Just in...
PC Sector Update
09:27am EST 1-Dec-98 SoundView Financial Group (Mark Specker)
Early feedback from a number of major PC vendors suggest that consumer sales got
off to a very good start over the U.S. Thanksgiving weekend. CPQ reported
"dramatic" y/y increases in consumer units. HWP's commentary on November sales
was also strong. GTW's tone as well as fundamentals, such as observed price and
lead-times, support a less rosy picture. We think GTW's mix remains too rich
to effectively serve its consumer market. With no price pressure on its
products and everything to gain from strong PC unit volumes and lower PC ASPs,
MSFT remains a favorite stock pick at current levels.
PC Lead Times and Pricing:
Table 1
Desktop 11/97 Desktop 11/98 %Change Laptop 11/97 Laptop 11/98 % Change
Processor 233 PII 333 C 233P-MMX 233 PII
Memory 32 32 0% 32 64 100%
HD (Gbyte) 4.3 6.4 49% 3.2 4.0 25%
Price (Avg) $2,235 $1,219 -45% $4,523 $2,325 -48%
Lead-Times 6 4 -33% 6 6 0%
Overall: Table 1 above shows the average configuration of a "base" computer
taken from Dell and Gateway. The base computer is the sweet-spot low-end
configuration the companies are marketing. Pricing for this typical low-end
configuration has declined y/y by 45%. Although we do not believe overall
consumer pricing will decline at this level, we note that:
* Despite good evidence that pricing of corporate systems has stabilized in the
past two quarters, consumer PC pricing continues to be very aggressive;
* Rapid unit growth of "Segment Zero" PCs is tending to mix prices down.
Table 2
PC Lead Time (D) 10/19/98 10/26/98 11/2/98 11/9/98 11/19/98 11/23/98 11/30/98
Dell Desktop 4 4 5 6 10 9 3
Dell Laptop 4 5 5 5 10 9 8
Gateway Desktop 5 5 4 3 7 7 4
Gateway Laptop 6 6 5 3 7 7 4
PC Price Changes
Dell Desktop $1,433 $1,433 $1,433 $1,287 $1,287 $1,258 $1,258
Dell Laptop $2,397 $2,397 $2,397 $2,344 $2,344 $2,376 $2,376
Gateway Desktop $1,279 $1,279 $1,279 $1,179 $1,179 $1,179 $1,179
Gateway Laptop $2,674 $2,674 $2,674 $2,574 $2,574 $2,524 $2,274
* Lead Times: On the whole, desktop lead times were about 6 days at this time
last year compared to 3 to 4 days now.
* Dell desktop lead times have come down from 9 days last week to 3 days this
week because corporate ordering is very light around the holidays.
* GTW lead times also decline sequentially from 7 days to 4 days. In our view,
this suggests that, while GTW's call volumes rose over the holidays, they
probably did not rise enough to offset the extra capacity, parts stockpiles,
etc. that GTW puts on this time of year to cope with the Christmas crush.
* GTW does about one-half of its total 4Q business between November 15 and
December 15.
* Pricing: Week-by-week pricing across DELL and GTW product lines show limited
recent declines as both companies positioned for the Christmas selling season
early in the month. We would expect further pricing actions, especially from
GTW, in the next several weeks.
Early feedback from companies on consumer sales:
* CPQ: Early feedback from CPQ is extremely positive on consumer PC sales.
Although all regions are not entirely rolled-up, CPQ is characterizing y/y unit
growth as "dramatic." The week ending Nov. 28 was the largest for consumer in
CPQ's history.
* In the September quarter, consumer was just under 15% of CPQ's total revenue
and just under 30% of total unit volume.
* Our estimates for the December quarter look for 15.5% of total revenue.
* DELL: No feedback as yet. DELL is essentially closed over the Thanksgiving
holiday in the U.S. Consumer remains a small (but rapidly growing) business for
DELL at under 10% of total revenue.
* HWP: Early feedback from HWP is also very positive regarding consumer sales.
HWP characterizes both Europe and U.S. consumer sales as very strong. Also,
HWP is particularly positive about its PC/printer /monitor bundling. Printer
and monitor attach rates are characterized as "very high."
* GTW: GTW's tone was far less positive than the overall tone of the indirect
PC vendors. As GTW has been saying since Comdex (the week of Nov. 16) it is
somewhat behind its planned unit shipment. Call volume and demand was
characterized as "at expectations" for the long weekend. However, GTW's tone
together with our fundamental inputs above suggest that GTW has yet to make up
for a weak start to the quarter. We note that:
* GTW's guidance for 4Q98 is for units up 40% sequentially vs. last year's 36.7%
sequential move. We are using 38% sequential unit growth on ASP declines of 4%
q/q (15% y/y).
Bottom line:
Overall: Discussions with a variety of sources in the past weeks suggest that
4Q was somewhat slow to start. Y/Y October was probably with the normal range,
but sequentially was clearly off the torrid pace of September back-to-school.
PC vendors were clearly hoping for good acceleration in November. We think most
of them got it.
* GTW: Early indications are that GTW is off to the worst start of the major PC
vendors -- however, it's all relative. We have said since the beginning of the
quarter that GTW set itself an unnecessarily high bar for 4Q. We think this is
especially the case as GTW appears to us to have both unsustainably high AUPs
and margins when compared with its competition. Left in place, this business
structure will likely continue to make to revenue growth sluggish. We think it
is too early to call the quarter (quite a bit too early), but more than anything
our fundamental inputs leave us concerned.
* CPQ: CPQ's commentary was a very good but not unexpected. CPQ has a strong
product line and very strong brand recognition worldwide. Also, low-priced "PCs
for the masses" favor the reach CPQ's multiple distribution channels (direct
and indirect) now give it.
* MSFT: MSFT will not have preliminary sell-through data from OEMs and
distribution for several more weeks. However, if present strong sales trends
continue for several more weeks it seems very likely that MSFT will begin to
talk even more favorably about the current quarter's outlook.
H |
