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Dell Delays Earnings as SEC Formalizes Inquiry

By Keith Regan
Nov 16, 2006 11:38 AM PT

Dell shares fell Thursday after the computer maker said it would delay its quarterly earnings report and acknowledged that the Securities and Exchange Commission (SEC) began a formal inquiry into the company's past accounting practices.

Dell Delays Earnings as SEC Formalizes Inquiry

The announcement came at the last minute, as Dell was set to report earnings after the stock markets closed on Thursday. It is certain to slow down efforts to turn around the company's performance after a weak stretch of several quarters. The company said it would post its fiscal third quarter results by the end of November.

"The move from the originally scheduled date of Nov. 16 reflects the level of complexity the company is facing in the preparation of its preliminary results," Dell said in a statement.

The complexity stems from ongoing inquiries by the SEC and the Dell's internal audit committee into "certain accounting and financial reporting matters," as well as the fact that the company has yet to formally file its second quarter report with the SEC.

Dell said the delay was not a result of the SEC's decision to enter a "formal order of investigation" into its books, a step up from what had been an informal inquiry. "Dell continues to cooperate with the SEC, and is committed to resolving all issues in connection with the investigation and regaining compliance with all SEC filing requirements as soon as possible," the company said.

Dell shares lost nearly 5 percent in morning trading Thursday, falling to US$24.58.

Year to Forget

The delay undermined some recent good news for the company, including some stock upgrades based on expectations of a healthy third-quarter performance due to strength in the PC market.

It has otherwise been a rough few months for the Round Rock, Texas-based PC maker, which set the computer industry on its ear with a streamlined direct sales model that helped vault it to top market share status.

Since August, however, Dell has revealed the accounting inquiries, became the first of many PC makers to recall laptop batteries made by Sony, and then lost its market share title to rival Hewlett-Packard.

Dell has tried to change its fortunes, announcing a sweeping plan to do away with most rebates and to offer simpler discounts on PCs. It also promised to invest heavily to improve its customer service, a common source of complaints about the company, a move exacerbated by its decision to outsource much of that function to India and other overseas locations.

It was anticipated that Dell would post a strong quarter due to discounts and other factors, and the company had two analyst firms upgrade its stock this week ahead of the report.

Instead, Dell said only that it would release results by the end of November and would do so only through a press release, suggesting that it will not hold the usual analyst call to provide color and field questions about the quarter.

Reading Tea Leaves

That lack of insight into how things are going is what has many analysts concerned about Dell's prospects.

"The SEC probe is "enough of a 'last straw' to override any but the most extreme improvements in Dell's fundamental business for the near-term," said Laura Conigliaro, an analyst at Goldman Sachs. "Of more concern will be the very real possibility now that this could precipitate management changes and add more uncertainty to a company that has already decided to provide less detail and no targets."

"We caution investors that uncertainty surrounding Dell's accounting is increasing, which implies the risk to our forecasts is rising," Richard Farmer, a Merrill Lynch analyst, told his clients.

Some of Dell's operational problems were a result of a more competitive PC industry, explained Gartner analyst Charles Smulders, with Chinese PC makers grabbing market share and other rivals improving their supply chains to the point where they can better compete with Dell on price.

"Dell was going to have to take steps to be more competitive this year anyway, because the industry is changing," Smulders told the E-Commerce Times. Dell has also suffered because of slower sales in the U.S. and because of exposure to more cyclical parts of the enterprise market, he added.

While the battery recall problems appeared to be out of Dell's control, HP has been one of relatively few PC makers to manage to avoid becoming involved, even though some of its notebooks use Sony batteries. That, and the distraction factor from the accounting issues, has led to speculation that Dell is in need of an executive shake-up.

In September, Dell founder Michael Dell said he bore some of the responsibility for the firm's problems, and said he would stand by his hand-picked successor in the CEO role, Kevin Rollins. "If you want someone to blame, you can blame me, too," he said at the time, when Dell was rolling out a new product strategy that focused on consumer products as well as PCs.

Meanwhile, HP -- which remains on track to report earnings late Thursday -- seems to have weathered its own distractions, most notably the boardroom scandal that led to the resignation of several top executives and three board members, including Chairwoman Patricia Dunn, who on Wednesday pleaded not guilty to felony fraud charges stemming from an investigation into board-level leaks to the media.


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