Editor’s note: Tech giant HP (NYSE: HPQ) is scheduled to disclose its latest quarterly financial report after the markets close Thursday – and the news may not be good. That’s the expectation of Technology Business Research analyst Stephen Belanger.
HAMPTON, N.H. – HP will reveal continued financial declines as the vendor prepares to split.
HP continues to lead in the PC and industry-standard server markets, but it struggles to develop larger-scale solutions engagements with customers
During HP’s 2Q15 earnings announcement on Aug. 20, TBR expects the vendor will report a revenue decline of 7.6% year-to-year to $25.5 billion. HP’s revenue is pressured by its pending corporate split, as the vendor continues to reposition its portfolio and sales strategies to accommodate changes in the data center and computing devices markets. Competitors such as Dell, Lenovo and IBM are working to take advantage of short-term uncertainty among HP’s partners and customers.
Additionally, with 65% of HP’s revenue coming from outside the U.S., TBR believes continued currency challenges related to unfavorable exchange rate movement will also impact HP’s year-to-year revenue performance negatively in its 2Q15 earnings report.
Effective Aug. 1, HP officially began operating as two separate companies, Hewlett Packard Enterprise and HP Inc., which will finalize with the new fiscal year on Nov. 1. HP’s PC and printing businesses have little overlap with its enterprise businesses, which TBR believes is enabling the separation to proceed as planned.
In 2Q15 HP announced its post-split board of directors and took advantage of its split to add a diverse range of members that bring unique skills and backgrounds. For example, Hewlett Packard Enterprise’s board will include executives from companies such as General Motors, Comcast, Sarr Group, Cummins Distribution and Alcoa, while HP Inc.’s board will include executives from Booz & Co., Autodesk, Liberty Media, Blackstone and other companies.
Amid its ongoing separation, TBR expects all of HP’s business segments to show revenue declines in its 2Q15 earnings report, with the largest decline (12.6% year-to-year) coming from HP Services, as the vendor continues to invest in higher-margin technologies such as cloud, analytics and mobility to fill gaps in its portfolio while allowing low-value account runoff.
TBR estimates HP will report a Personal Systems Group (PSG) revenue decline of 4.5% year-to-year in 2Q15 as customer anticipation of Windows 10 prevented customers from upgrading their PCs in the quarter. In a stagnant PC market, HP is looking to two sources for revenue growth: consolidation and replacement. While PC market consolidation has been underway for more than two years, room remains for further erosion of the market share of second-tier vendors.
At the same time, a significant percentage of all PCs in use are four or more years old, and HP, as well as its key competitors Dell and Lenovo, will leverage the release of Windows 10 to drive upgrades.
TBR estimates HP’s revenue from enterprise servers, storage and networking will decline 6.3% year-to-year to $6.4 billion in 2Q15, as the vendor continues to struggle to expand beyond its legacy as a point-product vendor to an end-to-end solutions provider. HP is working to improve integration of its software and hardware assets into cohesive solutions to better develop larger-scale, solutions-centric engagements with customers. To support this strategy and grow its data center hardware revenue, HP is targeting pockets of demand in the global data center market such as hyperconverged platforms and flash storage.
In 2Q15 HP altered its hyperconverged platforms strategy with the announcement that its EVO:RAIL hyperconverged product will no longer be available for purchase as of July 15, 2015.
TBR believes HP launched its EVO:RAIL appliance to remain competitive with major OEMs such as Dell, EMC and Fujitsu that also joined VMware’s EVO:RAIL program. However, following weak EVO:RAIL sales in 2015, HP has decided to focus solely on its line of ConvergedSystem (CS) hyperconverged appliances, featuring HP’s StoreVirtual technology. In 2Q15 HP also expanded its hyperconverged portfolio with the launch of its CS 250-HC StoreVirtual solution. TBR believes HP’s increased focus on its CS StoreVirtual hyperconverged solutions will accelerate time to market and enable the company to approach customers with a clear, more unified portfolio.
The vendor is uniquely positioned as it the only major OEM to offer hyperconverged solutions based entirely on its own technology, and TBR believes HP will drive hyperconverged platforms sales growth as it targets enterprise virtualization demand.