Corrected at 4:55 p.m. PST to reflect that printers and ink account for one-third of HP's revenue, not half.
With the PC market in its biggest rut since 2001, Hewlett-Packard's earnings report, which will come after the market closes on Wednesday, will likely be one of the few bright spots for the industry.
Four months ago we looked at each of the top five PC makers and how they'd fare in a hypothetical recession. Some things have changed since then: we're officially in a recession now, and the Dow Jones is near its lowest point this decade. One thing that hasn't shifted: HP is still leading the pack of PC makers.
The pack is in trouble. PC sales took a nosedive between November and January. IDC's data showed PC shipments worldwide dropped 0.4 percent to 77.3 million units during the fourth quarter. There hadn't been an overall drop in PC shipments since the second quarter of 2001, after the last recession. What HP reports Wednesday will give insight into how badly this recession is hitting computer makers.
It's expected that HP's overall sales and revenue will be relatively good, though not as solid as usual. That's to be expected. How well it weathers this economy, will speak to the company's resilience. HP appears well set up, thanks to its broad portfolio of products and services. Printers and ink account for one-third of its revenues, and could be a potential savior, although CEO Mark Hurd said last quarter that its biggest printing clients were delaying orders because of the economic climate. It's only gotten worse since, so it will be telling to see if those companies are still delaying. Enterprise services will also likely boost HP during the recession. Now that the PC maker also has its EDS business unit in its arsenal, we'll be watching to see if it will it be able to keep up with IBM during the quarter. Big Blue has also weathered the recession well thus far, beating expectations for the fourth quarter, reporting a 12 percent increase in earnings last month.
The PC business is not the company's most important to its bottom line, but it remains a critical portion of its business, particularly in terms of its brand image. The company showed several new products at CES in January, which will roll out over the course of this year. The announcements play to the company's main strength: broadening its already varied portfolio. HP announced a new high-end gaming desktop, mid-range Pavilion notebooks, and a few new Netbooks.
The Netbook push is important, and we will be listening to see if HP breaks that part of the business out tomorrow during earnings results, or if Hurd at least offers some color on how sales are doing. Despite getting into the market relatively early, the company is getting killed in the European mini-portable market by Acer and Asus, which are bundling 3G service with their Netbooks. HP has recently started to do the same.
Netbooks are a Catch-22 for most PC makers. They're cheap to build and very trendy, but they're low-margin products, and since they're so similar in price and form factor to notebooks, disastrous for the bottom line. HP, however, is working hard to draw distinctions between its Netbooks with software like its MIE interface on the Mini 1000. Other PC makers are also trying to tweak the Netbook concept in their own way, with varied results.
How will Dell fare?
Dell is one of the other PC makers that has decided to cling to the Netbook trend as a means of building up its user base globally. The company now has three Netbook models, which show a flair for design, but the threat to the company's overall margins remains. Dell has also moved into emerging countries like China and India. But it will now face even stiffer competition from Lenovo, which plans to re-emphasize its focus on selling PCs on its home turf.
Dell has recently moved to broaden its portfolio in other ways, as with the upcoming Adamo, a new high-end notebook that is intended to compete with Lenovo's X300 and Apple's MacBook Air. That's a good move for the brand image, but Dell has other issues to deal with. The company is still trying to get its costs under control. Dell is continuing to cut positions and close plants, and as a result, will take a pre-tax charge of $280 million, or 11 cents per share, for its fourth-quarter earnings, which it will report next week.
Acer continues to have momentum in Europe, but the Taiwanese manufacturer is also making headway in the U.S., particularly in retail. It's doing very well with its Acer Aspire One Netbook. In a recession, it's a smart move because cheap notebooks are going to be more attractive, but it's still a gamble to be that aggressive on price for the sake of market share.
Acer is also expanding into the smartphone market. Earlier this week it released eight new smartphones, the product of its purchase of E-Ten last year. Smartphones are becoming true mobile computers, and they're a very hot category, but the market is also getting crowded.
The global financial climate has resulted in some major changes at Lenovo. As mentioned earlier, the Chinese PC maker is planning on reprioritizing its global ambitions. The news came after miserable earnings results less than two weeks ago. The company reporting that it lost $97 million during its most recent quarter. As a result, it did not renew its three-year contract with American CEO Bill Amelio and reinstalled a Chinese leader, with the company's chairman stepping into the chief executive role.
For its PC business, Toshiba is heavily invested in laptops, which protects it from the declining desktop market. But it's also chosen not to go the Netbook route, in North America anyway, which may deprive the Japanese electronics maker of some small sales now, but could end up benefiting them for staying with higher-margin PCs in the long run.