Business Tech

Maybe Dell's dark days are finally over.

All signs are pointing to an improved PC market that will start to materialize later this year and really regain ground next year. Dell, the PC maker that's arguably been battered most by the downturn, also stands to make the greatest gains when the seas begin to calm.

Why Dell? The key to a full turnaround within the PC industry is when large corporate customers start buying computers for their employees again. Many had virtually stopped making new PC purchases due to increasingly tight budgets, combined with decisions to wait until Microsoft released the update to its operating system.

But there have been three good signs this week that point to an imminent recovery for the industry. On Monday, Dell took the trouble to send a press release announcing that it's seeing the demand for its products--PCs, services, servers--"stabilizing." That means more people and businesses are shopping, which it said will send its second-quarter revenue up slightly when it reports next month.

That was followed by Intel's upbeat outlook during its second-quarter results Tuesday. Intel's feel for the market is an important bellwether for the tech industry, and the chipmaker reported its best first-to-second-quarter growth in almost two decades. CEO Paul Otellini declared it a "clear expectation for a seasonally stronger second half."

Wednesday's study from PC market analysts at IDC showing better-than-expected growth worldwide in PC shipments serves to tie all the news together. For the second straight quarter, PC shipments were down, but beat expectations. Shipments were down just 3.1 percent last quarter, according to IDC. A recovery, it seems, is on the way.

Both Dell and Hewlett-Packard, the world's largest PC maker for several years running, will benefit when the recovery does start to kick in. Both are heavyweights in corporate computing. But HP has survived the tech industry slowdown better than Dell due to strong management, cost cutting, and its ability to react quickly to emerging consumer trends like Netbooks.

So when companies do start to spend money in large volume again this fall when Windows 7 is released, and into next year as budgets soften, Dell's improvement should be relatively better overall than HP's--if only because HP hasn't slipped that much in the past months. HP's shipments improved 3.6 percent in the most recent quarter; Dell's shrunk 17.1 percent.

The last few years have been rough for Dell. The company appeared caught off guard by the surge in consumer spending on laptops starting in 2006. HP (and Acer) recognized the change in the market, made some successful adjustments, and never looked back. Since then, Dell has employed several new tactics to invigorate its business, including getting back into retail, focusing more on product design, shaking up the organizational structure, and looking to shed costs through shutting down some manufacturing plants and several rounds of layoffs.

Though Dell is still trying to get its costs right, it has, however, paid a lot of attention to improving the breadth of its consumer offerings recently. It released the very pricey Adamo notebook several months ago and has also shipped more models of lower-priced Inspiron Mini Netbooks. While that hasn't reaped great results yet (its most recent earnings saw a fall of 63 percent), once the market is more stable, a wider variety of choices for consumers and its corporate customers should help.

And though Acer has gathered a lot of attention recently for its aggressive pricing and huge growth in the consumer market, an improvement in commercial spending could temper that momentum some.

"When we get to commercial recovery, (Acer) won't be as well-positioned as HP and Dell," said Loren Loverde, PC analyst for IDC. "They're still a smaller player in the U.S., and are half the size of Dell and HP. They don't have quite the scale in the U.S."

Acer's focus on selling more units at lower prices may also come back to bite it. When consumers are ready to buy more expensive systems--which carry better margins for the manufacturer--they're not likely to think of Acer, or its premium Gateway brand.

The others
Lenovo will continue to struggle while it figures out what kind of company it wants to be. It's still in the middle of navigating major management changes, and has had difficulty in kick-starting its consumer business. But the crown jewel, the ThinkPad business, can only be helped when companies begin to spend money on computers again. The company is well-established in China, a country that is still a growing market for new PCs.

Toshiba is heavily invested in the consumer market and particularly in small and medium businesses. As commercial and consumer spending go up, Toshiba should benefit with increased market share.

Now, when exactly this turnaround will happen is not entirely clear. Some analyst say the return to normalcy will begin later this fall, but it won't be complete until 2011. It will likely be gradual, and as Intel's Otellini noted earlier this week, when it does arrive, we should be prepared that it won't be a "recovery to prior levels."

There are more encouraging signs that the worst might be over for the PC industry.

For the second straight quarter, PC shipments worldwide were better than expected. Desktop and notebook shipments for the second quarter of 2009 decreased 3.1 percent from the same time a year ago, according to IDC's Worldwide Quarterly PC Tracker, released Wednesday. Though it's still negative growth, it's being read as a positive sign since analysts were expecting a 6.3 percent drop.

Combined with Intel's better than expected earnings Tuesday, and Dell's pronouncement that demand for computers is stabilizing, the industry looks ripe for a turnaround soon.

