Dell Drops Most in 9 Months as Slump in Spending Extends Abroad

By Melita Marie Garza

Aug. 29 (Bloomberg) -- Dell Inc., the world's second-biggest personal-computer maker, plunged the most in nine months in Nasdaq trading after saying the U.S. slump in technology spending has moved abroad.

Dell declined as much as 12 percent, the most since Nov. 30. The company said yesterday that ``continued conservatism'' from some U.S. clients is spreading to Western Europe and some Asian countries, and at least four analysts cut their targets for Dell's stock price after the report.

Earnings missed analysts' projectionslast quarter after Dell reduced prices, particularly in Europe, cutting into profit margins. Chief Executive Officer Michael Dell has sought to shrink the gap with Hewlett-Packard Co., the leader in global PC shipments, by spending more to form retail partnerships around the world.

``They are very aggressively, not just in the U.S. but worldwide, trying to retake market share,'' Paul Meeks, equity research director at L.R. Burtschy & Co. in Charleston, South Carolina, said in an interview with Bloomberg Radio. ``They're getting share, yes, and units, but that's really hurting their profitability per box sold.''

Dell, based in Round Rock, Texas, fell $3.09 to $22.12 at 9:31 a.m. New York time in Nasdaq Stock Market trading. Analysts at Bank of America, Citigroup Inc., Friedman Billings Ramsey & Co. and Deutsche Bank cut their estimates for the stock price.

Net Income

Second-quarter net income fell 17 percent to $616 million, or 31 cents a share, from $746 million, or 33 cents, a year earlier, Dell said in a statement yesterday. Sales for the period ended Aug. 1 advanced 11 percent to $16.4 billion. Excluding costs for job cuts and other items, profit was 33 cents, short of the 36-cent average projection compiled by Bloomberg.

Surging revenue in Brazil, Russia, India and China failed to compensate for slowing growth in Europe, the Middle East and Africa, as well as some parts of Asia. ``Strategic pricing'' crimped gross margin, or the percentage of sales left over after production costs, in European countries, Chief Financial Officer Brian Gladden said yesterday on a call with reporters.

Revenue from Brazil, Russia, India and China advanced 41 percent last quarter, Dell said. The company's share of sales from overseas dropped to 47 percent from just over 50 percent in the previous period. Commercial sales in the Americas rose 5.4 percent to $8.1 billion.

Lowering Costs

Gross margin, or the percentage of sales minus production costs, narrowed to 17.2 percent in the second quarter from 19.9 percent a year earlier.

Dell's consumer business posted a $5 million loss, the only unit that wasn't profitable, even though sales growth in the division outstripped all the company's other businesses. That shows the PC maker is still struggling to lower manufacturing costs enough to keep pace with price cuts.

``The aggressive pricing certainly threw cold water on the strong unit growth,'' Bill Kreher, an analyst at Edward Jones & Co. in St. Louis, told Bloomberg Television today. ``They're having a tough time cutting costs while at the same time improving product design.'' He advises investors to hang on to the shares.

To save money, Dell is limiting the degree to which buyers can dictate specifications, instead expanding its line of prepackaged models. Dell also has cut 8,500 jobs since the first quarter of last year, and expects to reach 8,900 by the third quarter, Gladden said.

Gross Margins

``We believe our margins can certainly expand quite a bit in Europe,'' Dell, 43, said yesterday on a conference call with analysts. ``If we look at the situation in the second quarter, it was more self-inflicted'' because Dell was so aggressive on price cuts, he said. He declined to provide forecasts for the next quarter.

Dell probably has saved less than $500 million so far from its cost-cutting measures, compared with projections of as much as $3 billion, Deutsche Bank analyst Chris Whitmore said in a report.

Competitor Hewlett-Packard, based in Palo Alto, California, also saw gross margin narrow in its latest quarter, a decline that CFO Catherine Lesjak attributed partly to commodity prices. This month, the company posted a profit that beat analysts' estimates as orders for laptops in Europe and Asia surged.

Waning orders from ``big corporate customers and state and local government'' restrained growth in Dell's U.S. commercial sales in the second quarter, Gladden said on the call.

Commercial Sales

Sales to commercial clients in Asia advanced 16 percent to $2.05 billion, slower than the 19 percent growth in the first quarter. Sales to corporate customers in Europe, the Middle East and Africa advanced 11 percent to $3.5 billion, short of the 15 percent increase in the previous period.

Since taking back the top job last year, Dell has begun selling through retailers, adding more than 13,000 in at least 24 countries and enlisting resellers abroad. Dell had built up his PC business over the past two decades by selling machines mainly over the phone and the Web. Hewlett-Packard sells PCs through a retail network of more than 80,000 stores.

Hewlett-Packard controlled 18.9 percent of the global PC market in the latest calendar quarter, according to Framingham, Massachusetts-based researcher IDC. Dell's share climbed to 16.4 percent in the period.

---With reporting by Rochelle Garner in San Francisco and Crayton Harrison in Dallas. Editor: Julie Alnwick, Cesca Antonelli

To contact the reporter on this story: Melita Marie Garza in New York at mgarza4@bloomberg.net