This is a subset of my full DDR Thesis which is here https://strawman.com/reports/DDR/Slomo?view-straw=27568.

The cornerstone of that thesis is that DDR is a high quality (but low margin) compounder that dominates a competitive, cyclical industry so volatility in their financials and share price may throw up opportunities from time to time.

This is the PC Refresh part of the Thesis which looks at the structural (AI PC’s), cyclical (Refresh cycle, Windows support) and seasonal (Q3 weak, Q4 strong?) factors that may be presenting an opportunity at current price / Mkt Cap.

PC Sales Background

PC Sales made up 19% of Revenue for DDR in FY23.

This is down from ‘normal times’ in FY19 when it was 25%. It grew to 27% and 28% in the covid years of FY20 and FY21 before flattening to 23% in FY23 and then 19% most recently.

Covid saw a big bring forward of demand due to a combination of factors including WFH and free money. In those years FY20 and FY21 PC Sales Revenue jumped 25% and 26% respectively. FY22 and FY23 normalised to a 5% increase and then a 13% decrease.

Given the size of this segment, recent PC sales falling has had a negative impact on revenues and profits.

There is now an expectation of a large increase in PC sales will occur due to – replacement of aged PC bought in the Covid years, Windows 10 support expiring in Oct-25 and the introduction of AI PC’s.

Questions

The big questions now are how big will this be and when will it occur?

DDR has been spruiking this Refresh cycle for a while and it makes good sense.

The last time they talked about this was 1H24 results in August.

I was expecting an update based on Q3 24 (Sep-24) in Oct but none was given.

Their competitors and comparables are mainly listed in the US so they report quarterly and might give us a better sense of where this Refresh cycle is up to.

If we assume the ANZ market is not far behind the US this might give some clues as to timing and potential size.

US Comps

I looked at Ingram Micro (INGM) and TD Synnex (SNX) on the NASDAQ as they are many multiples bigger than DDR (35x and 42x bigger by revenue respectively), have a similar business model and are the biggest DDR competitors in ANZ.

INGM’s last report for Q3 24 was on 13-Nov-24 and SNX reported Q4 24 on 10-Jan-25.

INGM and SNX are essentially singing the same song as DDR – that the PC Refresh cycle should be starting up by about now and should be big when it gets here, but it’s running late... should be here any quarter now…

Ingram Micro on 13-Nov-24: “PC refresh cycle starting to happen, although it may not be at the pace that industry analysts had predicted”

SYNNEX on 10-Jan-25: “TD SYNNEX observed a recovery in the PC market in Q3 and Q4, with high-single digit growth in the PC category.” And

“For the full fiscal year 2025, TD SYNNEX expects gross billings to grow in the mid-single-digit percentage year-over-year, partly due to the anticipated PC and server refresh cycle.”

This may be why DDR did not release a Q3 result – because there was nothing good to say on the hotly anticipated PC refresh cycle or more broadly?

Other forecasts

I also looked at the forecasts from IDC (https://www.idc.com/getdoc.jsp?containerId=prUS53061925) who claim to be “the premier global market intelligence, data, and events provider for the information technology, telecommunications, and consumer technology markets.”

On 8-Jan-25 they said “The PC Market Closed out 2024 with Slight Growth and Mixed Views on What 2025 Will Bring”

Further, that:

Looking ahead to 2025, the PC industry has several tailwinds and headwinds, which makes for a challenging outlook and difficult demand planning.

Enterprises continuing on the path of upgrading hardware before the end of support for Windows 10 which is scheduled for October 2025.

The impact that on-device AI will have on the industry will be positive, even if the inflection point is delayed.

On-device AI for PCs is inevitable, but suppliers trying to be patient as their customers are dealing with macro headwinds.

Conclusions

The PC Refresh is surely a thing and is due soon but as not started yet. This is likely for a few reasons.

Firstly the Windows 10 Support End Date is not until Oct-25, still plenty of time.

AI PC’s are in their infancy and more affordable mid tier models will be released through 2025.

End customers of DDR’s customers are still doing it tough with persistent inflation keeping interest rates higher for longer than expected – NZ is in a second recession, AUS is in a per capital recession.

AUS election cycle due to start (often capex decisions get delayed in times of policy uncertainty – this has been noted in the US market).

Things should be a lot clearer by mid-2025.

If I had to guess

The PC refresh cycle has only been delayed as it can’t be cancelled.

There may be a confluence of waiting for affordable mid range AI PC’s in mid 2025 and not needing to get onto Windows 11 (Win 12 is expected later in 2025) until mid 2025 or later.

Opportunity: This could see a long awaited surge in PC sales to corporates and a big bump in revenues in H2 25 if not sooner.

Risk: This also has the potential to cause inventory build up and write / mark downs if distributors over prepare for a cycle that is delayed and seeks different inventory (AI PC’s) than what they have in store.

The best distributors should be able to benefit by positioning appropriately for this now and as 2025 unfolds.

Next Steps

These findings are not what I had expected but are understandable.

So PC refresh part of the thesis is delayed at this stage, rather than broken.

I don’t expect a strong H2 24 for DDR but do expect better clarity on the outlook for FY25.

This may present a buying opportunity if the market is ST and marks DDR down on FY24 results as it’s been doing after recent stumbles.

I'll also be keeping an eye on the INGM Q4 24 result which is due mid-Feb, just before the DDR FY24 one.

Disc: Held