Dell, HP Results Suggest Commercial PC Comeback

Dell and HP quarterly results suggest business spending is back, even as consumer PC spending remains anemic. Dell and HP are rolling out new consumer mobile products.

Hewlett-Packard and Dell both offered quarterly results Aug 19, and their numbers offered some of the clearest signs that the business arena is in the midst of an IT tech refresh. At the same time, however, sales of consumer PCs seem to be weakening, in a possible signifier of the anemic economic recovery.

Overall, HP posted strong results for the third fiscal quarter of 2010, with net revenues of $30.7 billion. The company's Services, Enterprise Storage and Servers, HP Software, Personal Systems Group, and Imaging and Printing Group all experienced a year-over-year increase in revenue.

"We believe we are in the midst of a broad recovery in enterprise infrastructure spending, which HP should benefit from," Dinesh Moorjani, an analyst with Gleacher & Company, wrote in an Aug. 20 research note to investors. "The company is also investing in margin-accretive areas such as networking and services, and increasing its sales coverage, and can still outgrow the IT market despite its size."

Even as HP enjoyed increased enterprise sales, however, executives on the Aug. 20 earnings call pointed out some lack of demand in the consumer notebook market.

Likewise, Dell experienced strong demand from commercial customers, which helped drive quarterly revenues of $15.5 billion. However, the company's consumer business remained flat at $2.9 billion.

"We're confident we can improve our customer business operating margins to the 2 percent level in the near term," Dell CFO Brian Gladden said during the company's Aug. 19 earnings call. "We've been repositioning the business, which involves targeting our efforts to the right geographies, products and customer subsegments. We have a solid product portfolio lining up for the holidays, and we're making progress in simplifying our product portfolio."

In the consumer segment, both Dell and HP find themselves battling companies such as Acer, which have gained market share through lower-priced devices. Even so, commercial sales represent the substantial revenue driver for both.

"Commentary regarding commercial demand was positive and 81 percent of Dell's revenue comes from commercial customers," wrote Brian Alexander, an analyst for Raymond James, in a co-authored Aug. 20 research note on Dell. "The commercial spending environment remains robust, particularly in the Large Enterprise space (30 percent of revenue)."

Ultimately, both companies are benefiting from a pickup in business spending, even as consumer PC sales remain anemic.

"The commercial PC refresh is in full effect with commercial PC revenue and ASP growth accelerating relative to the prior quarter," Alexander wrote in another Aug. 20 note, this one about HP. "Management confirmed that consumer PC demand is waning and channel inventory is approximately two days above target."

During the global recession, analysts generally predicted that companies would start spending on IT infrastructure once the economy showed improvement—and that, after quarters or even years of waiting, the scope of that tech refresh would be enormous.

Even as the global economy began an ostensible recovery, however, business spending seemed slow to follow. Microsoft executives noted earlier in 2010 that sales of Windows 7, which was meant to coax companies into upgrading both their hardware and software portfolios, was selling well among consumers, but that businesses had yet to engage in the same level of purchasing.

But it seems that at least a portion of businesses are starting to come around.

"TBR believes businesses worldwide are cautiously refreshing their IT hardware, driven by the necessity of replacing hardware kept in service through the recession," Ezra Gottheil, an analyst with Technology Business Research, wrote in an Aug. 20 research note. "The new equipment is advanced over the devices being replaced, and in many cases increased efficiency drives a rapid return on investment."

Those manufacturers concentrating on the consumer market, though, may have cause for worry; and companies such as HP, with substantial consumer segments, may need a new strategy to boost their products' uptake.

"TBR believes the growth in the consumer PC market slowed as a result of loss of confidence, but that HP's slowdown was greater than that in the overall consumer market," Gottheil added. "To maintain margins in this commodity market, HP is choosing not to compete in a PC price war with Acer."

Both Dell and HP seem to think that tablets could be a way to attract consumers. Dell recently released the Streak, a 5-inch tablet meant to compete with similar touch-screen products such as the iPod Touch and iPad. HP is widely expected to install its newly acquired Palm WebOS as the operating system for an upcoming series of mobile devices, including tablet PCs and smartphones.

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