US retail numbers - ugggglllyyyyyyyy
The PC Beat
2001-07-30 07:33 (New York)
SALOMON SMITH BARNEY Industry Note
PCs
The PC Beat
July 30, 2001 SUMMARY
* Data points from 2Q earnings conference calls
Richard Gardner suggest continued PC demand weakness across most
415-951-1669 customer segments and geographic regions.
richard.gardner@ssmb.com * Last week, Compaq reported a 17% yoy and 8% qoq
Cynthia Hiponia decline in 2Q revenue due to weak U.S. and
415-951-1624 European PC demand, industry-wide pricing pressure
cynthia.s.hiponia@ssmb.com and reductions in channel inventory. Mgmt cited
Chris Noser no indication of a pick-up in consumer or
415-951-1731 commercial PC demand.
* Microsoft, eMachines, PC Connection and CDW all
cited weak PC demand in their June quarter
earnings reports and all expect a flat to down
revenue during 3CQ versus the typical 5-10%
sequential increase
* NPD Intelect data suggests that for the week
beginning July 8, U.S retail desktop shipments
declined an astounding 46% yoy, while notebook
shipments fell 10% yoy.
* Reiterate underweight recommendation on PC
hardware.
REFLECTING ON EARNINGS SEASON...FEW DATA POINTS TO REKINDLE
OPTIMISM
Earnings season provided numerous data points regarding PC demand,
most of which suggest continued demand weakness across most
customer segments and geographic regions. We find little incentive
in 2Q reports and 3Q guidance for clients to increase positions in
PC stocks at the moment. Most PC-related companies are now guiding
3Q revenue flat or down sequentially, with most hope tied to
December quarter events such as the release of MSFT's Windows XP
and a potential year-end recovery in corporate IT spending (which
we do not expect).
COMPAQ REPORTS 2Q, GUIDES DOWN 3Q
Last Wednesday, Compaq (CPQ#, 3H, $14.28) reported 2Q results.
Revenue of $8.5B (-17% yoy, -8% qoq), was in line with our revised
estimate of $8.5B but slightly below consensus of $8.6B. EPS of
$0.04 (-82% yoy, -66% qoq) were in line with our revised estimate
and consensus.
The company's disappointing revenue performance was attributed to
weak U.S. and European PC and PC server demand, worldwide pricing
pressure and channel inventory reductions. Given these tough
conditions and mgmt's expectation of little near-term improvement,
mgmt guided 3Q revenue down to $8.0-8.4B (down 25-30% yoy, down 0-
5% qoq) versus prior consensus of $9.2B. We believe revised 3Q
guidance reflects an ongoing deterioration in international
markets, further reductions in consumer PC channel inventories
ahead of the 4Q launch of Windows XP, and a weaker than normal
back-to-school pick-up in 3Q.
On the call, mgmt suggested that U.S. commercial PC and enterprise
demand are showing signs of stabilization, but stressed that there
has not been any pick-up. Additionally, mgmt indicated that the
U.S. consumer market shows no signs of either stabilization or
improvement.
After the call, we reduced 3Q revenue and EPS estimates from $8.6B
and $0.09 to $8.2B (-27% yoy) and $0.08 (-75% yoy), respectively.
We reduced FY01 revenue and EPS from $35.5B and $0.42 to $34.7B (-
18% yoy) and $0.36 (-66% yoy), respectively. Finally, we reduced
FY02 revenue and EPS estimates from $38.7B and $0.77 to $36.6B
(+6% yoy) and $0.69 (+97% yoy), respectively.
MICROSOFT REPORTS 4FQ01, GUIDES DOWN 1FQ02
On July 19, Microsoft (MSFT, 2H, $65.47) announced 4Q revenue of
$6.6B (+13% yoy, +2% qoq). This was in line with revised guidance
but above the company's original target of $6.3-6.5B. EPS of $0.44
(excluding a $3.5B pre-tax write-down of certain equity
investments) were $0.02 above consensus and our estimate.
Operating EPS were $0.01 above consensus and our estimate.
Mgmt conveyed concerns of weak 3CQ PC demand and, as a result,
guided September quarter revenue and EPS to $6.1-6.2B (down 6-7%
qoq) and $0.39-0.40 (down 9-11% qoq), respectively, versus prior
consensus of $6.3B and $0.45.
According to Microsoft CFO John Connors, worldwide PC unit growth
was "quite modest" during the June quarter yoy and below March
quarter growth. Microsoft expects weak PC demand to persist
through FY02 and believes that unit shipments are likely to grow
in the mid-single digits yoy during the year ending in June 2002.
OTHER EARNINGS NEWS
eMachines (EEEE, Not rated) reported 2Q results on July 25.
Revenue of $116M declined 7% yoy and 15% qoq while EPS of $0.12
declined a whopping 64% yoy. Mgmt cited ongoing weakness in PC
demand and intense price pressure. Second quarter unit shipments
of 266,300 declined 18% yoy and 7% qoq . eMachines' mgmt expects
continued weakness in PC demand and the economy and therefore
provided minimal guidance for the Sept quarter.
IBM (IBM#, 1M, $106.00) reported 2Q results on July 18. Revenue
declined 5% yoy while EPS grew 8% yoy. Asia Pacific posted the
strongest growth (+10% yoy in constant currency), followed by
Europe (+7% in constant currency) and the Americas (+0% yoy).
IBM mgmt cited an 18% yoy decline in PC revenue and attributed
much of its overall revenue shortfall to this segment. Mgmt also
echoed other companies' comments regarding industry-wide pricing
pressure. While specific guidance was sparse, mgmt did comment
during Q&A that it does not expect a significant 2H01 pick-up in
commercial PC demand (consistent with our thinking).
PC Connection (PCCC, Not rated), a US small business reseller,
reported 2Q results on July 19. According to mgmt, all product
categories continue to be adversely affected by weak IT spending.
Total revenue of $297M declined 19% yoy and 2% qoq with sales of
notebooks, desktops/servers and memory falling 39%, 29% and 37%
yoy, respectively.
Due to continued demand weakness and declining margins, PCCC mgmt
chose not to provide any guidance, but did comment that 3Q
performance to date would suggest flat to down revenue
sequentially in 3Q.
Computer Discount Warehouse (CDWC, Not rated) also reported 2Q
results on July 19. Revenues increased just 5% yoy to $995M and
remained flat qoq. Mgmt cited weakness in desktops and notebooks,
down 14% and 19% yoy respectively. As for guidance, CDW mgmt
cautioned that revenue is likely to remain flattish qoq in 3Q at
$990-1,030M.
Finally, IDC released 2Q growth statistics for the worldwide PC
market on July 19. IDC believes worldwide PC shipments declined 2%
yoy and 7% qoq during 2Q. US shipments declined 8% yoy and 1% qoq.
European shipments declined as well due to soft consumer and
commercial demand. Finally, growth rates declined significantly in
Japan, China, India, Australia and South Korea. According to IDC,
Dell was the only vendor to grow unit shipments and market share
during the quarter.
There are several consistent themes across all of these reports.
First, while several vendors have cited some stabilization in US
demand, all have cautioned that US demand has not re-accelerated.
Second, several companies have cited deteriorating conditions in
Europe, Asia and Latin America (Compaq, HP). Finally, most PC-
related companies expect their PC revenue to be flat to down qoq
during 3Q versus the typical sequential increase of 10-12%.
US RETAIL PC DEMAND
During the week beginning July 8, US retail desktop shipments fell
46% yoy. Sequential data suggests relatively flat shipments month
on month during June versus the typical end-of-quarter
acceleration. As we said in a prior PC Beat, Gateway typically
characterizes the June quarter as the "in like a lamb, out like a
lion" quarter---the lion is taking a breather this year.
