Dell’s Profit Drops; AMD May Help
Inevitability overtook Dell Inc. on Thursday -- not once, but twice.
The computer-making juggernaut posted its largest profit downturn in more than four years as growth slowed and margins thinned. Then, it said it was ending its long exclusive relationship with chip maker Intel Corp. and announced plans to use processors from Advanced Micro Devices Inc.
Dell said its fiscal first-quarter profit fell 18% and came in short of forecasts for the third quarter in a row. Long a leader in manufacturing efficiency, Dell has stumbled under pressure from ascendant rivals such as Hewlett-Packard Co. and Lenovo Group.
To stabilize the bottom line, Chief Executive Kevin Rollins said Dell would cut $3 billion in costs and invest $100 million in sales and support, including call centers and Web-based remote diagnostics. That sent Dell shares, which gained 32 cents to $23.95 in regular trading, up $1.04, or more than 4%, to $24.99 in after-hours trading.
AMD rose 58 cents to $31.35 in regular trading but zoomed an additional $3.90, or more than 12.5%, to $35.25 after hours. Intel, already wrestling with problems of its own, fell a penny to $18.65 in the regular session, then dived 93 cents, or 5%, to $17.72 in extended trading.
Dell’s “concepts and intentions are good,” said Shaw Wu, an analyst with American Technology Research. “They definitely had to fix something. The thing that’s a little confusing is how they are going to go about it. Three billion dollars is very significant, but they said no to head count reduction. How do you get there, tear down buildings?”
Rollins didn’t give a timetable for the cost reductions.
“This is a sustained march we’re on,” he said in a conference call with financial analysts.
Michael Cohen, research director for Pacific American Securities, said he was skeptical of how the cost reduction would affect revenue.
“In the past when Dell has been aggressive in cost, competitors could not match the reductions because they were barely at break-even,” Cohen said. “Now, with a more cost-competitive industry, Dell is likely to find themselves triggering a price war.”
Round Rock, Texas-based Dell earned $762 million, or 33 cents a share, on sales of $14.2 billion, down from $934 million, or 37 cents, on revenue of $13.4 billion in the first quarter of last year.
Dell, still the world’s largest manufacturer of personal computers, said it would use Sunnyvale, Calif.-based AMD microprocessors in a small number of high-end server computers, ending its exclusive use of Intel chips since Dell was founded in 1984.
Intel dominates the global processor market, running more than 80% of the world’s computers, but AMD has made technological advances in recent years that even Intel concedes has put AMD ahead in some categories.
“Customers have demonstrated a desire for the technology AMD has to offer,” Rollins told reporters. He called Intel a “great partner,” which will be supplying Dell the vast majority of its processors, but he added, “Our commitment to our customers is use the best technology where we can find it and bring it to them in a cost-effective way.”
In recent months Dell has misread the demand for cheaper computers, abandoned its line of hard-drive MP3 music players that competed against Apple Computer Inc.’s iPod, and deeply discounted many of its products, hurting margins, to win back market share.
Dell’s recent troubles break a streak of growth that set the pace for the entire PC industry.
Archrival HP outpaced earnings expectations Tuesday, and Dell finds itself with the tables turned from only a year ago, when Dell’s profit and market share were growing robustly and HP was retrenching after sacking its chief executive.
“We think Dell’s stock is now looking more like a value trap than a good value,” Cindy Shaw, an analyst with Moors & Cabot, wrote in a report to investors last week. Dell’s problems are “largely company-specific.”
April’s announcement that Dell would miss targets “confirmed our fears about more aggressive pricing and increased spending on customer service -- although the earnings impact was worse than we had anticipated,” said Shaw, who joined the handful of Wall Street analysts who give Dell a rare “sell” rating. “We continue to think it may take at least several more quarters for the company to get past the ‘reset’ phase.”
