The Apple Rule is Working for Dell

When Michael Dell jumped back into hot CEO seat at Austin-based Dell Inc in February, I wondered whether he and the company would benefit from application of what Larry Ribstein has brilliantly coined “the Apple Rule.”

Well, it looks as if the Apple Rule is working pretty darn well for Dell.

The company just announced that it will miss another deadline for filing its quarterly report with the SEC, making it three straight quarters that the computer giant has failed to file its 10-Q. Nor has Dell filed its annual report for 2006.

Under a strict application of its rules, Nasdaq should delist Dell, but it won’t because the company remains an 800 pound gorilla (i.e., a $65 billion market cap).

Meanwhile, despite all this apparent trouble, the market doesn’t seem all that concerned — Dell’s stock price has increased by 23% since Mr. Dell returned as CEO.

Sort of makes you wonder what might have happened had the Apple Rule been around during far more turbulent times in the fall of 2001 to help a large, innovative company and a couple of its visionary leaders who ended up suffering far different fates than Dell?

2 thoughts on “The Apple Rule is Working for Dell

  1. Tom,

    Thanks for the update. Let’s hope the Justice Department doesn’t turn its royal disfavor on Dell. It makes me think of a medieval court. We spend our energy scheming and praying to stay in favor with the king. How can we reclaim civil liberties and rule of law?

    Did you mean $65 billion market cap?

  2. Actually the feds have already hit Dell (the company) hard. The SEC initiated a probe in 2004 I believe that literally forced Dell into mulling over its books and moving deferred revenue around into one bucket and then back to the other bucket etc for years. Consequently I believe Dell lost focus and Kevin Rollins was fired. This is not to say Dell has had a picnic this decade, however, these prosecutorial witch hunts don’t help.

    The fraud according to the feds falls into 2 areas that I am aware of now:

    1. Intel hubs. the “hub model” that Dell pioneered basically means Intel and suppliers stock a “warehouse” at Dells factory floor and Dell does not take possession until a “pull” of inventory occurs which is after dell has the customer’s money. Thats the Dell supply chain, in a nutshell. The problem arises when Intel has expired inventory on the floor at Dell that they need to writeoff or other non-transactional writedowns, which happen in any inventory setting except at Dell this is actually at the customer site. It is obvious to me, as someone familiar with Dell, that Dell personnel are wasting time trying to explain to lawyers at the SEC various nuances of their operating model and how/why these transactions do not fall easily into GAAP definitions.

    Not to mention the fact, that Dell is doing 50 million line items per day (since they flattened the channel to go direct) so that any small “reconciliation” required by the feds is a major IT project that needs to be funded and staffed.

    Anyway the second area the feds are dealing with is non cash expenses related to warranty carveouts. This is ridiculous to say the least. Here is the issue: when dell sells a computer for $5K, they take out say, $800 as warranty expense and put it in a deferred bucket to recognize over time, in case the unit is returned on warranty. this implementation is fine. Then in 2001 or thereabouts, Dell started offering some elaborate extended warranties that customers can buy on top of the standard. With Dell’s line item volume they did not rework the standard warranty component so if you bought a computer + an extended warranty the Dell supply chain basically *overdeferred* a portion of your revenue because you were carved out for standard plus the extended warranty (doublecounting).

    So whats the big deal right? Isn’t overdeferring revenue just a MORE CONSERVATIVE way to do business? Ummm, Noooooooooo…. according to the feds. Overdeferring means there is more opportunity for *cookie jar accounting* (which was the preferred accounting method in the 90s forcing cash flow analysis only for some very legitimate reasons)… and cookie jar accounting is now shareholder red flag number ONE…. therefore Dell is fraudulent here, right?

    Anyway the feds have come up with a litany of “fraud” that happened as a result of Dell overdeferring…. to the tune of about 100 million dollars over a 2 year period (bear in mind Dell does 60 billion $$ per year in revenue so discovering 100mm in deferreds that you think belong here or there over 3 years could probably be accomplished without much digging, at most companies just by virtue of the nature of deferreds).

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