Dell Losses Reflect Its Changing Business Model

There are more tough decisions ahead for Michael Dell and his company.

After reporting disappointing fiscal fourth-quarter results Feb. 28, the PC vendor is likely to face a number of challenges as he tries to bring the company back to the profitability that so many on Wall Street have come to expect.

During its fiscal fourth quarter, which ended Feb. 1, Dell’s net income was $679 million, or 33 cents per share, which is a 6.5 percent drop from the $726 million in net income the company posted a year ago. For the quarter, Dell's revenue increased from $14.5 billion last year to $16 billion this year.

Dell is also trying to make a comeback at a time when the U.S. economy is showing continued signs of a slowdown. The U.S. market remains extremely important to Dell even though it reported Feb. 28 that 49 percent of its revenue in the fourth quarter came from overseas, where sales increased 16 percent.

Since Michael Dell returned as CEO more than a year ago, he has tried to refocus the company, offering enterprise services and more sophisticated technology, such as iSCSI storage products, while expanding its PC business to include more consumer sales through retail agreements.

At the same time the company wants to grow, Dell has also cut costs and trimmed staff in hopes of becoming leaner as it competes against Hewlett-Packard and other rivals in the PC and server markets. Donald Carty, Dell's chief financial officer, said he wants to eliminate about 8,800 positions at the company.

“They [Dell] are clearly trying to think about their cost-structure needs,” said Stephen Baker, an analyst with the NPD Group. “Dell is also trying to [generate] more volume through their channels and that might squeeze their margins a little bit. They are trying to be cost effective there now so it doesn’t cost them in the long run.”

In some ways, Dell’s current struggles to reinvent itself in the market reflect the difficulties HP went through after acquiring Compaq. To improve, HP needed to streamline its operations, trim staff positions and look for ways to offer new services and technology to its customers.

Only now is HP reaping those benefits.