Hewlett-Packard (NYSE:HPQ) is due to release its Q4 earnings on Nov 20 and the PC giant’s earnings will reflect the slowing PC market. In the previous quarter, the company reported a net revenue of $30 billion and a loss of nearly $9 billion due to impairment charges related to the EDS acquisition. The company also provided a detailed turnaround strategy and 2013 outlook where the company expects a marginal decline in revenue across all segments in 2013 except the software division. The Enterprise Services business is expected to have revenues of up t0 13% lower and significant margin pressures as well. 
In an effort to stay competitive and release innovative products, the company will increase R&D expenses and IT spending. It plans to simplify business processes and sales and marketing expenses is expected to reduce in the future as it rolls out a CRM service across the organization by implementing Salesforce.com’s products and services. The company also plans to reduce its workforce by 27,000 that will save it $3-$3.5 billion annually. Our valuation is contingent on how effective the turnaround is and the growth potential of its new business lines and we will be watching these closely.
Short Term Revenues To Fall
Due to a weak macroeconomic environment, a slowing PC market and restructuring efforts, the company expects a marginal decline in revenue across all divisions except the software division. The Enterprise Services business will be affected the most and the company expects to have revenues lower by up to 13% annually. It also expects full year GAAP loss per share to be in the range of $2.23 to $2.25.
We believe some divisions are likely to perform well despite the environment and we have detailed it below:
1) Ultrabooks, Windows 8 Tablets, Enterprise Tablets And HP Thin Clients
HP’s PC division is still a top performer despite the slowing PC market, backed by the Envy Ultrabook and Sleekbook line. The ultrabooks have not taken off as well as expected, but as the PC market improves, it will drive HP’s revenues in 2012 and beyond as the company launches the SpectreXT, the latest Ultrabook in the popular Spectre line. Currently this division constitutes just over 15 percent of the current Trefis price estimate of HP.
The company will resume production of tablets running the Microsoft Windows 8 OS and the new range of tablets will run on Intel’s x86 processor powered by Windows 8 Pro, and the ARM processor based Windows 8 RT tablets will not feature in this lineup. This is a strategic move as HP has a huge institutional client base, and the more powerful x86 format is likely to be popular as productivity tools with institutions and HP can leverage this network.
The company also has plans to make a line of tablet based thin clients. It will depend extensively on cloud storage and will enable content sharing between devices. This is probably aimed at better serving enterprise customer that already use its line of Windows 7 based tablets, specifically hotels, hospitality and medical industries. This move will help HP gain market share in tablets without directly competing with Apple iPad, which is more consumer-centric. 
2) Merged Printing and PC Business Entity
According to the turnaround plan, HP will re-focus on its core printing business by introducing new and innovative products. It also combines the print and PC business and the combined entity is worth $65 billion. The company sees a significant cost saving opportunity by combining the two entities and managing a lean, centralized work force for sales and management. HP is the world’s largest printing solutions provider and it plans to leverage this by introducing new, cutting edge multi-function printers and high yield printing accessories. It is a slow growth business, but its leadership position, strong product portfolio and intellectual property will help its profitability and cash flows. Multi-function printers are becoming popular with enterprises as they provide combined multiple functions such as printing, fax, photocopying, scanning etc. and as companies upgrade to the new line of printers, we can expect this division to maintain profitability.
3) Cloud Services
The HP Cloud is based on OpenStack and is a direct competitor to Amazon Web Services. Some of the services are HP Cloud Compute, HP Cloud Object Storage and HP Cloud CDN. This will have a pay as you go pricing. Cloud services are potentially the biggest new revenue source for HP in 2012. HP also announced that it is expanding its Converged Cloud portfolio with Microsoft solutions that could simplify a customers transition to the cloud. The Joint Private Cloud initiative would provide pre-integrated solutions based on joint technology development, and will be a one-stop-shop for sales and support. The HP Converged Cloud solutions will feature Windows Server 2012 and provides customers with a clear path to go beyond virtualization and accelerate their cloud transformation. HP Services constitute 40 percent of our current Trefis price estimate of HP. It currently competes with Amazon (NASDAQ: AMZN) in this space. Notes: