FWIW:
Don't Look for a Strong Second-Half Comeback From PCs
By Tish Williams
Senior Writer
03/18/2002 07:43 AM EST
Hope for PCs is so two-months-ago.
While investors are trying on the idea of a recovery for size, PC onlookers are furrowing their brows and unpacking their recently boxed-away dour expressions. Despite signs of a modestly improving economy, corporate spending on PCs has yet to materialize, and the first quarter seems to be following a seasonal pattern. Seasonal is fine, of course, but it doesn't signal the wider rebound PC investors were hoping for in 2002, when a mythical three-year computer purchase cycle would come back around, bringing goodness and light to top lines and share prices.
Pessimism about PCs is once again the trend.
Last week, several analysts moderated their opinions of upcoming demand for PCs. Solomon Smith Barney warned investors to expect a first-quarter shipment falloff equal to the industry's fourth-quarter gains, as well as a second-quarter demand decline between 3% and 5%. Deutsche Banc Alex. Brown's George Elling widened his expectation of a 2% fall in shipments in the second quarter to a 6% drop, and lowered full-year forecasts from 5% growth to only a 2% climb.
During each of their calls with the financial community in the past month, Dell (DELL:Nasdaq - news - commentary - research - analysis), Hewlett-Packard (HWP:NYSE - news - commentary - research - analysis) and Intel (INTC:Nasdaq - news - commentary - research - analysis) sent a clear signal that they still haven't seen anything that could be interpreted as a pickup in corporate spending. Nonetheless, companies such as Compaq (CPQ:NYSE - news - commentary - research - analysis) and some Street analysts have bought into the idea that a combination of Windows XP, new Intel Pentium 4 chips and low PC shipments in 2001 created a pent-up demand situation that would be unfettered in the second half of 2002.
On Intel's midquarter update, Lehman Brothers analyst Dan Niles specifically asked about the idea of 2002 being the year to replace the machines bought three years ago during the Y2K frenzy, but Intel CFO Andy Bryant shook off the suggestion. "We've seen nothing that would indicate that's happening yet. Consumers are acting pretty normally, and corporate customers are acting normal off new levels," Bryant said.
Just a Normal Year
Rather, 2002 is poised for typical seasonal patterns, which means a big first-quarter decline with a narrowed second-quarter fall, followed by a third-quarter uptick and a fourth-quarter surge. At the end of 2001, a seasonally strong fourth quarter was a welcome respite from an atypically dismal year. But in 2002, seasonality would replace the more aggressive second-half recovery that investors desire.
"We're not going to have 15% growth in the third quarter and fourth quarter," says Hans Mosesmann, who covers chips for Prudential Securities. "Nobody's saying things are going to be huge in terms of a corporate upgrade cycle. There are elements in place for the consumer [spending] to be fairly decent and some sort of corporate upgrade cycle."
That's nothing to get terribly excited about. Research firm IDC raised its PC market estimates this week, erasing previous projections of 1.8% worldwide shipment growth in the year to 3%. While that might seem like optimism, it pales when compared with IDC's 2003 projections, which call for rosy 10% growth in shipments. For perspective, in a dismal 2001, shipments declined 5.2%. And while shipments may grow in 2002, even IDC expects the amount of revenue garnered from those shipments to fall 7.9% this year, a symptom of the lower prices put forth by Dell.
Those lower prices concern Brett Miller of A.G. Edwards, because when demand finally materializes, it will bring lower revenues. "If you see a declining price environment every day, as corporations postpone that large unit spike, that means there will be lower revenue recognition" for the purchase. At the moment, competitors Compaq, Gateway (GTW:NYSE - news - commentary - research - analysis) and Hewlett-Packard are doing their darnedest to lower prices, led by the master of the technique, Dell.
It could be that 2002 is simply another tough year, but another camp thinks the sector could be seeing a change in the business climate now that computers are at a level where three-year-old models aren't as far behind the applications curve as they once were. The 2001 launch of Windows XP was supposed to effectively render 1999 PCs old hat because XP recommended more memory and processor speed. But Windows XP has not had the magic upgrade effect Windows 95 had, though some still have hope that XP will push PC purchases in 2002.
"People in the PC industry are so used to the three-year cycle coming like clockwork. They say 'that's the way it works, that's how life is.' Well guess what, things change," Miller quips. "It's a replacement cycle product at this point, and it's worth probably 40% less, 60% of what you paid for it in a year. Would you want to be in a business like that? It's like having to buy a car every three to five years and immediately the price goes down 40%."
The corporate market continues to wither, hinting that PC demand in 2002 is mostly driven by economic circumstances. But the long-term trends seem to be running against the health of PC makers. Together, the two forces have turned bullishness about a strong fourth quarter of 2001 into a chilled outlook for the March quarter and the rest of 2002. |
