The Turnaround at Dell

Dell’s (DELL) rebound isn’t going as smoothly as had Wall Street hoped. The company just reported a decent earnings increase, 34 cents a share compared with 27 cents last year. Wall Street, however, was looking for 35 cents. As a result, the stock is getting clobbered today.
The company recently revised all of its financial numbers for the past few years. Here’s a summary of Dell’s new financial data.
Investors need to understand that businesses don’t turnaround very easily. Often the departure of a CEO is really a symptom of larger problems. Hewlett-Packard’s (HPQ) turnaround is closer to the exception. We sometimes think of stocks as athletes that have an off-night. There usually aren’t short-term earnings glitches. You’ll notice that small problems are like cockroaches, there are several more for each one you see.
Michael Dell took over as CEO with the departure of Kevin Rollins. The problems at Dell continue to be one of costs. Business Week notes:

But expenses as a percentage of revenue, a key measure of how well the company is managing costs, rose noticeably. Selling, general, and administrative expenses rose to 12.2% of revenue from 10.6% a year ago. Total operating expenses rose to 13.2% of revenue, up from 11.5% a year ago. “People are disappointed that the revenue increase did not flow through to the bottom line,” says Brent Bracelin, analyst at Pacific Crest Securities. “It doesn’t look like the company has trimmed enough fat.” Dell’s operating income of $829 million was 5.3% of revenue, well below the 8% level that Dell posted in years past.
Earlier this year, Dell said it wants to reduce its workforce by about 10%, but as of Nov. 2, Dell had cut only about 2.5% of the 84,000 employees it had on Aug. 3. Carty insisted, though, that the company “is still driving to that [10% reduction] number.” Carty added: “We’ve identified a considerable amount of low-value work.” The company also is working to automate certain tasks to help it eliminate more employees. “We have more manual work going on than we need,” he said. At the same time, he said that other initiatives, such as acquisitions or “new strategies,” may mean keeping or hiring certain kinds of employees.
Gross margin performance, too, didn’t meet some analysts’ expectations. Gross margin inched up to 18.5% of revenue, from 16.6% a year ago, but still fell below the 19% analysts were projecting. The company blamed component costs, saying they didn’t decline as steeply as the company was projecting. Shaw Wu, analyst at American Technology Research, questions why that’s the case, when some of Dell’s main competitors, including HP and Apple (AAPL) have recently enjoyed the benefits of low component costs.

Posted by on November 30th, 2007 at 10:22 am

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