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PC Market Slide Continues But Conditions Improving

By: Investor's Business Daily
Posted: 5/30/2014 5:38:00 PM
Referenced Stocks: HPQ;INTC;AMD;AAPL;FB

Hewlett-Packard and Lenovo, the top global suppliers of personal computers, both gave evidence of a much-needed PC industry rebound in their recent quarterly results.

The personal computer market was slammed in 2013, suffering its worst year ever as shipments fell 10% from the prior year, down 35 million units. If current trends hold, shipments could fall another 7% this year, estimates tech-research firm Gartner.

The silver lining is that the worst of the decline could be over, as suggested in the reports byHewlett-Packard ( HPQ ) and China-based Lenovo.

Revenue from HP's PC-centric Personal Systems Group rose 7% from the prior year to $8.2 billion during its fiscal second quarter, which ended April 30. It was the group's highest level in three years.

"Overall, we're seeing a slowing market contraction and signs of stabilization, particularly in commercial PCs," HP CEO Meg Whitman said in the post-earnings conference call on May 22. "This is coupled with support from a refresh of an aging installed base and the expiration of Windows XP."

Lenovo, which reported quarterly earnings on May 21, said that portable PC shipments rose 13% while desktop units climbed 6.8%. For the quarter ended March 31, Lenovo reported a 19% year-over-year rise in revenue to $9.4 billion. Net profit rose to $158 million from $127 million a year earlier.

The PC market's slow improvement has been a while coming. The PC market hit a peak in 2011 with global shipments of 361 million units. A year later, shipments fell 3% to 351 million units, then declined another 10% in 2013, according to Gartner.

The decline in PC shipments, including laptops, started with the widespread use of the smartphone and continued with the arrival of tablet computers.

"In the past, the PC was the only device consumers could use to connect to the Internet," said Mikako Kitagawa, PC industry analyst at Gartner.

Wireless smartphones and tablet users easily surf the Web on the go. As a result, the PC is no longer the center of their universe. "People began to hold on to their PC or laptop longer," Kitagawa said.

That's partly because consumers were spending more of their disposable income on smartphones and tablets while also paying monthly fees for data-service plans.

1 Billion Smartphones

Smartphone shipments topped 1 billion units in 2013, up 38% from 2012. Shipments of tablet computers rose 68% to 195.4 million units in 2013.

The PC market decline was evident in the third quarter of 2012 when chip leaderIntel ( INTC ) said that quarterly revenue fell 5% from the prior year. It was the first of four straight quarters of revenue declines for the company.

ChipmakerAMD ( AMD ) reported six straight quarters of year-over-year revenue declines in the same time frame.

As further evidence of the disruption, PC maker Dell took itself private last year rather than deal with the harsh spotlight of Wall Street. Six years ago, Dell was the largest PC maker worldwide, but it has since dropped to third place behind HP and Lenovo.

And early this year, Sony exited the PC market after 17 years, as rivals from China and Taiwan brought low-cost PCs to market.

The PC market is now dominated by five companies: Lenovo, HP and Dell, followed by Taiwan's Acer and Asus. Together, these five account for about 60% of the PCs sold globally.

Apple ( AAPL ) has just more than 5% of the global market and 11% of the U.S. market. The remaining PC suppliers have a third of the market but a much smaller share of the profit.

While a shift to cloud computing has increased demand for computer servers used in data centers, large companies such asFacebook ( FB ) andGoogle (GOOGL) are building their own equipment.

The rise of cloud services has also prompted businesses to forgo buying additional computers, choosing instead to rent time and applications running on cloud-computing networks.

PC Consolidation

Though the worst of the PC decline might be over, the struggles continue.

Acer's PC shipments fell 20% in the first quarter from the year-ago period, according to research firm IDC. Q1 revenue fell 16.6% to $2.5 billion. On the plus side, Acer returned to a profit, albeit a modest $37,000, after posting losses for three consecutive quarters.

PC shipments at Asus fell 8% in the first quarter. The combined total outside of the top five PC manufacturers dipped 13%, IDC reported.

"We'll continue to see consolidation in the PC market," Kitagawa said.

As it becomes increasingly difficult to thrive by selling basic PCs, manufacturers have developed newer systems that are ultra-light and slim to compete with tablet computers while introducing their own tablets and diversifying in other ways.

Early this year, Lenovo announced it would buy Google's Motorola handset division for $2.9 billion to extend its smartphone business. Lenovo also has a line of tablets.

The Trend Is Tablets

While Apple's U.S. PC shipments have slowed, the company has continued to thrive due to its enormous strength in smartphones and tablets.

"We continue to believe that the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend," Apple CEO Tim Cook said on an April 23 conference call with analysts after the company reported quarterly earnings.

Apple led the tablet market with a 36% share in 2013, down from a 53% share in 2012, as rivals such as Samsung have upped the ante.

The gradual improvement in the PC market is coming mainly from the business side. Consumer sales have remained weak.

In Hewlett-Packard's latest quarterly report, the company said that consumer sales declined 3% year-over-year, while commercial sales grew 8%. The refresh on the business side is partly a result ofMicrosoft (MSFT) having announced that it would end support for its Windows XP operating system, putting many businesses in a position to upgrade.

"Some PC makers saw a spike in the business market due to the replacement of systems running Windows XP," Kitagawa said. "But when it comes to the consumer side, there is not as great a need."

In a bid to spur consumer sales, PC makers have introduced a variety of new styles, including two-in-one portables that function as laptops or tablets.

"The newer portables coming to market are nice and looking sleek and in the right price range," Kitagawa said.