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Dell feeling effects of higher memory costs

Dell and other PC makers are still dealing with rising memory costs and will feel the Taiwan earthquake's toll through the end of the year, analysts say.

Although an earthquake ripped through Taiwan nearly a month ago, computer makers will feel the effect at least through the end of the year, analysts said today.

The latest aftershock from the deadly September 21 quake occurred yesterday when Dell Computer lowered earnings expectations for its third fiscal quarter because of another surge in memory prices. The hike has added nearly $75 to the manufacturing cost of roughly one-third of all Dell computers, the company said. In addition, the Dell said it would start packing its PCs with less memory in an effort to cut costs.

Component supplies and prices are already edging back to normal, industry observers have said, but the current situation will likely dent sales and profits at major PC companies through the end of the year. Further, some cost-cutting moves could come back to haunt manufacturers as the public has become accustomed to luxurious amounts of memory.

"Putting less memory on every box could turn out to backfire on them," said Dan Niles, an analyst at BancBoston Robertson Stephens, who indicated he would likely lower already lowered estimates as a result of yesterday's announcement. "Given that we are going to Windows 2000, if you are putting 64MB in the box, there are a lot of IT managers who are going to want providers who are providing 128MB."

The surge in memory prices, which doubled from July to early October and rose again last week, has added approximately $70 to $75 to Dell's manufacturing cost per computer, in approximately 30 to 35 percent of Dell's computers, chief financial officer Tom Meredith told analysts yesterday. Dell warned analysts about component shortages on October 7 but said that memory prices rose again since then.

As a result, Dell's earnings for the quarter will likely come in at around 17 to 18 cents per share, or $435 million to $459 million, according to estimates released today from Salomon Smith Barney, Morgan Stanley Dean Witter, and others. Earlier analysts expected earnings of around 20 cents a share, or $510 million, on revenues of approximately $6.5 billion. Many analysts also dropped estimates for the subsequent quarter from 22 cents per share to 21 cents per share.

While component costs are often passed to customers, Dell can't shuffle all the expense that way because roughly 38 percent of its business is transactional, or sold at prices agreed to in advance, according to Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray.

Kumar, among others, however, remains bullish on Dell. Other manufacturers such as Hewlett-Packard and Compaq have already said the shortages will hurt sales.

"Dell indicated that it believes that DRAM vendors may have gotten carried away and that the current pricing environment is probably not sustainable. However, this is a tough bet for us to make," wrote Gillian Munson, of Morgan Stanley, today. "Our team believes that the DRAM environment is not going to get significantly worse. We are not planning on it getting much better fast."

Dell also got hurt by the delay of chipsets that would have allowed the company to start selling more expensive computers with Rambus-style memory, which is largely made outside of Taiwan, Munson added.

Dell will report on its most recent quarter on November 11.