Ed Moltzen

The Chart

November 22, 2006

Going into Dell's third-quarter earnings report, there were five key questions that were lingering about the company's operations and position amid a series of investigations into its finances. After a delay of about a half-week in reporting, Dell answered some of those questions and left some unanswered:

1. Does Dell provide an update into the myriad investigations going on into its accounting and financial reporting? Yes, Dell provided an update and it was an ominous one. Not only has the U.S. Securities and Exchange Commission intensified its investigation from "informal" to "formal" (meaning SEC investigators now have a free hand to dig through years of financial records and emails, and interview Dell employees under oath), but the investigation has revealed some potentially significant weaknesses in Dell's leadership. Specifically, in the press release on its earnings, Dell wrote the end result of all the probes could lead to "... management's conclusion that there is a material weakness in the company's internal controls over financial reporting, and that disclosure controls and procedures are not effective."

2. What's Dell's cash flow from operations? Dell didn't report cash flow from operations. However, the company did report that its cash on hand increased from $10.8 billion last quarter to $11.6 billion -- or a gain of about $800 million. If cash flow from operations approximates that increase in cash on hand, it would still be a precipitous drop from the $1.1 billion in cash flow from operations that Dell reported in the year-ago quarter. The market won't know for sure until Dell reports official earnings and files its 10-Q with the SEC. Nobody can say when Dell will do that.

3. What is the contribution of Dell Financial Services to Dell's top line? Dell didn't answer this question. As of some of its more recent financial reports, Dell Financial Services had contributed about 10 percent of Dell's overall quarterly revenue and its contribution to Dell's top line was on the increase.

4. Do Dell's earnings per share suffer because the company has suspended its long-running share repurchase program? Answer: Not all that much. In the five weeks in the quarter before Dell suspended its share buyback program, the company managed to buy back and take 15 million of its shares off the market. That's lower than the range of 23 million shares to 47 million shares it had been taking off the market each quarter, but the share buyback suspension didn't appear to be much of a factor during the quarter.

5. Does Dell report full earnings for the quarter, or "abbreviated earnings" that may be subject to restatement? Dell not only reported abbreviated earnings, it provided only a press release with most - but not all - of the detail it normally reveals after each quarter. Not only that, top executives including Chairman Michael Dell, CEO Kevin Rollins and CFO Jim Schneider cancelled the usual conference call with financial analysts after their earnings announcement. The company's press releases lacked any attribution or quotations from any living person, let alone a top executive of the company. Dell's top leaders have simply ceased commenting publicly, for now, on any aspect of operations. That's noteworthy for a company whose leaders have a long track record of publicly praising its direct model, operational strength and results in one public forum after another.