HP to Update Street on Its Turnaround With Q1 Report
Computing giant Hewlett-Packard will give the latest update on the status of CEO Meg Whitman’s multi-year turnaround plan when the company reports earnings today after markets close.
While analysts aren’t yet expecting an improvement on the revenue side, they are expecting results to slide less than they did in the first quarter last year. The consensus of Wall Street analysts polled by Thomson Financial calls for HP to report revenue of $27.2 billion, which would amount to a four percent decline versus the year-ago quarter. In the same quarter last year, sales declined about six percent. Analysts are expecting an improvement in earnings, with the consensus view calling for HP to report 84 cents a share, versus 82 cents a year ago.
HP appears to be struggling with the need to improve sales while also preserving its profitability, and so far it doesn’t seem to be going well. As analyst Toni Sacconaghi of Bernstein Research said in a note to clients circulated Wednesday, for every dollar lost in revenue, HP’s operating profits fell by 53 cents in 2013. In 2014, he expects a decline of 21 cents for every revenue dollar lost in order for HP to meet its guidance.
While that sounds like an improvement, it’s actually a problem. If HP is to deliver on the $3.55 to $3.75 a share it has promised to report in profits for 2014, Sacconaghi argues, its revenue will have to shrink more slowly, or it will have to cut about $600 million from its operating costs or sell more higher-profit products and services than last year.
“While HP’s relative growth versus its competitors has improved, it appears to have come at the expense of margins,” Sacconaghi wrote. “It is unclear if HP’s inability to improve both revenues and margins is due to difficult market conditions or company specific issues,” including price competition from companies like Dell and Lenovo.
There are some possibilities for good news. With IBM selling its x86 server business to China’s Lenovo, HP may be able to capitalize on uncertainty with some customers and boost some sales in that segment, Sacconaghi said. Longer term, Lenovo, known for its aggressive pricing on the PC front, may present a bigger threat to HP’s server business, he said. HP is also relatively strong on the networking front in China, and may not have the difficulties in that market that IBM and Cisco have complained about recently. He expects sales in the Enterprise Group, which were about $7 billion in last year’s Q1, to decline about two percent.
Meanwhile, HP’s services unit continues to be an ongoing problem. Sales there declined six percent year on year in the most recent quarter and seven percent in the quarter before that. “This deceleration is worrisome, as it could reflect sustained Unix, storage and x86 server weakness over the past several quarters, and could take time to reverse even if hardware performance improves,” Sacconaghi wrote. He forecast another decline, from about $6 billion a year ago to $5.6 billion.
On the PC front, Lenovo has already proven itself a threat, and last year dislodged HP from the top of the global PC market. It was a Pyrrhic victory, as the PC business is in its worst state since records have been kept, but research firm Gartner estimates that while Lenovo boosted its share of the market by two percent, HP’s share declined by nine percent. A large deal in India, calling for HP to deliver 1.5 million units over two quarters, could help. For HP, good news like that has been harder and harder to come by. Sacconaghi expects PC sales to come in at $7.7 billion, down from $8.2 billion a year ago.
Here’s another thing to listen for on the conference call: Any hint by Whitman that HP may be contemplating an acquisition or two this year. I’ve argued before that HP may be in the market for a software company, especially a cloud software company in order to bulk up that relatively small business unit. With operating margins problematic, buying a software company would be a logical move, but the problem is finding one that’s both big enough to make a meaningful impact for a company of HP’s size, but also affordable — HP has only $12.2 billion on the balance sheet. That isn’t going to be easy. But then again, nothing about fixing this company has been.