PC Market Not Looking Good, Dell Especially

EVENT DELL Scheduled To Report FQ4 Revs Thurs 2.26.09; Does Not Provide Guidance
CAUSE Supply Chain Analysis Suggests Results $1.5B+ Below Street Estimates
IMPACT Negative For DELL, PC Supply Chain
ACTION Continue To Avoid DELL, HPQ, AAPL, PC Supply Chain, Enterprise Hardware

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SUPPLY CHAIN EVENT TRACKER

1.15.09 Supplier INTC provides “internal” Q1 rev target -3.8% below Street expectations
1.20.09 Competitor IBM declines to provide Q1 rev guidance
1.21.09 Supplier STX guides Q1 revs -17.7% below Street expectations
1.22.09 Supplier AMD guides Q1 revs “down” without further quantification
1.22.09 Supplier MSFT declines to provide FQ3 gudiance due to economic conditions
1.27.09 Supplier EMC declines to provide Q1 guidance
1.27.09 Supplier ELX guides Q1 revs -21.1% below Street expectations
1.28.09 Supplier WDC guides FQ3 revs -7.1% below Street expectations
1.28.09 Supplier AVCT guides Q1 revs -10.9% below Street expectations
1.29.09 Supplier QTM guides FQ4 revs -7.3% below Street expectations
1.29.09 Supplier BRCM guides Q1 revs -12.1% below Street expectations
2.10.09 Supplier NVDA guides FQ1 revs -10.0% below Street expectations
2.11.09 Supplier NTAP declines to provide Q1 guidance due to economic conditions
2.18.09 Competitor HPQ misses FQ1 revs by $2B+; guides FQ2 revs -11.0% below Street expectations

EVENT: EXPECT RESULTS $1.5B+ BELOW STREET. DELL is scheduled to report FQ4 (Jan) revs Thurs 2.26.09 after the close. The Street currently expects FQ4 revs of $14.375B (-5.2% Q/Q; no mgmt guidance). The implied decline is below a consistent 7-yr avg of +6.0% Q/Q (σ=3.51). The Street expects FQ1 revs of $13.801B (-4.0% Q/Q, only slightly below a consistent 7-yr avg of -17%; σ=3.16).

CAUSE: NEGATIVE SUPPLY CHAIN DATA. Commentary from virtually every PC supply chain or enterprise hardware company has indicated continuing deterioration in business fundamentals, or else no guidance at all as a result of the poor macroeconomic conditions. As the table below shows, the avg Q/Q rev decline for the Mar/Apr Q for companies in DELL’s supply chain (including competitors and select enterprise hardware names) is -14.6%—yet the Street is assuming just a small Q/Q rev decline at DELL (-4.0%), only slightly below seasonality (-1.7% Q/Q).

IMPACT/ACTION: CONTINUE TO AVOID DELL + SUPPLY CHAIN. HPQ just reported Jan-Q revs down -14.3% Q/Q, and it had the benefit of services and software to mitigate the decline—something DELL does not have. The Street is expecting a Q/Q decline of just -5.2% Q/Q for DELL’s FQ4 (Jan). Based on the data, we believe a decline of 15.0-17.5% Q/Q or more is in order, which would yield revs of $12.509-12.887B (Street $14.375B). DELL doesn’t give guidance, but FQ1 (Apr) revs also appear much too high on both an actual and growth basis: as the table below shows, a sample of major comps and suppliers on avg expect a Q/Q Mar/Apr rev decline of -14.6% vs -4.0% for DELL.

For more information, see our BizMaps.

Comments

[bluemarlin1402:]

What does Dell missing estimates have to due with the recommendation to avoid AAPL? They're not targeting the same customer and AAPL already reported blowout earnings.

AAPL's profit margin is among the highest off the computer manufactures, Dell's among the lowest.

Doesn't seem logical to me.

Feb 25 02:53 PM

[Richard Dav...:]

Hi bluemarlin, good question, though I disagree with your statement that they're not targeting the same customer. DELL of course has much more business exposure than AAPL (DELL's consumer biz is ~18% of total revs), but both DELL and AAPL target the exact same retail consumer. And DELL has much more PC exposure than does AAPL.

We do supply chain analysis, and as such, analyze the supply chains of thousands of companies globally, and the money flows between them. Thus when we speak of estimates, we're talking about revenues, not earnings. DELL by itself it not a huge predictor of AAPL (although the stock correlation of the 2 companies is 0.91, which is very high); however, they do share a very similar supplier base, including INTC, MU, Samsung, WDC, STX, Quanta, Hon Hai, BRCM, and many more.

We believe DELL will miss Street rev expectations by $1.5B. Any commentary that DELL has on the consumer part of their business has extremely strong implications to AAPL. Given that DELL has a January year, they have an additional month of visibility that we can use to ascertain the health of companies in the PC supply chain that have a Q ending in March, including AAPL.

Feb 26 02:44 PM

[Richard Dav...:]

Two further notes on your comment that "AAPL already reported blowout earnings:

1) per my previous comment, supply chain analysis is primarily concerned with money flows between businesses, and hence revenue, not earnings

2) what AAPL did in the Dec Q (the "blowout earnings") is far less relevant than what AAPL believes will happen in the Mar Q. And on a revenue basis, AAPL guided Mar-Q revs -4.9% below Street expectations when it reported 1.21.09. We expected that miss, and since then the Street has been steadily reducing its rev expectations for AAPL: now at $7.939B for FQ2 vs $8.203B when AAPL gave its guidance. DELL's projected miss tonight will be yet another negative data point on the health of the PC supply chain, and while the business side won't be relevatn to AAPL, the consumer side certainly will be.

Feb 26 02:50 PM