Dell Says Chip Prices Will Hurt Earnings

ROUND ROCK, Texas —  Dell Computer Corp., the No. 1 direct seller of personal computers, confirmed Monday that a rise in memory chip prices caused by last month’s earthquake in Taiwan will cut into its fiscal third-quarter earnings. The announcement sparked a drop in Dell’s shares.

Taiwan is the source of many PC parts, including dynamic random-access memories, the most common memory chips in PCs. Dell said it will put fewer DRAMs in PCs to try to cope with the price increases, which have been fueled by strong PC demand and the earthquake.

Customers will pay more for Dell PCs if they want machines with more memory, Dell said.

The company’s warning signals a turnabout from its previous comments on the Taiwan earthquake. Chairman Michael Dell told analysts on Oct. 7 that he saw no need for them to change earnings forecasts because of it. Memory prices have risen much more since the meeting, making the warning necessary, Dell executives said Monday.

Dell shares fell $1.50 to $41.31 in regular Nasdaq trading, then tumbled to $37.75 in after-hours trading as the company issued its statement.

Higher memory chip prices will add about $75 to the cost of making a computer, Dell said. Its average machine sells for about $2,200 and its lowest-priced machines goes for about $800.

Dell executives declined to say how much earnings will be hurt by higher DRAM prices. Analysts expected the company to earn 20 cents a share in the quarter ending this month. Dell earned $384 million, or a split-adjusted 14 cents a share, in the year-ago period.