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4 Things That Could Make HP’s Q2 Better Than Expected

May 20, 2014 | About:

Hewlett-Packard (NYSE:HPQ)'s second-quarter 2014 result is about to release tomorrow and investor closely looking at the stock movement. Driven by a strong PC and server performance, it had reported a better-than-expected first quarter. Will it retain its success in the subsequent quarter too? Let’s take a look.

Hopes Tied to Server Market

Currently, HP is leading the worldwide server market with 27% market share, ahead of its biggest rival IBM (IBM) by 1%. HP’s server roadmap looks very promising as it is gaining share in the low-end server (x86) space and gaining exposure in high-end cloud computing servers.

HP generates roughly 12% of its revenues from servers, almost 90% of which comes from the sale of x86 units. In the past quarter, revenues from servers grew 6% year over year as demand for its x86-based ProLiant servers also increased. If the momentum continues, HP could see further growth in its server revenues in the second quarter.

The company released the first generation of its Moonshot server in April 2013, which according to company CEO Meg Whitman will be able to process complex and intense workloads, and also help the datacenter service providers. The server uses copper-based chips that emits low heat and helps save energy. Although the company has not released any sales figures for Moonshot since its launch, Whitman confirmed that roughly 150 customers are testing their workloads with the server. If there is any positive development at the customers’ end, HP’s server revenues could get a substantial boost.

European PC Market Could Be a Key Driver

PC market has declined for the eighth consecutive quarter, but the rate has moderated in the past two quarters. Among the beneficiaries of the slight turnaround, HP deserves special mention as its PC segment revenue grew 4% year over year in the past quarter. The company recorded 6% growth in total units shipped aided by new product launches, a revival in the European region, and enterprise product refreshes. Whitman is quite positive about growth in Europe.

Market research firm IDC demonstrated an interesting chart that clearly shows HP’s market share gain in the Europe, Middle East and Africa (EMEA) region during the first quarter of 2014. The growth was on account of a surge in PC shipments in Western Europe, which was due to demand boost from the corporate sector. If the PC market in Western Europe revitalizes, it would have a positive impact on HP’s current quarter results.

Cost Cutting Efforts Could Make a Difference

The tech giant’s strict cost containment program played a vital role in the first quarter, which is expected to continue in the current quarter. The tech giant announced a huge headcount reduction of approximately 29,000 under a restructuring program planned in 2012. The program was aimed at saving roughly $3.5 billion annually to help the company invest in newer products and propel business growth.

Falling PC sales are having a bearing on the company, and to keep costs in check it has plans to right size the work force. HP therefore would cut 34,000 jobs by October this year as part of its restructuring program. This would result in a one-time charge of $4.1 billion, but things would change once the annual cost savings goals are achieved.

IT Spending – A Trump Card

The global trade situation is getting better with improving U.S. economy and easing European debt burden. The need for business growth is forcing enterprises to spend heavily for upgrading IT eco systems. Technology research firm Gartner expects global IT spending to grow 3.2% in 2014. The forecast for each segment (Devices, Data Center Systems, Enterprise Software, IT Services and Telecom Services) is equally important for HP as its products serve all end-markets and so could prove extremely beneficial if IT spending increases

Looking Forward

HP is trying hard to keep right things at the right place, but customer preferences and spending behavior could make a difference. Being a strong company, HP is expected to touch new heights with its ability to adhere to changing market needs and integrated management strategies.

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