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Market analysis

A look at the companies studied indicates the second quarter of 2016 posted mixed performance, with revenue increasing by 6.7% quarter on quarter, but declining by 3.4% year on year. However, net income was a different story, increasing 249% year on year and 104% quarter on quarter. The increase was attributable to strong results reported by Xerox, EMC and Lenovo. Despite the increase in net income, overall performance was relatively weak in terms of demand.

Worldwide PC shipments totaled 64.3 million units in the second quarter of 2016, a 5.2% decline from the year earlier. One of the persisting problems in the PC market has been the price hike in selected regions due to weakening local currency against the US dollar. This price issue has impacted both the EMEA and Latin America regions for the past year. However, PC shipment declines became moderate in the second quarter compared with previous quarters.1

The Western European printer and multifunction (MFP) market also saw a decline, falling by 5.8% in unit terms in Q2 2016 compared with the same period a year ago. Both the inkjet and laser segments turned in negative performances. For the second consecutive quarter, the market showed a decline of 275,000 units with a shipment volume of 4.5 million devices—a decline that is again largely due to the contraction in consumer printing.2

Looking at specific company performance, Lenovo and HP Inc remained the top performers in the segment for the quarter. Lenovo maintained the top position in worldwide PC shipments in the second quarter of 2016, despite a 2.2% decline in units from the same period last year. The company experienced double-digit growth in the US mobile PC market, but EMEA continued to be a challenge due to inventory build up during the quarter. In Asia/Pacific, Lenovo's shipments declined, but the decline was less than the overall average in the region. HP Inc returned to positive growth in the second quarter of 2016 after four consecutive quarters of shipment declines having resolved its inventory buildup, which had slowed its sell-in shipments. It also did well in EMEA, maintaining the top position, but was not able to surpass Dell in the US.1

Xerox’s second quarter 2016 total revenues decreased by 4% to US$4.4 billion as compared to second quarter 2015, with minimal overall negative impact from currency. The company’s year on year net income for the quarter increased exponentially which was due to a decrease in costs and other operating expenses. Selling, General & Administrative expenses of US$862 million was US$44 million lower than Q2 2015. 

Xerox’s Q2 2016 restructuring costs decreased by 55% to US$71 million. The higher costs in Q2 2015 were primarily due to US$146 million associated with software asset impairments resulting from a change in the company’s Government Healthcare Solutions strategy in the Services Segment. Loss from discontinued operations (net of tax) of  US$95 million was another factor which affected the net profit for the second quarter of 2015.3 A decrease in other costs, including cost of outsourcing, maintenance and rentals, cost of sales and R&D, positively impacted the net income for Q2 2016. The quarter on quarter net income increased significantly, by 356%, due to a decrease in restructuring and related costs of 43.7%  and income tax expenses of US$15 million in the first quarter compared to a benefit of US$9 million in the second quarter of 2016. The company plans to separate into two independent, publicly traded companies by year-end.4

EMC’s quarter on quarter revenue increased modestly by 10%, however the net income for the company grew by 117% to US$581 million. The surge was attributable to an increase in product revenues of 18% and an increase in investment income of US$13 million. A credit of US$1 million in restructuring and acquisition-related charges in the second quarter compared to the US$49 million cost in the first quarter further led to a rise in the profitability. The restructuring and acquisition-related charges in the first quarter were attributable to VMware’s restructuring charges.5

Despite a profit upswing of 69% year on year, the 6.2% decline in sales has caused Lenovo to design a new strategy with focus on high-growth markets for PCs, moving toward higher-priced smartphones and a hyper-converged infrastructure.6 Contributing to the increase in the company’s net income was a 17% year on year decline in operating expenses and an expense-torevenue ratio of 12.8%. The decline in the expense-to-revenue ratio was mainly attributable to the business realignment actions that led to lower expenses. Also, the net other operating income for the period was US$113.9 million compared to a loss of US$31 million in Q2 2015. The net other operating income for the period was mainly attributable to research and development related government grants and other incentives.7

1. Gartner, July 2016
2. IDC, Aug 2016
3. Loss from discontinued operations includes sale of the Information Technology Outsourcing business
4. Xerox Second Quarter 2016 Earnings, July 2016
5. EMC Corp 10K filing, July 2016
6. CRN, Aug 2016
7. Lenovo FY2016/17 First Quarter Results Announcement, Aug 2016