Dell announced fiscal Q1 earnings that beat expectations on profits, although not on revenue. But forget the earnings per share because the developing business story is revenue and how hardware companies get it. HP's (HPQ) earnings announcement yesterday -- and now Dell's today -- both preview the same trend: Lower revenue from traditional PCs and, eventually, servers and other enterprise hardware. And this isn't a cyclical trend, as there are good reasons to think these hugely lucrative markets may simply not ever regain their once-heady momentum.
First went consumer PC purchases
On the PC front, HP's personal systems group saw an overall revenue drop of 5 percent, year over year. The big culprit was consumer purchases, down 23 percent. There was growth on the corporate side, but not enough to offset the loss. Ironically, HP PC unit sales actually grew by 1 percent. In other words, hardware continues to get cheaper, and that trend is accelerating.
Dell had a similar experience. Here are two tables adapted from the company's financial reporting. The first is revenue by product category and the second is revenue by customer segment (click to enlarge):
Desktop PCs took a big hit, as you'd expect with a proportional drop in consumer purchases. Dell characterized it as unexpected -- more than the normal seasonal drop-off after holiday shopping. There are two reasons: Consumers aren't benefiting greatly from a largely jobless economic recovery and they now have cheaper alternatives for PCs.
If you think of common uses for PCs -- email, Web browsing, video, music -- it's obvious that tablets and smartphones have become substitute machines. Do they completely replace PCs? Absolutely not, but the relatively lower prices let consumers treat themselves to something new that does much of what they need -- and which offers other conveniences (portability, light weight, long battery life) to boot.
And then corporate purchases followed
As consumers step back, hardware companies depend more on corporate customers. Big customers, though, buy in bulk, giving them more leverage in negotiating and driving down prices. HP's corporate sales were up year over year, but are on a downward trend when you look at sequential quarters.
Dell claimed "enterprise solutions and services revenue up 5 percent to $4.4 billion led by server revenue increase of 11 percent" year over year, which is mathematically true. However, as with HP, the details are less jolly:
- Large enterprise revenue was down 5 percent from the previous quarter.
- Servers and networking sales were up 11 percent year-over-year, but down 6 percent from the previous quarter.
- Storage sales were down 13 percent year over year and 16 percent sequentially.
- Software and peripherals sales were also down year over year.
- Sequential and year-over-year growth in services helped boost enterprise revenue.
What is clear from the data is significant pressure on both consumer and corporate hardware spending. The hardware vendors are locked in to their legacy business of moving boxes, and that business is dying. Very slowly, to be sure, but still on a downward slope that will accelerate as cloud computing and virtualization spread further among business users while consumers increasingly find that they can make do without a traditional PC.
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