Dell Beats Wall Street Estimates by Cutting Costs, Reducing Expenses

Dell, the world's second largest desktop and notebook vendor, beat Wall Street estimates after it posted a third-quarter net income of $727 million. While Dell has acknowledged that IT spending is down and its revenues dipped year over year, the company's efforts at cutting costs and reducing expenses helped the PC vendor turn a profit. While Dell executives did not speculate about the fourth quarter of 2009, they did say that the future is proving to be a challenge. For enterprises, CEO Michael Dell said the company plans to expand its server, data storage and virtualization offerings.

Dell, which remains the world's second largest PC vendor, beat Wall Street estimates and posted a third-quarter net income of $727 million thanks to a number of aggressive cost-cutting measures and a reduction in operating expenses.

Dell released its third-quarter financial results Nov. 20. The company posted a net income of $727 million, or 37 cents a share. Wall Street analysts estimated net income of 34 cents a share for the quarter, which ended Oct. 31.

While Dell managed to beat Wall Street estimates, the company's executives warned that IT and consumer spending is beginning to slow, especially in the United States and Western Europe, as both regions have seen the biggest impact from the financial crisis and the global credit crunch. A number of research firms, including IDC and Gartner, have slashed their IT spending forecasts for 2009.

Dell's financial report came on the same week that Hewlett-Packard reported preliminary numbers for its financial fourth quarter. HP is expected to report a net income of $1.03 a share when it releases all its financial numbers on Nov. 24.

In order to turn a profit, Dell began cutting costs and expenses. Chief Financial Officer Brian Gladden told reporters that the company has now reduced its work force by 10,800 employees in the last 18 months. Dell has also announced that it will ask employees to take unpaid vacations, while other workers are being offered buyouts.

The impact of the global financial crisis did have an impact on Dell's bottom line despite its better-than-expected net income. In the third quarter of 2008, Dell's revenue stood at $15.2 billion, a 3 percent loss from the $15.6 billion in revenue the company posted in the third quarter of 2007.

Even Dell's $727 million net income this quarter was 5 percent less than the $766 million net income the company posted in the third quarter of 2007. To turn a profit in the third quarter of 2008, Dell reduced it operational expenses by more than 10 percent, which includes the payroll reductions and outsourcing more of its manufacturing.

Gladden declined to discuss whether or not Dell would eliminate more jobs in 2009.

In addition to reducing costs, Dell has tried to expand its business overseas, and the company reported that 48 percent of its revenue now comes from outside the United States. About 9 percent of its revenue in the third quarter came from the so-called BRIC countries of Brazil, Russia, India and China.

HP and IBM have also managed to turn a profit by seeking business outside the United States and offering more IT services.

For enterprises, CEO Michael Dell told analysts Nov. 20 that his company will focus much of its attention in the coming year on servers, storage and virtualization. Dell is also looking to offer more IT services.

"Virtualization, especially in servers and storage, are key technologies we are embracing to drive [growth]," said Dell. "We are expanding our server coverage up to 95 percent of the market opportunities next year. We have also introduced the fourth generation of our Dell and EMC storage systems, and we have expanded our EqualLogic solutions and introduced new PowerVault product lines."

When it comes to PCs, Dell said he was not sure if the market would grow in the coming year. Just before the company announced its earnings, research firm iSuppli reduced its 2009 PC shipment forecast from 11.9 percent growth to 4.3 percent growth.

"We really don't know what the growth of the [PC] industry is going to be next year," said Dell. "We are planning a pretty conservative set of assumptions on the belief that it's easier to dial it up than dial it down."

While Dell released its third-quarter numbers, the company's executives did not offer any specific guidance for its upcoming financial fourth quarter or for 2009.