Dell Inc. (DELL), already limping after a massive laptop battery recall earlier in the week, had more bad news for investors in its second-quarter earnings report. And it wasn't just the 51 percent decline in net earnings. The Round Rock, Texas, computer maker also revealed that federal regulators with the Securities and Exchange Commission have been investigating its accounting for the past year.
Though Chief Executive Kevin Rollins shrugged off the probe, investors appeared concerned as Dell shares fell $1.25 in after-hours trading Thursday evening. The stock closed up 7 cents to $22.80 in regular trading Thursday on the Nasdaq Stock Market.
In a conference call with reporters, Rollins said Dell received a letter from the SEC in August of 2005 "asking us about a fairly broad level of questions on some revenue recognition."
"We're complying with that informal investigation," Rollins said. "That's about all we know. We don't think there are going to be any issues that are material that we're going to have to worry about."
Chief Financial Officer Jim Schneider added that "this has gone on for about a year without anything being alleged. The facts that we're looking at right now in our opinion would not have a material effect on our financial statement."
Second-quarter profit, meanwhile, fell to $502 million from $1.02 billion in the same period a year ago.
Dell, which slashed its second-quarter outlook last month, reported earnings of 22 cents per share on sales of $14.1 billion, which were up 5 percent from a year ago. The company had originally forecast earnings of 32 cents per share on sales of $14.2 billion.
However, the results met the lowered expectations of analysts polled by Thomson Financial. In the same period a year ago, Dell had earnings of 38 cents per a share on sales of $13.4 billion.
Rollins said several factors were to blame, mainly overly aggressive pricing, a slowing marketplace and component prices that weren't lowering as expected.
On Monday, Dell and the Consumer Product Safety Commission announced the agency's largest-ever electronics recall for lithium-ion batteries on notebooks sold between April 1, 2004, and July 18 of this year.
The problem, which has resulted in smoke and fires but no injuries, appears to be with the battery cell maker Sony Corp (SNE). and hasn't affected others like main Dell rival Hewlett-Packard Co. (HPQ).
In sharp contrast to Dell, Hewlett-Packard Co. on Wednesday posted third-quarter profit that beat expectations while raising its guidance for the upcoming period.
Dell didn't provide an estimate for the recall's cost but said it won't materially affect the company's financial results, suggesting that Sony will bear the brunt of the cost, which analysts have estimated could run $200 million to $400 million.
All these combined factors overshadowed another Dell announcement: that it had expanded a partnership to use Advanced Micro Devices Inc. (AMD) computer chips in some servers and desktop PCs.
In its last earnings report in May, Dell said it would start using AMD processors for specialized computer servers used mainly by large businesses. It ended a long-standing exclusive relationship between the computer maker and Intel, AMD's chief rival.
Dell said it will offer Dimension desktop PCs with AMD Athlon processors next month, and several new server models using AMD Opteron chips by the end of the year.
Intel said it was disappointed by the decision, while Marty Seyer, senior vice president of commercial business for Sunnyvale, Calif.-based AMD, called it a "win for Dell, for the industry, and most importantly for Dell customers."
Industry analyst Michael Gartenberg of JupiterResearch said it would be a mistake to underestimate Dell but conceded it faces some big challenges "at a time when it's hard for many in the market to get excited about a thing like the PC."
In a call with analysts, even company founder Michael Dell acknowledged there were problems.
"We're not satisfied with our performance and we will do better," he said.