HP beats Dell (again) at its own game

Hewlett-Packard surpassed rival Dell in personal computer sales for the second straight quarter. But some analysts raise doubts that the computer giant can sustain the momentum, pointing to an atypical second quarter sales forecast and slippage in overall profit margin.

In the ferociously competitive world of PC sales, chalk up another win to the California team.

Hewlett-Packard Co. (HP) beat rival Dell Inc. in personal computer sales in the first quarter, marking the second straight quarter the Palo Alto, Calif.-based giant grabbed market share from its struggling rival.

I don't think we'll see Michael Dell standing outside corporate headquarters with a tin cup and dancing puppy anytime soon.
Charles King
analystPund-IT Research
Do two wins equal a trend?

"I would say so. HP is just executing excellently," said analyst Carl Claunch, who covers HP at Stamford, Conn.-based consultancy Gartner Inc.

The company's sustained effort to restructure the business is paying off beyond expectations, Claunch said. "It's easy to say I'm going to grow market share and lose profitability, or fight for profitability at the expense of market share, but to do both at the same time is excellent execution."

Personal computer sales at HP grew 17% to $8.7 billion, with unit shipments up 19% compared with the same period a year ago. Notebook revenue jumped 40% year over year, while desktop revenue declined 1%. Sales for the quarter that ended Jan. 31 climbed 11%, to $25.1 billion. Net income increased to $1.5 billion, or 55 cents a share, up 26% from $1.23 billion, or 42 cents a share, for the same period a year ago.

Even better, perception is catching up with reality.

Robust holiday sales -- greased by a slick new advertising campaign, "The computer is personal again" -- also suggest HP is gaining traction in reshaping its image as a more modern and consumer-friendly company, Claunch added.

The recourse for Dell?

Most analysts believe the return of founder Michael Dell as chief executive, and Dell 2.0, the company code name for its internal push to get back on track, are serious steps in the right direction. "Michael Dell was the one who created the company and presided over most of its most impressive period, so at least the right person is looking," Claunch said.

Gordon Haff is not so sure, given the root problems of Dell's low-cost model. "Michael Dell has been pretty explicit about saying this is an evolutionary, not revolutionary makeover that needs to happen. I question that assumption," said Haff, senior analyst at Illuminata Inc. in Nashua, N.H.

The problem is two-fold, Haff said. While companies still care about money, "they care about total operational costs, as opposed to just acquisition cost," he said. "The other thing is, Dell doesn't have the cost advantage it once had, not because Dell has gotten worse but pretty much everyone else has gotten better at it."

Charles King of Pund-IT Research in Hayward, Calif., is also not sure Michael Dell can bring the company back to its leadership position, and he agrees that the market tends to reward companies that do many things well, which plays to HP's strength. But he's not ready to write off Michael Dell yet.

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"He succeeded brilliantly the first time and he deserves the benefit of the doubt for the time being," King said, noting that Dell has already taken aim at a fundamental company weakness -- its global PC sales -- by replacing its global marketing sales executives.

"As far as PC market share in the U.S., we're talking percentage points differences between Dell and HP. Where Dell has consistently trailed HP is on overseas PC sales," King said. "That's an area that needs to be addressed and is clear is on Michael Dell's front burner."

These quarter-by-quarter horse races tend to lose sight of the big picture, King added. "Let's not forget this is still a $60 billion company. I don't think we'll see Michael Dell standing outside corporate headquarters with a tin cup and dancing puppy anytime soon."

Forecast not so rosy

Not every analyst was as sanguine about HP's results, pointing to a decline in the company's vaunted overall profit margin, which slipped to 7.3%, down from 7.7% in the previous quarter.

For others, HP's forecast for the coming three months was troublesome, suggesting that the company might not be able to keep the momentum going.

The company's outlook for the second quarter signals a 2.5% decline in overall sales, a period of the year when HP sales typically remain unchanged or post a slight gain, according to an analyst quoted by Bloomberg. Investors apparently were expecting more, bidding the stock down about 4% in afternoon trading Wednesday.

But Claunch pooh-poohed the warnings, noting that the profit margin in HP's on-fire PC unit is up to 4.7% in the first quarter, higher that it's been for many years. "The mix of product at HP continues to shift. Right now the largest single segment in the PC business is larger than the printing and supply business," he said. As for the second-quarter dip, Claunch said that's a seasonal phenomenon in the PC unit, and not unusual for the company overall.

Two areas, high-end servers and storage, however, give him pause. Claunch said they are not performing at "the same high bar" the company has set for itself.

"We're not sure of all the reasons. They have been ascribing it to the product line transitions, but they are through that, and we're still seeing them not performing as strongly as they ought to," he said, but the problem will not go unattended for long. "I suspect HP will be focusing their microscopes on that."

HP's commercial client business posted less dramatic gains, increasing 8% over the prior year, compared with a consumer client revenue increase of 28%.

Net revenue of $25.1 billion was up $2.4 billion year over year, or 11%. Excluding one-time charges, HP said it earned $1.8 billion this quarter, or 65 cents, beating analyst forecasts. Analysts were expecting HP to earn, on average, 62 cents per share on $24.3 billion in revenue, according to a survey by Thomas Financial.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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