WEEKLY DESKTOP SHIPMENTS YR/YR GROWTH BY PRICE POINT - U.S RETAIL
Week Beg. 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8
$599 and below -53% -30% -26% -49% -53% -69% -30% -79%
$600 - $999 66% 8% -1% 33% 23% 37% 37% 33%
$1000 - $1499 -2% -13% 12% -33% -41% -55% -46% -53%
$1500 and above -55% -39% -42% -6% -20% -35% -67% -46%
Market Growth -5% -15% -9% -15% -18% -31% -24% -46%
Source: NPD Intelect and Salomon Smith Barney
WEEKLY DESKTOP SHIPMENTS WK/WK GROWTH BY PRICE POINT - U.S. RETAIL
Weekly Seq. Growth 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8
$599 and below -24% 52% -13% -14% -37% -2% 114% -58%
$600 - $999 86% -35% 6% 37% -8% 5% -33% 15%
$1000 - $1499 51% -5% -13% -37% -11% 6% 40% -3%
$1500 and above -45% 23% -28% 136% -27% 1% -14% 28%
Total 33% -9% -6% 6% -17% 4% 5% -14%
Source: NPD Intelect and Salomon Smith Barney
WEEKLY DESKTOP SHIPMENTS MARKET SHARE BY VENDOR - U.S. RETAIL
Week Beg. 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8
APPLE 3% 3% 3% 3% 3% 3% 2% 3%
COMPAQ 25% 37% 30% 31% 25% 40% 18% 36%
EMACHINES 21% 19% 16% 14% 15% 14% 15% 17%
HWP 42% 34% 37% 41% 43% 31% 46% 42%
Other 9% 7% 14% 12% 14% 12% 18% 3%
Top 4 Aggr. Market Share 91% 93% 86% 88% 86% 88% 82% 97%
Source: NPD Intelect and Salomon Smith Barney
US retail portable shipments declined 10% yoy during the week
beginning July 8. As with desktops, portable shipments appear to
have been flattish month on month during June.
WEEKLY PORTABLE SHIPMENTS YR/YR GROWTH BY PRICE POINT - U.S.
RETAIL
Week Beg. 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8
$999 and below 19% -19% 8% 102% 142% 429% 92% 47%
$1000 - $1499 -9% 59% 3% 11% -45% -16% 12% 16%
$1500 - $1999 20% 26% 37% 64% 63% 41% 70% 0%
$2000 - $2999 -17% -18% -57% -44% -38% -30% -48% -47%
$3000 and above -34% -68% -44% -38% -38% -79% -41% -59%
Market Growth -4% 12% -7% 13% -5% 16% 8% -10%
Source: NPD Intelect and Salomon Smith Barney
WEEKLY PORTABLE SHIPMENTS WK/WK GROWTH BY PRICE POINT - U.S.
RETAIL
Week Beg. 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8
$999 and below 36% -6% 56% 7% -6% 79% -69% 23%
$1000 - $1499 49% 31% -38% 19% -42% 39% 19% 10%
$1500 - $1999 -7% -13% 47% 12% -14% 6% -10% -23%
$2000 - $2999 21% -13% -46% 37% -6% 40% -37% 17%
$3000 and above 26% -66% 166% 8% -6% -64% 108% 6%
Market Growth 21% 0% -7% 16% -19% 30% -23% 0%
Source: NPD Intelect and Salomon Smith Barney
WEEKLY PORTABLE SHIPMENTS YR/YR GROWTH BY PRICE POINT - U.S.
RETAIL
Week Beg. 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8
Compaq 27% 30% 34% 26% 29% 24% 22% 25%
Hewlett Packard 19% 22% 17% 23% 19% 20% 20% 20%
Toshiba 23% 17% 18% 19% 14% 13% 8% 12%
Sony 19% 19% 18% 16% 18% 18% 32% 27%
Other 12% 12% 13% 15% 20% 25% 18% 17%
Top 4 Aggr. Market 88% 88% 87% 85% 80% 75% 82% 83%
Share
Source: NPD Intelect and Salomon Smith Barney
PC INDEX
Our PC Index declined 1% during the most recent five day trading
period, but continues to perform in line with the NASDAQ.
Source: FACTSET and Salomon Smith Barney
PC COMP TABLE
PC FYE SSMB 07/26/01 Target Equity Firm F12 P/E to F12 Firm
Hardware Rating Price Mkt Cap Value/ P/E F12 EPS P/E Value/
(M) EBITDA Ratio Growth Rel. F12
to S&P Revenue
Apple sep 3H $18.47 $30 6,224 43.45 21.7 6.5 0.9 0.4
(AAPL)
Dell jan 3H $28.01 $21 77,980 41.38 39.5 0.8 1.7 2.3
(DELL)
Gateway dec 3H $9.74 $10 3,146 29.20 19.9 0.5 0.9 0.3
(GTW)
Compaq dec 3H $14.12 $18 24,173 18.90 24.8 0.6 1.1 0.6
(CPQ)#
Hewlett oct 1M $25.68 $34 51,026 13.10 22.7 0.7 1.0 1.0
Packard
(HWP)*#
IBM dec 1M $104.89 $150 186,599 16.14 21.3 1.0 0.9 2.2
(IBM)*#
Source: Company Reports and Salomon Smith Barney |
