Why Hewlett-Packard Needs To Show Progress On The Bottom Line Wednesday

Aug.19.14 | About: HP Inc. (HPQ)

Summary

Hewlett-Packard is in the midst of a two-year restructuring process.

By cutting jobs and shaving costs, HP expects to deliver higher profits to shareholders.

Last quarter, HP saw its revenues decline by 1%, while earnings rose 1% compared to the same quarter last year.

Hewlett-Packard Company (NYSE:HPQ) is set to report earnings for its third fiscal quarter of 2014 after the market closes on Wednesday, August 20. Last quarter, HP saw its revenues decline by 1%, while earnings rose 1% compared to the same quarter last year.

Hewlett-Packard is in the midst of a two-year restructuring process. By cutting jobs and shaving costs, HP expects to deliver higher profits to shareholders. On Tuesday, investors are looking for progress where it counts, on the bottom line.

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Contributing analysts on Estimize.com are forecasting that HP's revenue will be marginally lower than it was in FQ3 of 2013, while earnings will increase by 4 cents per share (5%).

In May 2012, HP announced a major restructuring plan to cut costs. The tech company initially planned on cutting 34,000 cuts by the end of 2014. However, according to an update in last quarter's results announcement, HP is now set on increasing the total number of layoffs to somewhere between 45,000 and 50,000 employees.

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HP's plan to cut its labor force is aimed at providing a much needed boost to the company's bottom line. In six of the previous eight quarters, HP has reported declining earnings on a year-over-year basis. Profits inched 1% higher last quarter, while revenue slipped 1%. This quarter, the market, as represented by the Estimize community, is expecting cost reductions to drive a 5% increase in earnings, while revenue slips ever so slightly compared to the same quarter of last year.

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Although the big story for HP remains its restructuring progress, changes in the enterprise business climate may also come into play. A recent revival in PC demand could give HP's revenue a boost. PC and workstation shipments account for nearly 30% of the company's sales, and relative strength in enterprise hardware and software may push sales above the Street's expectations.

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Tech rivals Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) both reported much stronger-than-expected sales this quarter. Intel's PC Client Group revenue was up 6% year-over-year, while its Data Center Group was up 19%. Microsoft saw its commercial cloud revenue double, while Windows volume licensing revenue was up 11%.

Strength at HP's peers could signal escalating business-to-business spending on technology. In addition to PC sales, HP also competes in cloud services and enterprise services and software, which have both been hot so far this earnings season.

Despite the positive news from rivals in the industry, Wall Street is setting the bar low, expecting HP's sales to fall from $27.200B in FQ3 of last year to $26.988B this quarter. Contributing analysts on Estimize have their sights set $110 million higher, forecasting revenue of $27.098 billion.

In addition to crowdsourcing earnings expectations from hedge funds, asset managers, independent research shops, students and non-professional investors, Estimize also ranks and sorts analysts by accuracy.

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The analyst with the lowest error rate with at least two estimates scored for Hewlett-Packard is Cwill. Over two estimates on HP, Cwill has averaged an extremely low error rate of just 0.5%. This quarter, Cwill agrees with the Estimize community that HP will beat Wall Street's revenue consensus. While Cwill has a higher revenue expectation than the Estimize community, he predicts that HP will miss the Estimize EPS consensus by 1 cent per share.

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On Wednesday, look for further updates from Hewlett-Packard on its restructuring progress. This quarter, the market, as represented by the Estimize consensus, is looking for some real progress on the bottom line. To satisfy investors' short-term expectations, HP will need to report at least 90 cents in earnings per share and $27.098 billion in revenue.

Disclosure: None.