Dell to Cut $2 Billion Costs, Counts on Acquisitions

Jun 14, 2012 09:14 AM EDT

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Dell Inc plans to slash more than $2 billion in costs over the next three years, primarily from the supply chain and sales group, as it sharpens its focus on the technology needs of corporations.

The shares of the No. 2 U.S. PC maker, which plans to pay its first dividend to shareholders this year, rose about 4 percent on Wednesday before giving up some of the gains. They remain down 15 percent in 2012, suppressed by disappointing quarterly earnings and fears that mobile devices are eroding PC spending.

Software and services are a key growth area, Dell executives told analysts at a conference in Austin, Texas. The corporate software and services business is on track for average annual growth of 10 percent until fiscal 2016, it said.

The PC maker has been actively snapping up companies as it tries to diversify away from personal computers, a market where growth is decelerating as Apple Inc's iPad and other mobile devices pull consumers away.

It has acquired eight companies in the past 12 months, including Wyse Technology and SonicWall.

"We have a modest software business and that's an area where we can grow rapidly," Chief Executive Officer Michael Dell said at the conference. "We've had some nice acquisitions, which are off to a good start."

Dell said on Tuesday it will start paying an annual dividend of 32 cents, raising its target for distribution of capital to shareholders to 20 percent to 35 percent of free cash flow.

That payout follows disappointing fiscal first-quarter results that spurred fears global tech spending is weakening faster than anticipated and raising doubts about the PC maker's strategy.

While the dividend was welcomed by investors, some analysts questioned the wisdom of initiating a dividend at this time.

"While we view this as a positive step in creating more shareholder value, we question if this is the most effective use of cash given the company's far from complete effort in transforming itself beyond commodity industry standard offerings," Shaw Wu, analyst with Sterne Agee said.

FIXING SALES STRUCTURE

Dell is expecting to add about $1 billion from tablets running Microsoft Windows 8 operating system and forecast PC market revenue growth of 4 percent by 2016. Dell, however, is not forecasting any growth in its PC business.

This implies a share loss to fast-growing Asian competitors like Asus and Lenovo, Shebly Seyrafi, analyst with FBN Securities, said.

Dell expects to have a tablet by the end of the year. Rival Hewlett Packard also is planning to launch a Windows 8 tablet for the holiday season.

"The tone from management remains cautious given the macro environment, which is consistent with other companies in the space," said Barclays analyst Ben Reitzes, who attended the meeting.

Dell's Chief Commercial Officer Steve Felice said the company is fixing the structure in its sales organization.

"Too many people were involved in (sales) opportunities," Felice said.

He added that Dell is also trying to incorporate the products it has bought via acquisitions into its overall sales portfolio, instead of focusing on them separately.

"The end result of all this is a delayed sales cycle," he said. "There was a lot of white space that we weren't properly covering."

Felice said the company will have to "reposition a couple of thousand" sales-related personnel. Felice, however, did not say on the webcast if the repositioning would involve any layoffs.

Dell has been diversifying its revenue base in the face of weakened consumer demand, giving up low-margin sales to consumers and moving into higher-margin areas, such as businesses in the public sector and the healthcare industry.

Chief Financial Officer Brian Gladden said acquisitions will continue to be an important focus for the company.

Its shares were up 2.21 at $12.24 in late trading.