Dell profits dip

Dell, whose direct-delivery model for years helped it grow faster than the overall PC market, said on Thursday its quarterly profit fell amid repair costs for faulty parts in business computers and expenses for layoff severance and consolidation.

For fiscal third quarter, ended 28 October, Dell's net income fell to $606m, or 25 cents per share, from $846m, or 33 cents per share, a year earlier, the company said in a statement.

Cash flow from operations was $1.1bn for the quarter and $3.3bn year-to-date. Dell ended the quarter with $12.3bn in cash and investments.

The Round Rock, Texas-based computer maker's revenue for the quarter was $13.9bn, which was in line with its Halloween warning that it would not hit higher estimates. Back at the end of the second quarter, the company had forecasted third-quarter revenues of $14.1bn to $14.5bn.

Dell CEO Kevin Rollins said: "We are disappointed that we didn't hit all of our numbers for the quarter but we're always looking for better ways to improve the efficiencies of our business."

Rollins admitted that Dell's sales teams were too aggressive in selling computers at a discount - $400 laptops and $300 desktops in some cases. But going forward, Rollins said the company would keep costs in line and focus on a balance of product pricing, including a newly launched XPS brand of premium PCs.

Part of the large revenue decline was due to $450m in unexpected charges.

Dell spent $50m on severance packages and $25m to consolidate office space after using performance-based attrition to eliminate about 1,000 employees in Asia, Texas and the United Kingdom, Rollins said.

The other big cost - $307m - will come from sending out service workers to fix OptiPlex systems with faulty capacitors, which has become a costly headache for other manufacturers as well.

The company also wrote off $29m in goodwill.

Dell said it managed to eke out a 36 per cent increase in enhanced services revenue, reaching $1.2bn from $1bn last year; a 35 per cent increase in storage revenue to $500m from $300m; and a 16 per cent increase in server revenue to $1.4bn from $1.2bn.

As a server supplier, Dell said it was particularly excited by the addition of multicore Intel Xeon processors for two- and four-way servers, which it said would enhance its ninth-generation server products coming next year.

Still analysts are not convinced that Dell's problems are solely the result of defective parts or not being able convince customers to upgrade to more expensive products.

Moors & Cabot analyst Cindy Shaw said in an investor newsletter: "We think Dell has been too focused on perfecting its existing model instead of adapting it to a changing environment.

"Industry sources tell us there have been few major changes to Dell's model over the last five years. During that time, vendors such as Hewlett-Packard, Lenovo, Acer and Gateway have become more competitive and narrowed price gaps."

Dell's revenue growth for six straight quarters has been on the decline as it aggressively cut prices and faced tougher competition from Apple, HP and other rivals.

Sam Bhavnani, a senior analyst with research firm Current Analysis, said: "One thing that is challenging Dell is its strategy towards higher-end products. This strategy is happening while pricing for hot categories such as notebooks is falling rapidly.

"Dell's notebook average selling-price has fallen 35 per cent in the last year. So, while Dell has had trouble hitting its numbers in recent quarters, it does have promising outlook in new product categories, such as printers and televisions."

The company also spent $1.4bn to repurchase 41 million shares during the third quarter. Year-to-date it has repurchased almost 140 million shares, it said. The company said it plans to repurchase at least $1.7bn more in stock during the fourth quarter.

Dell forecasted fourth quarter revenue of $14.6bn to $15bn and profits per share of 40 cents to 42 cents.

Reuters contributed to this report

Michael Singer writes for CNET News.com