San Francisco - Hewlett-Packard’s earnings outlook fell short of estimates before a breakup designed to improve growth prospects, disappointing investors looking for signs the new businesses would get a fresh start on solid ground.
Sales declined across most divisions in the fiscal third quarter - in personal computers, services, printers and software - fuelled by continued weakness in the global personal-computer market. For the fourth quarter - the last before the separation in November - profit before certain items will be 92 cents to 98 cents a share, Hewlett-Packard said on Thursday, below analysts’ average projection for $1.
“We faced a challenging macroeconomic and IT spending environment in the quarter,” Chief Executive Officer Meg Whitman said on a call with analysts. In the PC and printer market, which represents around half of Hewlett-Packard’s business today, the company sees “a difficult business environment for several quarters to come”, she said.
By creating two businesses - one offering technology and services to businesses, and another selling PCs, printers and other gadgets to consumers - Whitman is seeking to make them more responsive to market changes. That’s also making them more vulnerable to swings in demand, as seen in today’s earnings results. PC shipments fell 9.5 percent in the second quarter, and companies are spending less on software and services.
“You’ve got this underlying current of a negative macro within an IT spending environment on PCs and printers,” said Jeffrey Fidacaro, an analyst at Monness Crespi Hardt & Company, who has a buy rating on the stock. “They had a decent quarter given those challenges. More concerns are going to be around how are these two companies going to look going forward?”
Shares of Hewlett-Packard fell as much as 4 percent in extended trading. The stock declined 1.4 percent to $27.35 at the close in New York, leaving it down 32 percent this year.
Third-quarter net income fell 13 percent to $854 million from $985 million a year earlier, the company said.
For HP Inc, if there are declines in the PC business, only the printer business will be able to make up for it. Similarly, in Hewlett-Packard Enterprise, weak demand for corporate equipment will have to be supported by the troubled services division, instead of the more reliable PC business.
“HP Inc is going to be more of a cash flow and dividend story and HP Enterprise is going to be more of a growth story,” Fidacaro said. “When does the HP Inc with PCs and printers become an attractive market, and how do they position HP Enterprise?”
Revenue fell 8.1 percent to $25.3 billion, compared with analyst projections for $25.4 billion, according to data compiled by Bloomberg. Sales have declined for 15 of the past 16 quarters.
Growth outlook
Hewlett-Packard is due to meet with analysts next month, where it’s expected to give more financial details on the post-split companies. At that meeting they’ll update their outlook to give greater clarity on their free cash flow.
Sales in three of the company’s four main divisions were down. Revenue in the company’s PC division fell 13 year over year. Printers were down 8.6 percent on weak commercial demand.
“It’s pretty challenging out there right now,” Dion Weisler, the future CEO of HP Inc, said on the call.
Services revenues fell 11 percent. A bright spot was in the Enterprise Group, where revenues rose 2 percent, driven by servers and networking.
Software sales
The software division, considered critical for future sales growth in the enterprise business, saw sales shrink 6.2 percent to $900 million in the third quarter. Hewlett-Packard has been re-organising the software business and expects it to return to growth, Whitman said.
“Software is now completely clear on their role in HP,” Whitman said. “They are taking out costs and they are rationalising the portfolio.”
Last month, Hewlett-Packard disclosed that Hewlett Packard Enterprise will have around $16 billion in debt and $10 billion in cash, adding that this is subject to change. In the latest quarter, cash flow from operations was $1.7 billion, down from $3.6 billion a year earlier.
Hewlett-Packard also narrowed its adjusted profit outlook for the full fiscal year, to $3.59 to $3.65 share, from the range of $3.53 to $3.73 indicated in May.
Challenges
Even without the split, Hewlett-Packard has numerous challenges, as it faces major shifts in customer behaviour. Cloud computing and mobile devices are letting corporations use far less enterprise technology than before, while consumers are spending their money on smartphones first and PCs second.
“HP faces intense competitors of considerable scale in each of its major markets,” Amit Daryanani, an analyst at RBC Capital Markets LLC, wrote in a note.
Hewlett-Packard has also gone through numerous restructurings - 3 900 people left the company in the latest quarter - and sees the potential for further restructuring, Chief Financial Officer Cathie Lesjak said on the call. The company may also cut more jobs as part of a restructuring plan to remove 55 000 positions.
“We’re now rounding the corner where the growing businesses are bigger than the declining businesses and that’s actually going to lead to growth,” Whitman said on the call.
BLOOMBERG