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HP Is Facing Weakness, Watch Out

April 26, 2014 | About:
jaggom

jaggom

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Hewlett-Packard (HPQ) is seen as an older school technology company that has struggled to maintain its profitability due to declining PC sales. However, HP's recent results have been pleasantly surprising.

Some positive indicators

The personal systems division of HP that includes PCs showed excellent growth for the first time in seven successive quarters with the division posting 3.6% increase in revenue to $8.53 billion, largely due to an 8% uptick in commercial PC sales as a result of Microsoft's decision to withdraw support for Windows XP operating system, which led to a lot of companies rushing to upgrade their existing machines.

According to research firm Gartner, HP's consumer PC-based revenue posted a 3% decline in sync with the real depiction, where PC shipments have recorded their seventh consecutive quarterly decline as at the end of 2013.

Although, its industry peers such as Cisco and IBM, are trying to move away from the continued dependence on the PC industry, HP is illustrating improved performance in the division.

Cisco, the world's largest manufacturer of networking gear, is experiencing weak sales because of a paradigm shift in consumer preferences toward cloud computing. It has been forced to issue negative revenue guidance for the future. IBM's revenue continues to be dragged down by the same shift toward cloud computing, and the company's systems-hardware division witnessed a significant 25% drop in revenue during the recent fourth quarter.

Weakness here

HP’s biggest cause for concern seems to be the weaker performance of two important divisions: enterprise-computing and printing.

The enterprise-computing group provides service to the server and related hardware markets. It posted flat revenue of $6.99 billion. However, company’s slight decline in the division's operating margin is a possible sign of lowered future profitability. This is a cause of concern for potential investors.

Due to the servers increasingly becoming commoditized as a product segment, and brand names tending to matter less, the company faces stiff competition as reported by the research firm IDC. But HP currently leads the worldwide server market with a 28.1% share. The selling decision of IBM’s server business to Chinese tech giant Lenovo, the current global leader in PC shipments is another bad news for HP.

Moreover, HP is threatened from Lenovo’s history of settling for lower margins in order to gain greater market share. With the enterprise-computing division accounting for around 40% of its operating profit, the company cannot afford such a scenario at this juncture.

The printing division of HP, which is another major segment in terms of operating profit share, also performed poorly with a 2.2% decline in revenue to $5.82 billion. The 5% increase in hardware unit sales, as compared to an 11% decline during the same period last year, was a positive point for the company. HP plans to make a big jump into the 3-D printing industry by the middle of 2014 that might make a significant difference in the division's revenue.

The disappointing performance of two of HP's main operating divisions coupled with significant management turmoil continuously hurt the company's margins.

Conclusion

Although HP’s debt and free cash flow are impressive, the rise of competitors such as Lenovo is a headwind for the company which has failed to make a significant transition into either mobile or cloud computing. Therefore, investors should probably keep a close watch on HP's near-term developments.


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