In the wake of the dot-com crash, Dell was the darling of the media and investment worlds. While other companies were struggling to survive, good old Dell was a paragon of success. Unlike its competitors, Dell used aggressive supply-chain management to deliver value to its investors.

As the company met or exceeded its earnings per-share targets quarter after quarter, all kinds of stories sprang up about what made the company so special. Usually it was their abnormally amazing supply-chain management.

"Still relentlessly striving to get better faster, Dell intends to slash $2 billion in costs. CFO Jim Schneider has indicated that much of the cuts will come from manufacturing operations and the supply chain," Fast Company wrote in 2004. "That will put even more pressure on Dell's component makers. Michael Dell is fond of saying that in the high-tech business, you either grow or die. It all just happens much, much faster when you're living in Dell time."

But now we know, courtesy of an SEC investigation, that the Dell secret sauce was payments from Intel that kept rival AMD's chips out of Dell boxes.

The Economist reports on the whole sordid affair, which ended with the SEC extracting a $100 million fine from the Texas firm, though Dell neither admitted nor denied guilt in the settlement (emphasis added):

The penalty seems rather light given the gravity of the SEC's accusations. According to the commission, Dell would have missed analysts' earnings expectations in every quarter between 2002 and 2006 were it not for accounting shenanigans. This involved a deal with Intel, a big microchip-maker, under which Dell agreed to use Intel's central processing unit chips exclusively in its computers in return for a series of undisclosed payments, locking out Advanced Micro Devices, a big rival. (Intel is expected to settle a long-running anti-trust case that has highlighted these payments in the next couple of weeks.) The SEC's complaint said Dell had maintained "cookie-jar reserves" using Intel's money that it could dip into to cover any shortfalls in its operating results.

The SEC says that the company should have disclosed to investors that it was drawing on these reserves, but did not. And it claims that, at their peak, the exclusivity payments from Intel represented 76% of Dell's quarterly operating income, which is a breathtaking figure. Small wonder, then, that Dell found itself in a pickle when its quarterly earnings fell sharply in 2007 after it ended the arrangement with Intel. The SEC alleges that Dell attributed the drop to an aggressive product-pricing strategy and higher than expected component prices, when the real reason was that the payments from Intel had dried up.

It's amazing to read the investor conference call transcript from the first quarter of 2007, the period in which three-quarters of the company's operating income came from the Intel payments, according to the SEC.

Intel is hardly mentioned, meriting just two short comments. Even an analyst question about Dell's then-new deal with AMD, which signaled the end of the payments, didn't generate a peep about the possible impact of the Intel arrangement. Yet insiders at the company must have known that they were in trouble, if the SEC allegations are correct.

It's yet another example to stack on top of the maxim: when it seems too good to be true, it probably is. Even in "Dell Time."

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