Dell Inc (DELL.O) posted a
surprisingly steep drop in quarterly earnings on Thursday and
said companies around the world are cutting back on technology
spending, sending its shares tumbling 10 percent and sparking
fears of weakness in the whole tech sector.
The world's second-largest computer maker, which had
cautioned in May that big U.S. companies had become more
conservative with technology spending in the face of a weak
economy, said slow demand had spread to Europe and Asia as well
as U.S. state and local government and small business.
"The thing that is making the stock go down is they're
starting to talk about demand destruction in Western Europe and
in Asia," said John Menzies, a portfolio manager with Pacific
Growth Equities in San Francisco.
"Up until this point the large tech companies, like the
IBMs of the world, have done pretty well in holding up their
earnings because they've had strong and consistent
international demand," Menzies said. "This shows international
economies are slowing down and Dell cited that specifically."
The computer maker's profit fell 17 percent in the second
quarter ended August 1, to $616 million, or 31 cents per
diluted share, from the restated net income of $746 million, or
33 cents per diluted share, in the year-ago second quarter.
"Each geography saw profit growth well below revenue
growth," Goldman Sachs analyst David Bailey wrote in a note to
clients, referring to results in the company's core U.S.
commercial business and operations in Europe and Asia-Pacific.
"It is conservatism that has been relatively consistent for
the last six months or so, but it is somewhat spreading," Chief
Financial Officer Brian Gladden told reporters on a conference
Excluding amortization and business realignment costs, Dell
earned 33 cents per share, behind Wall Street's 36 cents per
share target, according to Reuters Estimates.
Revenue offered a bright note as it rose 11 percent to
$16.43 billion and topped all analysts' expectations.
But Dell also posted a disappointing drop in profit
margins, to 17.2 percent of gross profit, from 19.9 percent a
year earlier and 18.4 percent in the previous quarter.
Operating margins also fell.
"Strategic actions to accelerate growth in certain areas of
our business affected gross margins this quarter," Gladden said
in a statement. Cost cuts, changes to its portfolio of products
and an effort to push sales outside of U.S. and European
markets would also hurt operating margins, he added.
Dell has cut 8,500 jobs so far out of a planned 8,900, and
at least one analyst said the results could presage further
cutbacks. Officials said an ongoing 3-year plan to cut $3
billion in costs would show benefits in the second half of its
current fiscal year, which ends in January 2009.
Gladden said pricing actions to restructure how Dell sells
computer services in Europe hurt the company's quarterly profit
by 2 to 3 cents per share.
The Dell financial executive said its moves in Europe were
"self-inflicted" rather than in response to competitive
pressures in the region but cautioned that revenue deferrals
tied to the restructuring of its European services business
could serve as a drag on reported results later this year.
"It's a really tough tech market and Dell is obviously
cutting costs, but it wasn't enough to offset the pressure on
gross margin," said Shannon Cross of Cross Research.
"What people on the Street wanted to see was revenue growth
and a solid gross margin number. Because if you sell things for
no profit, to some extent, what's the point? This indicates
that they might have to streamline even more now," she said.
Dell shares tumbled to $22.75 in extended trade following
the quarterly report, after closing down 42 cents at $25.21 on
(Additional reporting by Jim Finkle, Alex Dobuzinskis and
Peter Henderson; editing by Richard Chang, Gary Hill)
Investors yanked $26.36 billion from stock funds in July -- the most since $44.84 billion in January. July trumps June's outflow figure of $4.82 billion, according to the Investment Company Institute.
Total assets invested in U.S. mutual funds fell by $91.56 billion, or 0.8%, to $11.59 trillion in July. The small loss came as the market returned -0.99% for the month and marked a major reversal for the S&P 500. It sank 8.59% the prior month.
But it appears investors started pouring money back into U.S. funds at the end of July, according to more recent data provided by Emerging Portfolio Fund Research. U.S. equity funds saw inflows of $14.6 billion from July 30 through Aug. 20, according to EPFR.
"Obviously investor sentiment toward the U.S. equity market has been abysmal until recent weeks, when there's been a shift to U.S. equities," said Brad Durham, managing director of EPFR. "Valuations are pretty beaten down, but the U.S. economy is likely to recover quicker than Europe. The U.S. seems like a pretty good bet right now."
Better-than-expected gross domestic product data and a drop in jobless claims released Thursday supports that notion. GDP grew at annual rate of 3.3% in the second quarter.
Year-to-date, through Aug. 20, U.S. funds had outflow of $59.1 billion, or 1.48% of total assets, according to EPFR.
"It's significant," Durham said. "There are more outflows year to date than any previous year since we started tracking equity fund flows in 2000."
In all, stock fund assets shrank $47.30 billion year-to-date through the end of July, according to ICI. That's more than a 180-degree turnaround from the same period last year in which they raked in $97.18 billion.
