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THE DAY AHEAD: Dell can manage memory storm, other PC makers can&#039t

Dell Computer Corp.'s (Nasdaq: DELL) warning about memory prices is much more than a Dell-specific issue. In fact, Dell investors should breathe easier -- Dell is lean and mean enough to weather the price swings.

Other PC makers won't be as lucky.



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Tech investors have a new enemy -- rising dynamic random access memory (DRAM) prices. Memory prices were on the rise and now the Taiwan earthquake is boosting prices again. PC makers simply can't pass on increased prices to consumers so profits will take a hit. But since Dell's business model is more direct it can digest the price swings quickly. Dell does feel price increases quicker than most because of just-in-time inventory, but it also recovers quicker.

Dell got its component supply despite Taiwan's earthquake, but was still dinged by memory prices.

"Recent higher-than-expected increases in memory pricing are likely to affect third quarter financial results," said Dell.

Dell CFO Tom Meredith said the company was able to handle component shortages despite the Taiwan quake, but couldn't "manage its way around memory prices." Memory prices jumped as high as 100 percent in August in September and then another 25 percent in recent weeks.

Dell, which will report its earnings Nov. 11, said it would cut memory consumption and advertise lower memory configurations. Instead of touting 128 megabytes of computer memory, Dell will advertise systems running 64 or 96 megabytes of memory.

"The company considers the effects of the memory-cost issue to be a short-term matter, but one that would be felt on fiscal third quarter operating margins," said Dell.

The good news? Dell is a direct vendor with about a week's worth of components on hand and Meredith was bullish on the fourth quarter. Dell will take a hit in the third quarter, but its fourth quarter may be OK if memory prices ease. Other PC vendors will take a hit in the pivotal fourth quarter.

If you connected the dots in recent weeks, you could have seen the memory woes coming for PC makers. For starters, Robertson Stephens analyst Dan Niles has been warning investors for weeks about Dell.

In addition, Micron Electronics (Nasdaq: MUEI) delivered an upside surprise courtesy of a vestige DRAM business. Then Micron Technology (NYSE: MU) issued strong results and said it was optimistic about firm DRAM prices.

Apple Computer (Nasdaq: AAPL) put the DRAM prices in a PC context when it lowered configurations for its G4 Power Macs and maintained the original prices because of the increase in memory prices.

Dell said demand remains strong and aside from the memory problems the company is firing on all cylinders. If and when component prices ease, Dell will be among the first to benefit.

For other PC vendors, the memory prices could spell an ugly quarter ahead. The already-wobbly Compaq Computer (NYSE: CPQ) will take a bigger profit hit than Dell because it's simply not as efficient. IBM (NYSE: IBM) has been mum about its PC business, but will address memory prices when it reports earnings Wednesday. Gateway (NYSE: GTW) also won't be immune when it reports its results Thursday, but like Dell should be able to handle the problems.

The PC crowd will hit their third quarter numbers, but DRAM prices could put a damper on the fourth quarter profit outlook.

DRAM prices aren't the only worries for PC makers. Graphic chips, liquid crystal displays and other key components are in short supply. Dell inked a deal with Samsung for its parts, but Apple indicated shortages would persist for products like the iBook. The next wave of PC earnings will add more details to the component picture.

Nortel goes e-business

Wonder why those e-business software companies have received such high valuations? Look no farther than Nortel Networks (NYSE: NT) acquisition of Clarify (Nasdaq: CLFY) for $2.1 billion.

Nortel apparently got e-business fever and wants to handle front-office software to offer customers "solutions" for marketing, billing and customer service.

Not only are e-business software companies in a booming business, they apparently make pretty good takeover targets too.