As HP (HPQ) CEO Meg Whitman made the media rounds last week to discuss the company's earnings for the second quarter, she noted that the company is reentering the tablet market this fall with a device that will run on Microsoft's (MSFT) new Windows 8 operating system. Considering how hot the mobile space is now compared to the dwindling demand for products that HP has traditionally offered, this is a very good mood.
However, it remains to be seen if this play will be enough to help HP remain competitive against dominant manufacturers like Apple (AAPL), Samsung and now Google (GOOG). Last week, Google closed a $12.5 billion transaction to buy Motorola (MMI), making it now able to install its popular Android operating system on mobile devices it manufacturers, including tablets.
HP attempted to get into the tablet market last summer with the introduction of the TouchPad. It was powered by WebOS, and was the first tablet to be powered by the system. HP acquired WebOS in 2010 when it bought Palm. Needless to say, the TouchPad was not a hit for HP. Just months after it was introduced, it was essentially shut down because HP decided not to use WebOS on its tablets and phones anymore. An interesting sidebar is the reported
The success of HP's first tablet was hampered by the unpopular WebOS. I don't think that will be the case with the new Windows 8. Already, it is getting glowing reviews. Furthermore, there are consumers, believe it or not, who have tired of Android and iOs devices.
No matter, the issue will still be whether HP's tablet will have the price, design and features that tablet users demand in this device. HP is going into a market that is becoming more and more crowded. The bulk of the devices are powered by Android. This includes the Kindle Fire sold by Amazon (NASDAQ: AMZN). Then there is the Apple iPad. While manufacturers seem to be eagle to produce the product, it appears consumers don't seem as eager to buy them.
According to IDC, a research firm, the number of tablet shipments decreased during the first quarter of 2012. Shipments dropped 38.4%, and that was attributed to sales of Android-powered devices declining. in sales. It was the Apple iPad that dominated. It shipped 54.7% of tablets during the fourth quarter of 2011, and 68% of them during the first quarter of 2012.
ComScore, another research firm that tracks the digital market, noted that the Kindle Fire been popular. As a part of the Android market, the Kindle Fire has almost doubled its share in the past two months from a 29.4% share in December 2011 to a 54.4%share in February 2012. comScore further noted that Samsung's Galaxy Tab family followed with a market share of 15.4% in February, followed by the Motorola Xoom that carved out a 7% share. The Asus Transformer and Toshiba AT100 "rounded out the top five with 6.3% and 5.7% market shares, respectively," according to comScore.
I point out these stats to show that HP will be up against some pretty solid competitors when it enters the tablet market. It is concerning that it was unable to capitalize on its purchase of Palm. The fact that the TouchPad was dead on arrival also gives me pause about the tablet HP will roll out in the fall. Its savings grace may just well be that it is powered by Windows 8. Clearly banking on just one device to further improve earnings is senseless. However, I do believe that HP's willingness to take on this project shows it is open to making meaningful changes, even though it means stepping outside of its core business.
That core business includes printing, personal computing and software development. HP's printing business is deteriorating quickly, which is troublesome because that business is responsible for most of HP's profits and cash flow. For example, revenue from the imaging and printing group declined 10% year over year with a 13.2% operating margin. Revenue from commercial hardware was down 4% year over year with commercial printer units down 7%. Consumer hardware revenue was down 15% year over year with a 13% decline in printer units.
To get better control over its finances, the company has put in place a multi-year restructuring plan. This includes laying off 27,000, which is the largest number of workers the company has ever let go at one time. That amounts to 8% of its workforce worldwide. The layoffs are expected to be completed by the end of 2014. The company is touting the layoffs as necessary to improve execution and to fund the company's long term health. This will hopefully help the company deliver the greatest value its customers and shareholders.
The restructuring is expected to generate between $3 billion and $3.5 billion in savings each year through 2014. HP plans to reinvest a majority of the savings back into the company.
In announcing its second quarter earnings, the company reported that net revenue was down 3% to $30.7 billion. That compared to $31.6 billion the company took in during the second quarter of fiscal 2011. Earnings per share were down from the prior-year period 24% to $.80. For the second quarter of fiscal 2011, EPS was $1.05. The company's operating margin slipped during the second quarter of fiscal 2012 to 8.9% from 11.3% from the prior-year period.
HP remains committed to paying dividends. In May, the company announced that its board of directors declared a regular cash dividend of $13.2 cents per share on the company's common stock. HP is trading around $22 at the time of this writing. If the restructuring is successful, I think we will see the stock trading closer to $35 by late 2013 and beyond.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
