Hewlett Packard Earnings Preview: What We Are Expecting From First Earnings Post Split?

HP Enterprise (NYSE:HPE) and HP Incorporated (NYSE:HPQ) are set to declare their fourth quarter results on 24^th November. (Fiscal years end with October.) This will be the first earnings release post the recent split of the companies, which was effected on the first day of the new fiscal year. While HP Enterprise comprises the Enterprise Group (servers, storage, networking, consulting and support), Enterprise Services, Software and Financial Services, HP’s portfolio includes the personal computer and printing businesses.

The underlying business conditions for both the companies remain tepid, and a strengthening US dollar is further adding to their woes. In this earnings announcement, we expect the companies to disclose more granularity on their financial data. While we are in the process of splitting our financial model to reflect the change in business operation, in this note, we explore what we expect from their operational divisions.

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HP Enterprise (HPE)

HP Enterprise is comprised of the erstwhile Enterprise hardware businesses (servers, storage, and networking), the software business, HP Services,  and the Financial Services business. In this earnings announcement, we expect the following trends to emerge for each segment:

• HP Enterprise Group: This division includes HP’s Industry Standard Servers (ISS), Business Critical Systems (BCS), and storage solutions. Demand for server is on the mend, and this was reflected in Q2’s shipment numbers from IDC. While vendor revenue in the worldwide server market increased 6.1% year over year to $13.5 billion in the second quarter of 2015 (2Q15), HP’s factory revenues grew by 7.7% to $3.4 billion. We expect that the company will continue to report good growth in its Industry standard server (ISS) revenues, buoyed by the recent increase in server demand and strength in density-optimized systems, which also drove margins.  Furthermore, we expect traditional storage revenue to decline as converged systems gain traction, which should boost sales of mid-tier 3PAR storage unit.
• Software Division: HP Enterprise’s software division revenues will continue to decline, impacted by the shift in its portfolio and operating model to SaaS and subscription-based offerings. Therefore, we expect license and service revenue from perpetual licensing business to decline, and this would impact the overall software division revenues.
• Enterprise Services: The enterprise services division includes technology services, infrastructure outsourcing and application and business outsourcing services. While the new signings for this division is improving, account run off continues to erode the  order book.  We expect that the company will continue to report improved signings, but revenues will decline as the run off affects topline.
• Networking Division: While networking revenues have been under pressure, Aruba’s acquisition did boost revenues in Q3. We expect that this trend continued in Q4 and HPE to report growth in networking revenue.

 HP Incorporated (HPQ)

HP Inc. consists of the  personal computer and printing businesses. The underlying trends in these industries suggest that the company will report a decline in revenues.

• PC and workstation division: According to Gartner, worldwide PC shipments experienced a decline of nearly 7.7% in the third quarter of 2015 despite the much awaited the release of Windows 10 in July. ^[1] Market leaders, especially HP, were most affected by this trend. Although HP’s market share was constant, its number of units shipped declined by 4%. We believe that this decline in shipments will hurt HP’s top line and bottom line performance in Q4.
• Printing Division: According to IDC, the worldwide hardcopy peripherals market shipment declined by 6% in Q2 2015. ^[2] The trend indicates that demand for both inkjet and laser printers faltered in Q2, as was the case in Q1. We believe that this trend continued in Q3 too and was reflected in Lexmark’s result as its laser printer hardware revenues declined by 16% and supplies revenues by 13%. Furthermore, channel inventory for supplies increased during Q3, indicating a slowdown in sales.  Moreover, we suspect some softness in demand continued in Q4. We also expect that HP’s market share was under duress due to aggressive pricing from Japanese competitors in the printing business, primarily due to the weakness of the Yen.

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1. Gartner Says Worldwide PC Shipments Declined 7.7 Percent in Third Quarter of 2015, October 8 2015, www.gartner.com [↩]
2. Worldwide Hardcopy Peripherals Market Declines Nearly 6% in the Second Quarter of 2015, August 24 2015 [↩]