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Dell 3Q to feel pinch
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October 18, 1999: 7:49 p.m. ET
Increase in memory chip prices after Taiwan quake to tarnish earnings
By Staff Writer John Moore
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NEW YORK (CNNfn) - Dell Computer Corp. warned Monday that an unexpected increase in the price of computer memory chips is likely to affect its third-quarter financial results.
The announcement could spell more bad news for technology stocks, which have been in a tailspin amid inflation and earnings worries.
Dell (DELL) officials told analysts recently that the company's business should remain strong in the wake of last month's earthquake in Taiwan, which knocked the region's chip foundries out of commission for about two weeks.
In a statement released after markets closed Monday, however, the company said random-access memory chip prices had increased as much as 25 percent amid a shortage of components.
In a brief statement, Dell said the impact "would be felt on third-quarter operating margins." A Dell spokesman declined to provide specific profit or revenue forecasts.
Analysts polled by First Call had expected Dell to earn 20 cents a share in the third quarter.
"We are managing the memory situation carefully and are working to offset the cost increases with efficiencies in other parts of our business," said Thomas J. Meredith, Dell's chief financial officer.
Meredith added that Dell will offer PCs with less memory and advertise memory upgrades to offset the effects of the price increase.
Dell shares fell 1-1/2 to close at 41-5/16 prior to the warning. Its shares plunged to 37-5/8 in after-hours trade.
"Dell is going to open down significantly tomorrow, more than 10 percent," said David Wu, an analyst at ABN AMRO.
Stock to face pressure
The prospect of weaker-than-expected earnings from Dell could send technology stocks reeling again when markets open Tuesday. Disappointing results from Intel Corp. (INTC) last week sparked a sell-off in technology shares.
But Hugh Johnson, chief investment officer at First Albany, said the damage should be confined to the PC sector.
"Dell will be down, others in the sector like Hewlett-Packard (HWP) and IBM (IBM) will be down, but you might see a different result in software and semiconductors," Johnson told CNNfn. "I think the market will separate Dell's news" from the rest of the tech sector.
Dell is the latest technology firm to feel the effects of the Taiwan earthquake. Last week, Compaq Computer Corp. (CPQ) warned retailers that it would be unable to fill all orders for its personal computers heading into the holiday shopping season.
BancBoston Robertson Stephens analyst Dan Niles recently downgraded his rating on Dell's stock to "long-term attractive" from "buy," anticipating slower-than-expected growth because of the Taiwan earthquake.
But a Dell spokesman said the company does not anticipate a sales shortfall due to component shortages out of Taiwan.
"Availability isn't an issue. If anything, the component availability is getting better," said T.R. Reid, a Dell spokesman. "This specifically relates to cost increases of 25 percent from already high levels. We're bullish about demand heading into the quarter."
Hewlett-Packard said earlier this month its fourth-quarter sales growth would come in at the low end of the forecast range because of shipment delays in the wake of the Taiwan earthquake.
Taiwan also took its toll on Advanced Micro Devices Inc. (AMD), which said because of the quake, it had produced 350,000 motherboards for its high-end Athlon chips, about 150,000 less than it normally expects during first-quarter production of a new product.
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