A Tale of 3 Computer Makers

Numbers can tell you a lot.

These are the recent annual earning statements for Dell and HP, plotted as a chart. Each value is shown as a percentage of revenues for that year:

       

Dell's COGS are a higher percentage of revenue (81% in 2008) compared to HP (76%). This is a big deal when net margin is near 5%. Dell's direct model may be more efficient than traditional retail channels, but that doesn't translate to higher margins for Dell. HP's higher overall margins means that they can leverage earnings from their server and printer products to subsidize their battle for greater PC and notebook market share.

Two other things are striking: First, HP has been pretty aggressive in getting their SG&A spending down in line with Dell's (11% vs. Dell's 12% in 2008). However, HP spends 3 times as much as Dell on R&D percentage-wise. That's 6 times as much in absolute numbers ($3.8B vs $610M in 2008). Their efficiency, coupled with a greater investment in R&D, positions HP to do better against Dell in the future.

Now, compare both of them to Apple's numbers:

SG&A spend is at similar levels (around 12% of revenue in 2008), so is R&D (3%), but there's a big difference in their COGS ratios. Apple started the decade looking very similar to Dell & HP, with COGS at 77% in 2001. However, by 2007 it is only 66%, translating to an over 10% increase in net margin, which was 14.9% in 2008, over double HP's. This was a result of Apple changing the game by entering the higher-margin music-player and smart phone business, and that has put Apple in a whole different league.

What's more astounding is that Apple accomplished this transformation with very similar R&D budgets to Dell and HP. However, there was a significant jump only recently in 2008 where Apple increased R&D spending by 40% to $1.1B at a time when HP trimmed their's by 2%. One can only imagine what that $300M extra is working towards after the development of the iPhone.

(Note: Dell's Fiscal Year 08 ended in February 08, while Apple and HP's fiscal years ended in Sept and Oct respectively).