PC Shipments Down In Q2 But 2H16 Will Be Better: Gartner, IDC

The PC market has been witnessing shipment declines over the past few quarters and according to the recently released worldwide PC shipments data by two independent research firms — Gartner Inc. (NYSE:IT) and International Data Corporation (“IDC”), the second quarter of 2016 was no exception. In fact, it marked the seventh straight quarter of a decline.

The preliminary data released by Gartner showed that PC shipments in the quarter were down 5.2% year over year to 64.3 million units. The research firm stated that among the top six vendors, Lenovo and Apple Inc. (NASDAQ:AAPL) were the only ones to witness year-over-year declines in PC sales, while manufacturers like HP Inc. (NYSE:HPQ) , Dell, Asus and Acer all recorded growth.

However, per the research firm, Lenovo has managed to retain its leading position with a 20.5% market share despite the 2.2% year-over-year decline in unit shipments, which indicated the fifth consecutive quarter of a decline. The next five spots were held by HP Inc., Dell, Asus, Apple and Acer in that order, with market shares of 19.1%, 15.2%, 7.3%, 7.1% and 6.9%, respectively.

Notably, the quarter may have just turned the fortunes around for HP Inc., as the company witnessed year-over-year shipment growth for the first time in the five trailing quarters. The spin-off from the 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.

On the other hand, the IDC report stated that PC shipments were down 4.5% from the year-ago period to approximately 62.4 million units. Note that the actual figures are roughly 3% lower than the research firm’s June prediction of a 7.4% decline.

According to IDC’s report, Lenovo, HP, Dell, Asus and Apple occupied the top five positions with respective market shares of 21.2%, 20.8%, 16.0%, 7.2% and 7.1%.

The data is certainly disappointing for Apple. As per these reports, this was the first time that Apple had slipped to the fifth position, having occupied the fourth spot for several quarters now. The IDC report revealed that “Apple continues to face an increasingly competitive market as it awaits a refresh of its PC lineup. As a result, shipments experienced a decline from last year.”

One of the most important things underlined by the reports was a 1.4% increase in unit sales in North America, following five consecutive quarters of decline. Every other region has registered a decline in unit sells on a year-over-year basis.

As usual, there are slight differences between the data provided by the two research firms. This is mainly due to different techniques used for tracking PC sales as well as the inclusion and/or exclusion of certain products. For example, unlike Gartner, IDC includes Chromebooks which runs on Alphabet Inc.’s (NASDAQ:GOOGL) Chrome operating system. Similarly, Gartner takes into account Microsoft Corporation (NASDAQ:MSFT) tablets and "detachables" such as the iPad Pro and the Asus Transformer, while IDC does not.

Nonetheless, both the firms unanimously cited the stronger U.S. dollar as the main reason for a weak second-quarter performance. The firms were also of the opinion that Brexit did not have a material impact on PC shipments during the quarter.

Although the woes of PC manufacturers continued in the second quarter, this time, vendors may have seen a ray of hope. Both Gartner and IDC believe that the market is showing some signs of improvement as the decline in PC shipments during the quarter has seemingly slowed down. This could be because of strong unit sales in North America which partially offset weaknesses seen in the rest of the region.

The firms believe that the impact of a strong dollar is fading in several regions. Mikako Kitagawa, the principal analyst at Gartner, believes that "The price issue has impacted the EMEA and Latin America regions for the past year. However, PC shipment declines became rather modest in the second quarter compared with previous quarters, which suggests a fading currency impact.”

Consequently, IDC and Gartner expect a slight recovery in PC shipments in the second half of the year. The firms also believe that the industry will witness a faster commercial transition of Windows 10 toward the end of this year.

Kitagawa also added that "The second and third quarter are typically PC buying season for the U.S. public sectors. Positive second-quarter results could suggest healthy PC sales activities among the public sectors. There is an opportunity for a Windows 10 refresh among businesses, which we expect to see more toward the end of 2016 to the beginning of 2017."

Conclusion

In the emerging markets, consumers are increasingly opting for relatively inexpensive mobile computing devices, such as smartphones. The increase in functionality and larger screen sizes (5 inches and above) are boosting the demand for such devices. Additionally, the ongoing transformation in the way people communicate has led to the proliferation of mobile devices.

Therefore, we believe that the strong dollar and delay in transition to Windows 10 are only temporary factors. Instead, PC manufacturers have to a bigger problem to deal with — cost of device — to ensure long-term growth.

From the long-term perspective, PCs have to compete with mobile computing devices as returning to growth is still a distant possibility. The decline will hurt the business prospects of companies like HP, Intel Corporation (NASDAQ:INTC) Seagate Technologies (NASDAQ:STX) and Western Digital (NASDAQ:WDC) that continue to depend substantially on PC sales.

Currently, Intel carries a Zacks Rank #2 (Buy). HP Inc., Microsoft, Seagate and Western Digital each has a Zacks Rank #3 (Hold), while both Alphabet and Apple are Zacks Rank #4 (Sell) rated stocks.