Editor’s note: Beau Skonieczny is a research analyst with Technology Business Research.

HAMPTON, N.H. - HP maneuvered through macroeconomic obstacles and internal missteps with better than expected results announced on Monday.

HP (NYSE: HPQ) continued to underperform the market in 3Q11, as the organization endured a plethora of challenges stemming from internal and external developments. Despite the challenging conditions, HP revenue grew sequentially by 3.0%, while on a year-to-year basis sales fell 3.5%.

Consumer demand continued to weaken, primarily in mature markets where demand was particularly weak in EMEA, as economic uncertainty inhibited discretionary spending, leading to a 9% year-to-year decrease in consumer sales.

Commercial sales also suffered, falling 2% year-to-year as many small businesses also felt the effects of the uncertain economic state, which weakened HP’s sales mix of Business Critical Systems.

TBR believes HP’s strategic and communications failings also contributed to weak sales, at least by deferring some sales into later quarters.

(Read Bloomberg’s news report on earnings here.)


HP’s Imaging and Printing Group (IPG) was also impacted by external forces, where continuing yen appreciation and channel inventory reductions resulted in a 10% year-over-year decline. As a result, HP’s sales mix of profitable printing supplies as a portion of IPG fell below normal to 64%, subsequently leading to a 460 basis point decline the segment’s gross margin to 12.8%.


TBR believes on-going economic uncertainty and other external factors, such as the recent floods in Thailand, will continue to reduce HP’s revenues and margins in the near term; however, the company is poised to capitalize on long term profit and revenue expansion as spending among commercial customers improves in calendar 2012.

Growth in Future


More aggressive investment in internal R&D and sales capabilities will build long term value for HP and drive profitable growth.

While HP engaged in a number of large scale acquisitions in fiscal 2011, most recently the purchase of Autonomy for $10.3 billion, HP will shy away from mega-acquisitions in the next fiscal year. Instead, the company will target more organic investments in building out HP’s portfolio, brand and global presence via aggressive investment in R&D and sales capabilities.

TBR believes the strategic shift will help position HP to more profitably drive growth in the long term by developing, marketing and selling its own solutions that hold higher margins and have the potential to be leveraged across HP’s broad portfolio to maximize packaging and cross-sales opportunities. HP will maintain a highly selective acquisition strategy, where TBR believes HP will engage in more niche purchases that provide specific capabilities and benefits to HP’s portfolio, such as regional penetration or security capabilities.

Healing Process


As HP continues to repair its brand, other PC vendors will not hesitate to take share.

HP’s brand image was challenged in 3Q11 as customer uncertainty continued to build around HP’s strategic direction. While HP’s new CEO Meg Whitman assured that HP will pursue a steadier course with no surprises during the calendar 3Q11 earnings call, TBR believes there will be a slower healing process as customers regain confidence.

HP’s brand damage was most severe in China, where the company has already endured large-scale product recalls as a result of faulty components from Nvidia and Intel. China PC leader Lenovo amplified the losses for HP, a trend TBR expects will continue in both the consumer and commercial PC market in China.

TBR believes HP’s investment in building more organic growth through increased R&D and sales capabilities will help the company establish stability, subsequently restoring and enhancing brand value in the long term.

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