February 08, 1999, Issue: 1146
Section: Business & Finance -- Quarterly Financial Review: Major PC
OEMs
PC market trends continued in 4Q
Philip C. Rueppel
A number of trends became evident in the financial results of PC companies for
the December quarter.
First, while it was certainly a seasonally strong quarter from a demand
perspective, there was little financial news that was significantly better than
expectations. Even though major computer companies met or exceeded
earnings forecasts, many companies such as IBM, Compaq, Gateway and Sun
Microsystems had revenue that was lower than consensus forecasts, which was
surprising, given the underly-ing strength in other areas of technology.
As a result of the mixed reports, stock performance was mixed as well. Part of
the issue was that the expectations bar had been raised repeatedly by Wall
Street analysts (myself included) after our research uncovered much better
demand for components, microprocessors, memory, and disk drives. That
indicated that a stronger volume trend was likely for computer companies. And
both Intel and Microsoft, who had reported exceedingly strong results early in
the season, made it tough to compare their growth with computer system
companies.
Other metrics were, by and large, positive. On a fundamental front, ASPs were
relatively stable in the PC market, as component prices appeared to firm, and
customers seemed to be willing to pay a bit extra for value-added performance.
Both Gateway and Compaq noted this trend. Consumer PC demand in general
reached record levels, and general-purpose server demand also continued to be
very strong.
In addition, many of the companies mentioned had only one or two sales issues,
and few saw broad-based problems that led to revenue shortfalls. IBM's
difficulty centered around mainframe pricing, even though it saw significantly
better unit volumes. Sun was in a major internal ERP transition, which skewed
results, but is likely to be back on track as early as the March quarter. And both
Gateway and Compaq showed their best year-over-year growth, just not as
much as hoped for.
Even more important for the stocks, almost all companies remained bullish about
the outlook for 1999. The demand picture remains robust near-term, and
company management appears to be comfortable with the general level of
growth expectations going forward. Few even thought the Year 2000 issue
would have a significant affect on demand in the second half, although it is still
too early to tell.
-Philip C. Rueppel is an analyst at BT Alex. Brown Inc., San Francisco.
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