Dell Q3 Profits Fall 28 Percent

For its fiscal 2006 third quarter, Dell reported net income of $606 million, or 25 cents a share, from $846 million, or 33 cents, in the same period last year. Sales for the quarter rose $13.9 billion, an 11 percent increase from last year. Both earnings and revenue were below previous expectations, primarily due to declining sales of desktop computers.

Looking ahead, the company projected fourth quarter sales of between $14.6 billion and $15 billion, and a profit of between 40 cents to 42 cents per share. Analysts polled by Thomson Financial/First Call expect $15 billion in sales for the quarter, and earnings of 42 cents per share.

Despite lower results, the Round Rock, Texas-based PC maker proclaimed "continued successful application of Dell's unique direct business model."

"We are very pleased with our ability to deliver industry-leading profitability, earnings and a balanced" profit performance, said Jim Schneider, Dell's chief financial officer, in a conference call with financial analysts.

Earlier this month, analysts and solution providers began openly questioning Dell's business model and prospects after the company announced it would fall short of previously expected third-quarter results.

Dell CEO Kevin Rollins said, however, that the company is now tracking its growth in a healthy and appropriate manner.

"We believe 10- (or) 11-percent growth rate is a very healthy growth rate for a company our size," Rollins said.

During the quarter, Dell reported "enhanced services" revenue of $1.2 billion. That figure is flat compared with the preceding quarter, but higher than the $1 billion for the same quarter a year earlier. Dell, which outsources much of its services, does not detail the profitability of its services business. Services now account for about 9 percent of Dell's overall revenue, compared to 7 percent a year earlier.

Dell executives attributed the decline of its sales of desktop PCs to an industry transition to mobile PCs. Earlier this year, Dell executives had told Wall Street analysts desktop PCs still accounted for 20 percent of its overall growth.

Among what Dell said were successes is the company's printer business. The company's imaging revenue grew by 31 percent during the quarter, with consumables growing strongly as well. However, the overall printer business was still "profit-challenged" even though signs show it could change, Rollins said.

"I would say the way we're managing this business has really been to continue to take share, rather than focus on taking profitability," Rollins said, adding that on consumables during the quarter, Dell "made a few million dollars. I think we could very well be at the point where this starts to make money in the fourth quarter onwards into next year."

He added that the company will continue to bundle printers with other products, even as it moves to turn the corner to profitability.

"There are better ways to make more money and get those printing products out to the customer," Rollins said. "I don't think you'll see bundling stopped, but I don't think you'll see us using it as the only tool."

In after-hours trading, shares of Dell dropped 50 cents to $28.71.