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Once the the fastest growing OEM, ASUSTEK Computer becomes the latest victim of the PC slump

Taiwanese electronics OEM ASUSTek Computer Inc. (TPE:2357) in Q2 and Q3 2012 was roughly tied for the world's fastest growing PC maker, according to the Interactive Data Corp. (IDC).  Now its seen that streak of success collapse as poor sales of Windows 8 PCs catch up to it.

I. Windows 8 Finally Catches up to ASUSTEK

As a large percentage of consumers have rejected Windows 8, PC sales have predictably suffered, but the extent to which it has suffered has been eye-catching.  The market has posted the biggest percentage declines in unit sales in the history of the Windows PC.  And ASUSTEK -- once a poster-child of sucess has now become the new face of the consequences of Windows 8's market failure.

In Q3 2013, while Dell and Hewlett Packard Comp. (HPQ) saw virtually no year-to-year growth (0.3 and 0.4 percent growth, respectively) and Lenovo Group, Ltd. (HKG:0992) posted an anemic (but market leading) 2.2 percent growth, ASUSTEK watched its fellow Taiwanese OEM Acer, Inc. (TPE:2353) drop 34.5 percent in unit sales.

The ASUSTEK Windows 8 Transformer Pad
 
This wasn't exactly unexpected; Acer lost 9.6 percent of sales from Q3 2011 to Q3 2013 as well.
 
What was much more shocking was that ASUSTEK -- just a year ago tied for the title of fastest PC sales growth -- saw a massive decline in sales (34.1 percent) that virtually tied it with Acer in market decline.
 
The good news for investors is that ASUSTEK was somewhat shielded from this decline by its offerings in new markets, including the tablet market.  Tablets are ASUSTEK's second largest product category, accounting for 20 percent of the company's total earnings.
 
Despite the decline in PC unit shipments, ASUSTEK managed a modest NT$4.94B ($167.6M USD) profit.  A year ago ASUSTEK made NT$6.71B ($227.1M USD) -- so that's a drop of 26 percent.  Most of this came from NT$1.52B ($51.58M USD) in "one-time" tax expenses, according to a report by The Taipei Times.  It is unclear what these charges pertained to.  Those taxes aside, net profit declined 3.7 percent on a YoY (year-to-year) basis.

Taiwan Dollars
ASUSTEK was hit by a major one-time tax charge in Q3. [Image Source: Reuters]

Revenue was down 4 percent at NT$107.079B ($3.63B USD).  Analysts had expected NT$110B ($3.73B USD), according to a Bloomberg survey - a 2.7 percent miss.  
 
Analysts hoped for earnings of NT$9.03 ($0.306 USD) per share.  Instead they saw NT$6.65 ($0.226 USD) per share -- a major miss -- due largely to them being blindsided by the tax charge.
 
Q4 should prove critical to ASUSTEK.  The OEM remains relatively hopeful that Windows 8.1, an overhaul to the troubled Microsoft operating system, will improve on Windows 8's laggard sales.
 
II. Tablets Remain a Bright Point
 
ASUSTEK's chief financial officer, David Chang remarked, "We remain optimistic about the desktop and laptop market, but our priority is to make the company’s smartphone business turn a profit next year."
 
As the rocky PC market continues to erode, ASUSTEK -- once a champion of Windows 8 -- is turning to alternatives.  In Q3 ASUSTEK song strong sales of Google Inc. (GOOG) branded Nexus 7 tablets, which run the latest version of Google's mobile Android operating system.  Retailing for a modest $230 USD for the 16 GB second-generation variant, these 1080p tablets helped ASUSTEK to 3.5 million units of total sales.  

ASUSTEK Nexus 7
The Nexus 7 (second gen.)

That was good enough to earn third place in the tablet market (with 7.6 percent of total sales), behind Apple, Inc. (AAPL) and South Korea's Samsung Electronics Comp., Ltd. (KSC:005930).  It's worth noting that it's a pretty distant third place, though. Samsung is estimated by the IDC to have sold 9.7m tablets (roughly three times what ASUSTEK sold), while Apple is estimated to have moved 14.1m iPads in the quarter.
 
ASUSTEK is vying with Lenovo and other firms for the contract to produce the third-generation Nexus 7 tablet, which is expected to launch sometime early next year.  Comments ASUSTEK CEO Jerry Shen, "We are still in talks [about the Nexus 7 orders]."
 
PadPhone

If it gets the order, ASUSTEK believes it can sell 13m tablets next, year, which would likely be good enough to remain in third place.
 
