Hi K,
Here is some interesting data re the SMB business impact to the Tech
Sector for '99. Specifically focused on Y2K spending...
COMPAQ: SMB SURVEY RESULTS
11:11am EST 24-Mar-99 PaineWebber (Young, Don)
KEY POINTS
* From March 16 through March 19, 1999, we conducted a proprietary survey on PC
demand within the SMB market to better assess overall PC growth during 1999.
The survey data suggests that, contrary to popular opinion, a snap-back in PC
demand due to Y2K upgrades is not realistic in 1999.
* Our data indicates that most of the SMBs resolved the majority of their Y2K
needs in 1998, driving PC spending for the year. Two key data points support
this conclusion including: (1) 62% of the firms surveyed expect their PC
spending to be down or flat in 1999 versus 1998. (2) The Y2K impact is
expected to be much less of a driving force behind PC spending in 1999, as
69% of the firms indicated that Y2K WOULD NOT impact their 1999 PC spending.
* We believe the SMB market is an important component/indicator of PC demand,
as this sector represented an estimated 41% of unit shipments and 43% of
total revenues among the top 10 vendors in 1998.
* Based on the results of the SMB survey, we are lowering our 1999 forecast for
PC unit growth within the SMB sector from 17% to 5% and, in turn, decreasing
our total 1999 PC unit growth forecast from 14% to 9%.
* The emergence of a single pricing pool during the first half of 1999 appears
ever more likely, suggesting that PC weakness will be shared by both the
Direct and Indirect vendors.
* We recommend that clients underweigh PC hardware manufacturers, as a recovery
in PC demand appears unlikely over the next several quarters. Since the
beginning of 1999, we have reduced our annual estimates for CPQ, DELL, HWP,
and MUEI to reflect our concerns of slower PC demand. The results of our SMB
survey suggest that our estimates may still prove to be too aggressive.
Quarterly Earnings Per Share (fiscal year ends December)
1998A 1999E 2000E
1Q $0.01 $0.34
2Q 0.02 0.41
3Q 0.07 0.48
4Q 0.39 0.61
Year $0.48 $1.85
FC Cons.: $0.47 $1.76 $2.26
Revs.(MM): $35,426 $43,000
P/E: 62.8x 16.3x
SURVEY SUGGESTS SMB DEMAND ISN'T LIKELY TO RECOVER IN 1999.
From March 16 through March 19, 1999, we conducted a survey on PC demand within
the SMB market to better assess overall PC growth during 1999. We consider the
SMB market to be an important indicator of PC demand, as this sector
represented an estimated 41% of unit shipments and 43% of total revenues among
the top 10 vendors in 1998. The remaining sectors, Home, Large Business and
Education/Gov't, represented an estimated 24%, 23% and 11%, respectively, of
units shipments among the top 10 vendors. Similarly, we estimate that the
Home, Large Business and Education/Government sectors represented 19%, 27% and
11% of total revenues among the top 10 vendors.
The results of the SMB survey strongly indicate that expectations for a bounce-
back in PC growth in 1999 are unlikely. Rather, our survey suggest that the
pulse of the SMB market is, if anything, slowing from those levels experienced
in the second half of 1998. Two main data points support this assessment
including:
* PC spending in 1999 versus 1998: 51% of the firms surveyed indicated that PC
spending is expected to decrease from PC spending levels in 1998. Only 37%
of the firms felt that PC spending would increase in 1999, from the prior
year, while 11% felt that spending would be flat. Of the firms expecting a
decrease in PC spending, 67% believe that PC spending/upgrades in 1998 will
contribute most to the decline.
* Y2K Resolution: Contrary to the general opinion, Y2K is not likely to be an
essential force behind PC demand recovery. Of the firms surveyed, 69%
indicated that Y2K WOULD NOT impact their 1999 PC spending. Of this 69%,
nearly 71% cited Y2K spending in 1998 as the primary reason for the non-
impact in 1999. The primary driver noted for PC spending in 1999 is growth
of business, at 57% of those surveyed, followed by upgrades (including Y2K),
at 37%, and pricing, at 6%. In essence, we learned that most of the SMBs
have resolved the majority of their Y2K issues far ahead of plan.
In summary, we surveyed 35 firms, from a variety of industries and geographic
locations. We were surprised to find that after only a few responses, a clear
trend was emerging...PC spending is likely to be weak in 1999, from those
levels attained in 1998. Despite earlier indications from management
(specifically from Compaq and Dell), who reiterated to us in meetings earlier
in the year that strong PC demand was expected due to Y2K upgrades in 1999, our
survey data suggests otherwise.
MOVING TO A SINGLE PRICING POOL.
