Healthy Enterprise IT Spending Should Buoy Dell, HP Results, Deutsche Bank Says
Dell reports its quarterly earnings tomorrow, and Hewlett-Packard reports on Tuesday. Deutsche Bank analyst Chris Whitmore today previewed their results. Consumer spending on PCs is weak–but we knew that already. Enterprise IT spending, however, is strong enough that it may prove an effective counterweight, he says in a note to clients issued this morning. Despite a weak consumer environment, “we believe overall IT spending is healthy led by strength in the U.S. with mixed trends in Europe,” Whitmore writes. “Storage and security remain key pain points for CIOs and past underinvestment is driving infrastructure upgrades and the continued migration toward virtualized environments and cloud build-outs.”
At Dell, while weak PC sales to consumers will put some pressure on overall sales, Whitmore writes, revenues should be more or less in sync with the consensus number of $15.4 billion. Gross margins should, however, be better than the 17.6 percent reported in the year-ago quarter–as high as 20 percent–because of better sales of more profitable products to corporations, a pricing environment for commodity components that is “relatively benign,” and higher contribution from Dell’s corporate storage products to overall results. “Looking forward, we expect Dell to highlight increasing activity around corporate upgrades and a growing pipeline of corporate infrastructure upgrade activity, which should support earnings in subsequent quarters,” he writes. He expects Dell to report per-share earnings of 45 cents, slightly better than the consensus expectation of 43 cents.
He also expects corporate PC sales to be strong overall for Dell, driven by upgrades to Microsoft’s Windows 7. He reckons about 80 percent of Dell’s small business and corporate customers are still running Windows XP. Soft sales to consumers are more or less baked into the expectations and shouldn’t come as a surprise to anyone. Even though Dell has improved profitability of its consumer PC segment recently, it is having a hard time competing with Apple’s iPad, which sold 4.7 million units in the March quarter. “Expectations for the Consumer segment are very low,” he writes.
At HP, the picture is kinda the same, but also kinda different. It’s seeing the same relative strength in corporate IT spending relative to consumer spending that Dell is, translating strong sales of servers and software combined with services. Its weakness will be, Whitmore writes, around the growth of sales of its products generally, or what he calls “organic revenue growth.” He expects revenues to grow companywide by 2.2 percent to $31.5 billion, gross margins of 24.5 percent, one point better than a year ago, and $1.20 in per-share earnings–a penny below the street consensus of $1.21.
HP will be running downhill a bit, thanks to the state of the currency markets. The weakness in the U.S. dollar translates to attractive prices to buyers outside the U.S. This help from the currency markets could continue for the next few quarters, he writes. Even so, judging by the belt tightening seen in internal memos, HP may need every advantage it can get.
Sales of laser printers should be strong given a replenishment of inventories, and some gains in market share from more attractive prices. The inkjet business is another matter entirely. “Fundamentals in the inkjet printer market remain challenging and continue to be characterized by competitive pricing and soft unit volume.”
On PCs, HP is getting hammered on the consumer front thanks to the iPad, just as Dell is. “Although well anticipated, soft results in this segment could undermine confidence in HP’s organic growth prospects and highlight the absence of a tablet offering,” he writes, though the Touchpad is expected in the summer.
On the enterprise side, sales of servers should prove solid as demand for building out data centers remains strong overall, though storage sales may be weak on share losses to EMC and NetApp. Also, sales of servers based on Intel’s Itanium chip may prove weak because of uncertainty around the product’s future.