Looking to go down the road Samsung did, ASUSTEK is looking to expand its fledgling Android smartphone effort into a bigger global brand next year.  Mr. Shen told investors; "Asus aims to grow its smartphone business from about 1 million units this year to 5 million units next year."


In its home nation, ASUS's Padfone lineup has thus far sold well.  ASUS plans to grow the Padfone and Fonepad/Memofone (the Padfone's phablet brethren) global lineup in 2014.  Mr. Shen said new smartphone models would be unveiled at his company's 2014 Consumer Electronics Show keynote this upcoming January.
 
III. Haswell Powered Chromebooks in the Pipeline
 
Like HP, Acer, and Samsung, ASUSTEK also revealed that it's eyeing Chromebooks as a potential escape route should the Windows 8/8.1 flop continue.  ASUSTEK is planning tentatively to release an 11.6-inch model priced at $199 USD and a 13.3-inch version for $249 USD, according to The Taipei Times. According to a separate report by Bloomberg, these Linux laptops will feature 14 nm Haswell processors from Intel Corp. (INTC).  The same Bloomberg report states that Toshiba Corp. (TYO:6502), another top ten PC OEM, will also release new Chromebooks in H1 2014.
 
If accurate, that would make them one of the cheapest Haswell laptops to date.  These models will like follow a similar model to Acer's recently released C720 Chromebook, which features a 1.4 GHz Haswell Celeron chip, 2 GB of DRAM, a 16 GB SSD, and an 11.6-inch screen for $199.  A similar Acer model retails for $249 with 4 GB of DRAM.  These notebooks are current the #5 and #4 (respectively) top sellers on Amazon.com, Inc.'s (AMZN) notebook computer marketplace.
 
Intel at its annual developer forum in September suggested in a teaser slide that ASUSTEK Haswell Chromebooks were incoming.  Currently Dell is the only top-five PC OEM not to offer a Chromebook.

Haswell Chromebooks
Intel teased at the ASUS Chromebook announcement at IDF.

Chromebooks are fast-inheriting the netbook legacy and driving Windows out of the budget space.  After Microsoft began to slowly mothball Windows XP, the netbooks space appeared all but dead, perhaps taken over by tablets.  Now it appears that the problem was the netbooks, but was Windows all along, given that netbooks are seeing a resurgence, driven by Google's Linux-based Chrome OS.
 
Sundar Pichai, the head of Chrome browser and Chrome OS development, was recently put in charge of Android and is reportedly working to merge the two operating systems' APIs and tree.  If Chrome OS gains access to Android's massive app catalog that could spell the beginning of the end for Microsoft Windows in the budget-to-mid-range laptop market.
 
Indeed, a report from Bloomberg suggests that Microsoft CEO candidate Stephen Elop, Microsoft's current devices chief, is pushing his company to focus mostly on mobile devices when it comes to consumer operating systems, and on enterprise products -- and shuffle effort away from consumer versions of Windows for notebook computers.  He's reportedly advocated further opening up full versions software offerings like Internet Explorer and Microsoft Office for other platforms (such as Chrome OS or Android).  Such a move could prove a prelude to an exit of the low-to-mid range PC market, as it would erode Microsoft's advantages over ChromeOS and other rivals in terms of software availability and familiarity.  
 
Stephen Elop is currently on a shortlist of candidates to become Microsoft's next CEO.  Microsoft's search committee, chaired by top shareholder, former CEO, and company co-founder Bill Gates is expected to announce sometime this month or next month.
 
Of course it Mr. Elop or not, it's perfectly possible that Windows could rebound and continue to be a strong forced in the notebook market.  Microsoft did move 80 million units (to warehouses) compared to about 1 million Chromebooks.  However, Chromebooks appear to be faring far better in direct sales to consumers (which are not in that IDC metric), given their sales on Amazon.  Still the take-home message is that Windows may be down, but it remains the dominant power in the market, until Chromebooks or something else come along and grow sales to a more significant volume.

Vivobook
Despite waivering support, Windows 8 notebooks still comprised the bulk of ASUSTEK sales.

Despite the relative fizzle of wearable computers -- a supposed "next big thing" -- ASUSTEK plans to remain open to the possibility of a smartwatch or similar device.  It said it will introduce a wearable computer offering at the June 2014 Computex trade show in Taiwan.  The wearables segment has been continuously dredged up since the 1980s, when it was first introduced by high-tech Japanese firms, such as smartwatch pioneer Seiko (Holdings Corp. (TYO:8050)).

Sources: ASUSTEK [filing], Bloomberg [analyst estimates], Taipei Times





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