Dell Q3 upset by aftershocks

The direct computer manufacturer Monday said a recent 25-percent spike in prices for computer memory chip components it uses to build personal computers were likely to hurt results for the company's third-quarter ending later this month.

After Dell's (Nasdaq:DELL) warning, announced after the close of trading, investors reacted swiftly by walloping the company's shares, which dropped more than 3 points.

Dell thus became the latest major U.S. computer maker to feel the effects of the quake which devastated industrial production in Taiwan. Compaq Computer cautioned earlier this month that it expects spot delays in some consumer personal computer lines.

However, the company rejected suggestions that the Taiwan quake was fully to blame for any impact upon earnings. "Is it a contributing factor? Absolutely," said company spokesman, T.R. Reid. "But memory prices have been going up for a long time...The easy way out would have been to blame everything on the earthquake." Two weeks ago, company chairman Michael Dell told analysts his company's financial performance would not be impacted by the natural disaster.

On Monday, Thomas Meredith, the company's chief financial officer, said in a statement that Dell's third-quarter operating margins would be hurt but that the effects of the industry-wide memory-cost increase would be a short-term matter. The company did not comment on how or whether the pressure on profit margins might translate into lower earnings per share.

The Round Rock, Texas-based company, the world's second largest personal computer maker behind Compaq Computer Corp. (NYSE:CPQ), stressed that demand for its products is "extremely strong and continues to outpace the computer-systems industry, and that overall availability of components has improved."

Where the quake hurt
During its fall analyst meeting on Oct. 7, Dell had told analysts and reporters that component suppliers affected by last month's earthquake in Taiwan had been quite responsive to Dell's high-volume production requirements, and that the supply situation in that country was progressing well.

But Dell executives cautioned that the pricing and availability for other components was more difficult, particularly for computer memory and liquid-crystal displays used in notebook computers and flat-panel screens.

The company said it had learned only recently that the latest memory pricing had increased more sharply than expected, to as much as 25 percent higher than the previous price.

In his statement, Meredith said Dell was taking steps to reduce overall memory consumption, "including advertising system configurations with lower amounts of base memory."

Dell, the leading direct distributor of personal computers, seeks to use tight, "just-in-time" component procurement in order to wring efficencies out of its supply chain and pass along what are typically falling electronic component costs in the form of lower PC prices to its customers.

However, in this instance, the strategy appeared to have exposed the company to a sudden spike upward in memory prices.

Dell's third-quarter earnings will be released on Nov. 11. Through the first half of the current year company revenue grew more than 40 percent, double the industry rate.

Meredith said current Dell customer demand is consistent with the growth pattern of the year's first half, and reiterated that Dell's overall business and prospects for robust growth remain "quite strong."

Reuters contributed to this report.