HP Pre-Earnings: Looking For Restructuring Updates Amid Weak PC Market

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Quick Take

  • HP’s restructuring will be in focus again as the company expects to save $3-$3.5 billion annually, and we expect this to help earnings.
  • As HP’s service division continues to suffer from pricing and signing pressure, we expect its cloud and big data analytics services will stabilize revenue across this division.
  • The global printer and cartridge markets saw double digit revenue declines in 2012 and are expected to recover in 2013. We are closely following HP’s printer and ink division for any signs of recovery in this industry.
  • PC shipments saw a historic decline in Q1 CY13. While HP will be affected by the decline in PC shipments, it has taken some prudent steps to ensure that it maintains its market share.

Hewlett-Packard (NYSE:HPQ) is due to release its Q2 earnings on May 22, and the PC giant’s earnings will reflect the slowing PC market. In the previous quarter, HP reported a 6% y-o-y decline in net revenue to $28.3 billion and a net income of $1.2 billion as turbulent macro economic conditions continued to affect HP’s sales across geographies and verticals.

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As HP continues to restructure its business according to the detailed turnaround strategy that it had announced in May last year, we expect the company to report lower revenues for its different divisions. Moreover, HP is trying to reinvigorate its product lines by launching new products and increasing its R&D efforts.

See our full analysis on HP

Restructuring In Focus

The company announced significant restructuring plans in May last year as it planned to simplify business processes and lower its sales and marketing expenses. The company 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.

In the previous earnings call, CEO Whitman said that the restructuring was well underway. Whitman also stated that while 2013 would be a year in which HP will fix its business, 2014 will be a year in which HP would see recovery and expansion. In Q1 FY13, HP reported that restructuring program significantly impacted the bottom line. HP increased its guidance for adjusted diluted earnings per share for the second quarter to $0.80-0.82 range.

While we expect that restructuring will positively impact bottom-line, in this earnings report we would like to know more about any additional steps HP has taken to ensure recovery in revenues for the remaining FY2013.

Short Term Revenues To Fall

As HP is still plagued by a weak enterprise demand and a slowing PC market, we expect a slight decline in revenue across HP’s divisions in Q2 FY13. However, HP has launched many new products in the past quarters, and we expect these products to drive revenue growth in the coming years.

Some of the division that we are closely monitoring in this earnings announcement are:

1.) Cloud Services To Stabilize HP Services Division

The service division is the largest contributors to HP’s revenues and makes up ~40% of its estimated value. In Q1 FY13, HP reported pressure on new contract signing and pricing as its clients deferred from increasing their IT spend. However, HP did report an increase in demand for its cloud services and big data analytics offerings.

We believe that cloud services are potentially the biggest new revenue source for HP in 2013. Although, its traditional IT services business such as technology and application outsourcing continued to reel from lower renewal rates in Q1 FY13, its CloudSystem offering that focuses on converged infrastructure saw good growth. We will closely monitor this earnings announcement for any improvement in renewal rates. Moreover, we would want to know whether the pricing pressure on HP has eased. If HP were to report higher renewals and prices, we can infer that HP’s new initiatives in cloud services and Software as a Service (SaaS) are paying off.

2.) Printing and Ink Cartridge Division

The printer and Ink Cartridge division is HP’s second largest division and makes up ~20% of its value. HP is the world’s largest printing solutions provider and it plans to leverage this by introducing new, cutting edge multi-function printers and high yield printing accessories. Multi-function printers (MFP) are becoming popular with enterprises as they provide combined multiple functions such as printing, fax, photocopying, scanning etc. As companies upgrade to the new line of printers, we can expect this division to maintain its profitability.

According to IDC, the world printer market is set to recover in 2013 after it posted double digit decline in 2012. [1] We expect that HP will post better revenues for this division as its MFP gain more traction with its enterprise clients. Moreover, as HP is a leader in the printer market, its printer and ink division will give us a fair indication whether this industry is on its way to recovery or not.

3) Server And Storage Division

Server and storage division is HP’s third largest business division and makes up ~15% of its value. According to IDC, HP, with a market share of 27.6% in 2012, is the second largest server manufacturer manufacturer in the world. [2]

As part of its restructuring plan, HP overhauled its ProLiant Gen 8 servers. The company has stated that its Gen-8 server are doing well and have outsold its Gen-7 servers. [3] Additionally, HP launched the energy efficient Moonshot server for addressing the needs of cloud computing, big data analytics and mobile verticals. In this earnings announcement, we would want to know how these products have fared in the market as these product releases are part of the flagging Industrial Server division. If these products continue to gain traction, it will help in stabilizing HP’s server and storage division going forward.

Moreover, HP is keeping up with evolving technology in storage solutions. It has recently launched converged storage solutions that takes advantage of cloud computing. In April, HP reported that it sold out its mid-tier 3PAR storage unit and this product continues to be in high demand.  According to IDC, HP is still the number 2 data storage company in the world. We will be closely following the storage division results for assessing demand of HP’s storage products.

4.) PC and Notebook Division

HP’s PC and Workstation division is the fourth largest division, which contributes 29% to its revenue and makes up 15% of its estimated value. According to IDC, HP posted a substantial 23% double-digit decline in shipments in Q1 CY13.

We expect the decline in the global PC market to continue and HP’s market share to decline further. HP’s market share in PCs declined from 17.7% in Q1CY12 to 15.7% in Q1CY13. HP has taken some prudent steps to ensure that it maintains its market share. [4] In this earnings announcement, we would want to know more about new launches and measures taken by HP to increase its PC sales.

We currently have a near $18 price estimate for HP, which is ~15% below of the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Worldwide Hardcopy Peripherals Market decline in 2012, February 13 2013, www.idc.com []
  2. Worldwide Server Market Rebounds Sharply in Fourth Quarter as Demand for x86 Servers and High-end Systems Leads the Way, Februaury 27 2013, www.idc.com []
  3. Shareholder’s Conference call, March 20 2013, www.seekingalpha.com []
  4. See Will Leap Motion’s 3D Gesture Technology Help Revive HP’s PC Sales? []