Hewlett-Packard Company (HPQ, Financial) is a diversified computer systems company that provides products for consumers, enterprises, government, health and education sectors globally. The company posted second-quarter fiscal 2015 results last month topping on earnings estimates but lagged on sales. Since January this year, the stock is down around 19% as the market is still not sure how the PC and printer company will operate after the proposed split up.
Second quarter in focus
In fourth-quarter fiscal 2014, five of the six business segments were down in revenue, and the decline continued in first two-quarters of fiscal 2015 also. For example, Personal Systems revenues declined 5.3% year over year to $7.74 billion. Printing revenues decline 7% year over year to $5.5 billion; Enterprise Group fell 1.1% from the year-ago quarter to $6.56 billion. Also, the Enterprise Services revenues were down 15.5% year over year to $4.82 billion, and Software revenues were down 8.1% year over year to $892 million.
Consolidated revenues came in at $25.5 billion, representing 6.8% year over year decline and lagged consensus estimate of $25.8 billion. Since the company generates 65% of revenues from the international market, negative currency translations impacted the results. Besides this, lower sales across all its business segments proved a drag on the top line.
As a result of lower sales and pricing pressures in hardware, gross margin declined 19 basis points year over year to 24%. HP’s net income came in at $1.596 billion or $0.87 per share versus $1.691 billion or $0.88 reported in the prior year quarter. However, it managed to beat the Street’s estimate.
The company exited the quarter with $14.77 billion in cash and cash equivalents and long-term debt of $15.46 billion. During the quarter, HP repurchased shares worth $659 million and paid dividends of $291 million.
The proposed split
In October this year, HP will be trying to rehash its way to growth again by splitting the company into two publicly traded companies –Â an enterprise "Cloud" unit, and a commodity PCs and printers business.
Agreed, cloud computing is growing at a brisk pace, but HP’s proposed enterprise cloud division already has a new competitor well ahead of the proposed split. In my last piece on EMC (EMC, Financial), I had mentioned about the acquisition of Virtustream to bolster its cloud segment in order to compete with the likes of Microsoft (MSFT, Financial) and Amazon (AMZN, Financial). Also, HP will be starting afresh in the Cloud business so will have the late mover disadvantage versus its peers in the same market.
However, the opportunities in cloud computing are slated to be growing at a compound annual growth of 30% from 2013 through 2018, according to a report from Goldman Sachs. So the proposed enterprise cloud unit has a better market growth potential ahead.
As for the other unit, PC and printer business, PC sales are already declining, and the doldrums are expected to continue till 2018. However, according to IDC,
"Fortunately for PC makers, tablet growth has slowed," said Jay Chou, senior research analyst, Worldwide PC Trackers. "The PC ecosystem has also begun to see some fruits from efforts to narrow the divide between the PC and mobile devices in terms of both user experience and price points. Nevertheless, much more needs to be done as advances in both hardware and software are expected to benefit an ever wider spectrum of form factors, such as 2-in-1 devices that will further siphon volume from notebooks."
Short-term outlook
As a part of cost cutting initiatives, HP laid off approximately 3,900 people during the second quarter, bringing the total to roughly 48,000 to date. The company plans to cut down 55,000 jobs by the end of fiscal 2015.
EPS for fiscal 2015 is expected to be in the range of $3.53 to $3.73, which is below the consensus estimate at midpoint of the range. So, the short-term woes will continue for investors.
Final take
HP has been executing well on cost control by way of massive job cuts. By the end of fiscal 2015, this will total to 55,000 jobs reduced. The company is planning to spin off the business into two separate entities to pursue growth. However, looking at the historical performance during last four quarters, all but one segment has registered decline in sales for some reason or the other.
Also, exposure to currency translations will impact the growth negatively. Moreover, the macroeconomic challenges and muted IT spending environment remain the near-term concerns.
Hence, for the time being it is better to sell the stock if you have it in your portfolio.
