Editor’s note: In his analysis of HP’s latest earnings report and corporate update, Technology Business Research analyst concludes: HP’s short-term results are pressured by strategic reorganization, and the vendor’s long-term market positioning remains unclear.

HAMPTON, N.H. - HP is in the midst of executing prolonged restructuring initiatives to realign its sales and product strategies to trends in the global data center and PC markets. The vendor is investing in higher-growth segments such as cloud, big data and security, and is expanding its consumer and commercial PC portfolios to protect market share. Year-to-year revenue growth from HP’s commercial PC business and sustained success in the x86 server market, both key revenue drivers, are signs that HP is adapting its business to the global IT market. The vendor will continue to rely heavily on in its core PC and server portfolios to drive revenue and to create entrance points into new deals as HP seeks to become further entrenched as a go-to end-to-end solutions provider.

HP revenue declined a reported 2.5% year-to-year to $28.4 billion in 3Q14, caused by declines across each business unit except for the Personal Systems Group. HP’s 3Q14 results exhibit its core competency as a hardware vendor; however, HP struggles to develop deeper engagements with customers beyond servers and PCs. Storage, software and services revenues declined year-to-year in 3Q14, which demonstrates HP’s difficulty in aligning its go-to-market strategies to cloud- and big data-driven market changes. Concurrently, competitors are also adapting their business strategies, which fuels competition. For example, HP faces rising competition as Dell strengthens its channel presence, Lenovo integrates IBM’s x86 server business and cloud-based services from providers such as Amazon and Google are increasingly adopted by data center customers. TBR believes HP’s short-term results will remain pressured by companywide restructuring efforts, while the vendor’s long-term positioning remains unclear as vendors across the industry execute significant strategic changes and reposition for future growth.

  • HP plans to break into two companies to more nimbly address market opportunities

In October, HP announced plans to break into two companies by November 2015. The two companies will be named Hewlett-Packard Enterprise and HP Inc. and will have separate financials and stock, but will be both overseen by Meg Whitman as CEO and Chairman, respectively. Hewlett-Packard Enterprise comprises the Enterprise Group, Enterprise Services, Software and Financial Services. HP Inc. consists of Personal Systems and Printing. Based on performance over the last year, the two halves are approximately equal in revenue and operating profit.

TBR believes HP’s decision to split into two companies reflects the firm’s claim that companies with a more narrow focus are better positioned for success in the IT market. HP is not alone in this strategy, indicated by the recent wave of breakups and spinoffs in the IT market. For example, Symantec also announced plans to split into two companies, while EMC uses a federated approach through its Information Infrastructure, VMware, Pivotal and RSA Security businesses and IBM recently completed the divestiture of its x86 business to Lenovo. TBR believes potential drawbacks of HP’s decision to split its company include confusion among HP’s channel partners and customers, the loss of some synergies in the supply chain and sales process and the potential division of key assets, especially HP Labs. Some benefits of the decision to split include cleaner and more beneficial alliances, more focused marketing and overall GTM strategies, more investment flexibility and more freedom for each company to restructure as it sees fit.

HP plans to take one year to execute the separation of the two companies, but ultimately the companies will not be completely separate, as they will share top executives. In many cases the relationships between the two companies will be similar to the relationships among HP’s separate business units prior to the split. There will be partnerships, handoffs and financial arrangements between the two companies similar to those currently inside HP. At the same time, HP’s business units will also be doing what they are doing now — refining their business models and working on improving their execution.

TBR believes the benefits of splitting into two independent companies will outweigh potential drawbacks such as partner and customer confusion. Separate, and more nimble and focused, companies, better position HP to adapt to changes in the global PC, printing and data center markets. As these markets continue to rapidly change, separate companies will provide HP with clearer strategic roadmaps, and more focused executive structures and investment strategies to quickly respond in increasingly different PC and data center markets.

  • HP explores “new computing experiences” with its PC business

While the size of the PC market has solidified, global PC vendors continue to vie for market share. More specifically, companies such as Acer, Asus, Fujitsu and Toshiba are losing revenue, profits and market share to larger scale competitors including Lenovo, Dell and HP. TBR believes HP will target the commercial segment to spark growth, particularly in Europe where Lenovo’s market share and revenues have been surging since 1Q14.

HP is using an innovative product design strategy to spark interest for its portfolio, but HP’s difficulty communicating the benefits of innovation to a largely price-driven market will limit its ability to protect margins and reclaim lost market share. The disconnect between HP’s portfolio and its customer base, particularly among consumers, combined with continued pricing and competitive threats will negatively affect short-term results.

In October, HP unveiled a new computing device named Sprout that combines a large flat-screen display, similar to HP’s Pavilion Touchsmart touch desktops, with a flat touch-enabled work surface and an overhead assembly that combines a projector and a 3-D scanner. HP will use the device to improve its positioning in the budding 3D printing market, as Sprout is programmed to improve 3D scanning simplicity. Additionally, HP also plans to develop both commercial and consumer 3D printing solutions.

Sprout and 3D printing exemplify HP’s use of innovative product design to bolster its marketing initiatives and brand perception. While the technology is still nascent and has several years before it impacts bottom or top line, HP will continue to develop new and innovative products to establish a reputation for being an innovator in the PC market. Additionally, HP is in a solid position to emerge as a leader in the 3D printing market, but 3D printing will remain a niche market and will have a limited impact on HP’s financial results in the near-term. The vendor’s early investments, coupled with its experience with a global distribution network will enable the firm to bring 3D printers to the market faster than competitors.

TBR believes HP is taking the right steps to retain its market share and protect profitability in the rapidly changing global PC market, but competitive technology and pricing pressures will continue to drag down short-term results.

(C) TBR