Hewlett-Packard (NYSE:HPQ) is due to release its Q4 earnings on November 26. In the previous quarter, HP reported 8% y-o-y decline in revenues to $27.2 billion as turbulent macro economic conditions and secular downturn in PC industry continued to affect its profitability across geographies and verticals.
During the quarter, the company has taken prudent steps such as the launch of new products and services to reinvigorate its business lines. However, it is still plagued by a weak enterprise demand and a slowing PC market. We expect these factors to continue to impact HP’s revenues across its business divisions.
Revenues To Decline In Q4
Due to a weak macroeconomic environment, a slowing PC market and restructuring efforts, the company expects a marginal decline in revenue across all divisions. We project HP’s revenues to decline by 9% y-o-y in FY2013. While we expect revenues from the PC hardware division to decline by over 13%, we project mid-single-digit decline in revenues for other divisions. Currently, we forecast HP to report $112 billion in revenues for 2013. We continue to closely monitor the following divisions in this earnings announcement:
1. HP Services and Software Division: HP’s services and software divisions cumulatively account for 40% of the company’s value. During the last quarter HP reported an improvement in signings as the renewal rate for its services and software division increased. While the business environment continues to be challenging, we expect that the decline in services revenues will be less profound as compared to previous quarters. In this earnings announcement, we’ll be closely watching HP’s renewal rate and pricing for its technology and application services. HP continues to report double-digit growth in revenues of its strategic enterprise services such as cloud, mobility, security and big data. Therefore, we expect converged cloud services to be the key driver for services revenue during this quarter.
2. Server & Storage Division: The server and storage division is HP’s second largest business division, making up 20% of its value. According to preliminary data from Gartner, HP’s worldwide server shipment grew by 5% in the third quarter, thus arresting a slump of eight consecutive quarters of shipment decline.  We expect the company to report lower revenues due to continued macro pressure and an intensely competitive pricing environment. However, it can register growth in shipments for the recently launched hyperscale Moonshot server. As these hyperscale servers gain traction, they can offset the decline in industrial server shipments.
3. Printer Division: HP leads the worldwide hardcopy peripheral market with a market share of 40.5%.  The company continues to target the high-end ink market and commercial hardware rather than low-end consumer hardware. In the first half of FY13, HP launched ink advantage program that caters to enterprise clients, which bolstered its revenues. We expect HP to benefit from these initiatives in this quarter as well, which should mitigate the revenue decline.
4. PC Sales To Remain Tepid: HP’s PC and workstation division is the fourth largest division, contributing nearly 30% to its revenue and 10% of its estimated value. Weak PC demand across the world continued to plague computer manufacturers during the quarter as the shipments declined. While we expect that the decline in the global PC market will continue to affect HP, it has taken some prudent steps such as the launch of new advanced thin clients and tablets at lower prices, to sustain its market share.  In this earnings announcement, we are paying close attention to HP’s tablet and thin client shipment numbers. Additionally, we want to know more about the measures taken by HP to increase its PC sales.
We currently have $22.96 price estimate for HP, which is approximately 10% below the current market price.Notes:
- Gartner Q3 Server Shipment Data: HP Halts Slide As Dell Slips, November 1 2013, www.crn.com [↩]
- Worldwide Hardcopy Market Shows Encouraging Signs of Slower Year-Over-Year Declines for Both Units and Shipment Value in the Second Quarter of 2013, August 21 2013, www.idc.com [↩]
- Read HP Launches New Products To Counter Slumping PC Sales [↩]