Dell’s Profit Drops by Half
Dell Inc. Chairman Michael Dell vowed Wednesday to “do better” after the world’s biggest personal computer maker posted second-quarter earnings that fell by half amid a bruising price war with rival Hewlett-Packard Co.
The company also disclosed an informal Securities and Exchange Commission investigation of its accounting -- deepening worries over the tech juggernaut’s prospects.
As the Round Rock, Texas-based company slashed prices to spur sales, some customers have complained that Dell also cut back on customer service. And though HP benefited from a recent rebound in retail sales, Dell’s direct-sales model -- traditionally one of its competitive advantages -- hindered its ability to connect with buyers of low-end machines.
“We are clearly disappointed with our financial results,” said Dell Chief Executive Kevin Rollins. “We were overly aggressive in a slowing marketplace, and in a situation where component prices didn’t come down as we thought.”
Dell shares slipped more than 5% to $21.60 in after-hours trading after the earnings announcement. They had risen 7 cents to $22.80 during regular trading. The shares have fallen nearly 24% this year.
The company reported a profit of $502 million, or 22 cents a share, for its fiscal 2007 second quarter, compared with $1 billion, or 41 cents, during the same period last year. Sales rose 5%. The result matched analysts’ expectations, which they had greatly lowered last month after Dell warned that price cuts would hurt margins.
That announcement sent Dell shares down 10%, their biggest decline in six years.
But even as they punished Dell, investors have rewarded HP, which has had its product lines reorganized and staff trimmed under CEO Mark Hurd. HP posted strong profit growth Wednesday, and its shares rose 72 cents, or 2%, to $35.15 on Thursday. HP shares have climbed nearly 23% this year.
Dell executives “haven’t managed the Street expectations that well,” said American Technology Research analyst Shaw Wu. “Everyone’s cheering 5% [revenue] growth at HP and not cheering 5% at Dell. It’s managing perceptions over reality.”
Dell also took a hit this week when it recalled 4.1 million laptop batteries that the company said could catch fire, after at least six in the U.S. apparently did.
“To recall the batteries was the right thing to do,” Rollins said. “We recalled a much larger quantity than the specific incidents would require.”
Dell also said it had increased, to $150 million from $100 million, the amount it planned to spend on customer service improvements this year. The company does not issue financial guidance.
“We’re not satisfied with our performance, and we will do better,” said Dell, the company’s namesake founder, who relinquished the title of CEO to Rollins in 2004.
Dell started selling computers out of his University of Texas dorm room when he was 19 and dropped out of school to concentrate on the business in 1984. Rollins joined the company in 1996. For much of the last decade, the duo presided over sharp growth that made the company a bright spot even as the rest of the tech industry stumbled after the dot-com boom.
The company disclosed Thursday that the SEC, in August 2005, had sent notice of an informal investigation of Dell. In responding to requests for “information relating to revenue recognition and other accounting and financial reporting matters for certain past fiscal years,” Rollins said, the company recently found information that raised “potential issues.”
Dell said that it didn’t believe the issues would materially affect its financial results, but that its audit committee nevertheless launched an independent investigation.
“We’re not trying to keep this a secret from people,” Rollins said, after analysts asked why the company took so long to disclose the year-old investigation. “But we feel that the longer something like this goes on, we should disclose it.”
Analysts said they were not overly concerned but would monitor the situation.
“It raises a flag,” said Chuck Jones, a technology analyst with Atlantic Trust Stein Roe. “But hopefully not a huge flag.”
