Dark Days at Dell

Accounting problems: Dell has not filed its earnings report for the quarter that ended in July, and last week delayed last quarter's report. Dell says it will announce preliminary results Tuesday without a conference call to discuss them. (See Dell Delays Earnings.)

Regulatory problems: The Securities and Exchange Commission (SEC) is formally investigating Dell's revenue recognition practices. Nasdaq notified Dell Sept. 15 that it is out of compliance and can face de-listing because it had not yet filed its most recent earnings.

Dell has requested a hearing, and several Wall Street analysts say it would be shocking if a company of its size were de-listed, even with the latest delay. (See Dell Wants Hearing.) "It would have to have done something be real bad," one says, "but never say 'never.' "

Another analyst says Dell may be saddled with an "E" after its ticker symbol the way Brocade was for five months in 2005 when it was late filing earnings, but a de-listing is unlikely. (See Nasdaq Drops Brocade's 'E' .)"I don't think Dell is in imminent danger of being de-listed," the analyst says. "Brocade was trading as BRCDE for a long time, but it never got de-listed. A big company like Dell, it would be a long time before it got de-listed."

Lawsuits: Seattle law firm Keller Rohrback LLP has filed a complaint against Dell alleging the company breached its duties of its 401k plan by falling to properly manage the plan and failing to provide its participants with accurate information to make informed decisions. The law firm last week said it would file an amended complaint in January after Dell revealed the formal SEC investigation.

Throw in recent industry numbers showing Hewlett-Packard has passed it as the top PC maker after several quarters of decline for Dell, and these are bleak times in Austin. There was enough of an uproar in September that chairman Michael Dell had to give CEO Kevin Rollins a vote of confidence at Dell's Technology Day, and things have only grown worse since. (See Five More Years.)

While Dell has given no indication of the root of its accounting problems, analyst Shaw Wu of American Technology Research wrote in a research note that a possible cause is the way Dell accounted for marketing rebates from Intel and product warranties.

Others say the fact that nobody can narrow down the cause of the problem makes it worse. At least we knew why HP honchos were hauled in front of Congress, and what the charges were against HP and Brocade execs. (See Sprint Pushes Dualmode Talk Button and Reyes Charged With Fraud.) With Dell, everything is guesswork.

"Visibility into Dell's operations and results have been poor lately," David Wong of A.G. Edwards wrote in a note to clients. "The company first postponed its analysts' day scheduled for the first half of the year, then cancelled the event all together. With this latest development, the release of October earnings will be delayed, there will be no earnings call, and we think it is possible that the first quarter filing delinquency might result in Dell being able to only partially release earnings details."Another analyst says it all adds up to a series of management errors.

"We see this announcement as potentially part of a larger picture involving Dell internal controls," wrote Goldman Sachs analyst Laura Conigliaro in a client note. Conigliaro pointed to these ineffective controls as "unnecessarily aggressive pricing, badly chosen go-to-market strategies, and poor customer service-related decisions" over the past few quarters.

What Dell has said about earnings this year hasn't been good. Its revenue growth went from 13 percent year-over-year in the quarter that ended in January, to 6 percent in April and 5 percent in July. Its operating margins over that time fell from 8.2 percent in January to 4.3 percent in July.

If there is a bright spot in Dell-land these days, it's the company's storage performance. Buoyed by a partnership with EMC, Dell's storage revenue grew 36 percent year-over-year in the quarter that ended in July. That's not as high as the 41 percent growth in January, but it's still a substantial uptick. And the storage numbers were apparenly good last quarter. Dell hasn't been able to reveal them, but EMC says Dell contributed 15 percent of its total revenue -- up from 14.3 percent the previous quarter.

Maybe Dell can confirm those numbers soon. "Things are pretty screwed up for them, both on the SEC investigation and with revenue traction," says one of the analysts who called de-listing unlikely. "It appears they may be getting better with revenue, but there is no way to confirm this until they report.Dave Raffo, News Editor, Byte and Switch

A.G. Edwards

American Technology Research

Brocade Communications Systems Inc. (Nasdaq: BRCD)

Dell Inc. (Nasdaq: DELL)

EMC Corp. (NYSE: EMC)

Goldman Sachs & Co.

Hewlett-Packard Co.