PC Shipments Falter In Q3 Due To High Component Prices

The downward trend in the PC industry persisted in third-quarter 2017 as well. According to the recently released worldwide PC shipment data by independent research firms — Gartner Inc. (NYSE:IT) and International Data Corporation (“IDC”) — even the back-to-school season failed to lift the PC market.

The preliminary data released by Gartner depicts that PC shipments in the quarter were down 3.6% year over year to 67 million units. This also marks the 12th straight quarter of year-over-year fall — the longest duration of decline in the history of PC industry.

Though IDC also reported a decline in PC shipments, its reported figures were widely different. Per the research firm, worldwide PC shipment edged down 0.5% on a year-over-year basis and totaled 67.2 million in the third quarter. The decline, however, was lower than IDC’s previous forecast of 1.4%.

Although the firms reported a decline in PC shipments, their take on the back-to-school season sales performance is different. Per Gartner, a very weak back-to-school sales season resulted in a 10.3% year-over-year decline in PC sales in the United States, while IDC believes “back-to-school promotions helped boost results”, in the quarter.

Chromebook – The Major Differentiator

In our opinion, the disparity in data and comments may be due to the different techniques used by the firms for tracking PC sales, as well as the inclusion and/or exclusion of certain products, specially Chromebooks, which run on Alphabet Inc.’s (NASDAQ:GOOGL) Chrome operating system.

Notably, unlike Gartner, IDC includes Chromebooks. Gartner, on the other hand, takes into account Microsoft Corporation (NASDAQ:MSFT) tablets and detachable, such as the iPad Pro and the Asus Transformer.

According to IDC, Chromebooks continued to witness strong growth, while in a reply to MarketWatch’s mail, Mika Kitagawa, principal analyst at Gartner said that “they did notice “strong growth” for the devices in the quarter, especially in the U.S.”

Escalating Prices Upsetting Demand

Although the firms chose different data-compilation techniques, both highlighted almost similar reasons for the plunge. Both agreed that shortage of key components, including DRAM, SSD and LCD panels, has been flaring up PC prices, in turn thwarting the overall demand. Per Gartner, DRAM shortages worsened during the third quarter when compared with the first half of 2017.

Mika Kitagawa observed that to counter higher component cost situation “most vendors generally pass the price hike on to consumers, rather than absorbing the cost themselves”, which adversely affected the overall PC market.

Region-Wise Performance

Talking about the geographical performance, the firms agreed that overall PC shipments across every region dropped during the quarter. However, as per IDC, which reports Japan’s sales separately, the country witnessed year-over-year growth for the fifth consecutive quarter.

Per Gartner, PC shipments in the United States dipped 10.3% year over year to 14.7 million units, primarily due to poor consumer PC demand, partially offset by stable demand in the business segment. Nevertheless, the firm noted that business PC demand “could slow down among SMBs due to PC price increases due to component shortages."

PC shipment in Europe and the Middle East and Africa (EMEA) edged down 1.1% year over year to 19 million units, according to Gartner. The research firm also mentioned that the declining trend in Western Europe is slowing down, therefore it anticipates a potential stability in the last quarter of 2017. In Eastern Europe, Gartner didn’t notice any remarkable positive influence from the Windows 10 migration and thus, demand is not improving.

In Asia/Pacific, PC shipments dropped 2.1% year over year to 24 million units, mainly due to dismal demand for consumer PCs, partially offset by steady demand for business PCs, per Gartner. The research firm noted a 5% PC unit sales decline in China.

In Japan, the PC industry continued to display strength, according to IDC. Per the firm, “Japan traditional PC market showed stable growth in 3Q17, primarily driven by refresh projects and migration to Windows 10 as well as further notebook adoption.”

Top Vendors List

HP Inc. (NYSE:HPQ) retained its leading position during the quarter, per Gartner. Also, this was the sixth consecutive quarter of year-over-year shipment growth for the company, following five back-to-back quarters of underperformance. The spin-off from its parent, Hewlett-Packard Company, and restructuring initiatives, such as focus on product innovations, pricing, marketing and sales activities, divestment of non-core assets, and cutting jobs to lower costs, are apparently paying off at last.

Gartner stated that among the top five vendors, only HP Inc. recorded growth in PC shipment, while Dell, Apple (NASDAQ:AAPL) , Lenovo and Asus witnessed declines during the third quarter. With a market share of 30.5%, HP Inc. witnessed year-over-year growth of 4.4% in PC shipment.

Lenovo, on the other hand, registered a 1.5% decline and has a market share of 21.4%. Dell holds the third spot, with a market share of 15.2%, and witnessed a 0.4% decline.

Apple and Asus also registered year-over-year decline of 5.5% and 9%, respectively. However, in terms of market share, Apple lost its fourth position to Asus, with respective shares of 6.9% and 7.3%.

In the top vendors’ list, IDC has a slightly different opinion. While HP Inc., Lenovo and Dell are the top three vendors here also, the research firm has different names for the fourth and fifth position. Per IDC, Apple is in the fourth spot, while Asus holds the fifth position.

What’s Ahead?

Though both research firms reported a year-over-year decline in global PC shipments, the forward looking statements indicate that the PC industry is moving toward stabilization.

IDC’s Loren Loverde, program vice president, Worldwide PCD Trackers, said “The traditional PC market performed much as expected in the third quarter." He further added, "Emerging markets rebounded slightly more than anticipated, but overall results reflect the stabilization we expected following component and inventory adjustments. The outlook for the fourth quarter remains cautious, likely with a small decline in volume for the quarter and the year. The gains in emerging regions and potential for more commercial replacements represent some upside potential, although we continue to expect incremental declines in total shipments for the next few years."

Furthermore, Gartner does not include Chromebook shipments in data compilation, which is showing tremendous growth. Last year, Chromebook shipments grew a whopping 38%, while the total PC market dipped 6%.

In the second-quarter PC shipment report, Ms. Kitagawa had said, “The Chromebook is not a PC replacement as of now, but it could be potentially transformed as a PC replacement if a few conditions are met going forward.” She further added “For example, infrastructure of general connectivity needs to improve; mobile data connectivity needs to become more affordable; and it needs to have more offline capability”.

The aforementioned positive comments on the PC market by the two industry experts will provide a respite to the PC vendors, as well as the companies which are dependent on the PC industry.

An improving trend in PC shipments will benefit the business prospects of companies like HP Inc., Microsoft, Intel Corporation (NASDAQ:INTC) , Seagate Technologies (NASDAQ:STX) and Western Digital (NASDAQ:WDC) , which continue to depend substantially on PC sales.

Currently, HP Inc. and Intel, both carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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