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Dell reports steep decline in profits

Stock falls as struggling computer maker's earnings drop 33 percent; Dell expects earnings to be 'under pressure' for next several quarters.

By Rob Kelley, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Dell reported a 33 percent drop in fourth-quarter profits, slightly ahead of expectations. But the No. 2 PC maker's sales figures came in below estimates, and Dell warned that growth and profit margins will remain "under pressure" for the next few quarters.

Shares of Dell (Charts) fell 2 percent in after-hours trading on the news.

Dell reported earnings of $673 million, or 30 cents per share, for the quarter, compared to analyst expectations of 29 cents per share. In the fourth quarter of 2005, the company earned $1 billion, or 43 cents per share.

Analysts had expected profits of 32 cents per share for the quarter before Dell issued a warning on January 31.

Dell said its sales for the quarter were $14.4 billion, a 5.1 percent decrease from the year-ago period. Analysts had expected revenues of $14.88 billion.

Sales were definitely a concern in the quarter, said an analyst.

"Both desktop and notebook sales looked weak," said Bill Fearnley Jr., an analyst with FTN Midwest. "The notebook number was especially anemic given the overall strength in the category."

The Round Rock, Texas-based company said the results were preliminary because it is reviewing its accounting and may have to restate results of prior quarters.

Dell announced in 2006 that the Securities and Exchange Commission had launched an investigation into its bookkeeping practices.

The company did not hold a conference call for investors and analysts following Thursday's earnings release. It did not have one after reporting third-quarter results, either, because of the investigation.

Dell has struggled in recent quarters, losing market share and its position as the No. 1 PC maker to rival Hewlett-Packard (Charts), which has excelled in the growing notebook computer category.

Dell's stock has tumbled more than 40 percent over the past two years on decreased sales, slimmer profit margins and the accounting probe. Over the same period, HP's share price has gained more than 85 percent.

"Our concern is that Dell has faced a lot of tough competition in the PC market," said Fearnley. "HP continues to be more aggressive in pricing, yet their operating margins continue to improve. This trend makes it difficult for Dell to gain market share."

On January 31, Kevin Rollins stepped down as the CEO of Dell, and former CEO and founder Michael Dell took the helm of the company. The fourth-quarter earnings reflect results from November through January, so they don't include the company's performance since Michael Dell took over.

Shares of Dell closed at $23.01 on Nasdaq Thursday.

Looking forward

Dell did not offer specific guidance but said that it expects growth and margins to be under pressure for the next several quarters as it transforms the company.

It remains unclear what the overall time frame for Dell's turnaround is, said Fearnley.

"Because of the continuing SEC investigation, the company hasn't been able to file its quarterly reports on time," he said. "It limits the amount of information they're giving to investors and analysts. The biggest question that remains unanswered is 'how bad is the situation?'"

According to estimates from Thomson First Call, analysts expect Dell to report revenue for its first quarter, which ends in April, of $14.3 billion, up just 0.4 percent from a year ago, and earnings per share of 28 cents, a 15 percent decrease from the same period last year.

Dell said in its earnings statement that it is moving to shorten product development cycles, make decisions that better reflect customer needs and develop new approaches that allow it to serve customers better in fast-growing markets.

"We are disappointed with the company's results, but what matters is our future plan of action. We are systematically moving to increase efficiencies, improve execution and transform the company," said Michael Dell in a statement.

"Our business model will become more aligned with the needs of our customers," he added.


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