HP Still Has A Long Way To Go Despite Encouraging Results

by Trefis Team
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Quick Take

  • HP reported Q1 FY 2013 earnings at $28 billion, a 6% y-o-y decline
  • The company’s reported non-GAAP diluted earnings at 0.82, beating its forecast of $0.68-$0.71
  • Revenues declined across all business verticals though showed improvement
  • CEO Meg Whitman cites restructuring program as having a big impact on earnings that will start paying off in 2014

Hewlett-Packard (NYSE:HPQ) reported a y-o-y 8% drop in its revenues at $28.3 billion for Q1 FY13. The PC giant’s earnings continued to reflect the slowing PC market and a surge in market share of non-PC devices. While its restructuring plan had a meaningful impact to the bottom line, CEO Meg Whitman said that HP still has a long way to go in the multi-year restructuring process.

Segment Results

The company reported a decline across all its business verticals. The company’s personal system segment at $ 8.2 billion reported 8% decline in its top line. Weak sales of notebook segment, which declined 16%, were partially offset by a 4% increase in desktop sales. Despite a decline in revenues, HP was able to grow its PC market  share by 1.4% confirming HP as the PC industry leaders for the quarter.

The printing business for the company declined by 5% y-o-y, to $5.92 billion. However, product innovation and document workflow products such as the new multi-function printer helped HP report an improvement of 16.1% in operating margins. The newly restructured business verticals, the enterprise group and enterprise services, reported a 4% and 7% y-o-y decline in revenues at $6.98 billion and $5.91 billion respectively.

Restructuring Gains Traction

The company announced significant restructuring plans in May last year as it planned to simplify business processes and lower its sales and marketing expenses as it rolled out a CRM service across the organization by implementing Salesforce.com’s products and services. The company also plans to reduce its workforce by 27,000 by the end of 2014, resulting in projected savings to the tune of $3-$3.5 billion annually. CEO Whitman said that the restructuring was gaining momentum, but this multi-year strategy would deliver significant results only by 2015-16. Whitman credited the restructuring program for significant impact to bottom line. Our valuation is contingent on how effective the turnaround is and the growth potential of its new business lines, and we will be watching these closely.

See our full analysis on HP

For Q2 2013, HP estimates non-GAAP diluted EPS to be in the range of $0.80 to $0.82 and GAAP diluted EPS to be in the range of $0.38 to $0.40. As the company goes through restructuring efforts, the guidance provided by HP stated that revenues were expected to decline across all divisions, except in the software division. We have updated our model with lower projected revenue across all divisions.

Updated desktop and notebook market share

Together with a 14% y-o-y decline in units, HP reported a 16% drop in notebook revenue. It also reported a 4% y-o-y jump in desktop revenue for a 10% decline in units sold. This leads to the conclusion that the company’s announced go-to market strategy is working and it was able to garner higher prices for its desktops. We have included higher unit price in our model, although we project that the company will continue to lose market share.

The enterprise services division contributes the most to HP’s value. EDS is part of the infrastructure outsourcing division and was acquired in 2008 to boost the services division though it has struggled and is is one of the focus ares of the restructuring effort.

We currently have a $17.52 Trefis price estimate for HP.

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