Dell’s Expansion Eats Into Earnings

Dell has come storming back from its rough past few years, but its rapid expansion
efforts have finally caught up with it, as the company reported Thursday a 17 percent
decline in profits for the second quarter due to all of its product development and
overseas expansion.

Dell reported net income of $616 million, or 31 cents a share, down from $746 million
and 33 cents in the period a year ago. Revenue rose 11 percent to $16.43 billion.
Analysts surveyed by Thomson Financial had been expecting income of 36 cents a share on
revenue of $15.95 billion.

On a conference call with financial analysts, Chief Financial Officer Brian Gladden
said earnings were affected by what he called “strategic actions” to expand in areas,
such as its global consumer business and overseas markets.

Certainly it is making inroads. Dell (NASDAQ: DELL) has entered the U.S. retail market
in a big way, selling its PCs in Best Buy, Staples and Wal-Mart. On the conference call,
Gladden said international sales made up 47 percent of Dell’s business.

But that rapid expansion has its costs. Gladden said Dell had deferred revenue in its
Europe, Middle East and Africa regions, which the company will recognize in future
quarters. Gladden said this had an impact of two to three cents on the current quarter.
“We’re still working on improving our cost structure,” he said.

There were other costs as well, including $27 million in expense for the amortization
of purchased intangibles and $25 million in business realignment costs. Each expense was
worth about one cent in earnings per share.

Dell was hit fairly hard for this, with its shares down $2.50, nearly 10 percent in
after hours trading.

The company continues its efforts to reduce headcount, with 8,500 people dismissed
from the company since the same quarter of last year, not counting for acquisitions. Dell
aims to cut $3 billion in operating expenses by 2011 and is on target to reach that goal,
said Gladden.

Reflecting the current trend toward mobility, notebook sales jumped 26 percent but
desktop computer sales slipped 1.8 percent. Dell put its server unit growth at 19
percent, a little lower than the 24 percent IDC said it

“Growth in the enterprise this quarter is evidence we are now in the consideration set
by more current customers and existing customers are turning to us for more robust
offerings at an increasing rate,” said CEO Michael Dell in regards to the company’s
strong server showing.

According to Dell, sales in the Americas were up five percent total, with a seven
percent unit increase. Servers were up 18 percent and mobile was up 12 percent. Europe,
the Middle East and Africa (EMEA) revenue rose 11 percent and shipments were up 20
percent. Server units were up 18 percent, and notebook units increased 52 percent.
Asia-Pacific and Japan Commercial revenue grew 16 percent and unit shipments were up 16
percent. Mobility was up 27 percent and servers were up 21 percent.

New low-cost computers for emerging markets

In a sign of how important Asia-Pacific has become, Dell this week introduced four
low-cost computers from its Vostro small business line, two desktops and two laptops, for
China, India and other emerging markets. They are meant for small-business users and are
to be sold in 20 countries across Asia, Africa and Latin America.

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