"I think we're moving out of it," said Loren Loverde, director of IDC's PC Tracker study. "We're still in negative growth, but we saw better growth than we did in the first quarter. That bodes pretty well for growth going forward."

The improvement was felt worldwide, with each region meeting or surpassing industry analysts' expectations. Though those expectations were indeed fairly low to start with, the fact that all of the regions performed adequately is a good sign, Loverde noted.

Acer continued to outpace the field, growing its shipments worldwide 23.7 percent. It's now right on Dell's tail, competing for second-largest PC maker with 12.7 percent of the overall market.

Dell is hanging in there with 13.7 percent of all computers shipped, and did make some progress with new notebook designs and Netbooks during the quarter. But as it slips farther behind perennial leader Hewlett-Packard (with 19.8 percent of PCs shipped) and tries to stay ahead of Acer, its weakness in those areas are coming into focus. Acer has been able to exploit an area Dell has not paid much attention to until recently.

"It's really evidence of growth the of consumer portables, which has not been a Dell focus or strength, and it has been an Acer focus and strength," noted Loverde. "Combined with Acer's much broader distribution, particularly in Europe, and also their fairly rapid expansion and much smaller focus on the US., Acer will continue to grow faster than the market."

But there are still challenges for Acer, who is much smaller than Dell or HP, and tends to focus on lower-priced notebooks, which means it could have trouble moving into higher-margin products later.

Lenovo continues to be in fourth place, with 8.7 percent of PCs shipped, followed by Toshiba, with 5.3 percent of the market. Toshiba experienced the next-best growth after Acer (10.5 percent for the second quarter) on the strength of its move into Netbooks, which are selling particularly well in Japan.

The bad news: first-quarter spending on computing technology was worse than forecast. The good news: growth could resume earlier, according to a report Forrester Research released Tuesday.

The analyst firm reduced its forecast for 2009 information technology spending from a 3 percent decline to a 10.6 percent decline, but it's the hitting bottom, it said. Spending should return to growth in the fourth quarter in the United States, and in the first half of 2010 in Europe and Asia, Forrester said, basing its forecast on newly collected data.

"The big drops are not precursors to further declines," said Andrew Bartels, a principal analyst at Forrester. "Rather, we think they are evidence of a temporary pause in U.S. tech purchases, which we expect to start recovering in the fourth quarter, as businesses realize that they overreacted in the first quarter."

Forrester isn't alone in seeing signs of recovery.

It's "reasonable to be optimistic for 2010," said Google Chief Executive Eric Schmidt last week. And Gartner predicts that PC sales will start picking up in the end of 2009.

For 2009, some sectors are expected to be hit worse than others. Computer equipment spending should drop 13.5 percent, communications equipment's decline should be 12.4 percent, consulting and outsourcing should drop 8.6 percent, and software spending should have the smallest decrease, at 8.2 percent, Forrester projected.

Forrester has reduced its forecasts for 2009 IT spending several times.

(Credit: Forrester Research)

Updated at 1:55 p.m. PDT with information from the earnings call. Also corrected decline in operating expenses.

The quarter that ended on May 1 was a rough one for Dell.

The PC maker announced Thursday it recorded a net income of $290 million for the first quarter of fiscal year 2010, and earnings of 24 cents per share, or 15 cents per share when accounting for write downs from severance pay and factory closings during the quarter. That's down 63 percent from the $784 million, and 38 cents per share recorded a year ago. Revenues were also down 23 percent to $12.3 billion.

Analysts on average had been expecting revenue of $12.66 billion, and earnings between 19 cents and 27 cents per share.

"It started out as a slow first (fiscal) quarter. It picked up a bit in the second half of the quarter," Chief Financial Officer Brian Gladden said on a call with reporters Thursday. But he said it was "still a challenging IT demand environment" and emphasized that Dell is not yet ready to say that the drop in demand has yet reached its lowest point.

Dell has been saying for the last few quarters that since its core customer base--corporate IT departments--are being battered by the economy, it would try to focus on internal housekeeping tasks like cutting expenses and operating costs. Gladden said the company's operating expenses had fallen by $101 million from the previous quarter and by $312 million from a year ago.

Despite that, Dell is still facing major challenges. Revenues decreased in every major business unit significantly, though a relatively bright spot appeared to be the consumer group. Consumer revenue was down 16 percent to $2.8 billion, and consumer shipments rose 12 percent from a year ago. It's been spending much more on research and development on products down in Round Rock, Texas, and produced yet another Netbook, and more notebook models--including the high-priced Adamo--during the quarter.

The company also continued to expand the number of places its PCs can be bought: there are now 30,000 retail outlets worldwide, which is contributing to the growth in the consumer business.

