May 18, 2011
Hewlett-Packard reported its financial results for the quarter ending on April 30, 2011, early in the day on May 17, a day sooner than expected. Dell reported its financial results the same day, at its normal time at the end of the day. In many ways, as we will see in a minute, the results were similar. Yet the financial market reaction was dramatically different. HP's stock price dropped by 7% during the day, while Dell's stock price rose by almost 7% in after-hours trading. Bloomberg News, in its article on the two companies' results, headlined what it saw as the reason for the different performance: "Dell Shares Rise After Corporate Spending Gives Company Edge Over Rival HP."
I am not a stock analyst, nor is Forrester in the business of analyzing or forecasting stock performance. But the divergent responses of the stock market to the financial results of HP versus Dell do have implications for vendor strategy, while the underlying results show where the tech market is headed.
First, let's compare the actual numbers. HP's revenues in the quarter were up by 3%, and right in line with expectations, while Dell's revenues were just 1% higher, and lower than expectations. Dell's sales to business rose by 3%, while HP's sales increased by 8%. Dell's sales to consumers fell by 7%, slightly better than the 8% drop in HP's sales to consumers. So far, very similar numbers between the two vendors, with HP actually doing better than Dell in the quarter. So, why the market perception that Dell outperformed HP?
One reason is that Dell's earnings were better, at least in terms of growth. HP's net income increased by 5% and its earnings per share by 15%, while Dell's earnings rose by a much more impressive 177% and its earnings per share by 188%. However, Dell had a particularly bad quarter the year before, so its growth numbers reflect that low base. Another reason is that Dell raised its revenue and income expectations for future quarters, while HP lowered its fiscal 2011 annual revenues by $1 billion.
But there is third reason why the reaction to Dell's and HP's results was so different, and that is perception: Dell was perceived as having a smaller exposure to the consumer market than HP and so was less exposed to the buzz saw of Apple's iPad that is decimating consumer demand for conventional laptops and netbooks. That perception is partly but not entirely true. In this quarter, Dell's ratio of consumer-to-business revenues was 20%/80%; HP's ratio was 32%/68%. That is a difference, but it's a shades-of-gray difference, not a black-and-white difference. Still, in today's market, if a vendor is in the consumer computer hardware business and is not named Apple, it will suffer in the eyes of stock investors. Dell was less in that business than HP, so it was perceived to be doing better.
From a strategic perspective, this episode raises the question as to whether vendors like Dell, HP, or even Microsoft that are in both the consumer and business computing markets should do what IBM did several years ago and sell off their consumer computing business. IBM's stock price in 2011, which is up 15% so far this year while Microsoft's and HP's are both down, shows there is shareholder value in being focused just on the business computing market and not trying to compete in both the business and consumer markets. Apple makes the same point from the other side. However, it is not practical for Dell or HP to separate its consumer PC business from its business PC business, nor is it reasonable for either to spin off the whole PC business, given its size for both companies.
Still, there is an alternative that provides some of the same benefits at much, much lower cost. That is to provide greater clarity about the relative size of their consumer versus business revenues. Dell actually does this, with a clean, simple number for its consumer revenues compared to its business and government revenues. HP does not, providing only a breakdown of its printer product revenues between consumer and business purchases and no numbers on what proportion of PC, server, storage, or services revenues come from consumers versus business. (Microsoft — which we think has a very similar ratio of consumer-to-business revenues as HP –is just as bad as HP in not disclosing actual consumer versus business revenue.) So it is not surprising that when both Dell and HP report that their consumer PC revenues are down, investors assume that HP is suffering more than Dell. Dell can point to a number that shows only 20% of its revenues come from consumers; HP cannot point to a number that shows only 32% of its revenues come from consumers. And it is probably no coincidence that both IBM and Dell have had similar rises in their stock prices this year, while the more obscurantist Microsoft and HP are each down.
Finally, turning to what Dell's and HP's revenue numbers show about tech market trends in the business tech market that we track, our expectation of slowing but still positive growth in business and government purchases of computer equipment is being borne out, though with some interesting twists. First, for all the computer equipment vendors that we track (with estimates for NetApp and Lenovo until they report), computer equipment purchases by business and government rose by 8% in Q1 2011, slower than the 13% to 21% growth rates of 2010, but not bad. Second, servers have done surprisingly well, with a 9% rise at HP, a 10% rise at HP, and a 22% rise at IBM (Unisys and Fujitsu did not do as well). We had expected slower growth as virtualization reduces the demand for servers, but it is possible that server buying by telcos and other would-be cloud vendors (including, of course, IBM, HP, and Dell) has kept demand growing. Third, corporate buying of PCs still is strong, but government buying is dropping. Dell's sales of PCs to the business and government market were flat, with a 10% decline in government purchases offsetting a 7% in large enterprise purchases. HP, with less exposure to governments, had a 14% increase in sales to business. Lastly, storage purchases have become uneven, with Dell down and HP up just 3%, but EMC and IBM are reporting stronger growth (and NetApp is likely to do the same).