Hewlett-Packard (NYSE:HPQ), one of the largest and best-known PC makers in the world, still has got some ground to cover before it can fully turn around its poor run of falling earnings and revenues that extends a few years back. HP investors are faced with a bewildering situation, where, on one hand, the company appears to be headed in the right direction and on the path to recovery following the Android debacle of two years back, while on the other hand, revenues continue falling at nerve-wracking rates. There are many reasons that go to explaining HP's continuing woes but primary among these is falling PC sales, with no clear end in sight. HP is not just a PC maker; the company sells software, printing systems and offers financial services amongst other products and services. The company recorded negative growth in almost all its major business segments but the PC department was the worst hit. In the second quarter of 2013, HP slipped into second place in the race to become the largest PC maker in the world with a market share of 16.3%, after relinquishing first place to China's Lenovo, which now holds pole position with a 16.7% market share. Nearly all major PC makers, with the exception of Apple (NASDAQ:AAPL), have been on the rough end of the stick as far as PC sales are concerned. Last quarter alone, the PC industry, as a whole, recorded a jaw-dropping 10.9% slump in PC sales.
A recent report by the Gartner Group revealed that worldwide PC shipments fell to just 76 million units in Q2 2013, a massive 10.9% drop compared to Q2 2012.The roaring tablet market is busy gnawing into PC territory and the trend looks set to continue unabated. The table below shows how major PC makers fared in Q2 2013.
Worldwide PC Vendor Shipment Estimates
|Company||2Q 2013||2Q 2013 Market Share||2Q 2012 Shipments||2Q 2012 Market Share||2Q 2012-2Q 2013 Growth (%)|
- Source Gartner Group (July 2013)
- The data includes mobile PCs and desk-based PCs as well as mini-notebooks but excludes media tablets and iPads.
From the table, it is clear that HP increased its global PC market share, relatively speaking, not by growing its absolute numbers of PC shipments, but only by virtue of the much worse slump recorded by its major peers such as Acer Group, which dropped by an incredible 35.3% and ASUS, which sold 20.5% fewer notebooks in Q2 2013 compared to Q2 2012.
HP is currently scrambling to try to meet the ever-growing demand for less expensive and more versatile mobile devices in the wake of the crumbling PC industry that is in the throes of a massive shakeup. The company has instituted a variety of cost-cutting measures and focused more energy and resources in more promising technologies and niches such as data analysis and storage, business software and technology consulting. The measures seem to be working somewhat and have eased the pains for HP a wee bit. Investors did expect bad results for HP; in fact the Q2 2013 results gave a sigh of relief to most who expected something much worse. The revenue and earnings figures, bad as they are, beat HP's own forecasts.
Earnings and Cost-Cutting Measures
HP plans to eliminate close to 30,000 jobs in a bid to rein in on slumping revenues. The company jettisoned an incredible 18,800 workers in the month of April. The company earned just $1.1 billion or $0.55 EPS in 2Q 2013, down a staggering 32% from its $1.6 billion and 0.80 EPS recorded in 2Q 2012.
HP is cutting PC prices in a bid to try to lure reluctant customers to bite the unappetizing PC and laptops hook. Problem is that it is not reducing prices quite as dramatically as one of its main rivals in the business, Dell (NASDAQ:DELL), is doing.
HP Reeling from its Past Sins
HP's missteps of two years back are well documented and are still haunting the company. The company, like most large PC makers, took too long to respond to the radical shift in consumer tastes and preferences from traditional PCs to smartphones and tablets fully equipped with voice recognition software and touchscreens. These devices are not only growing ever-more powerful and popular with consumers, but are becoming cheaper and more affordable too. HP suddenly woke up from its deep slumber and realized this was not just the flavor of the moment and a passing fad but represented the new direction in which the PC industry was evolving. The company rushed headlong into the Android arena with its raft of me-too Android devices that proved disastrous and dented its image. The result: a downward spiral of falling revenues and earnings. This was the seventh-consecutive quarter that revenues fell compared to previous periods. But last quarter's10.9% drop was the worst so far. The massive PC contraction is difficult for HP as the desktops and laptops that have so far been its forte seem to have fallen out of favor with consumers throughout the world.
HP made its first foray into tablet computers and smartphones that operate on the Palm OS platform 2 years ago. That was an ill-timed and poorly-choreographed move that HP's management would like to forget in a hurry. The company is now hot on Android OS tablets and recently introduced a Windows tablet but seems reluctant to dip its toes in smartphone waters again.
HP also plans to take a radical direction by releasing a wave of touchscreen PCs and tablets in a variety of sizes in the coming few months in a bid to lure more customers. These new devices are expected to hit the markets just in time for the upcoming school season.
Where to From Here?
HP is a respected PC maker and is also well known for its printers too. In my opinion, here is what the company is doing right and what it needs to do to try and salvage its bad run in 7 consecutive quarters:
- Personal Systems - revenues for HP's personal systems fell 8% YoY (Year on Year). The company recently demonstrated a range of notebooks and tablets at a conference. Its ElitePad runs on Windows 8 and HP claims it is eliciting excited responses from customers. HP is planning to move into Chrome OS and Google Android devices. Although this might not exactly bring about a HP PC renaissance, this is certainly the right direction for the company to go.
- Printing - HP printers brought in 5% less revenues YoY but with a healthy 16.1% operating margin. I think the problem here lies in the fact that HP makes too many printer models. This can trigger indecision in buyers when faced with the bewildering variety. HP should consider dropping less popular models.
- Enterprise Group - revenues here fell 4% YoY. Networking revenue rose 4% while Industry Standard Servers fell 3%, storage revenue fell 13% and Business Critical Systems revenues fell by close to a quarter - 24%. HP should revamp its SDN (Software Defined Networking) and SDS (Software Defined Storage) segments since there is a strong market for these.
- Enterprise Services - revenues here declined 7% YoY. Operating margins are also low -just 1.3%. HP announced that it is introducing two brand-new enterprise services, namely HP Proactive Insight Experience, and New Mobility Connectivity Services. The movement to the cloud by many corporations is likely to prove to be a challenge to HP as it tries to grow this business segment.
- Software - revenues fell by 2% YoY but provide HP with robust 17.0% operating margins. Although the acquisition of Autonomy has not yet delivered the expected results for HP, there are signs that good progress is being made.
HP is yet to return to growth. Revenues and earnings are steadily slipping. But the recent meeting with partners and customers as well as the introduction of new and exciting touchscreen PCs and tablets seems to be the saving grace that likely prevented HP from slipping into a death spiral. The company is still early in its turnaround strategy and HP investors probably won't see any growth in revenues and earnings for the next two years. The short-term outlook for HP is not good but longer-term investors are likely to reap the benefits of the radical restructuring being undertaken by HP's management.
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.