Dell predicts ruthless cost-cutting, could mean layoffs

Nicole Volpe

NEW YORK: Dell Computer Corp., which recently emerged as the world's No. 1

personal computer maker, will be merciless in managing costs and will consider

more layoffs, a senior executive said on Thursday, as it keeps the heat on a

price war to seize market share.

"We will be ruthless in how we address our cost structure going

forward," Tom Meredith, Dell's senior vice president of business

development and strategy, said at the Merrill Lynch Hardware Technology

conference here. Meredith pointed to cost controls and aggressive pricing as

reasons Dell was able to take market share from rival Compaq Computer Corp.,

which it supplanted as No 1 in the PC market in the first quarter of this year.

Asked if layoffs could be part of that ruthless cost cutting, Meredith said,

"Absolutely." Earlier this week, Dell declined to comment on growing

speculation that it was planning a new round of layoffs. In February, it

announced its first-ever large-scale staff reduction, cutting 1,700 jobs, or 4

percent of its work force.

UBS Warburg cut its rating and earnings estimates for Dell on concerns about

its aggressive pricing strategy. Analyst Don Young said he cut his rating on the

stock to ‘buy’ from ‘strong buy’ and his second-quarter share earnings

estimate to 74 cents from 83 cents.

"We remain concerned about Dell's continued price aggression, and we

lack confidence that the PC industry's sacrifice of short term profitability

will lead to long-term gains," Young said. "We are also hearing more

about further streamlining and expense reductions at Dell confirming our belief

that Dell is continuing to prepare for a drawn-out price war," he said.

Since late September, when signs of weakening began showing in the computer

market, shares of Dell have lost 20 per cent of their value. Since then, shares

of Dell have outperformed the Philadelphia Stock Exchange "box maker"

index, which gauges computer maker share strength, by nearly 19 percent,

Meredith said he believes inventory levels across the PC industry built up to

29 days' worth in March from the mid-20s in February. The increase was

especially marked at retailers and distributors. "It's higher than people

think it is," Meredith said. Merrill Lynch analyst Steven Fortuna said he

is not concerned about PC inventory levels, saying they have remained at about

25 days for the past few quarters.

Asked whether the PC industry has bottomed out, Meredith said, "From the

Dell perspective, we've been gaining share. If that's the case, then what's the

problem? But those of our competitors who recently announced earnings, they

don't appear to have hit bottom."

For example, Compaq last week reported lower Q1 earnings and scaled back its

outlook for the Q2. Meredith said the PC market remains intensely competitive.

Besides Compaq, the company's biggest rivals are Hewlett-Packard Co. and

International Business Machines Corp. "These competitors are fierce,"

he said. "They're tough. They're big. They do have cash and they're willing

to spend it."

Meredith reiterated guidance given by Dell last month that Europe was

"starting to flourish" for the company and that there were pockets of

strength in Asia. He declined to comment on results for Dell's fiscal first

quarter, which ends on Friday.

(C) Reuters Limited 2001.