Editor’s note: Jack Narcotta is an analyst with Technology Business Research. He analyzes Hewlett-Packard following the company’s recent second quarter earnings report. 

HAMPTON, N.H. – HP to grow profit despite declining revenue. The strategies implemented by CEO Meg Whitman and her executive team have not provided remedy to triage shrinking market share and declining revenues. HP has yet to prove it can grow its non-PC and server business to offset declines in those two industries, and a hyper-competitive pricing environment that will persist through 2014 will limit HP’s ability to rebound from its downward growth trajectory.

In 2Q13 (HP’s fiscal 3Q13) HP’s Personal Systems Group (PSG) recorded $7.7 billion in revenue, a year-to-year revenue decline of 11%. Notebook and desktop PC product lines, which in 2Q13 represented nearly a third of HP’s corporate revenue were hit hardest, with PC unit shipments falling 11% year-to-year in 2Q13 following a steep 20.1% annual decline in 1Q13.

HP’s top line is in slow decline. Though its revenue sources are varied – services, printing and its personal computing OEM business – the firm as a whole has seen sequentially declining revenue in every quarter for more than a year.

In calendar year 2011, HP’s revenues totaled $127 billion. In 2012, full-year revenue was $120 billion. TBR expects prolonged lukewarm consumer response to HP’s Windows 8 notebook and tablet PCs, as well as pricing pressure in an increasingly competitive x86 server marketplace, to shrink revenues to $114 billion in the current calendar year and $109 billion in 2014. HP employs more than 300,000, providing it with ample room to cut costs; headcount reductions are a key component of Whitman’s restructuring efforts. By trimming its rosters – HP employs more than 300,000, providing it with ample room to cut costs – it can sustain profitability at levels previously attained with higher revenue and not lower expenses.

However, HP’s operating income – among the highest in the PC and server industries – remains vulnerable to decline as server revenues shrink due to intense price competition and aggressively priced rivals Lenovo, Acer and Asus undercut PC unit shipments.

HP is being pulled in opposite directions as it seeks to re-establish momentum in consumer PC markets, which are lower margin, while protecting its more lucrative enterprise customer base

While the addition of Chrome OS and Android devices to its portfolio reflects HP’s awareness of the trends that are influencing the PC industry, growth will be limited through 2H13 as more low-cost, APAC-based firms obstruct HP’s efforts to reclaim market share. Demand for devices such as the Slate 7 tablet and Pavilion Chromebook will be muted as Asus’ Nexus 7, Samsung Galaxy Tab and Apple’s iPad Mini overshadow HP and its Chromebook is priced higher than devices from market leader Samsung.

Prolonged weakened PC demand and increasing pricing pressure as a result of fierce competition from Lenovo continue to erode HP’s market share. While HP boasts strong PC margins relative to Windows peers such as Acer, Asus and Lenovo, HP’s hesitation to tolerate lower profit margins will limit its ability to stem attrition of consumers and enterprise PC users to vendors offering lower-price solutions.
The company’s Personal Systems Group (PSG) continued to be caught in the wake of a declining global IT market, and overall revenue in 2Q13 declined on an annual basis for the seventh consecutive quarter, falling 10% year-to-year to $27.6 billion, weighed down by an annual revenue decline of 11% in PSG to $7.7 billion.

Shipments of notebook PCs, which in 2Q13 composed 49% of PSG’s revenue, were down 14% annually, in parallel with a 16% drop year-to-year in notebook revenues. Continued pressure from rivals such as Lenovo, who claimed the No. 1 rank in global PC unit shipments in 2Q13, and Asus, as well as the proliferation of Android and Apple tablets and smartphones into the consumer marketplace, continue to erode HP’s PC market share.

HP’s data center components are coalescing into a unified platform, but more mature solution sets from rivals mute its value proposition

HP seeks to make software, storage and networking work in unison to minimize management complexity, reduce operation costs and power usage, and increase performance and ultimate solution capacity. SMB and midsize enterprise markets are especially important as demand for cost-effective yet capable data center solution stacks is driving server and storage growth in contrast to declining demand from large enterprises.
However, HP’s lengthy unification of its wide-ranging product set and late entry into the solutions marketplace squelch the messaging that supports HP’s solution stack.

HP’s organically developed technology and tuck-in acquisitions have allowed it to craft a compelling data center value proposition. However, rivals such as IBM and Dell have more effectively positioned their converged data center solutions as answers to business challenges in contrast to HP’s broader, workload-centric focus. As a result, HP will be challenged to expand its footprint in the solutions market and leverage its combined solutions to reverse revenue declines in its discrete server, storage and networking product segments.

Revenue of from HP’s industry-standard x86 servers and storage products declined 7% and 13%, respectively, in 2Q13. Traditional tape and hard-disk-based storage dropped a marked 37% to $500 million as enterprises continue to move away from hardware-heavy legacy data center solutions and toward software-defined server capabilities, storage capacities and networking. On a positive note for HP’s storage business unit, the increased influence of software in commercial storage initiatives helped its converged storage revenues climb 37% year-to-year in 2Q13 to $333 million.

(c) TBR