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Dell and HP: Good News in the Quarter Is a Bad Omen for the Economy

Yesterday was a big one for PC earnings announcements, as Dell (DELL) saw a 22 percent revenue increase year over year and HP (HP) was up 11.4 percent.

It sounds good, until you look at the details and see that Dell had a remarkably similar pattern to HP. Both are riding on spending that businesses put off. Consumers aren't going anywhere fast, and neither company advanced on the need to get beyond hardware sales. It was market luck that will quickly dissipate. Chances are, we're just around the corner from a recovery -- but in the sense of bringing back the bad times, both for the economy as a whole and the computer industry.

Yesterday, I pointed out that HP saw all its growth in systems, but was flat in services and in software. Dell had year-over-year service growth of 35 percent, but that number is highly deceiving. In the quarter ending July 2009, Dell had not yet acquired consultancy Perot Systems. This year, Dell's services revenue was $2.889 billion. Last year, without Perot, it was $2.141 billion. But in the roughly approximate quarter ending June 2009, Perot made $628 million. Put together, the total service revenue last year was $2.769 billion. So the actual service business growth was about 4.3 percent. That's a clearly better than HP's one percent, but still nothing to write home about.

It's more difficult to compare software sales growth. HP saw 2 percent. Dell lumps software and peripherals together and experienced 6 percent year over year growth. But HP's imaging and printing -- which includes its traditional major peripheral product lines -- was up 9 percent. You can't assume that the actual printer sales were actually up by that much, but it does suggest that Dell's software sales might not have been so robust.

Dell saw the biggest gains among corporate buyers. That parallels my impression that HP also road on corporate purchases that were likely orders companies previously delayed because of the recent economic slide.

That's another way of saying that corporate customers are getting their buying in now, especially as they have leverage in negotiations. And a look at the balance sheets shows where some of the bodies are buried. Dell saw a huge year-over-year leap in financing receivables, from $2.252 billion to $3.272 billion. In other words, Dell is providing the loans for the equipment. I would guess it's because the company couldn't close a significant number of deals without it. HP doesn't have that particular challenge, but neither is seeing a pick-up by consumers. Neither is advancing R&D spending much, with Dell's at 1.3 percent of revenue and HP at 2.4 percent. Services are flat. Software is flat.

And yet, both face an inexorable drop in the price they can get for technology as well as an unbundling of hardware, software , content, and services brought about by the Internet, cloud computing, and the ability for customers to demand only the hardware capabilities and information and services that they want. Forget customers buying powerful boxes, only to use a small portion of the problem solving capacity they represent. And forget the ability to sell so many desktop machines, as people find that smartphones, tablets, and netbooks often provide the access and abilities they need.

If you depend on corporate IT spending, you'll become disappointed. Everything I've heard from CIOs, outsourcers, and service providers is that companies still want to keep a lid on spending. And they will, which means don't expect the replenishment purchases to go on indefinitely. Once companies are set, they'll crank back the buying, leaving tech in a hole.

But I don't think the problems are limited to technology companies. In general, companies aren't hiring. Consumers are cautious, largely because they have less money than ever. Credit is tight. This is a time to be prudent and careful. I don't suggest that businesses should withdraw from the world and give up. But planning that pelting rains could come sooner than you might think or like is a smart step.


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