Editor’s note: Tech giant HP made news Thursday by disclosing the $2 billion-plus sale of a server business in China, but the latest earnings report shows revenue declines at each of its business units year-over-year. Technology Business Research takes a look at what’s happening as HP nears a split into two groups. ​

HAMPTON, N.H. – HP’s corporate revenue decreased a reported 6.8% year-to-year to $25.5 billion in 1Q15, as revenue from each of the vendor’s business units declined on a year-to-year basis.

Personal Systems revenue declined 5% year-to-year, caused primarily by weak commercial PC sales, particularly of desktops (desktop units were down 14% year-to-year in 1Q15). Over the same period, HP limited Enterprise Group revenue declines to 1%, as 11% year-to-year industry-standard server (ISS) revenue growth partially offset storage, proprietary server and networking declines.

HP’s operating margin was down 110 basis points to 5.6% of revenue, which TBR attributes to hardware pricing challenges, and subsequent gross margin pressure.

HP’s short-term results will remain pressured in 2015 as the company prepares to split into two entities by November.

In 1Q15, new details regarding HP’s split into HP Inc. and Hewlett Packard Enterprise emerged. In total, the split will cost HP between $2 billion and $3 billion. Both companies will share all of HP’s facilities, but each facility will be separated into HP Inc. and Hewlett Packard offices. Additionally, TBR expects the vendor will continue layoffs after the split in addition to HP’s 55,000-employee layoff plan that will be completed before the split. Layoffs will be focused in ailing businesses such as PSG, as well as in administrative roles.

HP continues to solidify its leadership structure ahead of the split. Marten Mickos, who was originally slated to lead HP’s cloud team, has been shifted from that role to focus on “customer engagement and advocacy.” Additionally, Cathie Lesjak, HP’s CFO, was originally announced as the CFO of Hewlett Packard Enterprise, but has since been reappointed as the CFO of HP Inc. TBR believes these changes in HP’s planned executive structure are indicative of the challenges HP is facing as it prepares to split.

HP updates its ISS portfolio to better address customer demand for analytics

In 1Q15, HP’s Enterprise Group revenue declined 1% year-to-year to $6.6 billion. HP’s server business faces challenges, as the vendor looks to secure its leading share of the x86 server market. Specifically, increased competition from key competitors such as Lenovo and Cisco, continued hardware commoditization and the proliferation of cloud services threaten HP’s ISS business; however, in 1Q15, HP’s ISS revenue increased 11% year-to-year. TBR believes a key differentiator for HP is the depth and breadth of its ISS portfolio, which enables the vendor to fulfill demand for standalone servers, converged systems, hyperconverged solutions, hyperscale servers and other x86-based offerings.

The company will continue to update its server portfolio, with a focus on key technologies such as cloud, analytics and security, to drive the value proposition of its servers and retain its leading position in the market.

HP bolstered its ISS portfolio in 1Q15 with the announcement of new systems based on Intel’s recently launched Xeon E7 v3 product families. The processors are designed specifically for performing analytics on large data sets, which will enable HP to target large organizations seeking to unlock business insights from their existing data. Further, the processors will enhance the value proposition of HP’s server products by reportedly providing up to ten times greater performance per dollar, which will unlock TCO benefits for customers.

In June, HP’s Apollo 2000 and 4000 systems, Integrity Superdome X and ProLiant DL580, DL560 and BL660c Gen9 servers, which incorporate Intel’s Xeon E7 v3 processors, will become available to customers. TBR believes the product updates will help HP adapt to growing analytics demand, and stave off competition from other major server OEMs (17 thus far, including all of HP’s major competitors) that also updated their portfolios with Intel’s E7 v3 product families.

HP’s PSG business falters amid market consolidation and stagnant PC sales

The global PC market is trending down with global PC sales declining single-digits on a year-to-year basis. Consumers are not upgrading to premium PCs, which is pressuring PC vendors to reduce ASPs to spur demand. Larger vendors such as HP, Lenovo and Dell are successfully competing for the market share of smaller companies such as Acer, Asus, Fujitsu, Samsung and Toshiba, which lack the manufacturing scale and sales channel reach to compete against them. Further, HP and its main competitors, Lenovo and Dell, are trimming their wide product portfolios to reduce costs and make the purchasing process easier for customers. HP is focusing product development outside of traditional PC form factors, as well on mobile devices that target specific vertical markets and customers segments, which will help the vendor sustain momentum and protect its install base.

In 1Q15, HP’s PSG revenue decreased 6% year-to-year to $7.7 billion, as notebook revenue growth of 5% from 1Q14 was unable to offset desktop and workstation revenue declines of 17% and 6%, respectively. During the same period, HP’s PSG operating margin declined 50 basis points to 3%, which TBR attributes to a shift in HP’s sales mix toward lower-priced devices. HP is going all-in on low-price PCs, including its Chromebooks and Stream notebooks. Additionally, HP is incorporating new flexible form factors into its PC portfolio through the Spectre x360 product line, which TBR believes will help the company differentiate in the consumer PC market.

Thus far, HP has been more willing than Dell and Lenovo to embrace the entry-level PC market segment, which was demonstrated by notebook revenue and unit sales growth of 5% and 19% year-to-year, respectively, in 1Q15. Increased entry-level PC sales will help HP protect its global PC market share.

However, TBR believes it also has the potential to threaten HP’s profitability as its sales mix continues to shift away from premium devices.

(C) TBR