Dell Takes Hit; Sees Hope in Windows 7

Dell takes a fourth-quarter sales hit in all global markets, but company officials believe the forthcoming Windows 7 release could stimuate sales. The storage business is a bright spot.

Channel vendor Dell reported a weak fourth quarter with revenues dropping across all its worldwide markets. However, company executives said they were excited about the potential of the forthcoming Windows 7 operating system release to boost sales.

Dell, a direct-sales vendor that in 2007 launched an aggressive channel sales effort, reported a 48 percent drop for its fiscal fourth quarter ended Jan. 30. Part of the decline was caused by a one-time $277 million charge for reorganization. Income was $351 million on revenue of $13.4 billion, compared to income of $679 million on revenue of $13.4 billion for the comparable period last year. Without the charge the company would have exceeded analyst expectations.

The PC maker has been attempting to broaden its reach and make its products available in more countries, but even those countries were suffering. The company said its Americas Commercial business fell 17 percent, as did commercial sales in Europe, the Middle East and Africa.

Boost from Windows 7

Brian Gladden, senior vice president and chief financial officer of Dell, did see cause for optimism with the Microsoft upcoming Windows 7 release. "We're starting to get pretty excited about Windows 7 and think it will be an important catalyst for growth," he told analysts on the call.

Of course, that could delay new purchases. "Having said that, it will likely push some purchases back until it comes out," he noted.

Dell said it's been in discussions with customers to determine their readiness for Windows 7; if their apps will work; and if there is investment protection in anything they install.

In the meantime, Dell will continue to "rapidly adjust its cost structure in the face of slowing demand," according to Gladden. One area, for example, is how Dell packages its products. With the packaging for nearly 40 percent of both business and consumer products redesigned, Dell was able to shave about 5 percent off the cost of each box.

Such cost-cutting efforts paid off for Dell as it managed to reduce operating expenses by $363 million for the quarter. The company had previously set a goal of cutting $3 billion in expenses by the end of its 2011 fiscal year but now expects to save $4 billion.

All told, operating expenses were down 20 percent year over year, with $152 million in savings in Q4 alone, according to Gladden. Headcount was down 11 percent year-over-year.

Storage Bright Spot

Gladden said that Dell's direct sales model gave it an indication of a coming sales slowdown sooner than its competition, and the company was able to adjust accordingly well in advance.

"We saw the shift in early 2008 and updated our forecasts throughout the year," he said. "We saw significant deterioration in demand in Q3, while Q4 was more linear with prior quarters, but the trend is still negative as customers continue to defer purchases. We can't predict how long it will be, but it will be protracted.”

On the commercial side, which represented 81 percent of Dell's business, Q4 was off 2 percent for the year and 18 percent for the quarter. The fast-growing BRIC nations of Brazil, Russia, India and China were down 23 percent, with Russia taking the worst dive.

The bright spot was storage. The EqualLogic purchase and other moves are paying off nicely to the tune of a 7 percent annual growth. Servers, storage and services now represent more than 50 percent of gross profit, up from 44 percent at beginning of fiscal 2008.

Company CEO Michael Dell, who was also on the call, said this will be the company's focus. "For every dollar spent on hardware, three to four dollars are spent on everything else, and that's exactly where we're heading for future opportunities," he said.

(This article was adapted from InternetNews.com)


TAGS: services,Microsoft,Dell,Windows 7,Storage

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