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4 Factors That Could Drive Hewlett-Packard’s Q3

ICRAOnline

ICRAOnline

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Hewlett-Packard’s (HPQ) third-quarter 2014 results are slated to release on August 20. It had reported a mixed second quarter with the top line missing the street’s expectation but the bottom line matching it. The company had a revenue shortfall as most of the product segments performed badly. But profitability improved a notch with better cost saving efforts. Will similar trends be seen this quarter?

Personal Systems Group’s contribution could go up

Last quarter, the segment’s revenue grew 7% year over year mostly driven by higher demand from corporate clients. Total unit shipments went up 10%, which looks very encouraging given that global PC shipment grew 7.4% in the April-June quarter of 2014.

Although most of the thrust for PC upgrade or replacement in the developed countries came from Microsoft’s (MSFT) decision to withdraw its support from Windows XP, technology research firm Gartner believes that the strength from business replacement will continue to hold up the industry to a great extent.

According to Gartner, HP’s continuous effort to regain its strength in the PC business is reflected in the statistics. Globally, HP’s market share grew to 17.7%, up from 16.2% in the prior year quarter. But the company maintained its lead in the U.S. market and improved significantly in Europe, Middle East and Africa (EMEA), with Western Europe in particular. PC shipments in EMEA increased 8.6% from a meagre 0.3% during the first quarter, and eight quarters of drop in a row before that.

Given that strength in EMEA and corporate buying could continue, HP’s new product lineups are likely to perform better thus boosting total revenues.

Opportunity in the server market is growing

As per IT research firm IDC, HP currently leads the overall server market with a 26.5% share, topping IBM’s 19.1%. Possibility of regaining share for IBM looks a bit shaky as it’s sold out its low-end server business to Lenovo (LNGVY), an arena ruled by HP.

HP’s server revenue grew year over year for the third consecutive quarter, aided by higher acceptance of Moonshot servers. The company also teamed up with production technology solution provider Foxconn to manufacture low-cost servers for data centers. HP also introduced its Shark system targeting the SAP HANA big data platform.

Server business operates under HP’s Enterprise Group segment and is its largest contributor. The company’s endeavors for boosting server revenue could show up in the coming quarters and support the segment’s growth as a whole.

Software revenues showing signs of stability

HP licenses IT Management (for traditional, cloud and hybrid setups), big data and security solutions through its Software segment. The company faces stiff competition from the prime software players like IBM (IBM), VMware (VMW), CA (CA), BMC Software (BMC) and Symantec (SYMC). Currently, the segment contributes roughly 4% toward the company’s total revenue.

The company has been proactive in expanding footprint in this high-margin business and eventually made some costly acquisitions that have started paying off well. Last quarter, HP’s Software revenue inched up by 0.4% year over year as weakness in its IP management business was compensated by strength from acquired entities like Autonomy, Vertica, ArcSight, Fortify and its security solutions.

Of late, it’s focusing more on the big data space and has taken part in developing Hadoop architecture to match its competitors’ feat. Opportunity in the big data is vast, and HP is investing continuously for monetizing it.

Moreover, HP could also benefit from its attempt to nurture core product portfolio and improve operational performances of the segment.

Further cost improvements possible

HP expects to cut more jobs in the coming quarters in order to return to profitable growth. As a result, an additional 16,000 employees could leave the company, bringing the total number to 50,000. Initially, HP had announced plans to cut 34,000 positions in its multiyear restructuring plan in May 2012.

The right-sizing will bring down operating costs although the company has to bear certain one-time charges.

Parting thoughts

HP’s broad-based weakness across the majority of the segments could be a concern and hence another quarter of revenue decline is likely. But a reviving PC market and HP’s growing exposure into software and server end-markets could arrest the rate of revenue decline. Additionally, its continuous cost reduction efforts could perk up profitability to some extent.


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