HP Earnings Preview: What We Are Watching
Hewlett-Packard (NYSE:HPQ) is due to release its fiscal third quarter earnings on August 20th. [1] In the previous quarter, HP’s revenues declined by 7% year-over-year. We expect the company to continue to report a decline in revenues and profits in Q3. The tough business environment likely continued to affect its profitability across most geographies and verticals during Q3, and that was likely exacerbated by FX headwinds. We expect that weak enterprise demand for HP’s services will continue to impact HP’s revenues across its services business divisions in Q3. Below we discuss our expectations for the quarter.
Outlook for Q3 and 2015
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For Q3 FY15, HP estimates non-GAAP diluted net EPS in the range of $0.83 to $0.87. For fiscal 2015, HP estimates non-GAAP diluted net EPS between $3.53 and $3.73 and GAAP diluted net EPS between $2.03 and $2.23. While demand for IT services is rebounding, most of the demand is from cloud-based services such as SaaS, PaaS and IaaS. These trends have been negatively impacting HP’s perpetual licensing business, and are visible in the company’s quarterly results. With the Q3 release, we expect the company to post a 6%-8% decline in revenue across most of its services divisions.
HP Services and Software Divisions
HP’s services and software divisions collectively account for nearly 28% of the company’s value, according to our estimates. During the last quarter, HP reported a decline across both the services and software divisions as the business environment was tepid. The business environment remains challenging, and considering the revenue run off of lapsed contracts and pricing pressures in the last quarter, we expect that the decline in services revenues will be more profound compared to the previous quarter. Additionally, the company reported softness in new contract signings in the last quarter, and for this quarter 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.
Server & Storage Division
The server and storage division is HP’s third largest business division, making up around 19% of its value according to our estimates. In fiscal Q2, HP’s Industry Standard Server (ISS) division reported 11% year-over-year growth in revenues, primarily due to double-digit increases in ISS’s ASPs, as the Gen9 ProLiant server drove margins, and overall improvement in the server industry, which grew by 13%. [2] Going forward, the combination of Gen9 and the server refresh cycle should drive growth in the remainder of 2015. We expect the company to post solid growth in ISS shipments, which should offset the decline in revenues from business critical systems and storage. Overall, we expect the division to report moderate revenue gains in Q3.
PC Shipments And Revenues To Decline
HP’s PC and workstation division is the fourth largest division, contributing nearly 30% of its revenue and 15% of our price estimate for its stock. According to Gartner, worldwide PC shipments experienced a decline of nearly 10% in the second quarter of 2015 as customers awaited the release of Windows 10 in July. [3] Market leaders, especially HP, were most affected by this trend. Although HP’s market share was constant, its number of units shipped declined by over 9.5%. We believe that this decline in shipments will hurt HP’s top line and bottom line performance in Q3.
We currently have $30 price estimate for HP, which is slightly ahead of the current market price.
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Notes:
- Q3 2015 Hewlett-Packard Earnings Conference Call [↩]
- Gartner Says Worldwide Server Shipments Grew 13 Percent in the First Quarter of 2015, While Revenue Increased 17.9 Percent, May 28 2015, www.gartner.com [↩]
- Gartner Says Worldwide PC Shipments Declined 9.5 Percent in Second Quarter of 2015, July 9 2015, www.venturebeat.com [↩]