Dell records 48 per cent drop in net income

Vendor also announced it is increasing its cost-cutting goal to US$4 billion by the end of fiscal 2011

Dell's net income dropped 48 per cent for the fourth quarter, the company said Thursday, as it also announced it is increasing its cost-cutting goal to US$4 billion by the end of fiscal 2011 as it tries to come to terms with the recession.

The company recorded net income of US$351 million for the fourth quarter ended Jan. 30, a 48 per cent drop from the $679 million it recorded in last year's fourth quarter. Net income per share was $0.18. Analysts polled by Thomson Reuters expected net income of $496 million.

Revenue fell to US$13.4 billion, a 16 per cent drop from a year ago, and short of analyst estimates of $14.2 billion.

Reduced IT spending has taken its toll on the company, with spending deferred until the economy improves, CEO Michael Dell said in a statement. However, the company is taking other steps to reduce costs to adapt to the recession.

The company now aims to reduce costs by US$4 billion by the end of fiscal 2011, a change from the original target of $3 billion announced in May.

The steps Dell has taken in the past to cut costs include compensation reduction, staff cuts, restructuring its product design and distribution, and realigning its manufacturing strategy by shutting down factories.

"Within our business, we're being very disciplined in managing costs, generating profitability and cash flow, and investing in ways that separate Dell from others today and when the economy inevitably improves," Dell said.

Predicting how long the recession will last is difficult, Dell said during a conference call. The company can't fight the recession, so it will focus on elements it can control, such as cutting costs, Dell said.

In the fourth quarter, the company cut operating costs by shutting down factories and by outsourcing hardware manufacturing, he said. The company has reduced the manufacturing cost of each PC by about five per cent, Dell said.

Similar measures will probably be taken to meet the additional US$1 billion cost-cutting measures by the end of fiscal 2011, wrote John Spooner, senior analyst at Technology Business Research, in a research note.

"We expect Dell's belt-tightening to involve additional layoffs and plant closings within the company's North America organization," Spooner wrote.

The company employed about 78,800 people at the end of the fourth quarter of 2008, a headcount reduction of 9,400 from a year earlier. Dell officials declined to comment on any pending additional layoffs.

Dell may pursue additional cost-cutting opportunities if demand for products and services remains volatile, said Dell Chief Financial Officer Brian Gladden during the call.

The company will also selectively focus investments in higher-margin products, such as enterprise servers, storage and software, Dell said. It is also increasing its focus on cloud computing opportunities, such as online services from its Web site.

Dell also has aggressive plans to push Microsoft's upcoming Windows 7 OS in enterprises. Hardware purchases may be delayed as customers wait for Windows 7, but in preparation for that OS, Dell is readying hardware that takes advantage of specific features planned for it, Dell said.

Server revenue for the quarter was US$1.35 billion, down 16 per cent year-over-year, while unit shipments declined 18 per cent. Revenue from storage products increased by 7 per cent to $692 million. Services revenue declined by 3 per cent to $1.36 billion.

On the consumer side, laptop shipments were flat and revenue declined by 17 per cent to US$4.01 billion. Desktop shipments declined 21 per cent, while revenue declined 27 per cent to $3.5 billion. The company doesn't disclose the numbers of laptops or desktops shipped, a company spokesman said. The company is now selling its consumer products in 24,000 stores worldwide.

Netbooks aren't a large part of the company's laptop shipments, Dell said. Consumers are demanding the larger screens offered in traditional laptops, but Dell said it will continue to offer netbooks, with a variety of screen sizes, as part of its product mix.

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Agam Shah

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