A regulatory probe and plunging profits at
sent shares of the world's top PC maker spiraling lower Friday morning.
Word that second-quarter earnings fell nearly 50% from a year ago no doubt disappointed investors, but they were absolutely blindsided by the revelation that federal investigators are looking into Dell's accounting practices.
Thursday's news about the
Securities and Exchange Commission
inquiry marks another setback for the company. According to Dell, the company "has discovered information that raises potential issues relating to certain periods prior to fiscal 2006" in the course of responding to SEC requests for information relating to revenue recognition and other accounting matters for past years.
While Dell said it does not believe that these issues will have any material impact on its financial position, the company's audit committee has initiated an independent investigation.
Shares of Dell sank $1.80, or 7.9%, to $21 in heavy trading. The stock had been as low as $20.65.
Dell also announced that it was expanding its relationship with chipmaker
Advanced Micro Devices
, with plans to offer desktop PCs using AMD chips next month, and a greater array of corporate servers with AMD chips.
But while the move to use AMD chips addresses a weakness that investors have long clamored for Dell to fix, it was not enough to offset the litany of bad news in the company's quarterly report.
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"We priced too aggressively in the face of slowing industry demand," said CFO Jim Schneider in a conference call. As a result, Dell left "margins on the table" during the second quarter.
Accurate as the appraisal may be, it reinforced the perception that the world's No.1 PC maker is struggling to find its groove. In May, management said that the company's problems were the result of too heavy of an emphasis on preserving profit margins.
Dell executives also said the company's vaunted procurement and assembly operations were no longer performing up to par. Company executives said that Dell had misgauged the degree to which component costs would come down during the quarter, delivering another blow to profit margins.
Chairman Michael Dell said the company was undertaking a full re-examination of all procurement and supply-chain practices.
During the second quarter, Dell's sales totaled $14.1 billion, with EPS of 22 cents, in line with analyst expectations. At this time last year, Dell had EPS of 41 cents on sales of $13.4 billion.
Dell pared back its estimates for the quarter last month, citing a challenging pricing environment for PCs and a slowing commercial market. It was Dell's third negative preannouncement in the past four quarters.
Desktop sales declined 4% year over year, to $4.9 billion, while notebook sales were up 8% and sales of corporate servers increased by 1% from the year-ago period to $1.4 billion.
On Wednesday, rival
beat Wall Street expectations, with 5% growth in desktop PC sales and 14% notebook revenue growth.
Dell CEO Kevin Rollins said his company had gained share in key markets during the second quarter, with strong growth in China and the Asia-Pacific region. He also pointed to storage and services, where the company grew revenue 36% and 21% respectively, as areas of strength during the quarter.
And Rollins said the addition of AMD chips will give Dell access to a broader segment of the market while reducing its costs.
In May, Dell introduced AMD chips in a small segment of its server line, ending a longstanding practice of using only chips by
Dell also said it will also spend an additional $50 million to $100 million on customer support through the end of the fiscal year.
Dell's customer support, which was already an area of concern, has reportedly been besieged in recent days after the company's announcement Monday that it was
recalling 4.1 million batteries for its notebooks because of fire hazards.
Management played down the significance of the SEC investigation, which Dell said was initiated in August 2005 and which it said does not indicate that any violations of law have occurred.
CFO Schneider characterized the investigation as "really just a list of questions," the likes of which the SEC sends out hundreds of times each year to companies, with the vast majority going undisclosed.
Schneider said that while Dell did not feel the matter warranted disclosure at the time, the company had uncovered certain issues while responding to the requests which would require Dell to bring more people into the circle as it looked into it.
As a result, Schneider said, the company felt it was prudent to disclose the investigation at this time.
But Schneider would not describe what type of issues its internal investigation was looking at, citing the ongoing investigation. And a Dell representative said the company could not comment on which division of the SEC was conducting the investigation.