Hewlett-Packard Co.’s (Nasdaq: HPQ) latest earnings report shows that despite three years of efforts to turn its business around, the venerable tech giant still has a lot more work ahead.
CEO Meg Whitman has decided to split the pioneering Silicon Valley company in two. But she has said it will take a year to disengage the sluggish printer-and-PC division from units that sell commercial tech hardware, software and services, where Whitman believes there are more opportunities for growth. Meanwhile, the company reported Tuesday that its sales fell 2 percent in the most recent three-month period, marking its 12th revenue decline in the last 13 quarters.
Profit was down 6 percent from a year ago. For the August-October fiscal quarter, HP reported net income of $1.3 billion, or 70 cents a share, on revenue of $28.4 billion. That fell short of the expectations of analysts polled by FactSet, who predicted earnings of 80 cents a share on revenue of $28.7 billion.
And there was little comfort in a new forecast issued Tuesday by the market research firm IDC. Although the firm says total PC sales by all makers should level out in the next few years, “no significant growth” is expected. The only “good” news is that the global PC market won’t shrink as much this year. IDC now expects the decline to be 2.7 percent rather than 3.7 percent, as forecast earlier.
PC sales have suffered as consumers increasingly turn to smartphones and other mobile devices. Yet it’s the biggest single part of HP’s business, accounting for more than 30 percent of the company’s nearly $112 billion in annual revenue.
Whitman has vowed to expand that by taking PC sales away from competitors. In the most recent quarter, HP said its PC business was the only segment that actually grew. But the poor outlook for the PC industry as a whole is part of what led to her decision to split the company, despite vowing earlier not to.
HP announced last month that it will separate into two companies, roughly equal in size. Whitman will remain CEO of Hewlett-Packard Enterprise, selling data center gear, commercial software and tech services. One of her lieutenants, Dion Weisler, will become CEO of HP Inc., selling PCs and printers. Whitman rejected a similar proposal soon after she was named CEO in 2011, after a period of turmoil in the company’s top ranks, but she says HP is now in better position to make the split. The split is expected to happen by Oct. 31, 2015.
Wall Street analysts have cautiously endorsed Whitman’s argument that the company’s commercial tech businesses can grow faster if they’re not held back by the printer and PC businesses. Restructuring the company may be a key to HP’s future success, said FBR Capital Markets analyst Daniel Ives, but he added that returning the company to the kind of growth it enjoyed in the past is still “an Everest-like challenge.”
Whitman told analysts on a conference call Tuesday that HP is working to increase profits and that its revenue should stabilize next year. When the split is complete, she added, each of the new companies will operate more efficiently and be more attuned to its customers.
“We’re going to make more progress as separate companies than we would have if we kept them together,” she said.
Investors have gradually warmed to the idea: While HP’s stock fell more than 12 percent in the week after Whitman announced the plan, shares have since returned to above $38, where they had been in August. HP stock closed Tuesday at $37.63, up 13 cents for the day, but fell in late trading after the earnings announcement.
Analysts say it will be best for HP if Whitman can split the company quickly, although some worry that both halves will incur higher operating expenses because they will have to build out separate administrative, supply and sales operations. Some analysts are also looking for HP to make significant acquisitions to expand its commercial tech business, particularly in the area of software, where HP is viewed as lagging behind competitors such as Oracle and IBM.
HP’s best opportunities for future growth are in Internet-based computing and “big data,” or selling software and services that help commercial customers analyze vast amounts of information, Ives said. But for now, he added, the printer and PC businesses are still a damper on HP.