Does Hewlett-Packard Have A Chance With New Thin Client Solution?

May.30.13 | About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) has introduced HP Velocity to expand thin-client solutions for mobility and unified communications. The product is a software enhancement for companies to add real-time communication applications to their solutions. The software enhancement will not sacrifice user experience in the network. In this article, I want to explain why the trend in the global thin-client market will favor a 1% revenue growth of Hewlett Packard's networking division. I also want to explain why the revenue increase will not improve the entire price multiples of Hewlett Packard.

Why will the trend in the thin-client market favor Hewlett Packard's new product? The market for thin client is increasing globally. According to Gartner's chart, global thin-client shipment will rise from around 4 million units in 2010 to 26 million in 2013. Hewlett Packard will benefit from the growing trend with its new product. This will boost the sales of HP Velocity and increase the revenues of the company's networking division.


It is inevitable that the growth of the networking division will not improve Hewlett Packard's price multiples. The networking division is just a small part of Hewlett Packard. In the second quarter, networking revenues were up 1% year-on-year, but the other divisions did not do well. The enterprise group revenue declined 10% year-on-year. The personal systems revenue was down 20% year-on-year. The commercial revenue division suffered a 20% decline in revenue. Hewlett Packard's net revenue was $27.6 billion, a 10% decrease year-on-year.

"We beat the upper end of our non-GAAP diluted EPS outlook for the quarter by $0.05 per share, driven by better-than-expected performance in Enterprise Services and Printing, coupled with the accelerated capture of restructuring savings and improvement in our situation," cooed Meg Whitman, HP CEO.

In the first quarter, networking revenue was up 4%, but the enterprise group revenue declined by 4% year-on-year. The printing division revenue declined 5% year-on-year. The total hardware units were down 11% year-on-year. Hewlett Packard's net revenue was $28.4 billion, down 6% year-on year. The company's earnings per share was $0.82, down from $0.92 in the prior-year period.

"We beat our non-GAAP diluted EPS outlook for the quarter by $0.11 per share, driven by improved execution, improvement in our channel, and go-to-market efforts and the impact of the restructuring program we announced in May, 2012," said Whitman.

Thin-client Solutions

Hewlett Packard has introduced several thin-client solutions into the market in the past. Its HP Performance Series provided more secure and reliable user experience. Its HP Flexible Series offered multimedia deployment and management functionality. The company developed thin-client solutions that worked with leading unified communication solutions.

HP Velocity will solve common thin-client customer problems and tackle performance issues. Working with performance technologies, HP Velocity will allow video streaming, file transfer, and VoIP. "As office workers become more mobile and more smartphones, laptops and tablets enter the workplace, the challenge to secure data grows more daunting," said Jeff Groudan, marketing director, Thin-Clients, HP. "With innovations such as HP Velocity and our support for unified communications, companies can enable their mobile workforce while knowing they have the security, reliability and manageability of thin clients without sacrificing productivity, user experience, or performance."

Hewlett Packard needs the new product to deliver its fiscal 2013 earnings per share outlook. Fortunately, thin-client solutions are driving revenue. When we look at the networking revenues in the recent reports, we notice that they showed year-on-year growth. It is clear Hewlett Packard is operating efficiently with the product and should enjoy improved price multiples. But this is not the case.

With a price to sales ratio of 0.41, Hewlett Packard is trading cheaply, not surprising since its gross margin is 22.32%. The new product will increase the company's networking division revenues, bring down its operating expenses, and improve its margins. But as in the past, net revenue will not show improvement because the division is just a small part of Hewlett Packard. Investors are not likely to witness robust earnings that establish a benchmark for performance.


How is Hewlett Packard performing in relation to rivals. With a price to sales of 0.41, compared with 0.41 for Dell (NASDAQ:DELL) and 2.28 for [[EMC]], an EPS of -6.85, compared with 1.06 for Dell and 1.23 for EMC, Hewlett Packard is not too far behind its rivals. EMC's Horizon View through VMware and Dell's thin-client solutions will provide competition for Hewlett Packard's new product. However, HP Velocity is unique because it allows for real-time communication applications.


Based on the performance of Hewlett Packard's networking division and the growth prospects of thin-client solutions, we can say HP Velocity will improve the revenues of its sector. Looking at the price multiples of Hewlett Packard, its declining debt, its net loss, and share repurchases, we can say HOLD Hewlett Packard for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.