But retail is clearly not the singular solution. Dell needs to do something to turn the ship around, which might come from outside the company. It has not taken the option of an acquisition to achieve quick growth off the table. IBM is suing to keep its former M&A chief David Johnson from joining Dell, which has reportedly offered him the position of vice president of strategy. Gladden on Thursday declined to discuss Johnson's hiring, but did say that mergers and acquisitions would "continue to be an important part of how we build the company."

"We've done 13 or 14 acquisitions in last few years. We're not sitting back and watching other companies do consolidation," he said.

This post was updated at 3:45 p.m PT with information from the earnings call.

TiVo on Wednesday reported a loss of $4.1 million, or 4 cents per share, for the first quarter of fiscal year 2010.

It's a letdown for TiVo, which a year ago recorded a $3.6 million profit. The Alviso, Calif.-based maker of digital video recorders had been anticipating a $6 million to $8 million loss for the quarter ended April 30.

The company's technology and service revenue was $48.5 million, down just more than 12 percent from last year's $54.4 million. But TiVo did see an uptick in revenue from the sale of DVR hardware, up from $6 million a year ago to $6.4 million during the most recent quarter.

About 37,000 more people bought subscriptions to its DVR service directly from TiVo, to bring the current total of all subscribers to 3.2 million.

CEO Tom Rogers put a positive spin on the results during Wednesday's conference call with analysts. He called it "a solid quarter" and said he believes TiVo "started fiscal (year) 2010 off on the right foot."

He stressed the company's strategy of becoming a single destination for all video entertainment, whether it's content from cable, satellite, or streaming over broadband.

Though TiVo essentially invented the DVR market, it's never been able to capture a mass audience on its own. It did manage to eke out a profit last fiscal year of $104 million, or $300,000 without counting the large sum it was awarded from its lawsuit with EchoStar last fall.

To increase its subscriber base, it has relied heavily on partnerships with companies like DirecTV, Cox Cable, and Comcast, which is beginning to roll out its TiVo service in a few markets. Recently TiVo has added more streaming-video options through partnerships with Blockbuster, Netflix, and Amazon HD.

Looking ahead to next quarter, TiVo anticipates a net loss between $6 million and $8 million.

TiVo stock was down 2.9 percent to $6.78 per share in after-market trading.

The rough seas of the consumer electronics business has caused yet another smaller boat to capsize. Soyo, the maker of Honeywell TVs, has filed for Chapter 7 bankruptcy protection.

(Credit: CNET)

The news was first reported by the HDGuru.com blog. An SEC filing from earlier this week states that the company shut down operations on May 5, and filed for Chapter 7. Chapter 7 means the company is planning on liquidating its remaining assets, with no plans to reorganize under a new repayment plant to creditors, as a Chapter 11 filing would allow. The company could not be reached for comment.

Soyo makes LCD monitors, portable hard drives, and Bluetooth ear pieces, but is probably most recognizable since it owns the license to sell TVs under the Honeywell brand name. It's unclear how customers who recently bought Honeywell TVs are to deal with repairs or warranties issued by the company.

While Honeywell wasn't one of the top brands of TVs, its exit from the TV market is yet another sign of the ongoing shakeout taking place in the consumer electronics business. Syntax-Brillian, maker of Olevia brand HDTVs, filed for bankruptcy last summer, shortly after Philips turned over its North American TV operations to Funai.

More recently Pioneer has said it will no longer produce TVs after March 2010

Like Pioneer, Soyo's exit from the TV business was forced by mounting losses, in this case, more than $25 million in loans. Worldwide TV sales dropped 6 percent in the most recent quarter, as consumers find themselves with less discretionary income to spend on gadgets, and as the market for LCD TV buyers becomes increasingly saturated.

The typical way gadget makers deal with declining sales is to introduce new technology. But the TV industry is still years away from the next step of broad availability of OLED (organic light-emitting diode) TVs. They're still prohibitively expensive to produce on a large scale, and most companies working on OLED right now--Sony, Sharp, LG, Panasonic--don't seem to be in a rush.

Until then, expect to see more stories like this one, companies either dropping out of the TV business altogether, combining operations with a competitor, or licensing its brand away in certain markets.

Toshiba said Friday it expects to lose 350 billion yen for the fiscal year just ended on March 31, and will cut more temporary workers.

The company plans on letting go 3,900 temporary employees in its Japanese offices, according to a report in The Wall Street Journal, as well as reducing its capital spending this year by 180 billion yen ($1.8 billion) to 250 billion yen from the previous year. Almost 4,500 temporary workers were laid off previously.

The company now expects a net loss of 350 billion yen in the fourth quarter of its fiscal year that just ended. That's worse than the 280 billion yen loss previously expected, and it doesn't appear things will get better for the Japanese electronics company any time soon.

"We're seeing the economy nearing its bottom, but it is likely to stay at the bottom for a while," Toshiba Executive Vice President Fumio Muraoka said.

