IDC published worldwide PC shipments (exhibit 1) this afternoon (10/10/19) signaling a market units increase of 3.0% YoY in 3Q. Solid commercial demand as well as tariff impact (desktop enacted on 9/1) were highlighted as drivers. Sequential performance (vs. 3.7% growth in 2Q) was impacted by incremental supplier component constraints (Intel) as well as elasticity from pushout of notebook tariffs to December. That said, tailwinds for 4Q should include an uptick in commercial demand on Windows 10 refresh as well as increased sell-ins to pre-empt 12/15 tariffs.
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Yesterday’s investor day reminded us of the balancing act: use size/incumbency to drive growth while carefully managing considerable leverage. Emphasis was still placed on achieving relative share growth, with margin dropping down to free cash flows as the key objective. Commentary on an enhanced focus on higher end storage as well as a reiteration of efforts behind mainstream servers. The stock traded down 3% on slightly revised down LT growth targets, but we continue to see more favorable set of company specific growth drivers relative to peers and see commentary around de-levering as an incremental derisking event.
DELL hosts its annual investor day this Thursday (9/26). Topline growth should be in-scope. Despite bottom line execution through vs. peers in through an increasingly tenuous macro backdrop in 2019, YTD stock performance is merely in line with the group. We are looking for the following: 1) refresh of LT segment revenue growth targets with increased transparency to achievement 2) update around “better together” narrative, including customer overlap metrics and ability to drive incremental synergies and 3) identifying further levers to pull to narrow the 30% valuation discount.
DELL capped off our earnings season yesterday (8/28/19), reporting F2Q20 earnings after the close. Against a backdrop of most of our hardware names posting either margin expansion or derisked revenue trajectory, DELL delivered both: inline revenues paired with a 180bps gross margin beat vs. our model. EPS exceeded consensus by ~$0.70 and the F20E guide was raised; the stock was up 9% in the aftermarket. DELL has navigated the macro better than most in our coverage since concerns started to elevate in Jan/Feb. In the current environment, we continue to like a scale player that can capture on-prem share.
VARs see overall IT budget spend likely growing, albeit in the low single digits. One reseller mentioned that business had a sudden stepdown entering July. Another touched on global uncertainty; European deals stepped up CIO supervision in 70% of cases, leading to 20% uptick in sales cycle length. Overall, VARs recognize that 2018 provides a tough compare for enterprise spending, potentially exacerbated by recent signals of weakness, but they continue to see IT capture a larger share of overall corporate budgets.
We surveyed 50 value-added resellers of storage in the US, Europe, and APAC. The survey was taken in July, asking about April-June business though we may have picked up some July views. Takeaways include (1) the outlook for overall IT spending in 2019 improved over last quarter; (2) storage spending stepped down sequentially with nearly 75% reporting fair/ok sales strength; (3) NTAP’s outlook worsened vs. the prior period, while DELL sales and outlook remained steady (4) discounting ticked down across our coverage with DELL & PSTG seeing the largest changes.
John Treadway has worked with large enterprises considering both private and public cloud implementations, first at Cloud Technology Partners, which was acquired by HPE, and now at Symphony Solutions, where he is CEO. Although hyperscaler revenue growth is moderating, he argues it is mostly due to tough comparisons as cloud approaches $70bn of revenue. He says AWS’s Andy Jassy might be right that only 3% of workloads are in the cloud by dollars.
In addition to tracking the five major tech sectors—Hardware, Semis, Software, Internet, and Services—we have added 2-3 subsectors for each for greater granularity. We show their performance in our weekly Wolfebytes.
AWS gains decelerated from 41% in 1Q to 37% in 2Q and Microsoft from 73% to 64%, still solid results that suggest workloads continue to move to public clouds and capex should improve in the second half. Google Cloud’s stated $2bn includes G Suite. We don’t have history from the company, but our estimates suggest a doubling YoY as Thomas Kurian begins to triple its salesforce. Full-year growth for the top four should be about 40%. We are hosting cloud consultant John Treadway Tues at 2pm.
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