Hewlett-Packard (NYSE:HPQ) is due to release its Q3 earnings on August 21, and the PC giant’s earnings will reflect the slowing PC market. In the previous quarter, HP reported the steepest decline in revenues in the recent years, as its revenues declined by 10% y-o-y to $ 27.6 billion. Additionally, its net income declined by 30% y-o-y to $1 billion as turbulent macro economic conditions continued to affect its profitability across geographies and verticals.
HP is in the middle of restructuring its business according to the detailed turnaround strategy that it announced in May 2012. However, it is still plagued by a weak enterprise demand and a slowing PC market, and we expect that these factors will continue to affect HP’s revenues across its business divisions in the quarter.
Looking For Updates on Restructuring
The company announced significant restructuring plans in May last year as it planned to simplify business processes and lower its sales and marketing expenses. The company plans to reduce its workforce by 27,000 by the end of 2014, resulting in projected savings to the tune of $3-$3.5 billion annually. While we expect that restructuring will positively impact the bottom line, in this earnings report we would like to know more about any additional steps HP has taken to ensure recovery in revenues for the remaining FY2013.
Revenues Expected To Decline In Q3
As HP is still plagued by a weak enterprise demand and a slowing PC market, we expect a decline in revenue across HP’s divisions in Q3 FY13. In this earnings announcement, we are closely monitoring the following business divisions:-
1.) Services Division: The service division is the largest contributor to HP’s revenues and makes up ~40% of its estimated value. In Q2 FY13, HP reported pressure on new contract signing and pricing as its clients deferred from increasing their IT spend. As a result, its traditional IT services business such as technology and application outsourcing continued to reel from lower renewal rates. We continue to closely monitor HP’s renewal rate and pricing for its technology and application services divisions in this earnings announcement.
However, its Cloud system offering that focuses on converged infrastructure saw good growth. Converged Infrastructure built on technologies like converged storage, software-defined networking and Moonshot server will power cloud computing by seamlessly integrating big data analytics and security. We believe that cloud services are potentially the biggest new revenue source for HP in 2013, and expect that HP will continue to report good growth in revenues from these strategic enterprise services.
2.) Printer & Ink Cartridge Division: The printer and ink cartridge division is HP’s second largest division and makes up ~20% of its value. According to IDC, global demand for printers is waning and the number of units shipped has declined over the past three quarters.  However, HP is focusing on high-end ink market and commercial hardware rather than low-end consumer hardware. In Q2 FY13, HP launched its ink advantage program that caters to enterprise clients. This program bolstered its revenues during the quarter. We expect HP to benefit from these initiatives in this quarter too and revenues to decline at a slower rate.
3.) Server Division: The server and storage division is HP’s third largest business division and makes up ~15% of its value. According to preliminary data available from IDC, the global server revenues continued to decline in Q2.  While HP continues to lead the server global shipment market with 30% share, it reported a 13.6% decline in the number of server unit shipped during the quarter. We expect that HP’s revenues from its industrial server segment will continue to suffer during the quarter due to poor demand across all major geographies, continued macro pressure and an intensely competitive pricing environment.
4.) PC Division: – HP’s PC and workstation division is the fourth largest division, which contributes 29% to its revenue and makes up 15% of its estimated value. Weak PC demand across the world continued to plague computer manufacturers as shipments declined by 11% in Q2 2013.  HP lost its #1 position to Lenovo during the second calendar quarter; however, it did witness sequential growth in the number of units shipped. While we expect that the decline in the global PC market will continue to affect HP, we believe HP has taken some prudent steps such as launch of new advanced thin clients at lower prices to ensure that it maintains its market share. Additionally, it has recently re-launched its tablets in the market.  We expect HP’s revenues for PC division to get a boost from tablets sale. In this earnings announcement, we are paying close attention to HP’s tablet shipment numbers. Additionally, we want to know more about new launches and measures taken by HP to increase its PC sales.
We currently have a near $18 price estimate for HP, which is ~30% below of the current market price.
- Worldwide Hardcopy Peripherals Market Sees Year-Over-Year Decline in Both Units and Shipment Value in the First Quarter of 2013, May 15 2013, www.idc.com
- IDC Q2 Server Data, August 13 2013, www.crn.com
- Lenovo Overtakes HP as the Top PC Vendor While U.S. Shipments Stabilize in the Second Quarter of 2013, July 10 2013, www.idc.com
- See Will HP’s New Tablets Help Fuel A Recovery In Its PC Business?
Disclosure: No positions