(Corrects story that ran Nov. 15 to show Wasatch no longer holds Hewlett-Packard shares.)
Nov. 15 (Bloomberg) -- The PC era is ending. More evidence of the monumental shift away from personal computers will come when Dell Inc. reports results later today, and Hewlett-Packard Co. announces its earnings next week.
As more consumers and businesses flock to smartphones and tablets, companies led by Hewlett-Packard, Dell and Microsoft Corp. that long benefited from demand for PCs are feeling the pain. Dell will report a 10 percent drop in sales, while Hewlett-Packard’s revenue fell 6 percent in the most recent quarter, estimates compiled by Bloomberg show.
The declines mark a reversal from the 1980s, when Microsoft co-Founder Bill Gates and Dell Founder Michael Dell helped usher in the PC age with low-cost machines that transformed how companies work and made it easy for consumers to use computers. The PC shunted aside bigger, pricier, more complex minicomputers and mainframes that once dominated the industry.
“PC makers are succumbing to the fate of those who don’t learn from history, not even their own,” said Erik Gordon, a professor at the Stephen M. Ross School of Business at the University of Michigan. The industry’s reaction has been “like responding to the early auto industry by trying to attach wheels to the hooves of horses.”
Microsoft, Dell and Hewlett-Packard are introducing their own tablet computers, and Microsoft has revamped its mobile-phone software in time for the year-end shopping season. Yet all three lag behind Apple Inc., Google Inc. and Amazon.com Inc. in tablets, and Microsoft’s share of smartphones is a fraction of the slice commanded by Apple and Google.
PC shipments tumbled 8.3 percent in the third quarter from a year earlier, according to market researcher Gartner Inc., and are forecast to fall this year for the first annual decline since 2001, according to IHS iSuppli.
Windows sales fell 33 percent in Microsoft’s most recent quarter, and revenue in Intel Corp.’s key third quarter -- when PC makers typically stock up on chips for the holiday season -- declined sequentially for the first time in more than 20 years.
The news probably won’t get better soon.
Round Rock, Texas-based Dell may report third-quarter sales fell to $13.9 billion and earnings excluding some items tumbled 27 percent to 40 cents a share, data compiled by Bloomberg show. Growth at the computer maker has stagnated, even after an acquisition spree since 2009 to diversify into storage, information-technology services and networking gear for corporate data centers.
“They are de-emphasizing the PC business,” said Abhey Lamba, an analyst at Mizuho Securities USA. “There will be revenue headwinds from that, and their other businesses need investment.”
Hewlett-Packard, based in Palo Alto, California, may be in even worse shape. Fourth-quarter sales may drop to $30.5 billion and earnings excluding some items may fall 3 percent to $1.14 a share, according to analysts’ average estimate. Chief Executive Officer Meg Whitman has said a turnaround won’t happen anytime soon, and the company on Oct. 3 slashed its earnings forecast, sending shares to a 10-year low.
“The innovation coming from those two companies has just been lackluster,” said Pat Becker Jr., a fund manager at Portland, Oregon-based Becker Capital Management Inc.
The PC makers’ stocks have been battered, which means investors aren’t paying much for already meager profit. Hewlett-Packard is trading at 3.3 times next year’s projected earnings and Dell at 5.5 times, among the cheapest companies among their peer group, according to data compiled by Bloomberg.
Dell rose 1.9 percent to $9.58 at the close in New York yesterday, trimming the year-to-date decline to 35 percent. Hewlett-Packard was little changed at $13.14, and the stock is down 49 percent this year.
While PC sales languish, smartphone shipments of 488 million last year overtook the number of PCs shipped for the first time, according to market researcher Canalys. Sales of iPads and other tablets are forecast to increase 26 percent to $79.4 billion next year, according to NPD DisplaySearch.
In notebooks -- the category the PC makers just a few years ago counted on for growth -- Apple has surpassed Hewlett-Packard as the top supplier in terms of revenue.
To be sure, PCs aren’t going away any time soon. The industry will ship 348.7 million of them this year, according to IHS iSuppli. Microsoft’s Surface -- a hybrid tablet computer that converts into a small laptop -- has received mostly positive reviews.
“There are plenty of people who’ve already written the tombstone, and you could say that’s a bit premature,” said Michael Shinnick, a portfolio manager at Wasatch Advisors Inc. in South Bend, Indiana, which holds Dell shares.
Windows 8, Microsoft’s much vaunted new software release, may be a mixed bag for the industry, though. Any new release of Windows spurs a wave of buying, which lifts all companies in the PC ecosystem. Yet many companies may eschew buying Windows 8 as they keep machines longer and are just now upgrading to the last version.
Old alliances are splintering too: Microsoft’s recently released Surface tablet runs a version of Windows called RT built for chips made by ARM Holdings Plc -- not its longtime partner Intel. And it competes directly with machines made by Hewlett-Packard, Dell and other electronics makers.
Microsoft may have a hard time selling business users on Surface instead of the iPad if they don’t need its stalwart Office suite of productivity programs, said Rick Sherlund, an analyst at Nomura Holdings Inc. The machine and Windows 8 are designed around a revamped home screen featuring colorful tiles that launch programs and update users with current information from the Internet.
“If you don’t need Office, you don’t need Windows 8,” he said. “This is the concern everyone has about Microsoft right now.”
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