HP, Dell Chase Tablet Market

Global PC shipments fell 3.2% during the Q1 this year, according to IDC. The drop was driven by wary business and retail consumers, rising fuel and commodity prices, the tsunami in Japan and political turmoil in the Middle East. The researchers expect the U.S. market growth to continue to be strained in the current quarter. Last quarter, shipments in the country fell 10.7% over last year to 16.1 million units. Both EMEA and Japan saw contraction in shipments, and it was only Asia Pacific markets, excluding Japan, where shipments grew, albeit a mere 5.6%. PC makers HP and Dell seem to be up for tougher times in the coming quarters.

HP’s Financials
HP (NASDAQ:HPQ) saw Q3 revenues grow 3% over the year to $31.6 billion, marginally ahead of the Street’s expectations of $31.54 billion. Adjusted EPS of $1.24 was also ahead of the market’s targeted $1.21.

HP’s PC business revenues fell 5% over the year to $9.4 billion, pulled down by a 23% decline in consumer PC sales that could not be offset by 13% growth in business PC sales. All other segments reported growth with enterprise, storage, and networking segment revenues growing 15% to $5.6 billion, software growing 17% to $0.8 billion, imaging and printing revenues growing 5% over the year to $6.7 billion, and services revenues growing 2% to $9 billion.

For the current quarter, HP is expecting revenues of $31.1 billion–$31.3 billion, compared with the market’s expectations of $31.8 billion. EPS is projected at $1.08 compared with the $1.23 the market was projecting. The company expects to end the year with revenues of $129 billion–$130 billion with EPS of at least $5 a share. The market was looking for revenues of $130.5 billion for the year with EPS of $5.24.

HP’s Service Focus
During the quarter, HP announced its intention to increase its focus on the service business, which the company believes will help it to earn better long-term margins. CEO Leo Apothekar described the service businesses as “missed opportunities” that have not managed to grow owing to neglect by his predecessor, Mark Hurd. HP’s service business had grown significantly following its $13.9 billion acquisition of EDS in 2008 and now accounts for 28% of its revenues. But the segment has not been driven to its potential.

As part of the added focus, HP is not only looking to appoint a separate leader for the division, but it also announced restructuring of the enterprise storage, servers and networking division by combining it with the technology service business. HP believes that by merging the two divisions it will be able to better address the market.

HP Addresses the Tablet Market
HP’s outlook has been mired by the declining PC sales. Within the consumer PC segment, tablets have been eating into sales. A J.P. Morgan research report estimates that the 2010 tablet related cannibalization of the PC market accounted for 18.9%. The tablet market is expected to reach $35 billion in 2012, recording 172% growth over the year. Below is an excerpt from a report via DigitalDaily that pegs the estimated PC  revenue cannibalization at $13.5 billion by 2012.

As yet, HP does not have a product to compete in the smartphone and tablet market. However, the company is working on changing this. By later this summer, HP is expected to release its first non-Windows tablet. TouchPad is based on the software HP acquired from Palm last year. The 32 GB version of TouchPad is expected to be priced at $599.99, the same as the iPad, and thus will have a tough competitor to beat. To put this in perspective, last quarter Apple sold 4.69 million iPads and has already sold more than 20 million units since the release of the iPad. A tough act to follow, and the Palm team has plenty of experience in chasing Apple’s tail already!

HP’s stock is trading at $35.98 with a market capitalization of $77.9 billion. It touched a 52-week high of $49.39 earlier last quarter.

Dell’s Financials
Meanwhile, Dell (NASDAQ:DELL) remained optimistic about its future. For the quarter, revenues grew 1% over the year to $15 billion but fell short of the Street’s target of $15.4 billion. EPS of $0.55 was ahead of the market’s projected $0.43. During the quarter, Dell’s PC revenues fell 8% over the year to $3.3 billion and storage revenues fell 13% over the year to $0.5 billion. Server sales surged 11% to $1.97 billion driven by strong business demand. Software and mobility divisions also saw sales grow 3% each to $2.6 billion and $4.7 billion respectively. By market segment, consumer revenues fell 7% for the quarter, offset by large enterprise revenues grew 5% and SMB revenues grew 7%.

While Dell did not give specifics, it raised its full-year forecast for operating income to grow 12% to 18% over the year compared with the 6% to 12% growth projected earlier.

Dell’s Tablet
Dell is expected to release its much-anticipated 10-inch Honeycomb tablet later next month. Known as the Dell Streak Pro, the new tablet will feature a 1 GHz dual-core Tegra 2 processor that is also expected to be in Samsung’s talked-about Galaxy Tablets. The market is also looking forward to the release of the Android-based Streak Pro, which will likely be thinner than both the Galaxy and the iPad and with a bigger screen than Streak 5, which has a five-inch screen. Dell has maintained its preference for Android over Windows: It believes that Windows 8 will be a more relevant OS than the current version and will evaluate its platform choice when the new version is released.

Dell is trading at $15.49 with a market capitalization of $29.54 billion. It touched a 52-week high of $16.96 late last week.

Dell’s optimism stems from its belief that tablets will not replace PCs and are instead an additional device available in the market. Most tablets still need to connect with a PC for backup and other services, and the belief may thus be justifiable. Yet, an AdMob survey conducted in March of this year of 1,430 U.S.-based tablet users saw that the hours that users spend on a tablet were displacing the hours spent on other popular electronics. Seventy-seven percent of these users reported decline in PC usage since they acquired a tablet. Neither HP and Dell can remain complacent about tablets. HP’s tablet will mark its entry into the a segment where Dell is already present with its options. However, I believe that for either of them to grow, they need to up the ante on the tablet strategy to release a differentiated product.