Dell Drops to Lowest Level in 7 Years After Predicting Slowdown
By Amy Thomson and Melita Marie Garza
Sept. 16 (Bloomberg) -- Dell Inc., fighting Hewlett-Packard Co. for computer sales as the economy slows, dropped to its lowest level in seven years after predicting ``further softening'' in demand this quarter.
A technology slump that started in the U.S. last quarter spread to Western Europe and some Asian countries, Dell said today, reiterating comments made last month. The company expects to incur costs this quarter from revamping operations and eliminating more than 8,800 jobs.
Dell, the No. 2 personal-computer maker, is struggling to keep up with industry leader Hewlett-Packard, which is posting higher earnings than analysts anticipated and has profit margins 5 percentage points higher than Dell. Chief Executive Officer Michael Dell has pledged to cut up to $3 billion in annual costs by eliminating employees and moving to lower-cost manufacturers.
``They're underperforming direct rivals such as H-P,'' said Raffaella Sommariva, a fund manager at AZ Fund Management SA in Luxembourg, which oversees the equivalent of $14.5 billion. ``Dell is suffering more because of its business model.''
Dell, based in Round Rock, Texas, fell $1.74, or 9.7 percent, to $16.25 at 10:13 a.m. New York time in Nasdaq Stock Market trading. The price was the lowest since September 2001.
The stock had dropped 27 percent this year before today, compared with a 10 percent decline for Hewlett-Packard, which announced plans yesterday to cut almost 25,000 jobs as it integrates the purchase of Electronic Data Systems Corp.
Almost half of big corporations globally have curbed technology budgets for the next year to help cope with the economic slump, Forrester Research Inc. said last week. Companies have delayed projects and attempted to bargain for lower computer prices, the Cambridge, Massachusetts-based researcher said.
Profit Margins
Since returning to the helm last year, Dell, 43, started selling PCs through retailers and overhauled design practices to compete with Hewlett-Packard, which led in PC shipments for the past two years.
Dell said in April it would shed even more jobs than the 8,800 projected last year. The reductions Dell referred to in its statement today pertain to that round of cuts, not new ones, spokesman Jess Blackburn said.
While Hewlett-Packard posted earnings that beat analyst estimates last quarter, Dell fell short. Profit dropped 17 percent and ``strategic pricing'' hurt profit margins in Europe, the Middle East and Africa.
``It is a slippery slope for them to continue to cut prices to stabilize demand,'' said Ashok Kumar, a San Francisco-based analyst at Collins Stewart Plc. He advises investors to hold on to Dell shares and doesn't own any.
Profit Margins
The company's gross margin, or the percentage of sales left after production costs, amounted to 19.1 percent in its latest fiscal year, compared with 24.4 percent for Hewlett-Packard.
Hewlett-Packard bought EDS last month for $13.2 billion, aiming to bolster its services business to compete with International Business Machines Corp. The PC maker said yesterday that its job cuts will help save as much as $1.8 billion a year.
Dell also competes with Hewlett-Packard and Armonk, New York-based IBM in server computers, which run corporate networks and Web sites. Dell posted the biggest gains in that market in the latest calendar quarter, with growth of 15 percent.
To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net; Melita Marie Garza in New York at mgarza4@bloomberg.net
Last Updated: September 16, 2008 10:15 EDT |
