HP's Very PC Quarter

Hewlett-Packard has good news for investors—and bad news for competitors, including former personal computer leader Dell

by Arik Hesseldahl

What's good for Hewlett-Packard is bad news for Dell. Well, for Dell and pretty much everyone else in the personal computer industry.

That's the easiest way to interpret the bullish news from HP (HPQ), which raised its revenue guidance for the quarter, saying that when it announces earnings on May 16, it expects revenue will come in between $25.5 billion and $25.55 billion. It also boosted its per-share earnings estimate, saying it expects to hit 64¢ or 65¢ on a GAAP basis, higher than the 63¢ low end of the range previously expected.

Worn Model?

The good news, HP said, came primarily from its personal computer group, which has recently propelled HP to the top of the PC market, ahead of longtime market leader Dell (DELL), which has been struggling to right its operational ship amid squeezed profit margins. HP stock finished the day up $1.21, or nearly 3%, on the news, to $45.01 on the New York Stock Exchange, after setting a new 52-week high during the session. Investors boosted Dell shares slightly, by 12¢, to finish at $26.02 on the NASDAQ.

Analyst Brent Bracelin of Pacific Crest Securities in Portland, Ore., said that the star of HP's successful show has been the consumer PC business, which sells HP and Compaq-branded PCs through retailers such as Best Buy (BBY) and Circuit City Stores (CC).

The results have challenged Dell's business model of selling directly to consumers, cutting retailers and other distribution channels out of the process. That model has long been cited as one of the main reasons for Dell's success during the PC market boom that propelled it to the top of the global PC market. But Dell has found staying at the top difficult in recent years.

Stealing Share

Dell has recently been viewed as restructuring its approach to the consumer PC business, having hired Ron Garriques, the former head of Motorola's (MOT) mobile-phone division to run the consumer PC unit (see BusinessWeek.com, 2/16/07, "Dell's New Blood: Cannon, Now Garriques"). "Ron has really spearheaded a serious look at the consumer strategy," Bracelin says. "He's certainly got his hands full."

One sign of new thinking at Dell was a memo leaked in April wherein CEO and founder Michael Dell expressed an interest in "reinventing how we address the needs of our consumers around the world," and said that direct sales were "not a religion." This led to some speculation that Dell might learn from HP's success at retail—not to mention that of Apple (AAPL), which runs its own retail stores—and embrace its own retail strategy, or even make an acquisition, but no specific changes in plans for the consumer are as yet apparent (see BusinessWeek.com, 5/4/07, "Why Dell Needs RadioShack").

Bracelin says market-share gains for HP have come largely at Dell's expense. "Most of HP's upside can be attributed to share losses by Dell," he says. "But it looks like Dell's share losses have bottomed as of the fourth calendar quarter and are beginning to hold steady or even improve slightly." Meanwhile Bracelin reckons that HP has also taken some share away from Lenovo Group (LNVGY) and Taiwan's Acer.

Wind in its Sails

The news of HP's good fortunes in the PC business came mere hours before HP was set to announce a batch of new consumer and business-oriented notebook PCs at an event in Shanghai. The star of that bunch is the Pavilion HDX, a monstrous notebook with a 20-inch screen aimed at consumers with a heavy appetite for digital media. The launch coincides with the availability of Intel's (INTC) latest chip platform for notebook PCs. Code-named Santa Rosa, it's the latest product to bear Intel's Centrino brand, which combines the PC's microprocessor with components for wireless Internet connectivity, and which is also aimed at consuming power efficiently to save battery life. Prices for the HDX machine will start at $2,999.

And if that isn't enough, the market for server computers is looking pretty strong for HP as well. Market researcher IDC recently pegged its fourth-quarter server revenue at $4 billion, putting it in second place behind IBM (IBM). IBM sold $5.7 billion worth of servers, ahead of Dell and Sun Microsystems (SUNW), each of which recorded server sales of $1.4 billion.

In a research note, Goldman Sachs (GS) analyst Laura Conigliaro called HP's blade server business the star among the company's server roster. But she also noted that HP also has a respectable currency breeze at its back from a weak U.S. dollar, which helped add $800 million to $900 million for the company.

Hesseldahl is a reporter for BusinessWeek.com.