Editor’s note: HP (NYSE: HPQ) announced another increase in the number of expected layoffs to as many as 15,000 on Thursday. It remains on the road to long-term recovery but must better connect with a rapidly evolving marketplace, writes Jack Narcotta, an analyst at Technology Business Research.

HAMPTON, N.H. – HP’s 1Q14 results display encouraging signs that its cornerstone PC and server businesses are regaining momentum. However, while HP continues to invest heavily to expand its portfolio of PCs, servers, software, converged storage and cloud capabilities – in mid-May HP announced it is investing $1 billion over the next two years to thoroughly revamp its cloud products and services portfolio – TBR believes HP will remain a work-in-progress into 2015 as declines persist in its services and printing businesses.

Despite HP’s total revenue in calendar 1Q14 declining 1% to $27.3 billion, TBR believes the results illustrate the degree to which HP’s overall business has recovered since Meg Whitman was appointed CEO in September 2011. HP continue to emphasize solutions over individual products, as solutions offer more opportunities for HP to deepen its engagement with consumers, commercial entities and channel partners. Additionally, amplifying the value of a proven end-to-end services platform is a compelling differentiator against Lenovo’s limited set of PC and professional service capabilities and Dell’s challenging evolution as a private company.

However, while 1Q14’s results demonstrate HP may have discovered a remedy for its PC and server business, it is still struggling to develop compelling messaging that fosters deeper enterprise customer engagement segments beyond x86 servers and storage. As a result, TBR expects HP to face year-to-year revenue declines between 3% and 5% through 2015 as customers scale back purchases and gauge HP’s transformation progress.

  • HP’s 2-in-1 PCs will position it to capitalize on enterprise demand but similar devices from rivals threaten to slow the recovery of its PC business

As organizations prioritize sustaining high levels of productivity while employees become more mobile, the profiles of 2-in-1 devices such as HP’s Pro x2 and EliteBook Revolve 810 G2 rise. Additionally, consumer-oriented devices such as Pavilion x360, Pavilion x2 and Split x2 signal HP is set to capitalize on growing adoption of Windows 8 PCs; TBR estimates Windows 8.1 will account for 15% of all Windows PCs by August 2014, underscoring the potential of this new device platform.

HP’s investment to expand its notebook PC portfolio beyond traditional clamshell form factors benefits the company in two ways. First, it positions the vendor to grow its commercial customer base by offering a more diverse PC roster that satisfies the needs of an enterprise’s mobile workers. As 2-in-1 PCs account for a larger portion of HP’s commercial PC mix, PC revenue is climbing, buoyed by the higher ASPs of 2-in-1 devices. In 1Q14, HP’s commercial PC revenue climbed 12% year-to-year. Second, TBR expects devices such as the Pavilion x360, priced at $349, to reboot HP’s consumer appeal, which HP will leverage in tandem with its growing stable of lower-ASP Android and Chromebook devices. In 1Q14 HP reported that consumer notebook revenue grew year-to-year for the first time since 2010.

However, with the market for 2-in-1 growing as Windows 8 adoption increases, rival Lenovo is using similarly designed PCs and the allure of its ThinkPad and Yoga brands to sustain Lenovo’s enterprise PC market share lead, as well as begin to position it as a leader in premium consumer PC markets. TBR believes that as the 2-in-1 market grows crowded, HP will lean on its supply chain and global sales presence to keep pricing in check, albeit at the expense of profit.

PSG revenue rose 7% year-to-year to $8.2 billion in 1Q14, the largest year-to-year increase in nearly four years. Commercial PC revenue climbed 12% year-to-year in 1Q14, illustrating the strength of HP’s portfolio in that market and the effect of PC refreshes to Windows 8 devices and purchases borne of the end-of-service date for Windows XP in April 2014. In consumer markets, continued pressure from rivals such as Lenovo and Asus, as well as a continued proliferation of Android and Apple tablets into the consumer marketplace, continue to erode HP’s PC market share and drag down revenue. PSG’s consumer PC revenue fell 2% year-to-year.

  • HP’s converged systems will be an important component of future growth, but it has yet to find the right balance of technology and solutions in its messaging

HP’s next-generation server and storage offerings are being placed in the spotlight as its smaller customers begin to tackle large-enterprise data management and network complexity issues. TBR believes enterprises are being challenged to balance manage exponential growth in data while introducing new applications, such as big data, security and analytics, using delivery models such as virtualized infrastructure and the cloud. As IT organizations transform to become more agile, reduce costs and drive greater innovation, they are increasingly turning to converged systems that minimize resources spent architecting and refining solutions.

While TBR believes HP is aware of these trends, and is crafting data center solutions aimed at simplifying potentially complex migrations to converged infrastructures, HP has yet to fully transform its go-to-market approach, and the majority of its data center solutions value propositions remain tilted toward hardware features and specifications. Instead, TBR sees a need for HP to amplify how its solutions, for example, reduce software migration and management complexities or promote how HP can help organizations leverage a hybrid cloud infrastructure to maximize the performance of specific workloads and applications. As a result, HP will face headwinds as it attempts to stabilize revenue performance from servers and storage by expanding its position in the solutions market.

Revenue from HP’s industry-standard x86 servers increased 1% from 1Q13 to $2.8 billion, but a 3% decline year-to-year in converged storage revenues – the first decline in three quarters for this segment – contributed to total storage revenues falling 6% year-to-year to $808 million; traditional tape and hard-disk-based storage fell 8% year-to-year.

(C) Technology Business Research