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News : International Last Updated: Dec 19th, 2007 - 13:17:15

Dell's profit drops 51% amid price cutting and slower PC demand: Company says SEC is probing its revenue recognition
By Finfacts Team
Aug 17, 2006, 21:07

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Dell headquarters Round Rock Texas - Much of the PC industry's growth is coming from strong demand in China and India.

Top global PC maker and Ireland's largest exporter and second-biggest private sector employer, Dell Computer's profit fell 51%, impacted by price cuts and flat demand for personal computers. The company also said the SEC is investigating its revenue recognition practices.

The computer giant reported net income of $502 million, or 22 cents a share, compared with $1.02 billion, or 41 cents a share, in the same quarter last year. Revenue rose 5% to $14.09 billion from $13.43 billion in the year earlier period.

Dell attributed its profit fall to aggressive price cutting and a slower market. "While we are disappointed with the results for the quarter, we are taking the necessary actions to correct missteps and improve our results for the long term," said Kevin Rollins, Dell chief executive officer, in a press release.

Results were about in line with the company's lowered forecast; Dell reduced its second-quarter outlook in July, putting earnings per share at 21 to 23 cents, with revenue at $14 billion.

Dell also disclosed an informal investigation by the Securities and Exchange Commission (SEC), dating back to August 2005. The company said it was looking into recent information that "raises potential issues relating to certain periods prior to fiscal 2006."

Separately, Dell said Wednesday it would, for the first time, begin selling desktop PCs that use microprocessors from Advanced Micro Devices The announcement confirmed reports that AMD would begin supplying chips for more of Dell's product line after Dell earlier this year ended its policy of using only Intel  chips.

In another development, Dell is losing its two top Asian executives, including the head of its China business, who are taking similar roles at rival Lenovo Group Ltd., which acquired IBM's PC business in late 2004.

Dell had operating income of $949 million, or 6.7 percent of revenue, in the quarter, which reflected investments in customer experience as well as pricing decisions the company believes will drive future growth. Cash flow from operations was $1.0 billion for the quarter and Dell ended the quarter with $11.1 billion in cash and investments. During the quarter, Dell spent $1.7 billion to repurchase 58 million shares of common stock.

  First Quarter          
(in millions, except share data) FY'071 FY'06 Change      
Revenue $14,216 $13,386 6%      
Operating Income $949 $1,174 (19%)      
Net Income $762 $934 (18%)      
EPS $0.33 $0.37 (11%)      
1 Results for the three months ended May 5, 2006 include stock-based compensation expenses of $77 million net of tax, or $0.03 per share, due to the implementation of Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payments, ("SFAS 123(R)"). Dell implemented SFAS 123(R) using the modified prospective method. Accordingly, net income prior to fiscal 2007 includes only compensation expense related to restricted stock awards, but does not include stock-based compensation expense for employee stock options or the purchase discount under Dell's employee stock purchase plan.

"The competitive environment has been more intense than we had planned for or understood," said Kevin Rollins, Dell's chief executive officer. "Over the last year, we tried to achieve both growth and increased levels of profitability, which allowed our competitors to improve their relatively low levels of profitability and accelerate their growth. We have now taken action to reignite our growth and reassert the unique value of our Direct Model. We are re-establishing our price position, investing in customer sales, service and support, building our product and technology leadership and improving our cost structure and productivity. All of these actions will enable Dell to optimize the significant potential we have for global growth at a time when we expect our industry to undergo significant change and consolidation."

Rollins said Dell is addressing the changes by reinvigorating its direct business model to provide greater value and service for customers. Specifically, Dell is focusing on three areas:

Customer Service

  • The company is investing more than $100 million to regain its leadership position in customer experience.
  • More than 2,000 new sales and support personnel have been hired in the U.S.; call centers have been added or expanded in Ottawa, Oklahoma City, Manila and Nashville.
  • By the end of the fiscal year, Dell will have opened 14 new manufacturing, call center and design and development facilities over a two-year period.

Product Leadership

  • Dell said that it will end the year with the broadest and highest quality product line in its history, including a new generation of servers, and new storage products, desktop and notebook computers, and printers.
  • In the enterprise, we will launch new ninth generation servers featuring Intel's Woodcrest microprocessors. Dell will also introduce new AMD Opteron processors in our multi-processor servers by the end of the year offering a great new technology to our customers at the high-end of our server line.
  • On the client side, our focus on the XPS brand and acquisition of Alienware signals a renewed vigor around product design and quality for desktops and notebooks. In mobility, we will enhance our line this fall with Intel's new energy-efficient Merom processor. And, we will have Intel's Conroe in our desktops and workstations later this year.

