Systems and PC hardware
Market analysis
Worldwide PC shipments totaled 90.3 million units in the fourth quarter of 2012, a 4.9% decline from the fourth quarter of 2011. The PC industry’s problems point to something beyond a weak economy. Tablets have dramatically changed the device landscape for PCs, not so much by ‘cannibalizing’ PC sales, but by causing PC users to shift consumption to tablets rather than replacing older PCs. This shift was triggered by the availability of compellingly low-cost tablets in 2012, and will continue. On the positive side for vendors, the disenfranchised PCs are those with lighter configurations, which means there should be an increase in PC average selling prices (ASPs) as users replace machines used for richer applications, rather than for consumption. During the holiday season, consumers no longer viewed PCs as the number one gift item. Given a burgeoning variety of increasingly more attractive devices and services, consumers directed their attention elsewhere. Analysts said there was uptake of very low priced notebooks as a part of mega holiday deals, but this uptake did little to boost holiday PC sales.1
PC shipments in Western Europe totaled 15.3 million units in 4Q12, a decline of 11.7% compared with the same period in 2011. In 2012, PC shipments reached 58mn units, a decrease of 8.4% from 2011. In the fourth quarter of 2012, all PC segments in Western Europe declined. Mobile and desktop PC shipments declined 12.1% and 10.9% in 4Q12, respectively. The decline in the professional PC market was less severe—falling only 4.9%—due to replacement purchases, while the consumer PC market declined 17.6% YoY.1
The world printing machinery and supplies industry is expected to exceed US$21bn by 2015. The market is driven by demand for digital color presses, specialty printers and inkjet printers. The changing landscape of technology is also fueling the printing machinery and supplies industry, with new products, innovation and dynamic media giving the market a significant boost. The printing market has grown alongside expansion in the PC market, with many computer owners also owning printers. Demand for inkjet printers and PC-free printers, which take flash memory cards used in digital cameras, continues to rise. The photocopying market has benefited from economic growth and the widespread adoption of in-house photocopying by business offices. Digital photocopiers are a particularly strong growth segment within the photocopying industry. The US photocopier market is expected to surpass 1.5 million units by 2015. The market is fueled by digital technologies and falling prices, and is evolving due to the trend toward centralizing all faxing, copying, scanning and printing needs through one device. Companies continue to develop more compact, faster photocopiers and color printers, allowing businesses to carry out a lot of work in-house, which was traditionally outsourced. Such tasks include producing pamphlets and brochures. The UK document imaging equipment market is expected to record yearly growth of almost 13% between 2011 and 2015. Market expansion will be fueled by higher sales as offices replace outmoded machines.2
Dell is taking a more aggressive approach towards PC pricing and is now willing to sacrifice profitability for market share. The company has also announced a definitive agreement to take Dell private, but has received additional offers since the announcement. Also, it is estimated that about 20% of the holders are now arbitragers and that many of them became involved expecting a bid higher than US$13.65/share. 3
EMC’s December quarter ended on a high note with modest revenue growth and it is likely to remain in mid-single-digit territory. New mid-tier products—including Mavericks (Isilon), Project X (flash array) and VNX —are expected to drive growth in 2H13. The company expects to see structurally slower growth in traditional storage platforms, but EMC's focus on themes like Big Data, Cloud, Analytics and Security helps provide some support to the downside risk.4
HP’s rate of decline in PCs and Printing appears to have stabilized to an extent, which could increase investor interest in HP and the broader group. HP’s server and storage revenues were slow. HP generated US$2.6bn in cash flow from operations in the first quarter, up 115% YoY. HP declared a dividend payment of US$0.132 per share in 4Q12 resulting in cash usage of US$258 mn. HP also utilized US$253mn of cash during the quarter to repurchase approximately 19.2mn shares of common stock in the open market.
Lenovo reported better results for 4Q12 with net income of US$205mn. Operating margins came at 2.6%. Write-back of contingent liabilities due to Medion incentives (US$20mn) and offsetting the initial startup costs for its Compal JV in Hefei (a loss of US$10mn) led to a small improvement in margins. The company had strong smartphone growth (9 million units), strong share gains in every segment and geography in PCs—especially EMEA consumer—and there is a sustained margin improvement plan in place. A decline in margins in North America and a sharp slowdown in enterprise spending were the two major risk areas.5
Xerox reported 4Q12 revenue of US$5.92bn, down (1%) YoY, as the Technology segment continued to face pressure from a softer demand environment that was offset by BPO and ITO strengths within Services. Management noted that the lack of megadeals in 2012 was not an indicator of long-term trends as the company is seeing a solid pipeline with high visibility. The company also lowered its target for stock buyback in 2013 versus 2012.6
IBM’s execution for the quarter was strong. A robust mainframe upgrade cycle came in as a positive surprise, but was largely offset by YoY revenue declines in Services. The Software business continued to grow by 3% YoY. IBM’s transition to higher value services, increased operational efficiency and targeted M&A is expected to help the company report an upward of US$20 EPS by 2015.7
- Gartner, Feb 2013
- Reportlinker.com 2013
- Jefferies, Feb 2013
- Morgan Stanley, Jan 2013
- JP Morgan, Jan 2013
- Morgan Stanley, Jan 2013
- JP Morgan, Feb 2013
Revenue and gross margin
System & PC Hardware companies reported positive sequential growth in revenue with the exception of HP. HP reported a 5.3% sequential decline and a 5.6% YoY decline in revenues. The company reported decline in revenues across all the major business segments including Personal Systems, Printing, Enterprise Group, Enterprise Services and Software. Dell’s revenue grew 4.3% sequentially but registered a decline of 10.7% YoY driven by a 7% decline in Large Enterprise revenue, a 9% decline in Public revenue, a 5% decline in Small and Medium Business revenue and a 24% decline in Consumer revenue. EMC recorded revenue growth of 14.2% sequentially, and 8.2% YoY. The company saw a huge demand for product portfolios for its network storage, Symmetrix storage and mid-tier storage platforms. Additionally, its Flash-based caching, Flash-based storage solutions and Greenplum product portfolio led to the revenue growth. IBM reported an 18.4% growth in revenue QoQ, driven by higher Software segment revenues, but YoY there was a marginal decline of 0.6%. The decline was due to lower revenues from the Services and Hardware segments. Lenovo recorded the highest YoY growth in revenue of 11.8%, driven by strong, balanced growth and market share gains for both notebook and desktop PCs coupled with strong unit shipments of mobile handsets driving its MIDH business segment. Revenue for Xerox declined marginally YoY by 0.7% due to an 8% decline in the company’s document technology business, as economic and market conditions continued to put pressure on sales of document systems, supplies and related services.
