Seeking Alpha
Profile| ()  

Rob Zenilman submits: In today's Wall Street Journal, Christopher Lawton and Don Clark's article, Dell Posts Profit Slide, Faces Accounting Issues describes how Dell (DELL) has just hit into a proverbial triple play by:

  • Recently recalling over 4 million notebook computer batteries due to a potential fire hazard.
  • Reporting Q2 profits 51% less than the same period last year.
  • Revealing that they have identified accounting issues that "raises potential issues".

Yesterday, Dell reported Q2 net income of $502mm ($0.22/share), down from $1.02b ($0.41/share) reported for the same period last year. This is despite a 5% increase in revenue ($14.09b vs. $13.43b). While Dell hopes that expanding their relationship with AMD (AMD) will help it be more competitive in the marketplace (primarily with HP (HPQ)), Dell has been spending heavily on upgrading their customer service, an increasingly sore spot with customers.

Without identifying what accounting issues were uncovered for the fiscal year ending February 2, CEO Kevin Rollins said "We don't think it's material," and the company does not expect any significant impact on previously released financials.

Comment: While Dell competes with HP in the PC market, HP enjoys a broader range of hardware, with its printer and mid-range computer systems, including the Stratus line of fault tolerant computers. HP is also aggressively diversifying into software, with its $4.5b purchase of Mercury Interactive. Dell is also facing increasing competition from Apple (AAPL).

To its credit, Dell has recently simplified its pricing, but it seems to be scrambling, with its purchase of Alienware, its expanding relationship with AMD and its customer service debacle. This is a Darwinian industry - remember when the top brands included IBM (IBM), Compaq and Gateway (GTW)? It remains to be seen whether or not Dell's problems are permanent. See: Second Quarter earnings conference call transcript

Source: Dell Hits Into a Triple Play