Productivity and Cost Improvements

  • Dell is accelerating plans to drive $3 billion of cost improvement in the year including structural material, component and transformational costs as well as improved warranty costs.
"We are confident in our ability to continue growing globally, particularly when we remember that 95 percent of the world's population lives outside the U.S. and we have less share of market outside the U.S. than some of our competitors," Rollins said. "The growth associated with these initiatives will not be accomplished in just one or two quarters. We are positioning the company for the next three to five years and beyond."

Dell is making key investments in its top countries, including China, India, Germany, Brazil and the U.S., to ensure that it can design, manufacture and provide service close to its customers for the long-term.

Dell ended its practice of providing specific quarterly guidance for revenue and earnings per share and said it would focus forward-looking statements on long-term specific company and industry factors influencing performance. Dell does expect financial results for the second fiscal quarter of fiscal 2007 to be similar to its first quarter results.

Product Highlights

Mobility revenue was up 12 percent on 36 percent unit growth year-over-year. Enhanced services revenue grew 28 percent year-over-year to $1.4 billion. Revenues for storage increased 12 percent year-over-year, while server shipments increased 8 percent. Revenue for imaging products increased 10 percent year-over-year on 54 percent growth of consumables, such as ink and toner cartridges and paper. More than half of Dell's imaging revenue now comes from purchases of consumables. During the second quarter, Dell will introduce a new generation of business color, mono and multi-function laser printers.

Regional Highlights

Sales outside the U.S. were 44 percent of the company's overall revenue for the first quarter, up 12 percent year-over-year.

Asia Pacific and Japan (APJ) increased revenue in the quarter by 17 percent and units by 30 percent year-over-year or roughly twice the growth of the industry. In China, revenue grew 29 percent year-on-year with continued strong profitability. In other emerging businesses, revenue increased by 54 percent year-over-year in Korea and 40 percent in India.

Shipments increased 18 percent year-over-year in Europe, Middle East and Africa (EMEA). Revenue for enterprise products - which includes servers, storage, services and associated software and peripherals - increased 9 percent in the quarter year-over-year.

Americas International - all of the Americas excluding the U.S. - had revenue growth of 26 percent year-over-year with 74 percent growth in Brazil. The U.S. maintained its number one position with 32 percent market share. Dell was recently selected the top equipment brand in a survey of information technology executives in the United States by ACNielsen who cited Dell's value and outstanding customer service.


Dell Achieves Record Global Share

Dell said it had achieved a record, industry-leading global share of 19.3 percent with units up 6 percent for the quarter. International sales, up 11 percent for the quarter, were led by the Asia-Pacific and Japan region, where Dell moved to the No. 2 position. The emerging markets of China, Brazil and India were led by strong unit growth of 37, 77 and 82 percent, respectively. In both China and Brazil, Dell expects to be No. 1 in servers with nearly 26 percent and 41 percent share, respectively.

Cash flow from operations was almost $700 million and Dell ended the quarter with $10.8 billion in cash and investments. Dell spent $1.0 billion in the quarter to repurchase 43 million shares of common stock.

Turnaround in Customer Experience

The company said that its intense focus on leadership in customer experience has resulted in a significant turnaround in all aspects of "customer experience, including satisfaction, purchase and repurchase preferences and support. These improvements have been validated by recent high-profile industry satisfaction surveys as well as Dell's own internal data."

For example:

-- Satisfaction -- Dell's scores in the annual University of Michigan American Consumer Satisfaction Index (ACSI) improved 2.5 points overall, with specific gains in customer satisfaction, product quality and service quality.

-- Purchase Preferences -- The Investor Business Daily/TIPP Home Computer Purchase Outlook Index survey reported Dell was the preferred brand among 50 percent of likely computer buyers in the July poll versus 41 percent in June (next competitor was at 12 percent of respondents). Among likely notebook computer buyers, Dell was the No. 1 choice of 60 percent of the respondents. It is the highest score for Dell in this category in almost three years.

-- Likely to Repurchase -- Dell's internal "Likely to Repurchase" data registered its highest results for the past six quarters with a 6.5 percent increase for relationship customers and a 5.0 percent gain for transactional customers.

-- Service Innovation -- DellConnect, a new service innovation, has met with great acceptance, as more than one million customers have now used the service. DellConnect allows Dell technicians to fix computer issues remotely and for free. Ninety-four percent of customers who have received service say it makes problem-solving easier and they would recommend it to others.

"While we are not yet satisfied, we are seeing a clear turnaround in service, support and purchase preferences for Dell," said Rollins. "Our response is to increase our investment in the customer experience throughout the world and continue this positive momentum to create the best experience for all of our customers. This is a top priority for us for the long term."

