Dell extends relationship with AMD, profit drops

Dell blamed its strategy of cutting prices in a slow market for a profit of just US$502 million in the second quarter, 51 percent below the same period last year.

The company also revealed it is being investigated by the U.S. Securities and Exchange Commission (SEC) for issues of revenue recognition and financial reporting in certain periods prior to fiscal year 2006.

Dell had earned US$1.02 billion in the second quarter of 2005, leading to earnings per share of US$0.41.

This year the company earned only US$0.22 per share on revenue of US$14.1 billion. Analysts polled by Thomson Financial had expected more for the quarter ending Aug. 4, forecasting US$0.25 earnings per share on revenue of 14.0 billion.

Dell also announced it is extending its relationship with Advanced Micro Devices, which was first announced in the first quarter. Dell will launch Dimension desktop computers with AMD processors in September and will introduce a two-socket and multiprocessor server using AMD Opteron processors by the end of the year, Dell said.

Until now, Dell has looked solely to Intel to supply its chips. The company surprised the industry in May by revealing it would begin selling two-processor servers with AMD chips by the end of 2006. Now Dell will extend that product family to include four-processor servers and Dimension desktop PCs.

"Customers want certain price, performance and heating characteristics that aren't possible with the Intel chips. Dell has always been very customer-responsive and sometimes that goes beyond exclusivity," said Rick Doherty, an analyst with The Envisioneering Group.

The move to AMD could have drawbacks, too, analysts warned. Accustomed to Intel, Dell will have to hire or train its engineers to design PCs with the new chip technology, and that could cause a "hiccup" in some product development plans, Doherty said.

Even if Dell's foray into AMD-powered servers is successful, it would have a limited effect on the company's earnings. Server sales accounted for just 9 percent of Dell's revenue this quarter, compared to 35 percent for desktops and 26 percent for laptops.

The remaining revenue came from software (16 percent), services (10 percent) and storage (4 percent).

In the face of these results, Dell executives promised change for the next quarter.

"We are clearly disappointed with our results; we will continue to balance growth and profit without giving up share. We can do better, we know that," said Kevin Rollins, Dell's chief executive officer.

"In the future we will be more circumspect about pricing. However, we are not backing off into margin-harvesting and loss of share."

Company chairman Michael Dell went even further, saying, "We are exploring all sorts of ways to accelerate new releases and cost improvements."

Neither man would add any details about the SEC investigation.

The news of Dell's embrace of AMD would usually attract flocks of happy investors to the company. But Dell has had an epically bad quarter.

After missing its earnings target in May, Dell hustled to turn its results around by spending US$100 million to improve customer service by hiring new call center employees, beefing up service packages, and simplifying cost structures.

But in July, Dell offered a rebate to customers in China who had received the wrong processor in their laptops, a cheaper version of Intel's Core Duo chip than they had been promised.

Then on Wednesday, PC-selling rival Hewlett-Packard (HP) announced strong earnings, casting doubt on Dell's excuse of a soft market. The results could also push HP to draw even closer to Dell's number-one position in the market.

And on Monday, Dell announced it would recall 4.1 million laptop batteries after a series of failures led to the lithium ion cells overheating and even catching fire.

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Ben Ames

IDG News Service
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