HPQ Earnings Preview: PC Sales To Improve, Printer Revenues To Continue Falling

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Hewlett-Packard Incorporated (NYSE:HPQ) is set to announce its fiscal Q2 results on Wednesday, May 24. [1] While we expect the company to report an improvement in PC revenues due to the tepid growth in PC shipments, printer hardware and supplies division will continues to impact both revenues and profitability negatively. Below we discuss what to expect.

For precise figures, please refer to our full analysis for Hewlett Packard Incorporated

Outlook For Q2 2017 And 2017

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For Q2 2017, HP estimates GAAP diluted net EPS from continuing operations to be in the range of $0.32 to $0.35 and non-GAAP diluted net EPS to be in the range of $0.37 to $0.40. For 2017, HP estimates non-GAAP diluted net EPS to be in the range of $1.88 to $1.98.

New Launches Across Product Lines Boost Market Share And Revenues For HPQ

The Personal Systems division is the company’s second largest division and accounts for around 46% of its value, per our estimates. The secular decline in the global PC industry reversed in Q1 2017 with marginal improvement in shipment numbers. [2] IDC estimated global PC shipments grew by over 0.6% in Q1 2017, while HPQ’s PC shipments grew by 13% in the same period. IDC also noted that “HP Inc. took back the top spot for the first time since Q1 2013 after several quarters.”

We believe that the average selling prices (ASPs) of HP’s PCs improved due to a shift in mix to premium category. This could translate into revenue growth during the quarter. The company is also selectively focusing on the high end of the market, which has resulted in margin improvement. This should help the company shore up its revenues and margins for FY2017.

Printer Segment Revenues To Decline 

HPQ’s printer division is its largest division, and we estimate that it accounts for about 54% of its value. In 2016, the secular decline in printer hardware continued, as shipments have declined by 4% to around 99 million. HPQ’s shipments declined by 8.7% as the company continued to maintain its leadership in the space. [3]

We believe that the decline in shipments can be attributed to a decline in sales of channel inventory as the company has changed its supply model. For Q2, we expect that as the company continues to tweak its supply chain management strategy, its supplies revenues will continue to negatively impact revenues. Furthermore, the underlying industries are witnessing secular declines, and this will continue to negatively impact HPQ’s revenues in the quarter and the remainder of 2017. However, we expect ASPs to grow both sequentially and year over year, driven by both mix and pricing. Nevertheless, lower printer and supplies revenues will remain a drag on overall revenues in Q2 and 2017.

At present, we have a $15 price estimate for HPQ’s stock, which is around 20% below the current market price.

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Notes:
  1. HP investor relations []
  2. Traditional PC Market Was Up Slightly, Recording Its First Growth In Five Years as HP Recovered the Top Position, According to IDC, April 11 2017 []
  3. Worldwide Hardcopy Peripherals Market Grew 0.6% Year Over Year to More Than 26 Million Units Shipped in the Fourth Quarter of 2016, According to IDC, 6 March 2017 []