Hewlett Packard Incorporated Earnings: Downturn In Underlying Industries Affects Topline

Hewlett-Packard Inc. (NYSE: HPQ) reported its first quarter earnings for fiscal year 2016. (Fiscal year end with October) In line with our expectation, HPQ’s revenues declined by 12% (5% in constant currency) to $12.2 billion. ^[1]  The company delivered $0.36 in non-GAAP diluted earnings per share, marginally down from the year-ago quarter. The company attributed the decline in revenues to the appreciation of the U.S. dollar and soft demand in the printer and PC industry. In this note, we review the earnings for the company.

See our full analysis on HP

 PC Revenue Declines Inline With The Industry, While Profitability Outperforms

According to IDC, worldwide PC shipments experienced a decline of nearly 10.6% in the fourth quarter of 2015. ^[2] The company’s personal systems division performed in line with the industry as both the number of shipments and revenue during the quarter declined over and above the market decline. While consumer revenues declined 16%, commercial revenues declined by 11% as the buyers continued to shy away from purchasing PCs. Furthermore, netbook and desktop shipments declined by 8% and 13% respectively. As a result, the company reported 13% year-over-year decline (6% in constant currency) in revenues to $7.5 billion. Operating profit declined to $229 million or 3% of revenue indicating that pricing in the industry continues to remain tepid. However, the company is implementing its strategy to move away from negative margin PC verticals and this helped the company to outgrow the market profitably and maintain its #1 position in commercial with an all-time high share of 24% in calendar fourth quarter of 2015.

Printer Division Revenues Shrink Amidst New Launches

According to IDC, the worldwide hardcopy peripherals market shipment declined by 6.3% in Q3 2015. ^[3] The data indicated that demand for both inkjet and laser printers faltered in Q4, as was the case in previous quarters. However, shipments of basic and managed print services (MPS) devices continue to grow, posting more than 380,000 units in 3Q15. Furthermore, high-end color laser devices (45 ppm+) recorded double-digit year-over-year growth (15.3%). We believe this trend was prevalent in the quarter as well, and was evident in the recently declared results of Lexmark’s. HP’s supplies revenue declined by 14% (8% in constant currency) year over year, and hardware units declined by 20% year over year. As a result, the printer revenue declined by 17% (11% in constant currency) to $4.6 billion.

However, the company announced  launch of  PageWide XL product in graphics portfolio for its initial entry into the technical production market. HPQ hopes to disrupt a $1 billion market through these fast large-format mono and color printers and achieve a leading share position.

The company is also targeting the SMB segment in emerging markets, and launched the DeskJet GT, a continuous ink supply system printer to meet the needs of these high-usage customers. In the coming months, the company is also planning to make other strategic announcements around 3D printing.

We are in the process of rebuilding our HP incorporated and HP Enterprise model. We will update these models shortly.

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1. See HPQ’s Pre-earnings article [↩]
2. PC Market Finishes 2015 As Expected, Hopefully Setting the Stage for a More Stable Future, According to IDC, January 12, 2016, www.idc.com [↩]
3. Business Inkjet Market Continues Its Growth Trajectory with 16.3% Year-Over-Year Growth in the Third Quarter of 2015, According to IDC, December 8 2015, www.idc.com [↩]