Domestic stock funds posted outflow of $18.69 billion in July vs. an outflow of $3.63 billion in June. Year-to-date, $5.686 trillion was invested in stock funds. That's 2.7% less than the same period last year.
World equity funds, or U.S. domiciled funds that invest in overseas markets, had outflow of $7.67 billion in July, vs. an outflow of $1.20 billion in June.
Hybrid funds, which hold both stocks and bonds, saw outflow of $1.47 billion in July vs. inflow of $697 million in June. They've had inflow of $6.56 billion year-to-date. That's a far cry from the $17.26 billion in inflows through the comparable period last year.
Meanwhile, bond funds took in $1.79 billion in inflows in July vs. inflow of $4.56 billion the month prior.
Taxable bond funds had an outflow of $689 million in July vs. an inflow of $1.94 billion in June. Municipal bond funds took in $2.48 billion in July vs. an inflow of $2.62 billion in June.
Money market funds have sucked in the most money of any category. Their inflow totaled $79.44 billion in July vs. an outflow of $75.89 billion in June.
Fund managers parked 4.4% of their assets under management in cash in July. That shows their appetite for risk is much lower than the same period last year when 3.5% of assets sat in cash.
While investors across the board pulled money out of funds, those at Vanguard, which specializes in index investing, saw positive inflow. Vanguard pulled in $1.6 billion into equity funds, $2.9 billion in bonds and $3.2 billion in money market funds.
Total net inflow at Vanguard amounted to $7.3 billion in July. This was roughly on par with the same month last year, which had $7.5 billion in total inflows.
Vanguard's investors poured in a total of $57 billion year-to-date through the end of last year. That's 14% less than the $66 billion in inflows through the end of July last year.
Strong exports and consumer spending
supported by government stimulus checks drove the U.S. economy
up at a solid 3.3 percent annual rate in the second quarter,
much faster than first thought, but growth is expected to flag
as those factors fade.
The U.S. Commerce Department on Thursday said consumer
spending and net exports were more vigorous than initially
estimated and that inventories fell less sharply. A month ago,
it said U.S. gross domestic product had expanded at a 1.9
percent rate in the quarter.
The upward revision was much sharper than analysts had
expected and added to evidence the U.S. economy may skirt the
downturn many had forecast as a result of a deep decline in
housing markets, tight credit and high energy and food prices.
The data and a drop in oil prices powered a big rally on
Wall Street. The blue chip Dow Jones industrial average closed
up 212 points, or nearly 1.9 percent. At the same time, the
dollar rose and bond prices slipped as money moved into stocks.
"It's clear that the second quarter not only wasn't a
recession quarter, it was actually a very robust quarter," said
Michael Englund, chief economist for Action Economics in
GDP had grown at a sluggish 0.9 percent rate in the first
quarter after a 0.2 percent contraction in the final three
months of 2007. The fourth quarter of last year was the weakest
since July-September 2001, when the economy was in recession.
The data did little to alter financial market bets that the
U.S. Federal Reserve would hold interest rates steady into next
year. The Fed has held benchmark borrowing costs at a low 2
percent since April to bolster the struggling economy.
Many analysts worry that exports and consumer spending,
which have buoyed the economy, are likely to taper off in the
second half of the year as spending supported by the tax rebate
program dries up and weakening global growth and a stronger
U.S. dollar crimp demand from abroad.
"This number seems to overstate the underlying strength
even though exports are obviously strong," said James
O'Sullivan, an economist at UBS Securities in Stamford,
Consumer spending, which fuels two-thirds of the U.S.
economy, grew at an upwardly revised 1.7 percent rate in the
second quarter, rather than the 1.5 percent pace first
Meanwhile, exports grew at a 13.2 percent annual rate
instead of the 9.2 percent pace initially estimated. In all, a
narrowing trade gap contributed more than 3 percentage points
to GDP growth.
Housing, however, continued to be a sore spot. Residential
construction fell at an annual 15.7 percent pace, slightly more
than the 15.6 percent decline reported earlier.
Meanwhile, inventories dipped at an annualized $49.4
billion in the quarter, rather than the $62.2 billion drop
first reported, a possible sign that businesses are less
pessimistic than believed.
In a separate report, the Labor Department said the number
of U.S. workers filing new claims for jobless benefits fell by
10,000 last week, although new claims remained at elevated
levels, indicating a weak labor market.
Continued claims -- people remaining on the benefits rolls
after drawing an initial week of aid -- hit the highest level
since November 2003, although the figure may have been lifted
by a program extending the duration of unemployment benefits.
The economy's sluggishness has hit the job market hard.
Employers have shed a total of almost half a million jobs this
year, and unemployment hit a four-year high of 5.7 percent last
(Additional reporting by Alister Bull in Washington and
Burton Frierson and Richard Leong in New York; Editing by