Dell blamed its strategy of cutting prices in a slow market for a profit of just US$502 million in the second quarter, 51 per cent below the same period last year. The company also revealed it is being investigated by the US Securities and Exchange Commission (SEC) for issues of revenue recognition and financial reporting in certain periods prior to fiscal year 2006.

Dell had earned $1.02 billion in the second quarter of 2005, leading to earnings per share of $0.41.

This year the company earned only $0.22 per share on revenue of $14.1 billion. Analysts polled by Thomson Financial had expected more for the quarter ending 4 Aug, forecasting $0.25 earnings per share on revenue of 14.0 billion.

AMD deal

Dell also announced it is extending its relationship with Advanced Micro Devices, which was first announced in the first quarter. Dell will launch Dimension desktop computers with AMD processors in September and will introduce a two-socket and multiprocessor server using AMD Opteron processors by the end of the year, Dell said.

Until now, Dell has looked solely to Apple-partner Intel to supply its chips. The company surprised the industry in May by revealing it would begin selling two-processor servers with AMD chips by the end of 2006. Now Dell will extend that product family to include four-processor servers and Dimension desktop PCs.

"Customers want certain price, performance and heating characteristics that aren’t possible with the Intel chips. Dell has always been very customer responsive and sometimes that goes beyond exclusivity," said Rick Doherty, an analyst with The Envisioneering Group.

The move to AMD could have drawbacks, too, analysts warned. Accustomed to Intel, Dell will have to hire or train its engineers to design PCs with the new chip technology, and that could cause a "hiccup" in some product development plans, Doherty said.

Limited effect

Even if Dell’s foray into AMD-powered servers is successful, it would have a limited effect on the company’s earnings. Server sales accounted for just 9 per cent of Dell’s revenue this quarter, compared to 35 per cent for desktops and 26 per cent for laptops.

The remaining revenue came from software (16 per cent), services (10 per cent) and storage (4 per cent).

In the face of these results, Dell executives promised change for the next quarter.

"We are clearly disappointed with our results; we will continue to balance growth and profit without giving up share. We can do better, we know that," said Kevin Rollins, Dell’s chief executive officer.

"In the future we will be more circumspect about pricing. However, we are not backing off into margin harvesting and loss of share."

Company chairman Michael Dell went even further, saying: "We are exploring all sorts of ways to accelerate new releases and cost improvements."

Neither man would add any details about the SEC investigation.

Bad news

The news of Dell’s embrace of AMD would usually attract flocks of happy investors to the company. But Dell has had a very bad quarter.

After missing its earnings target in May, Dell hustled to turn its results around by spending $100 million to improve customer service by hiring new call centre employees, beefing up service packages, and simplifying cost structures.

But in July, Dell offered a rebate to customers in China who had received the wrong processor in their laptops, a cheaper version of Intel’s Core Duo chip than they had been promised.

Then on Wednesday, PC-selling rival Hewlett-Packard (HP) announced strong earnings, casting doubt on Dell’s excuse of a soft market. The results could also push HP to draw even closer to Dell’s number-one position in the market.

And on Monday, Dell announced it would recall 4.1 million laptop batteries after a series of failures led to the lithium ion cells overheating and even catching fire.