The PC market shrunk during the first part of 2009, but not as badly as expected.

Shipments of PCs during the first quarter were down 7.1 percent from a year ago, to 63.5 million units, according to IDC, which released its Worldwide Quarterly PC Tracker on Wednesday. That's an improvement from the 8.2 percent decline that IDC had projected.

It's a "good sign" for PCs, said Loren Loverde, the program director for the PC Tracker at IDC. Loverde says the better-than-expected results were aided by falling prices of PCs and more new PC buyers around the world.

It's telling of the depth of fear the economy is stirring up when these numbers are considered a positive sign, especially when placed in context: a continually volatile world economy, accompanying high rates of unemployment, and companies that continue to hold off on technology spending.

But it's not the only sign that things might be turning around for technology companies. Intel CEO Paul Otellini was surprisingly bullish on the market for PCs Tuesday during his company's earnings call, saying, "We believe PC sales bottomed out during the first quarter and that the industry is returning to normal seasonal patterns...I believe the worst is now behind us from an inventory correction and demand level adjustment perspective."

It may not be totally behind us: IDC is predicting roughly 8 percent declines in growth for the second quarter. But there are several things to consider. Though consumer confidence is low, there are increasingly more PCs with lower prices to match available. Low-cost portables, like Netbooks, continue to be the bright spot for many PC makers, especially Acer and Asus, and helped to stem the overall decline worldwide.

And some regions are faring better than others. In the U.S., considered a saturated market for PCs, declines were kept to just 3 percent. Last month, Dell founder and CEO Michael Dell told an audience during a speech in China that the worldwide demand for PCs was "steady," and echoed IDC's assessment of U.S. consumers' continuing appetite. But of the top five PC vendors in the U.S., only Dell and Apple saw overall shipment declines when compared to the same quarter a year ago. Apple dipped slightly at 1.2 percent, but Dell's drop was more drastic at 16.2 percent.

"The U.S. PC market proved to be surprisingly resilient this quarter as notebooks were still seen as important purchases by many U.S. consumers," said Bob O'Donnell, vice president of clients and displays research for IDC in the report. And the gap between the world's largest PC maker, Hewlett-Packard, and the rest of the field is growing. HP actually saw its overall shipments increase and finally overtook Dell as the leading PC vendor in the U.S.

HP's shipments outside the U.S. increased 2.9 percent, but its shipments to U.S. retailers and consumers was up 12.2 percent. Dell's shipments worldwide declined 16.7 percent worldwide, and 16.2 percent here in the U.S. Though the Texas-based PC maker has done a lot of work to improve its business over the past two years, the first quarter of 2009 was particularly difficult for the company.

"Dell is still largely a commercial company," said Loverde. Less than 30 percent of its sales come from consumer PCs worldwide and the most growth in the market is coming in the consumer category, like Netbooks, and Dell hasn't been as aggressive as the likes of Asus and Acer there, he noted. "But I think we have a combination of Dell tentatively going after this growth segment combined with the challenge of executing with channel partners in a really volatile environment. Obviously the economic crisis is affecting products and consumer demand."

The top five PC makers worldwide stayed basically the same: HP holding 20.5 percent of the market, followed by Dell (13.6 percent), Acer (11.6 percent), Lenovo (7 percent), and Toshiba (5.4 percent), according to IDC's numbers.

In the U.S. only, HP led with a 27.6 percent share, just beating out Dell's 25.3 percent, followed by Acer at 10.5 percent, Apple at 7.6 percent, and Toshiba at 6.6 percent.

Dell founder and Chief Executive Michael Dell appeared optimistic about the PC market during a speech given in China Thursday, according to a Bloomberg report.

Speaking about the global market, he said, "Week on week, the demand for PC sales has been steady." He added that he anticipates "encouraging" demand from U.S. consumers, though he did not provide detail as to why. Research firm IDC said it expects global PC shipments to drop 4.5 percent during 2009.

In particular, Dell has high hopes for the Chinese PC market, where his company increased sales last year by 28 percent. In terms of revenue, China is now Dell's second-largest market.

The world's second-largest PC maker, Dell also announced plans to sell 15 different computer models to rural Chinese farmers, a huge market that will soon be flush with government cash. China is poised to shower some 800 million farmers with 20 billion yuan ($2.9 billion) of subsidies enabling them to buy home appliances, which apparently includes PCs.

Dell's most recent quarterly earnings report reflected waning demand for consumer PCs and falling IT budgets at large enterprise companies hitting the entire industry, with revenue dropping 16 percent to $13.4 billion.

But that hasn't stopped Dell from introducing both a new luxury consumer notebook and a new enterprise suite of servers, workstations, and IT services in the past few weeks.