Is Dell having a memory problem?
Analysts say the PC maker will at least meet second-quarter expectations for earnings, but they add that rising memory costs may prevent the company from beating their predictions.
According to First Call, a consensus of analysts expects Dell to report a profit of 24 cents per share for the second quarter.
Like other companies, Dell faced an upswing in memory prices during the quarter, analysts said in reports issued this week. Some analysts assert that the increases may hamper the company's ability to beat the consensus figure, despite an increase in PC unit shipments during the quarter.
Although overall prices for computer components--something Dell calls the "basket"--appear to be continuing on a downward trend, memory prices have begun creeping up again, analysts said.
Several companies, including Sun Microsystems, said memory prices cut into their most recent quarterly profits. Dell may feel the pinch as well, the analysts say, because it maintains only a small amount of inventory. Dell can readily take advantage of falling component prices, because it holds only a few days' worth of parts. The downside of smaller inventories, however, is the difficulty in absorbing short-term upswings in price, analysts said.
"DRAM prices have been trending up over the past two months. In fact, Cisco (Systems) cited rising prices as having a material impact on its results. With only three days of inventory on hand, Dell's direct just-in-time model is similarly vulnerable to price fluctuations," Michelle Gutierrez, an analyst with Soundview Technology, wrote in a report issued Tuesday.
But all is not lost for Dell when memory costs increase. According to industry observers, the company can make a number of potential adjustments, allowing it to respond to rising memory prices and continue to turn a profit, even while holding its PC prices steady.
The company can start by changing its most basic PC configurations. It can reduce its standard memory allotments or adjust other components such as processors or hard drives to compensate for higher memory costs. It can wait longer to increase the processor speed in a given PC, for example. Dell can also end promotions for free memory upgrades and begin charging more for memory upgrades that take customers from 128MB of RAM to 256MB of RAM, for example.
A random check of Dell's Web site on Wednesday revealed that the company is still offering 256MB of RAM as part of its standard configuration for a Dimension 2400 desktop. A move down to 128MB produces a $60 price credit, while a move up to 512MB is $100 extra. The Dimension 2400 is Dell's least expensive desktop for consumers.
Other measures that the company can take include continuing to remove costs from its manufacturing process and driving down warranty and support costs. Dell has been working for some time to find cost savings while working to shift customers to higher-profit products such as servers, storage and services. This effort is part of a broader plan to increase Dell's revenue and profits over the next few years. As Dell increases its market share--something it has done steadily over the past few quarters--it can also spread costs out over a larger number of units.
Finally, Dell can turn to non-PC products to shore up profits. It has, in the last several months, introduced a new line of printers and increased its emphasis on consumer electronics. Dell has also established an in-house services arm and expanded the information technology services it offers. Of these options, Dell executives place the most emphasis on services.
Morgan Stanley, in a report issued this week, estimated that Dell's nonsystem revenue increased from 20 percent to 22 percent of revenue during the quarter, for example.
Although memory prices pose a challenge to short-term profits, analysts are still relatively upbeat about the company's long-term prospects.
"While it is axiomatic to point out that Dell's direct model advantage diminishes in such environments, we think Dell?s direct model has exhibited tremendous ability to adjust?to navigate through such environments without any hiccup. However, rising component prices, per se, are unlikely to be conducive to better margins," Richard Chu, analyst with SG Cowen, wrote in a report Wednesday.