HP Earnings Preview: Revenues To Decline Despite Expected Improvement In PC sales

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Hewlett-Packard (NYSE:HPQ) is due to release its Q1 earnings on February 24th. (Fiscal years end with October.)  In the previous quarter, HP’s revenues declined by 2% year over year to $28.4 billion. Furthermore, the company delivered $0.70 in GAAP diluted earnings per share, marginally down 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 continue to remain challenging for the industry as a whole. We expect that weak enterprise demand for HP’s services will continue to impact HP’s revenues across its services business divisions in Q1. However, the company’s leadership in the hardware segment across printers, PCs servers will continue to boost revenues.

See our full analysis on HP

Outlook for Q1 and 2015

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For Q1 FY15, HP guides non-GAAP diluted net EPS to be in the range of $0.89 to $0.93, and GAAP diluted net EPS in the range of $0.72 to $0.76. For fiscal 2015, HP estimates non-GAAP diluted net EPS between $3.83 and $4.03 and GAAP diluted net EPS between $3.23 and $3.43. [1]

Will Revenues Falter Some?

Demand for IT services continues to main weak, especially in the European region that is in the midst of economic turmoil. Due to this 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 Divisions: HP’s services and software divisions collectively account for nearly 32% of the company’s value, in our estimation. During the last quarter, HP reported a decline across both services and software divisions as the 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 the previous quarter. Additionally, 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 have been trending lower over the past few quarters, and have negatively impacted revenue growth. However, 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. Printer Division: HP’s printer and ink cartridges division is its second largest division and contributes nearly 21.7% to its estimated stock value. HP leads the worldwide hardcopy peripheral market with a market share of over 40%. According to IDC, the worldwide hardcopy peripherals market declined in Q3. [2] To some extent, resilience in laser hardware sales has offset the decline in total sales. This trend seems to have prevailed in Q4 as well as Lexmark, which is one the biggest laser printer manufacturer in the U.S., posted good growth in Laser hardware sales. 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 Q1. 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.

3. Server & Storage Division: The server and storage division is HP’s third largest business division, making up 20% of its value. In Q3 CY14 (which corresponds to HP’s Q4 FY14 as the company has year ending in October), HP’s Industry Standard Server (ISS) division reported a 2% year-over-year marginal decline in revenues to $3.37 billion. However, since the growth in global server shipments in Q3 CY14 has since revived, we expect the company to report improvement in shipments and revenues for the first quarter. [3]

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 IDC, worldwide PC shipments experienced marginal decline of 2.4% in the fourth quarter of 2014. [4] However, market  leaders gained market share over the laggards. HP strengthened its position as its market share improved from 15.1% in Q4 2013 to 19.7% in Q4 2014. We believe that, on the back of new launches  it had undertaken in the previous quarters, HP’s revenues will continue to boost its top-line in Q1.

We currently have $31.33 price estimate for HP, which is approximately 20% below the current market price.

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Notes:
  1. 8-K []
  2. Worldwide Large Format Printer Shipments Continue on Growth Trajectory in the Third Quarter of 2014, According to IDC, December 04 2014, www.idc.com []
  3. Gartner Says Worldwide Server Shipments Grew 1 Percent in the Third Quarter of 2014 While Revenue Increased 1.7 Percent, December 03 2014, www.gartner.com []
  4. PC Leaders Continue Growth And Share Gains As Market Remains Slow, According to IDC, January 12 2015, www.idc.com []