LEH PC hardware report, dated 11/10/97, part 1 of 2
lehman.com
>>>>>>>>>>>>>>>>>>>>>>>>>>
Headline: PC Hardware: Preview Novemeber Monthly Monitor Report, Part 1 of 2
Author: Kimberly Alexy, CFA 1(212)526-3141
Company: CPQ DELL AAPL GTW CMPC ICO VST MICA SEG QNTM WDC
Country: IND CUS
Industry: COMPUT
Today's Date : 11/10/97
******************************************************************************
* In our November Monthly Monitor report, we highlight end demand trends in
both the corporate and consumer PC market, discuss ASP and margin trends and
focus on recent trends in the data storage industry.
* We will be resuming our Weekly PC Retail Sales survey, designed to assess
Christmas PC sales trends, next week. This month, we summarize ongoing impact
of sub-$1,000 and discuss consumer demand trends by vendor.
* Unit demand in both corporate and consumer PC market remained strong through
the month of October. We continue to believe sub-$1,000 are stimulating
incremental unit growth.
* While unit growth remains strong, however, we are seeing downward pressure
on ASPs from mix shift in the consumer market and increased price
aggressiveness in corporate markets.
* Unit growth remains strong for the drive stocks as well, but pricing
aggressiveness is pressuring earnings results.
*****************************************************************************
PART 1 OF 2
PC Demand Themes
PC demand through the month of October has remained strong at both corporate
and consumer markets. Concerns surrounding currency devaluation and weakness
in Asia Pacific economies caused a sell-off across the market and in
technology stocks, in particular. In general, unit PC sales into A/P remain
relatively small at approximately 12% of total unit volume. We estimate
minimal impact on total revenue growth as a result of such weakness. Our
larger concern is the continued decline in ASPs and reduced gross margin
contribution.
Throughout October, PC unit demand trends in both corporate and consumer
channels remained strong. However, while unit growth continues to be strong,
ASP declines continue to pressure revenue growth. For some companies, this
negative mix shift towards lower-margin consumer sales is causing margin
pressure. We believe ASP compression is occurring in both corporate and
consumer markets. Several factors are triggering ASP declines.
First, the strength of consumer PC demand coupled with the negative mix shift
associated with demand for sub-$1,000 systems is placing downward pressure on
ASPs. In addition, more aggressive price actions by indirect PC vendors in
the corporate market - we believe, in an effort to compete more aggressively
against Dell - have led to further pressure on desktop ASPs. Lastly, excess
notebook inventory are also contributing to weaker ASPs in this segment.
Positively, PC server growth remains strong and with ASPs 2-4 times desktop
ASPs, some offset is provided for those companies focusing on PC sever sales.
PC Survey Summary
This month we continue our telephone survey checks of the consumer retail PC
market. With the holiday selling season fast approaching, we will soon be
reinstating our weekly surveys. The results of these surveys will be
published in weekly First Call notes, as well as summarized in future Monthly
Monitor reports.
In our survey this month, products from Compaq, HP and Packard Bell continued
to be mentioned as the most popular. Each of these vendors has delivered
compelling price/performance packages into the consumer market. While
Packard-Bell remains the price leader, the strength of the Compaq and HP brand
names have provided competitive differentiation, especially on the low-end
frontier. With all three of these brands, plus Acer and some third-tier
players, having sub-$1,000 offerings, consumers now have available to them a
whole family of offerings in this price range. IBM has also announced a $999
product (the Aptiva E16) which, though supposedly shipping since October, has
not shown up in our surveys to date. Big Blue was late to market with a
product in this space and has suffered because of it.
We note the absence of the Japanese vendors from the popularity charts so far
in the second half of this year. While desktop systems from Sony and Toshiba
are still widely available, they have yet to repeat the strong showing in our
survey results that they turned in last year. Going forward, we will closely
monitor the success of these brands in the consumer retail desktop PC market,
as any continued weakness could signal a pullback by these companies from this
market segment (whether strategic or unintentional), and in any case would be
a further positive for the remaining players.
Compaq's three-tiered approach in its Presario desktop line aligns well with
the consumer market segments described above, and we believe that this has
helped the company in its exceptional consumer retail performance during the
last several months. Over the last month, Compaq has remained the dominant
consumer brand, as reported by our survey respondents. With their recent
Presario price cuts, we expect them to continue to be a category killer in the
consumer retail space.
Another market trend we are watching is the success of built-to-order PCs in
the retail channel. CompUSA entered this market in mid-September with its
American and American Pro PC lines. On their latest earnings conference
call, the company reported that demand for the machines dramatically exceeded
expectations. Even so, CompUSA management reported, there believe there is
little issue with vendor conflict, as they see the house-branded machines as
going primarily after markets where the major vendors are seeing little
penetration. This would imply the screwdriver shop systems builders, who
sell at low cost with little brand recognition. We still see vendor conflict
this as an area of risk for the program, as is the risk associated with so
directly staking the company's brand franchise on its internal product
business; if any major foul-ups do occur with the machines, CompUSA will have
to shoulder the burden of blame.
Addressing the profitability of the BTO business, margins on the machines were
described as being similar to the margins realized on sales of systems made by
other vendors. Tandy's Computer City chain is also said to be stepping up its
BTO efforts, reportedly negotiating with a third-party to partner in corporate
and consumer BTO programs, with goals of eventually making the systems
available through retail as well as on-line.
Promotional activity showed an uptick from last month's meager levels. A
number of package deals were available, with typical package prices in the
$1,200 to $1,400 range. Also, rebates continued on hard drives from Western
Digital and Maxtor, and one retailer offered additional break-point based
discounts on systems (starting on systems priced at $1,200) with additional
rebates on printers and monitors (monitor discount break points based on
screen size).
CONTINUED............................................................
Dell (DELL, $78 9/16, rated 2)
IBM (IBM, $99 1/2, rated 2)
HWP (HWP, $61 15/16, rated 1)
Compucom (CMPC, $9 1/4, rated 1)
Inacom (ICO, $30, rated 2)
Vanstar (VST, $13 1/2, rated 3)
MicroAge (MICA, $23 1/8, not rated)
Compaq (CPQ, $64 1/4, rated 2)
Gateway (GTW, $28 1/8, rated 2)
Quantum (QNTM, $30 3/16, rated 1)
Western Digital (WDC, $23 5/8, rated 2)
Seagate (SEG, $26 1/4, rated 3)
------------------------------------------------------------------------------
Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities.
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Larry |
