Dell profit sinks 23 percent in slumping PC market but beats Wall Street estimates

Dell profit down 23 pct but surpasses estimate

SAN FRANCISCO — Dell Inc.’s second-quarter profit was whacked 23 percent as the personal-computer industry’s slump dragged on this summer. The results beat Wall Street’s forecast, however, sending the shares up more than 6 percent.

Dell’s results reinforce a trend outlined in the latest numbers from rival Hewlett-Packard Co., the world’s No. 1 PC seller, and supplier Intel Corp., the biggest computer chip maker: Consumer demand for PCs is perking up, but spending by corporations is still weak.

Dell’s shipments of consumer PCs increased 17 percent over last year, while revenue in that category was down 9 percent to $2.9 billion. Price-cutting explains the discrepancy. PC makers have been slashing prices to preserve market share. Consumers also have been favoring little “netbook” laptops that generate lower profit margins for manufacturers.

Dell’s sales to corporations fell 32 percent from last year to $3.3 billion.

Round Rock, Texas-based Dell is especially vulnerable to anemic business spending, because 80 percent of its revenue comes from corporations, government agencies and other institutions.

Michael Dell, the company’s CEO, said in a statement that Dell expects better revenue in the second half of the year compared to the first half, if current demand trends continue.

But the company warned that its profits will continue to be pressured by “aggressive” pricing and higher component costs, and that business spending on PCs won’t likely pick up until 2010. Analysts have been eyeing the new year for a turnaround because companies will have new budgets, can’t hold on to old PCs forever, and will have a new version of Microsoft Windows available.

Dell’s profit was $472 million, or 24 cents per share, in the three months ended July 31. That compares with profit of $616 million, or 31 cents per share, in the year-ago period.

The latest profit figure includes 4 cents per share in pretax expenses connected to Dell’s ongoing restructuring.

Sales fell 22 percent to $12.8 billion.

Analysts polled by Thomson Reuters expected profit of 23 cents per share on $12.6 billion in sales. Analysts generally exclude one-time items, like restructuring charges, from their estimates.

Dell’s latest numbers were released early, right before the market closed, and Dell stock jumped 6.7 percent to end regular trading up 98 cents at $15.65.

While the numbers were ahead of Wall Street’s forecasts, analysts said the steep revenue and profit erosion was still troubling.

“It’s hard to say something positive when you have such a significant revenue decline — it was not a great quarter,” said Charles Smulders, a vice president with market research firm Gartner Inc. “HP had a tough time too, but clearly they have a stronger focus on consumer PCs, so that plays in their favor, since much of the demand is coming from the consumer market.”

Smulders said Dell is managing the business well and cutting costs effectively, but said “clearly you can only do that for a certain length of time. You have to drive revenue. That’s what we’re looking for in the next few quarters.”

Dell is trying to save $4 billion a year in a major makeover as it tries to hold its ground against mounting threats from rivals. HP and No. 3 PC vendor Acer Inc. have both gained market share while Dell’s share has slipped.

One way Dell is saving money is by trimming staff. After a deep round of layoffs the company’s head count fell by 9,300 last year to 78,900 at the end of January. Dell is also changing the way its computers are designed, made and sold, relying now more on contract manufacturers and retailers. The restructuring has also included an overhaul of how Dell’s business units are organized.