Picking through economic news this week (French and German growth numbers; financial market turmoil; scattered US indicators) and the vendor announcements from Dell, HP, Lenovo, NetApp, and Salesforce.com, four trends emerge:
- European economies are headed for a recession, and European tech market is already in decline. Eurostat (The European Union statistical agency) announced on Tuesday, August 16, that real GDP in the 17 euro area countries and the 27 European countries both grew by just 0.2% in the second quarter of 2011 from the first quarter. Annualizing these growth rates to make them comparable with US GDP growth rates, the numbers were 0.8%. France's real GDP showed no growth, while Germany's real growth was o.4% on an annualized basis. These were sharp slowdowns from France's growth of 3.6% in Q1 and Germany's growth of 5.3%. With worries growing about a financial crisis hitting European banks as a result of potential losses on their holdings of Greek, Portuguese, Irish, Italian, and Spanish bonds, ongoing government austerity programs in these countries as well as the UK, and feeble EU efforts to deal with the problems, there is a high probability that Europe will slip into recession in Q3 and Q4 2011.
Meanwhile, the latest vendor earnings announcements confirm that the European tech market is in decline. Measured in euros, Dell's European revenues were down 13%, HP's down 7%, and NetApp's down 5%. These results are for quarters ending in July, so include that month. For all 45 vendors that we track (including those whose fiscal quarters ended in May or June), European revenues in euros were down 1%, with expectations of another decline of 3% in Q3 2011. For US vendors, the fact that the euro's value against the dollar was 13% higher than in Q2 2010 offset some of the sting. But the reality is that the European tech market is already in decline.
- The US economy is not yet in recession, though it could still go there, but US tech sales are still relatively strong. There weren't a lot of US economic indicators this week, but those that did come out — industrial production, new home sales, the Federal Reserve's report on regional economic activity — were generally negative. The final list of 12 senators and representatives on the super-committee tasked with identifying an additional $1.5 trillion in budget savings over the next ten years came out, and the presence of mostly hardliners on both the Democratic and Republican side makes the likelihood of finding a compromise that would cover both tax increases and entitlement reforms unlikely. The outcome of the Iowa Republican straw poll — with Rep. Michelle Bachmann (who opposes raising the federal debt ceiling under any circumstances) edging out Rep. Ron Paul (who wants to abolish the Federal Reserve and go back the gold standard), while Gov. Rick Perry of Texas (who accused Fed Chairman Ben Bernanke of being "treasonous" if he kept pursuing monetary easing) jumped into the presidential race — will put pressure on Republican members not only to not compromise on tax increases but also to oppose any near-term additional federal stimulus. None of this was good news for the US economy, but neither was it clear evidence that the US was going into recession.
On the vendor front, it was a mix of really good news and poor news. HP's revenues from sales to US businesses and governments rose just 1%, while Dell's fell by 7%. On the other hand, Salesforce.com's US revenues rose by 41% and NetApp's by 29%. For the 45 vendors we track, Q2 2011 US revenues were 7% higher than the year before — down a notch or two from the 9% growth in Q1 2011, but still strong. Overall, computer equipment revenues were up just 2%, with communications equipment revenues up similarly, but software revenues rose by 11% and services revenues by 8%.
We also got an answer to the question of why the Bureau of Economic Analysis's revised data on business investment in software showed a small 2% increase in 2010, when all other indicators were showing stronger growth. It turns out as I had suspected that the cause was a decline in what is called "own account" software, or software created by a business for its own use. We exclude that from our count of software, and include that in our data on IT staff salaries and benefits (which is how "own account" software is valued). Excluding own account software, business investment in commercial software rose by 5% in 2011 — not quite as strong as the 8% growth that large software vendors' US revenues showed, but closer.
- Asia Pacific economies are still strong, and so are their IT markets. There was not much economic news coming out of the Asia Pacific region, but the tech market news was bullish. Dell's revenues in the Asia/Pacific market rose 12% (with 20%-plus growth in China and India); HP's rose by 17%; Lenovo's by 13%; NetApp's by 56%; and Salesforce.com's by 26%. For the 45 vendors we track, Asia Pacific revenues rose in the quarter by 17% in US dollars.
- The corporate PC market is doing surprisingly well, but Apple is killing the consumer market for HP and Dell PCs. After Google's announcement that it was acquiring Motorola Mobility, the second big tech news of the week was HP's announcements on Thursday that it was exploring options for spinning off its PC division and acquiring software vendor Autonomy. In addition, HP said it was stopping production of its tablet product. A key catalyst was the poor performance of HP's sales of personal computers to consumers, which fell by 17% in the quarter, after declines of 19% and 9% in prior quarters. Dell's position was better, with an increase in revenues from PCs to consumers of 3% vs. a decline of 1% in sales to business and government. However, in prior quarters, Dell's PC sales to business and government had been rising while its PC sales to consumers had been declining. Meanwhile, Lenovo, which primarily sells to business and governments, saw a 15% rise in its revenues. So, in general, the pattern is clear — Windows PC sales to business and government, still good; Windows PC sales to consumers, bad. The reason for the difference, of course, is Apple, which primarily sells to consumers. The Apple iPad has taken large chunks of the once-burgeoning netbook market, and has so far fended off efforts by Dell, HP, RIM, and almost everyone else to launch a competitive product. Meanwhile, Apple's Mac computers have also seen strong growth, with a 16% growth in revenues, which was a slowdown from its three-quarter growth rate of 33%. In fact, Apple's Mac revenues of $5.1 billion in Q2 2011 exceeded Dell's consumer PC revenues of $2.7 billion and HP's consumer revenues of $4.8 billion — and at current trends may exceed both combined in a couple quarters.
As long as Apple remains focused on the consumer market, Windows PC makers still have a good opportunity in the business and government market, where employees generally need the full functions of a PC, and not the more limited capabilities of a tablet (which may serve as a complement to the employee's PC). That would suggest HP should be considering ways of retaining its corporate PC business while spinning off its consumer PC business. Of course, that may not be feasible, given the common development and production systems for both. Moreover, since Apple is starting to move more aggressively into the business market, Windows PC makers will start to feel some pressure there as well. Overall, though, I think HP's strategy should be to exit the consumer business, not necessarily the PC business.