HP Earnings Preview: Revenue Growth In Focus

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Hewlett-Packard (NYSE:HPQ) is due to release its Q4 earnings on November 25. In the previous quarter, HP’s revenues grew by 1% year over year to $27.6 billion. Furthermore, the company delivered $0.52 in GAAP diluted earnings per share, down 27% from the year-ago quarter. A tough business environment continued to affect its profitability across most geographies and verticals. HP has been able to recoup its market share in the hardware segments such as PCs, desktops, tablets and printers through new product  launches, even though business conditions in the IT services division continue to remain challenging. Therefore, we expect that weak enterprise demand for HP’s services will continue to impact HP’s revenues across its services business divisions, and hardware will continue to bolster revenues.

See our full analysis on HP

Outlook for Q4 and 2014

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For Q4 FY14, HP estimates non-GAAP diluted net EPS in the range of $1.03 to $1.07, and GAAP diluted net EPS in the range of $0.83 to $0.87. For fiscal 2014, HP estimates non-GAAP diluted net EPS between $3.70 and $3.74 and GAAP diluted net EPS between $2.75 and $2.79. 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]

Will Revenues Falter Some?

Due to a weak macroeconomic environment and restructuring efforts, we expect the company to post a marginal decline in revenue across most of its services 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 a 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 32% of the company’s value. During the last quarter, HP reported a decline across both services and software division as business environment was tepid. The business environment continues to be challenging, and considering the revenue run off in the last quarter, we expect that the decline in services revenues will be more profound as compared to previous quarter. Furthermore, the company reported softness in new contract signings in the last quarter, and in this earnings announcement, we’ll be closely watching HP’s new contract signings. Furthermore, we are also monitoring the renewal rate and pricing for HP’s technology and application services as both these metrics were trending lower over the past few quarters. 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 Q2 CY14 (which corresponds to HP’s Q3 FY14 as the company has year ending in October), HP’s Industry Standard Server (ISS) division reported 9% year-over-year growth in revenues to $3.09 billion. Considering the 1.3% growth in global server shipment in Q2 CY14, we expect this trend in HP’s server shipment to continue, and the company to report improvement in shipment and revenues for the quarter. [2]

3. Printer Division: HP leads the worldwide hardcopy peripheral market with a market share of over 40%. According to IDC, the worldwide hardcopy peripherals market declined for the first time after three consecutive quarters of growth. [3] The company continues to target the high-end ink market and commercial hardware rather than low-end consumer hardware. This should augur well for HP as most of the revenue growth was in the high end laser sales in Q2. While the tough pricing environment will continue to negatively impact supplies revenue, higher unit sales will offset this decline for the company to post minor growth 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 Gartner, worldwide PC shipments experienced marginal decline in the third quarter of 2014. [4] We believe that HP will continue to gain market share in Q4, as it did in Q3, on the back of new launches  it had undertaken in the previous quarters. Thus, we expect the company revenues from this division to be marginally higher during the quarter.

We currently have $29.79 price estimate for HP, which is approximately 24% below the current market price.

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Notes:
  1. 8-K []
  2. Gartner Says Worldwide Server Shipments Market Grew 1.3 Percent in the Second Quarter of 2014 While Revenue Increased 2.8 Percent, August 27 2014, www.gartner.com []
  3. Worldwide Hardcopy Peripherals Market Declines in the Second Quarter of 2014, August 22 2014, www.idc.com []
  4. Gartner Says Worldwide PC Shipments in the Third Quarter of 2014 Declined 0.5 Percent, October 8 2014, www.gartner.com []