HP Earnings Preview: Revenues To Decline At A Slower Pace

Hewlett-Packard (NYSE:HPQ) is due to release its Q2 earnings on May 22. In the previous quarter, HP delivered better than expected results as revenues were flat and Non-GAAP diluted earnings per share improved by 10% to $0.90. The company bucked the secular downturn in PC industry, and posted growth in PC sales. However, a tough business environment continued to affect its profitability across geographies and other verticals. During the quarter, the company has taken prudent steps such as the launch of new products and services to reinvigorate its business lines. We expect that weak enterprise demand for HP’s services will continue to impact HP’s revenues across its business divisions.

See our full analysis on HP

Outlook for Q2 and 2014

For Q2 FY14, HP estimates non-GAAP diluted net EPS in the range of $0.85 to $0.89 and GAAP diluted net EPS in the range of $0.62 to $0.66. For fiscal 2014, HP estimates non-GAAP diluted net EPS between $3.60 and $3.75 and GAAP diluted net EPS between $2.85 and $3.00. Fiscal 2014 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.75 per share, related primarily to the amortization of intangible assets and restructuring charges.

Divisional Revenues In The Scanner

Due to a weak macroeconomic environment, a slowing PC market and restructuring efforts, we expect the company to post a marginal decline in revenue across most of its divisions. However, we expect revenues from the PC hardware division to grow. For most of the other divisions, we project mid-single-digit decline in revenues. We continue to closely monitor the following divisions in this earnings announcement:

1. HP Services and Software Division: HP’s services and software divisions collectively account for 42% of the company’s value. During the last quarter, HP reported a decline across both services and software division as business environment was tepid. While the business environment continues to be challenging, we expect that the decline in services revenues will be less profound as compared to previous quarter. In this earnings announcement, we’ll be closely watching HP’s renewal rate and pricing for its technology and application services. Nevertheless, HP continues to report double-digit growth in revenues of its strategic enterprise services such as cloud, mobility, security and big data. Therefore, we expect converged cloud services to be the key driver for services revenue during this quarter.

2. Server & Storage Division: The server and storage division is HP’s second largest business division, making up 20% of its value. According to Gartner, HP’s worldwide server shipment and revenue grew during the fourth quarter of 2013. ^[1] We expect this trend in server shipment to continue, and the company to report marginal improvement in shipment and revenues for the quarter. Furthermore, we expect the company to register growth in shipments for the recently launched hyperscale Moonshot server as cloud services, which use these hyperscale servers, are gaining traction.

3. Printer Division: HP leads the worldwide hardcopy peripheral market with a market share of 40% in 2013. ^[2] The company continues to target the high-end ink market and commercial hardware rather than low-end consumer hardware. The revenues for this division declined in 2013 due to a contraction in average selling prices across ink and laser hardware.  The contraction reflected a tough pricing environment. We expect this trend to continue in the current quarter, and the revenue to decline, albeit at a slower pace.

4. PC Shipment And Revenues To Buck The Trend: HP’s PC and workstation division is the fourth largest division, contributing nearly 30% to its revenue and 10% of its estimated value. Weak PC demand across the world continued to plague computer manufacturers during the first quarter as the shipments declined. ^[3] However, the company bucked the trend and reported growth in both revenues and shipment on the back of new launches. Thus, we expect the company revenues from this division to grow this quarter as well.

We currently have $25.04 price estimate for HP, which is approximately 20% below the current market price.

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1. Gartner Says 2013 Worldwide Server Market Grew 2.1 Percent in Shipments, While Revenue Decreased 4.5 Percent for the Year, February 26 2014, www.gartner.com [↩]
2. IDC Finds Continued Growth in the Worldwide Hardcopy Peripherals Market in the Fourth Quarter of 2013, February 19 2014, www.idc.com [↩]
3. Gartner Says Worldwide PC Shipments in the First Quarter of 2014 Declined 1.7 Percent, April 9 2014, www.gartner.com [↩]