PC maker announces lower income, plans to use more AMD chips--and also reveals federal investigation.
As expected, the world's largest PC maker announced on Thursday that it will ship Dimension desktops and two-processor servers equipped with AMD's chips by the end of the year. Its first embrace of AMD products came in May, when it announced plans to ship a four-processor server based on the chips.
But also on Thursday, Dell revealed that the Securities and Exchange Commission is conducting an informal investigation into some of its accounting practices, including revenue recognition and end-of-quarter policies.
The Round Rock, Texas, company received a letter from the SEC in August 2005, but it is only disclosing the probe now because it has found "some potential issues" during its own review of its accounting practices, said Jim Schneider, Dell's chief financial officer. Dell does not expect the issues to have a material effect on its finances, he said.
In its second fiscal quarter, ended Aug. 4, the PC maker's revenue was $14.1 billion--a 5 percent increase, compared with last year. Net income was $502 million, down sharply from $1 billion a year ago. Earnings per share came out to 22 cents, exactly what the company had predicted in July, but 10 cents below initial expectations.
On a conference call after the AMD announcement, Dell CEO Kevin Rollins cited the cost advantage the PC company would enjoy, as well as AMD's technology, as the reasons behind the move.
"There is a value in choice," Rollins said. Desktops with AMD's processors will appear next month, while the servers are planned for later in the year, he said.
Dell has danced around the AMD question for years, pledging support for its longtime exclusive relationship with Intel while praising AMD's products.
"In using AMD, Dell's really playing catch-up to HP," said Samir Bhavnani, an analyst with Current Analysis. HP, which reported earnings in line with expectations Wednesday, uses AMD processors alongside Intel chips in desktops, notebooks and servers. "It's really big for AMD, they could wind up closing what could eventually be their biggest customer," he said.
AMD, naturally, was thrilled to hear the news. "Dell's wider embrace of AMD processor-based offerings is a win for Dell, for the industry and most importantly for Dell customers," Marty Seyer, a senior vice president in the chipmaker's commercial business, said in a statement.
Intel was less pleased, but stoic. "It's unfortunate," Bill Kircos, an Intel spokesman, said in an e-mail. "But...we have just introduced an entire new Core Duo and Xeon lineup, the best processors in the world. Couple that with our manufacturing advantages, and it's up to us to convince Dell, their customers and the tens of thousands who sell Intel technology that Core Duo and Intel Inside is the best choice for any computing need."
Prices and plans
On the financial front, Dell again blamed aggressive pricing and poor planning as the culprits behind its poor second-quarter performance.
"We can do better, and we know that," Rollins said. During the quarter Dell announced a plan to reduce the number of one-time promotions it offers on its Web site and focus on offering a more consistent price for its PCs.
With little else to celebrate, Dell touted its market share gains over the last calendar quarter, as reported by IDC and Gartner. The company now holds 19.2 percent of the market, according to IDC. Dell intends to hold its market share even as it improves its profitability, Rollins said.
Another component of Dell's plan to improve its profitability is a comprehensive review of its procurement and supply-chain operation, Michael Dell, chairman of the company, said during the conference call. "We're exploring new ways to accelerate cost improvements," he said, without providing further details. Dell has always emphasized its lean manufacturing and supply chain as an advantage over its competitors, but other companies appear to have reduced the gap between themselves and Dell when it comes to costs.
It's been an especially bad week in a bad year for Dell. On Monday, the company revealed that it was recalling 4.1 million notebook batteries, on fears they could short-circuit and cause a fire.
The company is processing requests for new batteries through its Web site and over the phone, although there's about a 20-day lead time at the moment to receive healthy batteries, Rollins said. As of now, Dell hasn't seen any impact on the number of new PCs ordered with the company, but it's too early to tell if the recall will have an effect on the important back-to-school shopping season, he said.