Dell, Hewlett-Packard Look for a Boost From Windows 8
By: Chad Fraser
The countdown is on to the highly anticipated launch of Microsoft‘s (NasdaqGS: MSFT) Windows 8 operating system, which is due out October 26.
The company feels this new edition will reinvent its signature software, which powers 85% of the world’s computers. Microsoft has invested heavily in the development of Windows 8, including a complete redesign of the user interface, new functions and smoother, speedier performance. In addition, in a direct challenge to Google (NasdaqGS: GOOG) and Apple (NasdaqGS: AAPL), the company has developed versions to run on tablet computers, including its own brand new device, the Surface.
Will Windows 8 Be Enough to Save the PC?
So far, reviews of the software test versions have been largely positive. But the big question remains whether Windows 8—no matter how good it may be—can help stabilize a slumping PC market that has been suffering due to the surging popularity of mobile devices.
Here’s a look at two beleaguered computer makers that are struggling to adapt to the new reality: Hewlett-Packard (NYSE: HPQ) and Dell (NasdaqGS: DELL). Both are hoping Windows 8 will spur businesses and consumers to replace their old laptops and desktops. Meanwhile, they’re looking to offset weak PC sales by moving into more profitable areas, including services and computer servers.
Both beaten-up stocks still have a long way to go in their respective restructurings, but both dominate the industry and they are cheap in relation to earnings. That could give them some appeal to investors willing to take the long view.
Some Bright Spots in Dell’s Otherwise Gloomy Results
In its fiscal 2013 second quarter, which ended August 3, 2012, Dell’s revenue slipped 10%, to $11.4 billion from $12.6 billion a year ago. Operating income fell 18%, to $732 million, or $0.42 a share. Sales dipped 8%, to $14.5 billion. The weak results prompted Dell to cut its forecast earnings for all of fiscal 2013 to $1.70 a share, down from its previous forecast of $2.13.
The company has been working on cutting its reliance on PCs, but it still gets 50% of its revenue from its PC and Mobility (including laptops) divisions, and both saw declines in the latest quarter (of 9% and 19%, respectively).
In response, it is focusing on its more profitable computer services and server and networking products. That effort could be in the very early stages of bearing fruit: Services provided 15% of its overall revenue in the latest quarter, up from 13% a year earlier, and servers chipped in 16%, up from 13%. Moreover these were the only two divisions that saw growth in the quarter, with server sales jumping 14% and services revenue up 3%.
Dell is clearly hoping Windows 8 will help shore up its struggling PC business. But any benefits are likely still a long way off. The late October release means Dell can’t expect any real bounce in the current quarter. Moreover, companies likely won’t start making the switch until next year, and are likely to be much slower doing so than consumers.
There’s a Limit to What Windows 8 Can Do for Hewlett-Packard
Hewlett-Packard, too, is looking forward to the opportunity to sell machines running the new Microsoft operating system. But for now, it’s still untangling itself from a range of issues that have hampered it in the past. And it’s looking to Meg Whitman, just 11 months into the job and its third CEO in two years, to orchestrate a comeback.
Whitman’s plan looks a lot like Dell’s: looking to more profitable products and services to offset slumping PC sales. But the company still has quite a bit of baggage to unload first. First, it’s in the middle of a major restructuring that involves cutting 27,000 jobs by 2014. Plus it’s still struggling to turn around some past acquisitions, such as U.K.-based Autonomy, which HP bought for $10.3 billion in 2011.
As a result, the company posted the largest quarterly loss in its history in its latest quarter: $8.9 billion compared to a profit of $1.9 billion profit a year ago. However, that figure includes a number of unusual items, such as severance related to HP’s restructuring and goodwill writedowns on two major acquisitions: tech service provider EDS, bought in 2008, and PC maker Compaq. Without those charges, it would have posted a profit of $2.0 billion, or $1.00 a share, matching the consensus estimate.
Revenue slipped 5%, to $29.7 billion. But unlike Dell, there were few bright spots to be seen across Hewlett-Packard’s business segments: Sales at the personal systems division (PCs) slipped 10%, which was largely expected. However, sales also declined 3.7% at the server division, and services revenue fell 3%.
One other change to note: Services now account for the largest slice of HP’s revenue, rising to 28.7% of the total—though that’s mostly because of the drop in PC sales.
Analyst Feels Hewlett-Packard Is on the Right Track—but It Has a Long Way to Go
“HP is still in the early stages of a multi-year turnaround, and we’re making decent progress despite the headwinds,” said Whitman in the earnings release.
Jayson Noland, an analyst at Robert W. Baird & Co., agreed that HP still has much ground to cover. He neatly summed up HP’s situation in a Silicon Valley Mercury News article: “There are companies with a lower cost structure, like Lenovo,” he said, “and there are companies that have been much more innovative, like Apple. [HP is] kind of caught in the middle, trying to invest in innovation and cut costs at the same time.” Still, he felt that Whitman “generally seems to be doing the right things, given the cards she’s been dealt.”
HP may still have ways to go before investors see a recovery in share price. For lower-risk alternatives, check out 5 High-Yield Stocks that the Prudent Investor Must Own.
Article originally posted here.