Dense-Pac DRAM Warning Could Raise Red Flag
(08/09/00, 7:03 p.m. ET) By Mark Hachman, TechWeb News
A shortage of DRAM chips will take a bite out of memory-module maker Dense-Pac Microsystems' third quarter earnings, the company said Wednesday in a potential warning to the rest of the personal computer industry.
Historically, component shortages have hurt systems makers, especially as the PC industry prepares to ramp up production during the second half of the year. Prices of most mainstream flavors of DRAM, meanwhile, have climbed since early March.
While analysts characterized Dense-Pac (stock: DPAC) as a smaller module maker, they did note that similar reports from other manufacturers would be unsurprising.
"Some of the DRAM manufacturers are sold out clear to the end of the year," said Sherry Garber, a DRAM analyst for Semico Research in Phoenix. "Dense-Pac probably isn't a top-tier player, but I'm not surprised to hear that [report]. There will probably be other announcements. The a-word, allocation, is definitely out there."
Dense-Pac's president and chief executive, Ted Bruce, said in an interview that DRAM companies are now assessing the market, and how to allocate their own components.
"When the DRAM industry receives orders that are five to 10 times its own manufacturing capacity, they're going to pause and reassess the performance of each customer over the course of the year, allocating the supply appropriately," he said from the company's Garden Grove, Calif., headquarters.
According to past practices, that period takes from about six to eight weeks, plus an additional month for the DRAM maker to route components to the customers whose demand is the largest.
Dense-Pac buys DRAM chips from suppliers, then assembles them into the vertically stacked modules for applications that demand a high amount of memory in a small space, such as a server. Bruce said the company is also investing to diversify away from the DRAM market.
The company did not disclose the magnitude by which its earnings would be affected.
"The fundamentals of the company remain strong," Bruce said.
Online chip traders have marked a steady increase in DRAM spot prices, which have typically declined during the last two years. NECX.com, Peabody, Mass., has noted spot price increases in most 128-Mbyte PC100 and PC133 modules since about late March, climbing from a range between $11 and $13 to a range of between $17 and $19.
The American IC Exchange, a sister site that NECX acquired this month, is also reporting similar prices and price increases.
For now, the DRAM allocation may be confined to smaller players who lack the influence or the resources to manage their relationships with DRAM suppliers, observers said.
Ralph Kaplan, vice president and general manager of the memory products division at Smart Modular, Fremont, Calif., itself a division of contract manufacturer Solectron (stock: SLR), said his company was not currently being affected.
"The DRAM market is tightening up substantially," he acknowledged. "But from a standpoint of it having a highly significant impact on us, it's not, at this time."
For its last quarter as a separate company, ending October 31, 1999, Smart recorded net sales of about $250 million. Dense-Pac, by contrast, reported revenue of $11.0 million for its first fiscal quarter ending May 31, 2000.
OEMs including Motorola (stock: MOT) and Gateway (stock: GTW), which complained of tight component supplies in the first half of the year, have indicated that they believe the component supply to be tight, but manageable, during the second half of the year.
Dell Computer (stock: DELL) will likely offer further insight when it reports earnings Thursday afternoon.
Dell lacks the beyond-the-box revenue that Gateway has insulated its own earnings with, leaving it subject to the whims of the hardware market and potentially to a seasonally weak second quarter.
Twenty-five brokers polled by First Call/Thomson Financial expect Dell to report second-quarter earnings of 21 cents per share, 2 cents higher than the 19 cents per share Dell reported for the same period last year.
In May, analyst firm Dataquest, San Jose, Calif., predicted DRAM would be on allocation beginning in mid-2000, and extending throughout 2002.
"We're recommending for them [PC OEMs] to put long-term contracts into place," analyst Jim Handy said at the time. "Short of any global financial problems, we don't expect anything to get in the way of this." |
