Dell Seeks To Reinvent Itself Amidst SEC Probe And Other Distractions

Michael Dell and other execs talked up "Dell 2.0" on Tuesday, the company's new strategy for growing its business.
Dell Inc. came to New York today looking to promote its new systems and services, but Chairman Michael Dell and CEO Kevin Rollins found themselves answering just as many questions about the company's financial health and the potential for an executive shake-up.

The questions posed at the marketing event partly stemmed from Dell's announcement Monday that it will delay filing financial reports for its second fiscal quarter. Dell also canceled a meeting scheduled tomorrow with financial analysts.

Dell expects that the delay in filing financial results will prompt Nasdaq to initiate the process of delisting the company from the stock exchange. Michael Dell, however, said the process takes several months and he expects his company will resolve its problems before the delisting would be completed.

The U.S. Securities and Exchange Commission in August 2005 launched a probe, which the company calls an "informal investigation," into the possibility of misstatements in prior period financial reports, including issues relating to accruals, reserves, and other balance sheet items that may affect the company's previously reported financial results. The SEC's request for information has been joined by a similar request from the U.S. Attorney for the Southern District of New York, who has subpoenaed documents related to the company's financial reporting from 2002 until now. Dell says its board of directors' audit committee has launched its own investigation into the matter and that the company is also working with independent auditors to determine if any restatements of prior period financial reports will be necessary.

Michael Dell also fielded questions about Rollins' future as CEO. Dell noted that he and Rollins run the company together. "Kevin Rollins is an outstanding executive," Dell said. "If you want to blame someone, you can blame me, too."

The company, which rose to success with a brutally efficient supply chain, pricing that wrecked its competitors' margins in their attempts to keep up, and a logistical machine that made PCs and servers more customizable than ever before, has stumbled of late. Dell in August reported that second-quarter sales rose 5% to $14.1 billion, compared with the year-earlier quarter. But the results marked the company's second consecutive quarter-to-quarter decline in sales and profits. Dell blamed a year-over-year 51% quarterly profit decline to $502 million on an overly aggressive pricing strategy. The company has also been wrestling with recalls of more than 4 million defective Sony-made lithium-ion batteries that run the risk of bursting into flames when used in Dell's notebook PCs.

With these distractions threatening to detract from its product and services announcements, Dell played its cards close to the vest on Tuesday. While company execs were bullish on its services business, they avoided discussion of specific growth objectives. "I can't imagine that they don't have a specific target," said Gartner senior analyst Ron Silliman, who added that Michael Dell managed to "give a strong endorsement of Rollins without actually saying he was going to stay."

Rollins, Michael Dell, and other company executives on Tuesday did talk about "Dell 2.0," the internal name for the company's strategy to grow product and services revenue. Dell 2.0 "signifies a very exciting time in our company where we are re-examining everything we do," Michael Dell said.

Dell's initial model, now referred to as Dell 1.0, focused on pressuring competitors through cutthroat pricing gained by manufacturing efficiencies. The Dell 2.0 model focuses on building better customer relationships through services, growing revenue by selling into emerging markets, and cutting costs through outsourcing rather than supply-chain efficiencies. Dell plans to add manufacturing plants in Brazil, India, and central Europe.

When it comes to services, "Expectations in this area have changed," Rollins said Tuesday. "We know we've not done this perfectly in the past." He pointed to Dell's investment of several hundred million dollars over the past few years to improve services and the launch of DellConnect customer service as ways it's working to meet the market's needs, adding that DellConnect has about 1 million customers. Dell's services business brings in about $5 billion in annual revenue, a little less than 10% of the company's overall revenue.

AMD processors will also play a pivotal role in the emergence of Dell 2.0. Dell announced it will by the end of the week begin shipping its first PCs running on AMD processors. The Dimension C521 and E521 PCs are available with AMD Sempron, Athlon 64, or AMD Athlon 64 X2 dual-core processor options. Other Dell PCs introduced Tuesday included the E520 and XPS 210, which ship with Intel Pentium D or Core 2 Duo processors, and the OptiPlex 745, which ships with a Core 2 Duo processor.

Dell affirmed its commitment to Blu-ray optical disc storage, saying it plans by the end of the year to begin shipping its first storage products using this technology, which promises to enable storage capacities in the neighborhood of 200 Gbytes. Dell and EMC said they've extended their storage/systems partnership for another five years in order to better serve their 34,000 joint customers and add new businesses to their client roster. EMC CEO Joseph Tucci noted that Dell and EMC's share of the storage market has grown 21% since the companies first partnered in October 2001 and added, "We will do everything in our power to gain another 21 points of share" during the new contract.

Dell finds itself in the unusual position of looking over its shoulder as competitor Hewlett-Packard gains momentum in some areas. Of course, both companies have gained more publicity in recent weeks for reasons that have very little to do with the technology they sell. HP Chairman Patricia Dunn will continue as a director, but will relinquish her role as chairman in January due to a controversial investigation into media leaks that in turn has launched a criminal investigation.

What's most important for Dell and HP customers is whether these distractions will affect the companies' ability to execute on technology development and delivery.

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