Given the results of the SMB survey, PC demand is likely to face an extended
period of weakness, as a credible catalyst for recovery is not readily
identifiable. Although we recognize that the Education/Gov't sector is
expected to improve and that large business accounts tend to be stable PC
purchasers, we believe the expected growth in these sectors cannot outweigh the
downturn in the SMB sector. As an extended (2+ quarters) of PC weakness
unfolds, we believe the chances of a single pricing pool emerging has
increased. Should the scenario of a common pricing pool solidify, both the
Indirect and Direct vendors would "feel the pain," as a single pricing pool is
synonymous with lower pricing and reduced gross margins in all channels.
WE ARE LOWERING OUR PC UNIT GROWTH FORECAST TO 9% IN 1999.
Given the results of the survey, we are lowering our 1999 estimate for PC unit
growth in the SMB sector from 17% to 5%, an estimate which we believe is
generous. In turn, our total full-year estimate drops from 14% to 9%, as the
SMB sector represented an estimated 41% of total units shipped in 1998. Should
our estimate for SMB growth prove to be too aggressive, we would note that a
negative growth rate in 1999, to the tune of a 5% decline, would result in
estimated overall PC demand growth of 4% for the year.
REDUCE EXPOSURE TO PC MANUFACTURERS.
Based on the results of our survey, we continue to recommend that investors
decrease their exposure to the PC manufacturers until clear evidence emerges
for a recovery in PC demand. Although we have already reduced our full-year
1999 estimates on several of the companies within our universe, we caution
investors that further revisions may be necessary. We summarize our year-to-
date revisions below:
Current Previous
CPQ: To: $1.85 From:$1.95
DELL: To: $0.75 From:$0.78
HWP: To: $3.35* From:$3.55
MUEI: To: $0.45 From:$0.90
* Lowered operating forecast $0.20 per share, but lower tax rate maintains
reported estimate of $3.56 per share.
We further highlight that Compaq, Dell, Gateway and Micron Electronics are
highly dependent upon PC sales with PCs representing 88%, 97%, 96% and 88% of
1998 annual revenues, respectively. However, Compaq and Hewlett Packard have
the highest level of exposure to the SMB market, with SMB sales representing
42% and 40% of total PC sales, respectively. Therefore, Compaq is the most
sensitive to our survey results, standing to either benefit the most, but more
likely to receive the double-whammy, based on how PC demand plays out in the
SMB sector.
SMB SURVEY RESULTS:
1. Is PC spending in 1999 expected to increase, decrease, or be flat?
Answer: Decrease: 51.4%
Increase: 37.1%
Flat: 11.4%
Key Point: Of those SMBs expecting a decrease:
67% cited PC upgrades/spending in 1998 as the primary reason for the
decline in 1999.
2. When is the majority of 1999 PC spending expected to occur?
Answer: First Half 1999: 51.4%
Second Half 1999: 42.9%
Don't Know: 5.7%
Key Point: The response to this question clearly refutes the general opinion
that PC demand will be back end loaded in 1999.
3. When did the majority of 1998 PC spending occur?
Answer: First Half 1999: 37.1%
Second Half 1999: 57.1%
Don't Know: 5.7%
4. Will Y2K impact your 1999 PC spending?
Answer: Yes: 31.4%
No: 68.6%
Key Point: Of those SMBs that answered No:
70.8% cited Y2K spending in 1998 as the primary reason for the non-
impact.
Of those that answered Yes: The degree of impact is expected to be:
Dramatic 18%
Moderate 27%
Low 55%
5. Do you need to do anything further to prepare your company for Y2K?
Yes: 69%
No: 31%
6. From 1998, is your Y2K spending expected to increase, decrease, or
remain the same?
Increase: 37.1%
Decrease: 60.0%
Same: 2.9%
7. What is the primary driver for PC spending in 1999?
Growth of business 57.1%
Upgrades 37.1%
Pricing 5.7%
* Including system upgrades addressing Y2K compliance.
8. Who is your main vendor?
Absolute Weighted
White Box: 28.6% 32.1%
Compaq: 22.9% 32.0%
Dell: 14.3% 11.4%
IBM: 11.4% 9.5%
Gateway: 11.4% 6.5%
HP 5.7% 4.0%
Other 5.8% 4.5%
*Weighted values based on current number of PCs.
9. Are you likely to switch vendors? (Not including White Box):
Yes: 12.0%
No: 88.0%
KEY POINTS SUMMARIZED:
(1) PC demand will continue to be weak through 1999.
(2) Y2K is not going to drive 1999 PC spending.
(3) Most of the SMBs addressed the majority of their Y2K issues in 1998.
RISKS
Investing in the technology sector carries inherent risks, including rapid
technology change, short product life cycles, severe pricing pressure, and a
highly competitive landscape. Those and other risks can lead to volatile
earnings streams and associated stock price movements. |
