The US Securities and Exchange Commission first told Dell that it was being investigated in August 2005. The probe began with a letter from the SEC requesting information, said Dell CFO James Schneider, on a conference call.
At the time we got it, it seemed like we would respond with the information, he said. There really seemed like no reason to disclose it at that time.
He also noted that hundreds of such investigations by the SEC happened each year and that the vast majority are not disclosed. However, very recently Dell uncovered a couple of issues that it felt warranted a closer look by the regulators, during its own internal investigation, he said.
No additional information about the investigation was provided, except that it relates to earnings prior to fiscal 2006 and that the company does not expect it to materially affect its financial position.
During the quarter, Dell stumbled mostly by cutting its prices too aggressively during a slowing market in the quarter, said chief executive Kevin Rollins. Dell’s competitors were not affected by the lower prices because Dell tended to cut in areas that did not affect then, Rollins said, on a conference call. We either did it badly or were too aggressive, he said of the pricing cuts.
The main problem was that raw computer components did not come down in price as expected, Rollins said. He declined to elaborate on which components specifically.
In the future, we’re going to be a bit more circumspect in our pricing strategy, a bit more careful, Rollins said. However, we are not backing off into margin harvesting.
The Round Rock, Texas-based company posted a $502m, or 22 cents a share, profit for the quarter ending August 4, from $1.02bn, or 41 cents, a year ago. Revenue rose modestly, by 5%, to $14.1bn, despite Dell’s best efforts to boost market share with its bargain pricing.
Still, the recent numbers were in line with average forecasts from analysts, following Dell’s warning in July that profit would fall 30% short of previous predictions.
While Schneider said the company gained more than 1% in overall market share worldwide during the quarter, second-fiddle Hewlett-Packard Co blocked it from taking more. A day earlier, HP posted stronger-than-expected profit thanks to share gains at Dell’s expense.
Shares in Dell tumbled more than 5% to $21.61 in after-hours trading on the Nasdaq following the announcement. Yet the markets shone on Advanced Micro Devices Inc, whose shares climbed more than 7% to close at $24.20, before losing 68 cents after the bell.
AMD shareholders can thank Dell, which has announced that it would begin selling desktops equipped with AMD microprocessors in a departure from Dell’s 22-year tradition of having an Intel-only desktop lineup.
AMD currently is suing Intel, which dominates the world’s microprocessor market, for allegedly strong-arming OEMs into buying exclusively from Intel. Dell is among the scores of major computer makers that have been subpoenaed by AMD as part of its case, but Dell has not referred to the lawsuit in relation to its newly expanded AMD relationship.
Dell’s move to sign more deals with AMD has long been rumored, especially since Dell first announced in mid-May it planned to use AMD processors, initially in some of its servers. The company has now revealed that it would release a two-socket and multi-processor server using AMD Opterons by year’s end. And it would launch Dimension consumer desktops with AMD processors in September.
But the company has ordered as many as 1.2 million desktop machines driven by AMD processors, along with about 800,000 notebooks, according to Bank of America financial analysts Sumit Dhanda. That would mean AMD would grab 15% to 16% of Dell’s overall desktop business, and 18% to 19% of its notebook business, Dhanda said, citing unnamed sources in the manufacturing supply chain in Taiwan.
That doesn’t mean the Dell-AMD deal will be a hit to Intel, however. Intel will likely make up the lost business at Dell from different avenues, Dhanda said. He pointed to Intel’s relatively new deal with Apple Computer Inc, which alone should help Intel offset a good chunk of the impact from the lost Dell business, he said.
In the past, Dell defended its strategy of buying processors solely from Intel by pointing to the additional costs of architecting for another chipmakers’ wares. Rollins said there was some startup costs involved in adding AMD to its lineup but that those will be paid back very, very quickly given the nature of this thing. Those startup costs were not a major expense during the past quarter, he added.
Despite Dell’s quarterly profit woes, the company grew revenue 17% in Asia Pacific, where it now claims the No. 2 spot, according to Schneider. Revenue in China was up 31% and in India up 63%.
Demand for Dell was the weakest in Europe and the US, where revenue grew just 3% and 1%, respectively. Rollins said the company held its share in the US and gained in Europe and Asia.
