Has Dell's Comeback Hit a Roadblock?

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Exacerbating the pressure on Dell, the results come amid a generally strong earnings season for computer makers. HP on Aug. 19 reported third-quarter profits that beat analysts' expectations, and issued an upbeat fourth-quarter forecast, boosting its stock. On July 22, Apple beat earnings and sales expectations, but forecast thinner profit margins (BusinessWeek.com, 7/22/08) for the rest of the year and into 2009.

It wasn't all bad news for Dell. The company brought operating expenses down to 12.2% of revenues during the second quarter, from 13.9% a year ago. That was part of a cost-cutting goal of eliminating $3 billion in spending each year by fiscal 2009. Dell shed 1,500 jobs during the quarter and has cut its workforce by 8,500 since the beginning of fiscal 2007.

Dell is also expanding its product line with more machines designed to serve niche market segments. "They're trying to go after finer market opportunities in hopes of wringing out more market share," says Richard Shim, a research manager at IDC. In mid-August, Dell released a lineup of new notebooks for business customers, and its CEO said a fresh batch of business desktops is on the way. In July, Dell told BusinessWeek editors that the company was looking forward to a "big second half" to the year (BusinessWeek.com, 7/28/08).

Fierce Competition

The company is outgrowing the overall market. Dell's worldwide PC shipments rose 21.4% during the April-through-June period, compared with 15.3% growth industrywide, according to IDC. Dell now holds a 16.4% share of the worldwide PC market, compared with 18.9% for HP.

But Wall Street is starting to wonder if market share gains are coming at the expense of profits. Its competitors' must-have products and services—Apple's Macs, iPods, and iPhones; HP's printers; and IBM's software and consulting services—make them less susceptible to the vicissitudes of retail price wars, says American Technology Research's Wu.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.