Dell Q2 2008 Earnings Report Paints an Incomplete Picture

It's difficult enough to judge how fast or how well a company is growing when you already know the record of its past results are incorrect. But the question investors and shareholders are asking of Dell today is, are the company's once-and-future CEO and its very highly esteemed new CFO patching the massive leaks left behind by their predecessors? Yesterday's release of very preliminary earnings numbers for its previous fiscal quarter - which at least were not seriously delayed this time - answers that question with a firm, definitive maybe.

The type of fraud to which Dell Computer admitted two weeks ago that its former executives participated in, concerns shifting expenses around between departments to make earnings look better than they actually are.

Yesterday's fiscal Q2 2008 report - which may itself need adjusting after all the corrections are made - did not break down operating expenses between administrative and research categories, as previous reports from Dell used to do.

But if new Dell CFO Don Carty was forthcoming in his admissions - and there's no reason now to believe that he wasn't - then any corrections the company may need to make should not affect its revenue figures - the number on the top of its income statements. In that case, Dell did appear to take in 4.8% greater revenue in the previous quarter than it did for the second quarter a year ago, at nearly $14.8 billion.

Here's where the good news continues: Cost of revenue (a.k.a. "cost of goods sold") dropped in the last quarter - the kind of drop that has Michael Dell's personal signature on it. The extent of the drop is marginal - 0.6% - but the fact that it dropped at all when it had been steadily rising, is an indication that Mr. Dell's rescue team is making progress. Cost of revenue is not one of the figures that would be tainted by the category of fraud that Carty said Dell's internal investigation discovered, so we may be able to trust this figure.

From here, Dell's figures show signs of the use of wool, if you will, or at least fuzzy spots where the wool used to be. If the operating expenses portion of the income sheet could be trusted - and Carty has already warned that past figures cannot - they would have risen sharply over the previous year, by 29% to just over $2 billion. If adjustments to come in several years of past reports restate earnings that were never reported, then the good news is that there wouldn't really be a sharp rise here at all.

Reporters who apparently were not awake on August 16th for Don Carty's press conference ran with the story that Dell's net income jumped 46% over the previous quarter. Given the fact that Dell's gross margins have been dangerously low, that its operating expenses appeared high enough when they were actually higher, and that its net income as a percentage of revenue was, even by last year's standards, paltry, this 46% increase number is bound to be wildly inaccurate.

Dell believes it made a profit last quarter of $733 million. Four months ago, it reported it made a profit of $502 million - a figure we now know to be wrong. At the time it was reported last year, half a billion in profit on $14 billion in revenue was generally considered to be not good. So by that same logic, $733 million on revenue of $14.7 billion, and gross margin still hovering under the 20% mark, should be deemed not much better.

But if this is indeed the story of the Dell Computer recovery, then we are only at the beginning, and there are many chapters ahead. All of them will feature Michael Dell and Don Carty prominently, for whatever reason. Whichever way this story turns out, it will be recorded in history...primarily because so much of Dell's past history now has to be rewritten.