Dell earnings take a big dip
Shares of No. 1 PC maker tumble after hours as it reports news of SEC inquiry and earnings that meet lowered expectations.
By Rob Kelley, staff writer

NEW YORK ( -- Dell reported quarterly sales above expectations and earnings that were in line with analysts' estimates Thursday. But profits were substantially lower than a year ago due to increased competition from rival Hewlett-Packard.

The company also announced that the SEC was informally looking into its revenue recognition practices.

The world's largest PC maker said sales were $14.1 billion in its 2007 fiscal second quarter, an increase of 5 percent year-over-year.
The world's largest PC maker said sales were $14.1 billion in its 2007 fiscal second quarter, an increase of 5 percent year-over-year.

Shares of Dell (Charts) fell 5.5 percent after hours after closing at $22.80 in regular Thursday trade on the Nasdaq.

The world's largest PC maker said sales were $14.1 billion in its 2007 fiscal second quarter, an increase of 5 percent year-over-year. Analysts were expecting revenues of $14.0 billion.

Dell reported earnings of $502 million, or 22 cents per share, in line with analyst expectations, according to Thomson First Call. Earnings were down 46 percent from the year-ago quarter.

Late last month, Dell lowered its earnings and sales forecast because of intense competition in the personal computer business.

"What has always worked for Dell is not working all of a sudden," said Dan Renouard, an analyst with Robert W. Baird. "Because they were managed very tightly quarter to quarter and not thinking long-term, they underinvested in some serious areas like customer service, operations and IT."

Dell's management explained the substantial drop in earnings as the result of a miscalculation in pricing, and an unanticipated turn in the component market.

"We priced too aggressively in the face of slowing demand," said CFO Jim Schneider on an analyst conference call. "Component costs also came down slower than we anticipated."

Dell's CEO said that the company was working on learning from the pricing missteps.

"While we are disappointed with the results for the quarter, we are taking the necessary actions to correct missteps and improve our results for the long term," said Kevin Rollins, Dell chief executive officer, in a press release.

"Key actions include accelerating cost initiatives, increasing investments in service and support, and better pricing management," Rollins added.

But Dell's situation is far from dire, says an analyst, and only seems so because people are holding the company to the same high standards they did when it was a pure growth stock.

"Dell's done a poor job managing expectations. People were used to watching Dell kill HP - and now they're both growing around the same rate," said Shaw Wu of American Technology Research. "Dell is definitely not losing share - look at the numbers: revenue for both companies grew 5 percent year-over-year."

PC details

Dell reported that it maintained its lead in the global PC market in second quarter, with a 19.3 percent share.

The company announced that it will be extending its relationship with chip maker AMD (Charts) - a major change from its long-time exclusive dealings with Intel (Charts) - with new consumer desktop and server products to be released in September.

Analysts were positive about the company's new relationship with AMD, believing it could help in product segments where Dell has seen weakness.

"I think they're taking steps to improve this quarter's situation, especially with the AMD announcement," said Wu.

"They're going after two segments, consumer and server, where the company has underperformed. It's exciting to hear that they're shipping new [AMD-based] products in September."

SEC inquiry

Dell also said that it had received a request from the SEC in August 2005 seeking information relating to revenue recognition and other accounting and financial reporting matters. The company said it is cooperating with the SEC but it did not believe that there will be any material impact on its financial results.

Asked why the company did not disclose the nature of the SEC's request until now, chief financial officer Jim Schneider said during a conference call with reporters that the SEC had not alleged any misconduct on Dell's part, and that the company planned to comply fully with the requests of the inquiry before publicizing it.

The SEC investigation is the latest bit of bad news for Dell. The company announced a recall of over 4 million laptop batteries on Monday after it was disclosed that they could spontaneously catch fire. (Full story)

During the conference call with reporters, Rollins said Dell was not certain what kind of impact the recall would have on back-to-school sales of PCs.

"Safety and trust are our first concern. It is too early to tell how [the recall] might impact back-to-school," Rollins said. But he added that the company had not seen an impact on laptop orders since the recall was announced.

Dell announced in May that it would no longer give quarterly guidance. But analysts expect the company's slow growth to continue.

According to Thomson First Call, analysts are forecasting fiscal third-quarter sales of $14.6 billion, up 5 percent from a year ago, and earnings of 25 cents per share, down 36 percent from the same period last year.

On Wednesday, rival PC maker Hewlett-Packard (Charts) reported earnings and sales that beat Wall Street's expectations, sending its stock up 2 percent Thursday.

So far this year, shares of HP have soared 23 percent while Dell's stock has tumbled 24 percent. Dell has long been a Wall Street favorite since its direct-to-consumer model of selling computers over the phone, Web and through direct mail, has enabled the company to keep costs down.

But during the call with reporters, Schneider said Dell was testing a retail outlet in Dallas. He added that the company remains committed to its direct sales model.

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