HP Earnings Preview: Revenue To Remain Flat

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Hewlett-Packard (NYSE:HPQ) is due to release its Q3 earnings on August 20. In the previous quarter, HP’s revenues declined by 1% year over year to $27.3 billion, albeit at a slower pace. Furthermore, the company delivered $0.88 in non-GAAP diluted earnings per share, up 1% from the year-ago quarter. A tough business environment continued to affect its profitability across most geographies and verticals. During the quarter, the company has taken prudent steps such as launch of new products and services to supplement its business lines. However, we expect that weak enterprise demand for HP’s services will continue to impact HP’s revenues across its business divisions.

See our full analysis on HP

Outlook for Q3 and 2014

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For Q3 FY14, HP estimates non-GAAP diluted net EPS in the range of $0.86 to $0.90, and GAAP diluted net EPS in the range of $0.59 to $0.63. For fiscal 2014, HP estimates non-GAAP diluted net EPS between $3.63 and $3.75 and GAAP diluted net EPS between $2.68 and $2.80. Fiscal 2014 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.95 per share, related primarily to the amortization of intangible assets and restructuring charges. [1]

Restructuring In Focus

The company announced significant restructuring plans in May 2012 as it planned to simplify business processes and lower its sales and marketing expenses. According to its plans, the company is slated to reduce its workforce by 34,000 by the end of 2014, resulting in projected savings to the tune of $3.0-$3.5 billion annually. However, according to Q2 earnings announcement, the company now expects the reduction in force will reach 41,000 employees by the end of 2014 and will likely total 45,000 to 50,000 by 2015 (i.e. and exodus of another 4,000 to 9,000 employees). The company expected this to create additional run-rate savings in fiscal 2016 of approximately $1 billion per year on top of what it previously laid out ($3.0-$3.5 billion). In this earnings announcement, we want to know the affect restructuring had on HP’s profitability.

Divisional Revenues In The Scanner

Due to a weak macroeconomic environment and restructuring efforts, we expect the company to post a marginal decline in revenue across most of its divisions. However, we expect revenues from the PC hardware division to grow as the company has been able to buck the downtrend in the past few quarters. For most of the other divisions, we project mid-single-digit decline in revenues. We continue to closely monitor the following divisions in this earnings announcement:

1. HP Services and Software Division: HP’s services and software divisions collectively account for 42% of the company’s value. During the last quarter, HP reported a decline across both services and software division as business environment was tepid. While the business environment continues to be challenging, we expect that the decline in services revenues will be less profound as compared to previous quarter, primarily due to a release of services such as Helion network and association with SAP for HANA. In this earnings announcement, we’ll be closely watching HP’s revenues from these new products. Furthermore, we are also monitoring the renewal rate and pricing for HP’s technology and application services. Additionally, 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. In Q1 CY14 (Q2 FY14 as the company has year ending in October), HP’s Industry Standard Server (ISS) division reported 1% year-over-year growth in revenues to $2.82 billion. We expect this trend in server shipment to continue, and the company to report marginal improvement in shipment and revenues for the quarter. Furthermore, we expect the company to register growth in shipments for the recently launched hyperscale Moonshot server as cloud services, which use these hyperscale servers, are gaining traction.

3. Printer Division: HP leads the worldwide hardcopy peripheral market with a market share of 40.3% in Q1 2014. [2] The company continues to target the high-end ink market and commercial hardware rather than low-end consumer hardware. Despite the increase in market share, the printer division reported 4% year-over-year decline in revenues to $5.8 billion in Q1 CY 14 as supplies revenues declined by 6% to $3.866 billion. We believe that a tough pricing environment will continue to negatively impact supplies revenue, and expect the company to report decline. However, we expect that increase in hardware shipment will offset this decline in revenues.

4. PC Shipment And Revenues To Buck The Trend: HP’s PC and workstation division is the fourth largest division, contributing nearly 30% to its revenue and 10% of its estimated value. According to preliminary results by Gartner, after eight quarters of declining shipments, worldwide PC shipments experienced flat growth in the second quarter of 2014. [3] We believe that HP will gain from this turnaround in shipment on the back of new launches  it had undertaken in the previous quarters. Thus, we expect the company revenues from this division to grow this quarter as well.

We currently have $25.04 price estimate for HP, which is approximately 28% below the current market price.

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Notes:
  1. 8-K []
  2. Worldwide Hardcopy Peripherals Market Maintains Its Growth Trajectory in the First Quarter of 2014, June 4 2014, www.idc.com []
  3. After Two Years of Decline, Worldwide PC Shipments Experienced Flat Growth in Second Quarter of 2014, July 9 2014, www.gartner.com []