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Mon, Aug 21, 2006 - Page 10 News List

Analysis: Dell endures a nightmare week

BAD TO WORSE A major battery recall was just one of the pieces of bad news that dogged the firm, causing some to question the company's direction

AFP , NEW YORK

From its laptop batteries catching fire to seeing its earnings halve, topped off by a US Securities and Exchange Commission (SEC) inquiry, Dell had a nightmare week.

The world's largest computer maker said on Thursday that its second-quarter net profit tumbled 51 percent from the same period last year to US$502 million.

Dell had warned investors that its profit growth was likely to have slowed during the quarter as it vies to beat off aggressive price competition from the likes of Hewlett-Packard and other rivals.

Dell's share price is down 26 percent since the start of the year, while Hewlett-Packard's is up 23 percent.

Dell recently announced it would now use microprocessors from Advanced Micro Devices (AMD) for the first time in a bid to fend off such competition, ending an exclusive partnership with Intel.

The week got worse when Dell said it had started an internal probe into some of its accounting methods, after revealing that the SEC was investigating its accounting and reporting practices.

Rollins said that Dell had received a letter from the SEC last August "asking us about a fairly broad level of questions on some revenue recognition."

The company was loath to detail more about the probe and said it had been under no obligation to reveal its existence earlier.

That was not welcomed on Wall Street, which was also aghast at last Monday's news that Dell was launching the biggest electronics recall in US history after Sony-made batteries in its laptops displayed a habit of catching on fire.

A Web site set up by Dell to handle the recall of 4.1 million laptops was inundated with over 1 million hits last Tuesday alone, according to Internet monitoring firm ComScore.

Reports said customers were in for a lengthy wait for a new battery cell from Dell.

The Consumer Electronics Association said Dell's "quick action" on the battery issue had probably limited the impact. But Carmi Levy, senior analyst at research group Info-Tech, said it was a wake-up call to computer makers.

"The propensity for these devices to explode has been known for some time, and regulatory bodies and manufacturers need to turn up the heat on solving these issues," he said.

Dell, however, played down the recall's impact on its earnings. Sony will have to foot a fair share of the total costs, estimated at US$200 million to US$400 million, according to analysts.

For Dell, it all contrasted unfavorably with the week enjoyed by Hewlett-Packard, which reported forecast-beating net earnings of US$1.375 billion in its fiscal third quarter.

"We gained share without sacrificing margins and continue to execute well against our long-term plan," HP chief executive Mark Hurd said.

In contrast, some on Wall Street are questioning the direction in which Dell is headed.

Many analysts, for instance, had clamored for the firm to diversify away from Intel chips but amid the bad news, even the AMD deal is now being questioned.

"In processors, Dell is paying a near-term price for its decision to end its exclusive relationship with Intel," Citigroup analyst Richard Gardner said.

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