Dell shares tumble as company cuts costs

Shares of the PC giant slip nearly 7 percent on news that the company is expected to lay off employees and has already reduced its temporary work force.

Richard Shim Staff Writer, CNET News.com
Richard Shim
writes about gadgets big and small.
Richard Shim
4 min read
Shares of Dell Computer tumbled more than 8 percent Friday following reports that the company is cutting costs amid a sharp sales slowdown.

As first reported by CNET News.com, Dell is gearing up for large-scale layoffs, according to analysts, and has already slashed its temporary staff in an effort to cut costs.

Dell shares were off $2.16, or 8.3 percent, to $23.91 in afternoon trading Friday. In the past year the shares have traded as high as $59.68 and as low as $16.25.

A weaker PC market is forcing the Round Rock, Texas-based PC maker to make the cuts, according to analysts and sources close to the company. Dell has more than doubled in size over the past three years as it increased its share of of the growing computer market.

Sometime this quarter Dell is expected to surpass Compaq as the worldwide leader in the computer industry based on market share. But this distinction may mean little for a market that is in a slump compared to the high-flying days of the late 1990s. PC companies are resorting to price wars and even special offers to entice customers as they seek to remain competitive. Analysts have warned of an upcoming shakeout in the PC industry.

One of the areas Dell is focusing on is the consumer market. The company is addressing consumers with specials offers on its home and home office site including free ground shipping, free Web cameras, $100 rebates and free ISP service for one year.

One analyst said the cuts could eliminate as many as 5,000 jobs. Dell spokesman Mike Maher said the company is looking to cut costs but said no layoffs have been announced.

However, Dell has already slashed the number of temporary employees, News.com has learned.

In a report Friday, JP Morgan H&Q analyst Walter Winnitzki said the possibility of layoffs sugggests that Dell's business model is not working as well as it had in the past.

"In the past Dell has been able to take advantage of rapidly declining component prices to pass them on to customers in the form of price reductions without negatively impacting its financial model," Winnitzki wrote. "However, currently Dell is cutting prices ahead of realizing adequate cost and efficiency savings."

The result is a hit in margins and earnings that Winnitzki said will be clear when Dell reports its earnings next week.

Spherion, a Fort Lauderdale, Fla.-based staffing firm, said on its earnings conference call Thursday that a large, Austin, Texas-based company cut back its fourth-quarter temporary staff from 3,200 to "under 2,000 per week as orders slowed dramatically." Round Rock is a suburb of Austin.

Analysts who follow Spherion said the company was clearly referring to Dell, which uses it for temporary staffing.

Although Maher said he could not say whether Dell was the company Spherion was referring to, he confirmed Dell has cut the number of temps it employs.

"We have scaled (down) our temporary work force in line with our demands and the seasonal nature of the needs in (that) area," Maher said.

Analysts, however, say the cuts won't stop there.

Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray, said Dell is aiming to cut 8 percent from its operating expenses.

Dell Spokesman T.R. Reid would not comment on exact cost reductions or layoffs but said that Chairman Michael Dell has signaled that "we are going to even be more aggressive in reducing operating expenses."

David Bailey, an analyst at Gerard Klauer Mattison, said such cuts "could include head count reductions."

Other PC makers have already announced job cuts. In January, Gateway said it will cut more than 10 percent of its work force, or roughly 3,000 employees. Hewlett-Packard said last month that it will trim 2 percent of its staff, or about 1,770 workers.

Dell warned in January that its sales and earnings will fall below its prior forecast. Dell now expects earnings of 18 to 19 cents per share, compared with earlier estimates of 26 cents per share.

Sales are expected to be $8.5 billion to $8.6 billion, down from its earlier expectation of $8.7 billion. Dell will report earnings Feb. 15.

Employee attrition based on performance evaluations will likely begin soon at Dell, according to sources. Dell reviews employees at the close of its fiscal year, which ended Friday, and rates each on a scale of one to five, with one being best.

Those employees given a "four" rating will be let go, according to sources close to Dell. In the past, those given a "four" rating were often given a period to improve. Although the scale goes to five, that score is rarely given and if so, almost always leads to termination.

Even if Dell lays off a few thousand employees, it would barely make a dent in the overall company structure, which has grown at a fast clip over the past few years.

Dell had 16,200 workers in January 1998, 24,400 in January 1999 and 36,500 in January 2000, a representative said. The company currently has about 39,000 employees.

In the past Dell has reacted to changes in the market with only small adjustments, trimming staff selectively in unproductive or under-performing departments. Last year, for example, some jobs were eliminated in its European division, but the reduction was outweighed by hiring elsewhere.

Layoffs to some degree are inevitable, said IDC analyst Roger Kay. For years, the company enjoyed a lower cost structure than other PC makers because it sold computers directly. Now, Compaq and others have improved their logistical operations, eroding that margin.

"Dell's cost advantage has decreased dramatically in the last couple of quarters," he said.

Dell is also not gaining traction in some overseas markets, which are growing rapidly.

News.com's Michael Kanellos contributed to this report.