Dell will increase its investment in customer experience -- spanning the buying experience through service and support -- by an incremental amount of $50 million to $150 million for the fiscal year. The additional investment will accelerate customer experience initiatives throughout the organization.

Dell Announces Extension of Relationship with AMD to Build Best Product Line in Company History

Dell is extending its relationship with AMD, first announced last quarter. Dell will launch Dimension desktop computers with AMD processors next month and will introduce a two-socket and multi-processor server using AMD Opteron processors by the end of the year.

During the quarter, the company introduced new ninth generation (9G) PowerEdge servers with Intel's latest Xeon 5100 series processors. These systems deliver a 152 percent performance increase over the previous generation and can lower power consumption by up to 25 percent. Dell is enthusiastic about Intel's recent launches of the Core 2 Duo for desktops and Xeon 5100 Series processors for servers and workstations, and the upcoming Merom processor notebooks, which help Dell provide great technology for its customers. Dell's partnerships with AMD and Intel will greatly enhance its ability to end the year with the broadest and best product line in its history.

Total enterprise revenue, which includes servers, storage and associated services and software and peripherals, grew 11 percent year-over-year, led by storage revenue, which was up 36 percent. In Storage, Dell had its first full quarter shipping our new Dell/EMC CX midrange storage systems. Dell also launched two new Network Attached Storage (NAS) storage servers designed on its 9G server platform.

Enhanced services revenue was up 21 percent year-over-year to $1.4 billion. During the quarter, Dell announced Platinum Plus, a new service for enterprise customers that allows customers to compare critical IT performance metrics to historical results. Customers can also use the Real-Time Tracking Window using Google Earth to view around-the-world, real-time status of service progress. Initial results show customers are immediately benefiting with a significant reduction in resolution time.

In mobility, revenue was up 8 percent year-over-year on 22 percent unit growth. Dell is a leader in embedded wireless broadband. The company has finished a major upgrade of our notebook portfolio, including the 3-pound Latitude D420. The increased security, connectivity, and durability features of these notebooks reflect extensive input received from customers.

Dell's Inspiron E1505 recently received the Best Buy award from Consumer Reports, citing solid multi-media features and competitive price. Additionally, the E1505 and the XPS M1210 were both selected as Top 10 Back to School Systems by Laptop magazine. Desktop computer revenue decreased 4 percent year-over-year on a 1 percent decline in units.

In software and peripherals, revenue grew 10 percent with imaging revenue up 5 percent year-over-year. Consumables were up 46 percent and accounted for more than 50 percent of Dell's imaging revenue mix.

Total laser printing revenue was up 34 percent. Dell launched its third generation of laser printers, including six new color, multi-function, and mono lasers, delivering superior cost per page results for our customers. The product line refresh is led by the 3110cn printer, which is three times faster than its predecessor and delivers enterprise level color laser performance at less than half the price of a comparable competitor model.

Dell's Record Global Share Gain Led by International Markets

In the Asia-Pacific and Japan region, Dell had unit growth of 27 percent; almost triple the rate of the industry, excluding Dell. This allowed the company to move into the No. 2 position in the region with 11.1 percent share, up 1 percentage point year-over-year. In Japan, Dell also moved to the No. 2 position with 16.1 percent share.

In Dell's Americas region, revenue was up 3 percent year-over-year, led by 29 percent growth in Americas International as the countries outside of the U.S. approached a $4 billion run rate. In the U.S., revenue growth was 1 percent. Dell gained two share points sequentially and has 34.2 percent share for the U.S. market, which is larger than its next three competitors combined.

In Western Europe, the market's overall revenue decreased due to a slowdown in commercial, but Dell's share in the overall region reached an all time high of 14 percent with revenue up 3 percent year-over-year and unit growth of 6 percent.

Informal Investigation

In August 2005, Dell received notice from the U.S. Securities and Exchange Commission that it was conducting an informal investigation of the company. The notice stated that the investigation is not an indication that any violations of law have occurred. The SEC has requested information relating to revenue recognition and other accounting and financial reporting matters for certain past fiscal years, and Dell has been cooperating. In the course of responding to the requests, the company recently discovered information that raises potential issues relating to certain periods prior to fiscal 2006.

While the company does not believe that these issues have had or will have any material impact on its financial position or the reported results of operations for the relevant years, the company's audit committee, upon the recommendation of management, has initiated an independent investigation. Management is committed to addressing any questions, concerns or issues the SEC or the audit committee may have.

© Copyright 2007 by Finfacts.com

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