Thai floods take toll on Dell

Dell shares dropped 5 per cent in after-hours trading Tuesday evening after the computer maker missed fourth-quarter profit targets due to supply chain disruptions caused by floods in Thailand.

The third-largest computer seller by volume said it overcame the spike in hard drive costs by balancing it with favourable costs of other components, but struggled to find the mix of high-end drives needed to carry its high margin product line.

“Disruption for supply will continue probably into the third quarter,” said Brian Gladden, chief financial officer. “It’s improving … The mix will continue to be a challenge.”

Dell reported $16bn in sales for the fourth quarter, a slight increase over the same quarter the year before, but missed analysts’ expectations on profits.

Dell reported a 10 per cent drop in net income for the fourth quarter down from $1bn in the same period last year to $913m, on a non-GAAP basis. That equated to earnings of 51 cents per share compared to Wall Street’s expectations of 52 cents per share.

For the full fiscal year which ended on February 3, Dell reported $62.1bn in revenue, a 1 per cent increase over the prior year, and net income of $3.9bn. Earnings of $2.13 per share were 34 per cent higher compared to the prior year.

Dell has been shifting its business strategy away from lower-cost consumer PCs toward higher-margin hardware sales to companies, as well as services and software. Company sales accounted for 30 per cent of revenue and 50 per cent of gross profit, Mr Gladden said.

Those margins were challenged by the tightening supply of higher-end hard disks, as manufacturing factories in Thailand slowly recover from floods that hit the region last year.

Dell absorbed a cost increase of $150m in rising hard disk costs, representing a trend that is rippling through the broader market and will be felt through the first half of the year, said Steve Felice, Dell’s president and chief commercial officer.

The company is also working to streamline its newer software business, as Dell’s recent acquisitions, such as Compellant, a storage software company, get integrated into the broader operation.

“You won’t see the same kind of growth you saw last year in the operating expense,” Mr Felice said. “You will see a return to a more disciplined approach.”

Mr Gladden said the company would continue to invest in these new areas as long as demand allowed.

“We remain fully committed to our strategy,” he said. “Expect year over year growth in earnings per share.”

Dell continued to struggle with the US market, where sales were down 3 per cent, but saw 8 per cent growth in Europe and 10 per cent growth in the Asia-Pacific region.