Editor’s note: HP’s earnings results from its last quarter as a single company underscore its need to realign around changes in the global PC and data center markets., says analyst Stephen Belanger of Technology Business Research.
HAMPTON, N.H. – HP’s earnings results from its last quarter as a single company underscore its need to realign around changes in the global PC and data center markets.
Personal Systems was pressured by extended PC life cycles and weak global demand for traditional notebook and desktop PCs.
Meanwhile, HP’s Enterprise Group (EG) was challenged by low competitor pricing, hardware commoditization and rising adoption of public cloud solutions for a wider range of workloads.
Combined, these factors caused HP’s corporate revenue to decline 9.5% year-to-year to $25.7 billion in 3Q15.
Personal Systems revenue declined 14% year-to-year, as consumer and commercial PC revenue was down 12% and 15%, respectively, over the same period. EG revenue increased 2%, highlighted by Industry-Standard Server (ISS) and networking growth of 5% and 35%, respectively. However, HP’s networking growth was driven by its purchase of Aruba Networks in May 2015. Additionally, challenges expanding from its legacy as a point-product vendor to an IT solutions provider hindered HP’s overall EG performance in 3Q15.
HP’s operating margin declined 330 basis points year-to-year to 3.4% of revenue, as HP did not reduce spending enough to offset top-line declines and subsequent gross margin pressure. HP’s expense structure was pressured by continued portfolio and sales investments to accommodate changes in the IT market, as well as separation-related expenses. HP’s split into HP Inc. (HPI) and Hewlett Packard Enterprise (HPE) on Nov. 1 gives the separate entities more agility and means to invest for the future. Narrowing its aim on core competencies is a marked improvement in HP’s go-to-market strategy. HPI and HPE are focused on protecting operating margins, reducing expenses for secondary business units such as proprietary servers and enterprise services, and reallocating resources to better align to their separate objectives.
HPE adapts to the rising influence of cloud, analytics and other disruptive IT trends
As an independent company, TBR believes HPE can react more quickly to market changes, which is critical as trends such as cloud, analytics, the Internet of Things (IoT) and mobility increasingly disrupt the global IT market. While 3Q15 software and services revenue declined year-to-year and EG revenue growth was largely inorganic, HPE is taking steps to adapt its portfolio and go-to-market strategies to capture more revenue from high-growth segments of the global data center market.
In October, just over a year and a half after announcing its OpenStack-based cloud brand Helion, HP announced its exit from the public cloud market, effective Jan. 31, 2016. As HP is already undertaking a massive transformation and rebranding, TBR believes it is a good time for HP to adjust its cloud strategy. HP’s decision to focus on strengths such as virtual and managed private cloud, hardware and software cloud components, and value-added services shows its customers and partners the company has a renewed energy and focus, and a more forward-looking strategy. In the public cloud market, TBR expects HP will concentrate on being a broker of partners’ public cloud solutions via a cloud marketplace and include partner solutions in broader cloud engagements.
As HP refines its strategy for the public cloud market, rising adoption of cloud-based solutions continues to have a negative impact on its storage hardware business. Specifically, the vendor is challenged by the shift toward software disaggregation and the rising adoption of public cloud solutions for a wider range of use cases. As a result, HP’s 3Q15 storage revenue declined 7% year-to-year.
To adapt to changes in demand, HP is increasing efforts around flash and software-defined storage as it seeks to return its storage revenue to year-to-year growth. HP is investing in key product lines such as 3PAR and StoreVirtual to better accommodate customers’ storage requirements and solidify the value proposition of its portfolio. HP updated its flash storage portfolio in November, and TBR believes product launches such as new all-flash versions of its 3PAR product line will help HP attract both existing and potential customers considering purchasing flash solutions. Additionally, products such as 3PAR Flash Acceleration for Oracle and 3PAR Online Import software to IBM XIV storage will help HP target users of competitor hardware that are refreshing their storage hardware infrastructures.
With more freedom to invest in R&D as an independent company, HPI is better positioned to address change in the PC and printing markets
Amid continued market consolidation, HP successfully targets entry-level PC demand with ASPs of less than $400. This strategy helps the company bolster the appeal of its devices across all price bands, reignite revenue and unit shipment growth, and compete with Lenovo and Dell. For example, the success of HP’s $199 Stream PC is helping HP regain traction with consumers and reclaim market share as it focuses on protecting the installed base of commercial PCs that provides the bulk of its profits. At the same time, HP has renewed efforts in the premium 2-in-1 space, prompted by the release of Microsoft’s Surface Pro 4 and Surface Book products, which are helping to generate interest and spark demand for premium PCs.
HP’s 3Q15 Personal Systems revenue was challenged by weak demand for premium PCs, currency fluctuations and extended refresh cycles, which limited the positive impact of demand related to Windows 10. TBR expects Personal Systems revenue will remain challenged by unfavorable currency fluctuations through much of 2016, particularly within APAC. HP’s Printing revenue declined 14% year-to-year to $5 billion due to the trend of customers increasingly sharing digital photos and documents online.
In 3Q15 Printing accounted for 40% of HP’s total PC and printing revenue, but generated nearly 75% of PC and printing operating income. Prior to its split, HP reinvested a significant portion of income generated from its highly profitable Printing business in strategic enterprise growth areas such as cloud, analytics and mobility. As an independent company, HPI will maintain profitability while increasing PC- and printing-related R&D investments to accommodate demand around mobility, IoT, 3D printing, managed print services and other disruptive technology trends. TBR believes this will enable the company to react more quickly to changes in the PC market than it could prior to HP’s separation.
(C) Technology Business Research