Intel issued its Q109 financial results last night, including an unprecedented quarterly revenue decline of 26% against Q108. I’ve been tracking their revenues by quarter since the beginning of 2003 and Q408 was the only other quarter in which they posted a decline of more than 20%. While steering clear of a ‘revenue outlook’ Intel says that for ‘internal purposes, the company is currently planning for revenue approximately flat to the first quarter’ (ibid) – so revenues in Q209 will probably also decline by more than 20%.
You’ve got to admire CEO Otilleni’s optimism therefore when he indicated that he feels PC sales ‘bottomed out during the first quarter and that the industry is returning to normal seasonal patterns’ (ibid). I beg to differ. Although Intel should have far better intelligence than me, the signs are that we are just entering a sustained decline in the PC market, which will last many quarters.
Evidence Of PC Supplier Downturn
My evidence comes from the reported financial results of key players over the last few quarters (and all of these converted to $US at the appropriate quarter rate – for those of you that read my last blog). In particular:
- PC Chip Makers – Intel is doing badly but AMD is currently doing worse – having suffered a 35% decline in revenues in Q408. It is vitally important for users to retain at least two players in the microprocessor area. AMD has been a constant thorn in Intel’s side over recent years and I’m sure we have better (and cheaper) PCs as a result.
- PC Contract Manufacturers – Compal, Quanta Data and Wistron are Taiwanese companies set up by PC suppliers to manufacture their PCs and other electronic products. They have typically experienced very high growth as they substitute the work of in-house plants with lower-cost processes. While Compal managed a small growth, these three vendors together experienced a 3% decline in Q408.
- PC Major Brands – Acer, Apple, Dell and HP experienced strong revenue growth from PCs through most of 2008 – albeit with each quarter resulting in lower growth than the previous one (Q407 was 17%, Q108 16%, Q208 16% and Q308 15%). In Q408 growth was just 3% – with Dell doing worst – reporting a drop in revenues of 7%. Acer – also a Taiwanese vendor with a strategy based on continuous double-digit growth – posted just 6% more revenues in Q408.
- Distributors – aside from the chip makers the worst performing sector of the PC market is distribution. Ingram Micro, Tech Data, Computacenter and Northamber had posted small single digit growth through each quarter of 2008 until Q408 – when their combined revenues dropped by 10%. Northamber performed worse, with a 46% drop – but both Ingram and Computacenter suffered double digit declines.
- Microsoft – reported an 8% drop in its ‘Client’ software in Q408 – yet another indication of problems in the PC market.
A note on methodology – I took total revenues from each of these companies – apart from the ‘PC Major Brands’ from which I took their published PC revenues …and apart from Apple for which I took just ‘hardware’.
How Long Will PC Revenues Decline?
Being a researcher I decided to build a forecast from the associated revenues collected above and from my experience of the downturns in the 1992 and 2001. I’ve only included the revenues of those vendors mentioned above and am not trying to factor this up to the market as a whole (or user spending). Of course these vendors’ revenues overlap with one buying products and services of another… So – at the risk of being a hostage to fortune….
Rather than ‘bottoming out’ in Q109 I believe current economic recession will reduce demand and lead to declines throughout 2009 and the first half of 2010. Annual growth – for these vendors – will go from positive 6% in 2008 to –10% in 2009. The upturn will take place in the second half of 2010 and will contribute to a 1% growth in revenues in that year.
The profitability of these companies will also suffer during the period. Building from the published Net Income of theses vendors (and this time looking at total profits, rather than those associated with PCs for the PC Major Brands’ revenues) I’m forecasting a drop in profitability and absolute profit in coming quarters. Again I’m not predicting a rise in profits until the second half of 2010.
Can We Weather The Storm?
PCs have been near-commodity products for many years and most suppliers in the market think almost exclusively in terms of units (and staggering millions of units for the major players). In the past when money dried up the average price of PCs has dropped – enough to put some channels and vendors out of business… but never enough to threaten the whole market. The similarity of all PC products have made their vendors interchangeable. It is improbable that the current recession will destroy the sub-market.
I’m sure we’ll hear stories of warehouses full of unsold PCs – analogous to the oil tankers moored off the shore of Britain waiting for petrol prices to go up, or the acres of old airfields filled up with unsold new cars. Maybe they’re already there, but manufacturers are just cleverer at hiding them. In any case its going to be a great time for users to pick up bargains – as if the average price of PCs wasn’t already at basement levels.
I don’t want to become a Cassandra on market expectations, but I don’t see any green shoots of recovery yet and my forecast is that things are going to get a good bit worse before they recover…
Filed under: Intel, PC, Surviving The Downturn Tagged: | Acer, AMD, Apple, Compal, Computacenter, Dell, Forecast, HP, Ingram Micro, Intel, it-industry, Microsoft, Northamber, Prediction, Quanta Computer, Taiwan, Tech Data, Wistron
