Dell profit surges, but investigations cast pall

For the period ended November 3, Dell reported $14.4 billion in revenue and net income of $677 million, or 30 cents per share. A year ago, it reported then-disappointing revenue of $13.9 billion and net income of $606 million, or 25 cents a share.

Dell had been scheduled to report earnings last week, but postponed the announcement because of the complexity of reporting results while under investigation, it said. At that point, analysts had been expecting revenue of $14.4 billion and earnings per share of 24 cents.

The Round Rock, Texas-based company still hasn't filed a quarterly report with the SEC for its second quarter, and it offered no update Tuesday on when that report would be completed.

Depending on the outcome of the investigations, by the Securities and Exchange Commission and by the U.S. Attorney for the Southern District of New York, these numbers might not hold.

"The preliminary results for the second and third quarters could be affected by any restatements of prior period financial statements that are required as a result of any conclusions reached by the investigations. No determination has been made as to whether restatements of prior period financial statements will be required," Dell said in its earnings release.

Sparse details
The PC company did not hold a conference call to discuss its earnings results. Usually, it holds two: one for the media with CEO Kevin Rollins and one for financial analysts with Rollins, Chairman Michael Dell and Chief Financial Officer Jim Schneider. However, "we've made a decision to minimize our financial disclosures at this point," given the ongoing investigations, said Bob Pearson, a company spokesman.

Even the earnings release itself was sparse. Dell did not provide comparisons with figures from the previous year, although last year's earnings release with that data was easy to find on the company's Web site. Likewise, it didn't file a balance sheet or statement of cash flows.

It's not clear what exactly has prompted the investigations of the company's accounting practices. In August this year, when Dell first disclosed that it was under investigation by the SEC, it said that it initially received an informal notice from the SEC in August 2005 regarding revenue recognition practices. In the process of complying with that request for information, Dell said it discovered material "that raises potential issues" regarding prior operating periods before its 2006 fiscal year.

At the time, Dell said it didn't believe the "issues" would pose a material problem to the company's finances for previous years. But it couched its words much more carefully in Tuesday's announcement. Both the second-quarter and third-quarter results are now subject to change, depending on the outcome of the investigation, Dell said, and prior periods could also be affected.

Representatives for both the U.S. Attorney's Office and the SEC declined to either confirm or deny the existence of an investigation regarding Dell, citing office policy.

Brighter performance
The ominous nature of the "preliminary" tag affixed to the results overshadowed that fact that Dell's quarter was not nearly as bad as some of its other financial performances this year. Server revenue rose to $1.5 billion, from $1.4 billion a year ago, on 12 percent growth in units. The company's shipments grew faster than the market during the third calendar quarter, according to figures released Tuesday by research firm Gartner.

In Dell's core PC business, results were more mixed. Mobility revenue was $3.9 billion, up from $3.6 billion a year ago, with 17 percent growth in units. But desktop revenue fell from $5.1 billion last year to $4.7 billion this year, on a decline in shipments of 5 percent. The company retreated from the low end of the market to focus on more profitable systems during the quarter, it said.

Dell's overall PC market share plummeted during the third calendar quarter, as Hewlett-Packard took back the overall lead by a small margin.

The company's performance around the world was also a mixed bag. Shipments grew 23 percent in Asia, but increased just 9 percent in Europe, the Middle East and Africa. In addition, shipments fell 4 percent in the Americas, Dell's largest geographic segment by far. Revenue from the Americas was $9.2 billion, which was flat compared with last year.

But the company said the $150 million it has poured into improving its customer service department this year is having an effect. U.S. customers who phone the department now spend an average of three minutes on hold, compared with nine minutes last year, the company said, citing an increased number of technicians. Transfers are down 30 percent, and the number of people who have their problem solved the first time they call is up 20 percent, Dell said.

It's become more evident that Dell is willing to think differently about its business practices, coming off one of the worst years in the company's history, said Stephen Baker, an analyst with NPD Techworld, in a conversation prior to Dell's earnings release.

The company has put out word that it is seeking new executives to inject some fresh thinking into its ranks. It has also reconsidered long-held strategies, like its former reliance on Intel as its sole supplier of microprocessors, as rivals have eroded Dell's historic cost advantages, Baker said. Markets change over time, and Dell needs to change with them, he said.

"They've got smart people, and they should have been prepared for things to be different. But being a little more innovative and thinking outside the box doesn't mean throwing away the box," Baker said, referring to calls from some for Dell to experiment more with retailers or enterprise channel partners.

On news of the unexpected increase in profit, Dell's stock was up $2.20, or 8.8 percent, to $27 in after-hours trading.