storage revenue grew 16% and notebook unit sales were up 38% sequentially. Dell will continue to invest heavily in the mobile sector, which offers very attractive margins, Rollins said.

The broader shift to mobile saw desktop PC revenue drop 2% from last year, Schneider said.

Sales outside the US grew 20% and accounted for 40% of total revenue. Dell revenue in Asia Pacific and Japan rose 20%, with China driving unit growth in the region by a whopping 46%.

Dell netted a $606m profit, or 25 cents a share, during the quarter versus $846m, or 33 cents, last year. That included about $442m in one-time charges, including $300m for repairing defunct capacitors in its business computers, as well as the cost of cutting roughly 1,000 jobs in Texas, the UK and Asia. No more job cuts are expected during the current quarter.

Rollins had previously set an $80 billion revenue goal by 2009 for Dell. We have not backed off the $80 billion, he said yesterday. We think we can achieve it. However, when pressed on whether that would likely take longer than originally expected, Rollins declined to give a timeline.

The company projected profit for the current quarter of between 40 cents and 43 cents, with sales ranging from $14.6bn to $15bn.

We believe nine to 11% revenue growth rate is healthy for a company our size, Rollins said.

The company also said it would accelerate a stock buyback program and repurchase at least $1.7bn in shares this quarter. Last quarter, it spent $1.4bn to buy back 41 million shares.

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