Dell Cutbacks Pay Off

The PC maker will reduce staff amid a tough pricing environment.
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Updated from May 31

Dell's

(DELL) - Get Report

shares rose 5% Friday after the PC maker set plans to slash its workforce.

The Round Rock, Texas, company said first-quarter results were boosted by cheaper component parts and strong corporate sales. But the company, now under the leadership of founder Michael Dell, drew Wall Street's applause by taking the ax to costs amid a continuing tough pricing environment.

Most significantly, Dell will cut headcount by about 10% over the next 12 months. The reductions will vary across geographic regions, customer segments, and functions.

Dell said it had first-quarter net income of $759 million, or 34 cents a share, vs. $762 million, or 33 cents a share at this time a year ago. Analysts expected Dell to earn 26 cents a share, according to Thomson Financial.

The PC maker said revenue in the first quarter grew 2.8% year over year to $14.6 billion. While the growth pales when compared to the double-digit rate Dell regularly notched not long ago, it was better than expectations on Wall Street, which had called for sales to decline year over year to $13.95 billion.

Shares of Dell were recently up $1.49, or 5.5%, to $28.40 in recent after-hours trading.

"The results are surprisingly strong," said American Technology Analyst Shaw Wu.

Corporate spending on technology in the U.S. isn't exactly robust these days, Wu noted, yet that's exactly where Dell found much of its growth in the recent quarter.

Sales of servers were up 19% year over year and storage sales increased 13%.

Dell said it benefited from lower component costs and higher prices for its products and services during the three months ended May 4. The company's operating margin was 6.5%, vs. 6.7% at this time last year.

Dell offered only a limited financial report and will not host the customary post-earnings conference call due to an ongoing investigation into its past accounting practices.

The company said it has not yet determined whether it will need to restate past financial reports as a result of the accounting errors, which have triggered investigations by the

Securities and Exchange Commission

and the U.S. Department of Justice.

Dell said its own internal investigation into the accounting issues was moving toward a conclusion, but didn't say when it anticipated wrapping the matter up.

The PC maker has been in fix-it mode since found Michael Dell returned to the CEO job earlier this year, sparking hope among investors that a comeback was in the making.

Dell has rebuilt its senior leadership team in recent months and made a few changes to its business model, most notably partnering with

Wal-Mart

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to sell a couple of desktop PC models beginning in June. Until now, Dell has shunned retail stores in favor of selling its PCs directly through Internet and phone orders.

A changing PC market and fierce competition from

Hewlett-Packard

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-- which recently displaced Dell to become the world's No.1 PC company -- have caused Dell to rethink its business model.

In the recently ended quarter, Dell said desktop PC sales declined 6% year over year, while mobility sales were up 7%.

Echoing the comments it made during its previous quarterly report, Dell said that its "transformational efforts" to improve its growth opportunities and customer experience may cause short-term fluctuations in operating performance.

Dell did not provide specific guidance for the current quarter, but said that operating margins will be under pressure sequentially as the company enters the seasonally slower quarter with elevated operating expenses and additional costs related to ongoing investigations into its past accounting practices.

During the fiscal first quarter, Dell said it initiated a comprehensive review to better align operating expenses with the current business environment and its strategic growth opportunities. One outcome of the process is the 10% workforce cut.

A Dell spokesperson said the company currently employed 88,100 workers, although that figure includes more than 5,000 temporary contractors.

The goal of the job cuts, he said, are to eliminate redundancies and activities that are not critical to Dell's growth objectives.