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Layoffs arrive ahead of Dell earnings report

The PC maker announces layoffs just hours before it reports fourth-quarter results, confirming analysts' suspicions.

Dell Computer announced job cuts on Thursday morning, and will likely present an outlook for slower growth in the future.

The Round Rock, Texas-based PC maker, which said it will cut about 1,700 jobs, will deliver its fourth-quarter results after the market closes Thursday. The results, as well as the outlook for the future, will probably be muted.

Analysts expect Dell to report earnings of 19 cents a share for the fourth quarter and 85 cents for the year. Projected revenue is in the $8.6 billion to $8.7 billion range.

Dell issued a fourth-quarter profit warning last month, lowering revenue and earnings expectations. Slow demand and unusually aggressive price cuts for Dell are seen as two of the chief causes behind the shortfall.

Cost cutting has already begun. The PC maker had already cut temporary workers. Today's job reduction will lop off around 4 percent of its permanent work force. Overall, the company is aiming to reduce operating expenses by around 8 percent, analysts say.

Before the warning, a consensus of analysts polled by First Call expected earnings per share of 25 cents for the quarter and 91 cents for the year.

Analysts also expect the company to lower growth expectations. A few years back, Dell grew at an annual clip of 50 percent. In 1999, it warned that growth would slow to 30 percent and later scaled it down to 20 percent. Some analysts believe the number could go down again.

"We expect revenue growth will be set at 10 percent to 15 percent and are currently modeling 12 percent growth," Prudential Securities analyst Kimberly Alexy wrote in a recent research note.

Although Dell's current financial performance pales by its own history, it is likely to be outstanding compared with the industry as a whole, with revenue growth expected to be 25 percent to 27 percent.

Stock price from February 2000 to present.  
Source: Prophet Finance
"Dell will have reasonably good growth compared to some of the other PC manufacturers, but not good growth compared to Dell in the past," Gartner analyst Kevin Knox said. "Bottom line, Dell's challenge is to perform against how it performed in the past."

The great share grab
With U.S. PC sales slowing and expansion to overseas markets still in a fledgling phase, some analysts say Dell is shifting from a high-margin strategy to one of stealing market share by aggressive pricing.

"It's very apparent that in the last quarter Dell traded profitability for market share," said IDC analyst Roger Kay. "It was very deliberate."

Knox agreed. "Dell has been overly aggressive this quarter from a pricing perspective, but in this kind of market you've got to be that way," he said. "This is a long-term play on Dell's part."

Though Dell benefited from huge market share gains during the fourth quarter, the company could pay a high price for slashing margins. In worldwide PC shipments, Dell gained two percentage points during the fourth quarter and now is expected to pass Compaq Computer during the first quarter.

But in a recent report, J.P. Morgan Chase analyst Walter Winnitzki blamed Dell's unusually aggressive pricing for cost-cutting measures, such as layoffs.

"We also note that Dell's recent price actions suggest a departure from its past history and are a reason for the company to take the dramatic step of enacting head count reductions," he said.

In the past Dell has waited for component prices to fall before slashing prices, which insulated the company's margins. "However, currently Dell is cutting prices ahead of realizing adequate cost and efficiency savings," Winnitzki said. "As a result, its operating margins and (earnings per share) have collapsed in" the fourth quarter.

But Technology Business Research analyst Brooks Gray believes the strategy could pay off for Dell in a way it hasn't for competitors.

"Dell has typically had pretty successful after-market sales and return of customers," he said. "They have very good customer retention, plain and simple."

Like Gateway, Dell could also be hit by a limited geographic reach. "Seventy-five percent of Dell's revenue mix is derived from the U.S.," Gray said.