PC Hardware to Continue Strong in 1999, Says H&Q Report
But With Growth in Unit Sales Slowing, Execution Against Major Trends Will
Differentiate PC Leaders
Y2K Impact, While Unpredictable, Likely to Be Modest - Boosting Sales in Early
1999, Slowing Sales Later
SAN FRANCISCO, Feb. 24 /PRNewswire/ -- The following is being issued by Hambrecht & Quist, a member of the National Association of Securities Dealers, CRD number 940:
Major producers of personal computers will likely show another good year of unit sales growth in 1999 at an estimated 14%, but how well the leading companies execute against major trends will increasingly differentiate these leaders, according to a comprehensive report on PC makers issued by Hambrecht & Quist.
The report, PC Hardware Outlook by Walter J. Winnitzki, says investors evaluating leading PC producers should focus primarily on how well these leaders:
* Exploit opportunities to profitably reach customers at the high- and
low-end of the market;
* Transition to new business models that bring higher inventory turns and
return on invested capital;
* Leverage the Internet to scale up with new economies and efficiencies;
* Drive recurring revenues through customer relationship and account
control
The PC hardware industry is "showing signs of maturity and moving into adolescence," Mr. Winnitzki says. "A great deal of these companies' future success is in their own hands -- and it depends on how they succeed in executing their own strategic plans, properly positioning themselves to take advantage of major trends, along with their ability not to be surprised by potential discontinuities in the market."
While projecting a moderation of growth rate in worldwide unit sales of PCs from 15% in 1998 to 14% in 1999 and 2000, the analyst also projected a slowing of the decline in average selling prices to 4% in 1999 from 7.4% in 1998. Entering 1999, the H&Q report says, many strong underlying growth factors are still in place, including a strong corporate upgrade and replacement cycle, new opportunities created by Internet and e-commerce in the small business market, and the potential for increased penetration of the consumer market through lower PC prices and the growth of the World Wide Web.
Year 2000 computer issues (Y2K), while somewhat unpredictable in impact on PC-system expenditures, will likely "have a modest positive impact in early 1999 and a slight negative impact later in the year," says the report.
In assessing market opportunities, Mr. Winnitzki believes a major point of differentiation will be the ability of PC producers to move into enterprise systems since the server market is growing at three times the rate of the desktop PC market. "Not every vendor will be successful in breaking into this market, as the entry barriers are higher, especially related to the investments required in gaining credibility with MIS corporate customers," he says.
The success of direct PC vendors such as Dell and Gateway has caused traditional vendors to change their distribution models and sell directly to certain customer sectors such as the top 200 to 300 customer accounts, small and medium businesses, and advanced/repeat customers, Mr. Winnitzki notes. The new business model for traditional PC makers, the report also notes, focuses on inventory turns, return on invested capital and cash flow from operations rather than the maximization of profit margins.
The Internet is also focusing PC makers on business models that drive e-commerce opportunities, such as building an e-commerce brand, and leverage economies and efficiencies. "We believe that using the Web to efficiently scale could be the next sea change shift in the business model in the PC industry, similar or greater in magnitude to the impact that the inventory turns model had on the business in the 1990's," the report states.
Mr. Winnitzki believes a major opportunity in the consumer sector in capturing "recurring and very profitable revenues streams based on subscription sales as service providers."
"The leading PC vendors own two very important assets," he says. "The real estate on the desktop screen of a PC and control over the users' eyeballs (and minds) via the impressions they see on their screen when they first turn on their PCs. These components of hardware have value beyond their raw functionality because they control the software and services that people will use."
The royalty/revenue opportunity in the leveraging of these initial screen impressions, the report states, could mean a major change in the economics of the PC consumer market, now characterized by declining average sale prices and thin profit margins.
In the report, Mr. Winnitzki rated Compaq and Gateway a buy and Dell Computer, Micron Electronics and Apple Computer as holds.
Hambrecht & Quist is a leading underwriter of public equity, and a leader in merger and acquisition advisory and private equity services for growth companies in the technology, healthcare, services and branded consumer sectors. H&Q has completed more than 380 equity offerings globally since 1995, raising more than $27 billion for emerging growth companies. H&Q's principal offices are in San Francisco, New York and Boston with additional offices in Europe, Asia and Southern California, and a strategic partnership in Israel. Its stock is traded on the NYSE, symbol HQ. Its Web site is hamquist.com.
The information contained in this release is not a complete analysis of the company or of the industry. The opinions and estimates mentioned are the current judgment of Hambrecht & Quist; please note that opinions and estimates are subject to change without notice. This report contains forward-looking statements, which involve risks and uncertainties. |