Gross margin for System & PC Hardware companies were in line with the margins reported last year. HP’s margin was almost flat YoY, while it declined by 187bps sequentially primarily due to the company’s declining revenues. Lenovo’s gross margin improved 37bps YoY because of better scaling. EMC and IBM reported both sequential and YoY improvements in gross margin. Dell and Xerox registered sequential increases of 79bps and 40bps respectively.
R&D expenditure
Overall, R&D expenses increased for System & PC Hardware companies in the analysis except for HP, which had a sequential decline of 12.7% as the company continued to cut costs, and Xerox, which registered a QoQ and YoY decline of 0.6% and 10.6% respectively. Xerox’s R&D expense of US$160mn was US$19mn lower than the fourth quarter 2011, reflecting the impact of restructuring and productivity improvements. R&D expenses for Lenovo increased from US$118mn in 4Q11 to US$162mn in 4Q12. This increase was attributable to the increase in employee benefit costs and an increase in R&D supplies & laboratory expenses of US$32 million. Dell, EMC and IBM reported a YoY growth of 30.1%, 18.2% and 1.6% respectively in R&D expenses.
R&D as a percentage (%) of sales was in line with the previous quarters and reported marginal differences. R&D as a % of sales declined sequentially for all the companies except Dell, but increased YoY for all the companies except Xerox. The sequential decline was largely due to higher revenues this quarter. Xerox’s 30bps YoY decline in R&D as a % of sales was driven by lower spending and positive mix impact of the continued growth in Services revenue, which historically has a lower R&D as a % of revenue. R&D as a % of sales was almost flat for HP and IBM compared to 4Q11, while it increased by 67bps, 93bps and 33bps for Dell, EMC and Lenovo respectively.
Inventory and receivables
Days inventory on hand (DOI) declined sequentially for all companies except for HP, which recorded a 1 day increase in DOI as lower PC sales led to a higher inventory stock, and Lenovo, whose DOI also increased by 1 day. When compared to the same period last year, days inventory on hand increased for Dell, EMC and Lenovo, while it declined for HP, IBM and Xerox.
Days sales in receivables (DSO) also declined sequentially for all the companies except Dell, which reported a 1 day increase in DSO. However, on a YoY comparison, Dell had a significant drop in DSO of 13 days as the company reported a US$3.2bn decline in accounts receivables. HP’s receivables also declined US$5.4bn QoQ and US$4.8bn YoY, leading to a 14 day and 12 day decline in DSO respectively. DSO for EMC, IBM, Lenovo and Xerox declined by 3 days, 3 days, 3 days and 9 days respectively QoQ, while it increased by 4 days, 4 days, 5 days and4 days respectively YoY.
EPS
Profitability for System & PC Hardware companies improved sequentially, while it declined YoY for Dell and HP. Dell’s EPS of US$0.30 was 30.2% lower than the EPS in the same period last year due to lower revenues in 4Q12. HP’s EPS improved from US$(3.49) in the previous quarter to US$0.63 in the current quarter due to the absence of expenses related to goodwill impairment and purchase of intangible assets which the company incurred in the previous two quarters. However, on a YoY comparison, HP’s EPS declined by 13.7% due to lower revenues. EMC’s EPS increased by 39.3% sequentially and 2.6% YoY due to higher revenues and lower operating expenses. IBM’s EPS increased 11% YoY to US$5.13 due to lower operating expenses and lower shares outstanding in 4Q12. Lenovo’s higher revenue led to the rise in EPS. Xerox’s EPS was flat YoY at US$0.26, while it increased 23.8% YoY.
P/E for most of the companies in the analysis declined this quarter. Dell has seen a slow rise in its share price ever since the company announced its plans to go private, leading to a rise in P/E from 6.2x in the previous quarter to 10.1x in the current quarter. Xerox’s weak results over the quarters have led to low investor confidence, leading to a lower P/E. Lenovo is currently the No.1 PC/laptop manufacturer in the world and is slowly capturing the smartphone market in China and, hence, maintained its growth in P/E. EMC and IBM reported P/E of 20.6x and 13.3x, a decline as compared to the previous quarter.
benchmarks