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Taiwan quake to hurt Dell earnings

The largest maker of PCs says third-quarter earnings will suffer as a result of a rise in chip prices caused by the Taiwan earthquake.

More aftershocks from the Taiwanese earthquake rumbled today when Dell Computer stated that its financial results for the third quarter will be hurt by a rise in memory prices.

After the market closed, the Round Rock, Texas-based PC manufacturer issued a press release saying the recent rise in memory prices "would be felt on fiscal third-quarter operating margins." Typically, tighter margins lead to lower earnings.

The company also stated it would combat some of the rise in prices by reducing the amount of memory it puts in its PCs. Dell reports its financial results for its third quarter on November 11.

Dell warned financial analysts on October 7 that component prices had been impacted by the quake. Today, however, the company said it learned after the meeting that memory prices had increased more sharply than expected--by as much as 25 percent.

Before the announcement, analysts expected Dell to earn 20 cents a share for the third quarter, or about $510 million, according to a poll by First Call. "It is going to bring them down by a couple of pennies," said Daniel Kunstler, an analyst with JP Morgan Securities.

Dell has approximately 2.55 billion outstanding shares. A decline of a cent in earnings per share represents a decline of around $25.5 million in actual dollars.

Dell is the latest company to lower expectations for the third quarter because of the September 21 quake, which killed thousands. The quake severely disrupted manufacturing at the Hsinchu industrial park south of Taipei, and in the process created shortages of graphics chips, memory chips, and other components necessary for building personal computers and laptops.

As a result, the slide in PC prices is expected to stop, or even reverse, because of a rise in component prices. But PC companies won't benefit from the hike because they will not be able to manufacture enough machines. Hewlett-Packard earlier said that revenue will not be as strong as anticipated because of the rise in component prices, while AMD stated that it could be hurt because of "motherboard" shortages.

"We are managing the memory situation carefully and are working to offset the cost increases with efficiencies in other parts of our business," said Tom Meredith, Dell's chief financial officer, in a prepared statement. "We are also taking actions to reduce overall memory consumption, including advertising system configurations with lower amounts of base memory."

The overall effect on the expectations for Dell's financial quarter are unclear. Dell's stock closed today at 41.31, down 1.50.

Earlier this month, some analysts predicted that Dell would be hurt by the quake because of the company's just-in-time inventory strategy. Dell carries smaller component inventories than most other manufacturers as a way to reduce costs.

"Since Dell is so proud of its lean inventory, it's the least likely to have buffer stock," said Roger Kay, an analyst with International Data Corporation. "This is the point where Dell's strength becomes its weakness in certain circumstances, and these are one of those circumstances."

At the time, Dan Niles, an analyst with BancBoston Robertson Stephens downgraded Dell to a "long-term attractive" rating from "buy" because of component supply problems. "We believe supply disruptions in DRAMs [dynamic random access memory], motherboards, graphics chips, TFT [thin-film transistor] displays, and processor chips are causing industrywide PC production problems," he said.

Following today's announcement, Niles said that he is considering dropping his estimate from 19 to 18 cents a share.

Although PC makers are feeling a pinch from the quake now, it won't likely last, said Kunstler. Memory supplies, which have been abundant for three years because of excess manufacturing capacity, will likely climb again. "We're not going to see a tight DRAM market forever," he said.