Dell wows Street, slashing 10% of work force

NEW YORK (CNNMoney.com) -- Dell, the No. 2 PC maker, reported sales and profits Thursday that handily beat Wall Street forecasts and announced it would cut its staff by 10 percent over the next 12 months.

The cuts would amount to about 8,800 jobs, according to a Dell spokesperson.

Dell (Charts, Fortune 500) shares jumped more than 7 percent in after-hours trading on the news after finishing about 2 percent higher on the Nasdaq in regular trading.

The Round Rock, Texas, computer maker reported net income of $759 million, or 34 cents a share, for its fiscal first quarter ended May 4, compared with net earnings of $762 million, or 33 cents a share, a year earlier. Analysts surveyed by Thomson Financial had expected earnings of 26 cents a share.

Revenue grew about 2.8 percent to $14.6 billion versus forecasts of $13.9 billion.

Dell attributed the better than expected numbers to lower component costs and a better mix of products and services that meant higher average selling prices.

Thursday's results reflect the company's performance since company founder Michael Dell took over as chairman and CEO earlier this year.

"The turnaround here is progressing and somewhat sooner than what some [investors] had hoped," said Brent Bracelin, senior analyst with Pacific Crest Securities.

Dell also said that it took charges totaling $46 million, or 2 cents a share, over a Securities and Exchange Commission investigation into its bookkeeping practices.

Dell said the investigation was taking longer than it had hoped, but it had not determined whether it would restate any past results.

Looking ahead, Dell said it was still "focused on transformational efforts," warning that margins will be under pressure in the seasonally slow upcoming second quarter.

The company warned that it could face additional costs related to the SEC investigation and that its annual results could be affected by higher component costs and greater competition during the second half of the year.

Dell also announced it would cut the number of Dell employees by approximately 8,800, or 10 percent, over the next 12 months. Currently, Dell employs 88,000 individuals worldwide.

"While reductions in headcount are always difficult for a company, we know these actions are critical to our ability to deliver unprecedented value to our customers now and in the future," Michael Dell said in a statement.

Dell has struggled in recent quarters, losing market share and its position as the No. 1 PC maker to rival Hewlett-Packard (up $0.04 to $45.71, Charts, Fortune 500).

Dell's stock has tumbled about 34 percent over the past two years on sluggish sales and slimmer profit margins. Over the same period, HP's shares have more than doubled in price.

Earlier this month, HP reported double-digit increases in both profit and sales, helped by cost cutting and strength in its PC and printer divisions.

As part of its effort to reclaim the top spot among PC makers, Dell plans to start selling its personal computers through retailers. Last week, the company said it planned to sell its computers at 3,000 Wal-Mart stores in the United States and Canada starting in June.

Eric Ross, a partner and director of research at ThinkEquity Partners, remained skeptical that Dell would be able to sustain this momentum going forward.

"I think with rising component costs, their move to the retail channel and increased competition, ... that all points to lower margins," said Ross, who has maintained a "sell" on Dell stock for the past year. "It's a good quarter, but personally I would not be investing in the company."

Neither analyst owns shares of Dell, nor do their firms have a banking relationship with the company.