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HP’s Turnaround – Momentary or There to Stay

February 27, 2014 | About:
ICRAOnline

ICRAOnline

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Hewlett-Packard (HPQ)'s first-quarter 2014 results beat analyst expectations and gave the company a good start to the year. The Palo Alto-based tech giant’s PC business that has been sluggish for a long time saw a nice rebound, while the server business gave decent support. Let’s recapitulate some important numbers and find out whether these segments can support the company’s financials in the forthcoming quarters.

Quick Recap

HP posted non-GAAP earnings of $0.90 per share, up 10% year over year. The quarter’s result was above the company’s guidance and street expectations of $0.84. Although revenue inched down a percentage point, restricted cost management gave margins a boost.

HP’s revenue dropped 1% year over year to $28.2 billion. The majority of the business segments continued to lag, but Personal Systems and Enterprise Group showed some signs of improvements. Personal Systems revenue grew 4% as commercial sales increased 8%, which partially offset the 3% decline in consumer sales. Enterprise Group revenue increased 1% on account of improved server and networking business. However, storage and technology services businesses saw lackluster growth. Revenues declined 2% for printing, 7% for enterprise services, 4% for software and 9% for financial services segments. Non-GAAP operating margin grew 60 basis points to 8.5%, reflecting management’s strict cost reduction efforts.

Outlook

HP expects second-quarter earnings in the range of $0.85 to $0.89 per share and fiscal 2014 earnings in the range of $3.50 to $3.75 per share. Although the company’s quarter expectation was 2 cents short of street estimates of $0.89 at the midpoint, fiscal outlook was much higher than the analysts’ average of $3.67.

The cautious outlook reflects the challenges crippling the business environment in some of the geographical regions, and the currency headwinds. The company has better expectations from its European business. This, coupled with new product roll out and the ongoing restructuring, should aid HP’s results in the current fiscal. The company also plans to continue with its "cost-cutting measures" to ward off price competition.

Will PC Business Momentum Stay?

HP chief Meg Whitman must be the happiest person as the company’s PC business took a positive turn after seven quarters. In a situation where the PC market registered a 10% year-over-year slump in 2013, HP’s PC business turnaround projects a good sign. The PC giant unveiled two mobile devices (HP Slate 6 and Slate 7 VoiceTab) during the quarter to boost sales.

The improvement in PC business came mostly from higher corporate sales, although consumers still have a reservation for legacy PCs. With the advent of Apple (AAPL)'s iPad, people were convinced that a thin rectangle portable touch screen with long battery life could easily take care of most of the daily computing needs. The change in preferences disrupted the overall PC market over the past three to four years.

But HP proposes to stick to its strategy of continually delivering newer technologies in personal systems. The tech company announced further additions to its tablet as well as PC lines.

HP’s relentless effort to keep its PC business afloat is encouraging, but we have to wait for a few quarters to get a clearer picture. There is another positive development for the company.

Server Share Could Grow

HP is increasingly focusing on the high-margin server space and its efforts are showing encouraging results. The company expects to gain market share in the enterprise servers owing to the pact between IBM (IBM) and Lenovo (LNVGY).

Last month, IBM sold its low-end server business to Asian PC maker Lenovo – a win-win situation for both the companies. But Meg Whitman foresees distribution disruption in the process for a short period, which gives HP space to widen its market coverage. The interruption in distribution could annoy IBM and Lenovo customers, creating an ideal situation for HP to chip in with its offerings.

HP would leave no stone unturned to make the most of this situation.

Concluding Thoughts

Despite reporting a better-than-expected first-quarter, HP was a tad conservative with its second-quarter projections. The company is working hard to revamp its PC business, but things depend upon the spending. What remains to be seen is if HP could gain share in the server space that would aid the overall growth, and help the company offset the PC business uncertainties.


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