Fed spending hurts Dell financials

Company attributes lower than expected earnings to decreased federal IT spending.

A drop in federal spending is one reason why Dell did not deliver the earnings expected by Wall Street analysts for the second quarter of fiscal 2006 released Aug. 11.

The company’s stock fell $3.08 per share to $36.50, with 80 million shares traded Aug. 12.

Kevin Rollins, Dell’s chief executive officer, said federal IT spending has been weak for the past year, particularly in the second quarter. He said the company does not anticipate federal IT spending coming back in the third quarter.

Rollins discussed Dell’s second quarter 2006 earnings during a conference call after their release yesterday and his comments appeared in a story on TheStreet.com. The company did not immediately return a phone call on lower federal IT spending.

Federal IT spending accounts for about 20 percent of Dell’s revenue. Rollins also attributed the lower second quarter 2006 earnings to the company’s overly aggressive pricing in the U.S. consumer market.

Dell posted second quarter 2006 revenue of $13.4 billion, a 15 percent increase over the $11.7 billion posted for the same quarter last year. But Wall Street analysts predicted $13.7 billion.

Lionel Menchaca, a Dell spokesman, confirmed that “softness in the federal space” contributed to Dell’s lower than expected earnings/revenue, but he could not be more specific as to which agencies. Menchaca said the company expects earnings/revenue for the third quarter 2006 between $14.1 billion and $14.5 billion.

Dell has one positive federal IT story to discuss. The company announced July 25 it completed a six-month IT services project with U.S. Pacific Air Force Directorate of Communications and Information to improve its technology service desk.

Dell said the Air Force organization already noticed improvements in incident management. The company also said the service group expects to spend 20 percent less time resolving technical issues within a year.

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