HP Sees Revenue, Profit Pressures as Breakup Nears

A still stagnant PC market and weak corporate IT demand is still plaguing HP, though servers and networking were strong points in the third quarter.

HP Breakup Nearing

Hewlett-Packard entered its final financial quarter as a single company battling many of the issues that prompted the decision a year ago to break in half, from the continuing slowdown in the global PC market to slowing demand for corporate IT technology as businesses shift more of their workloads to the cloud.

The tech giant officially will split into two companies Nov. 1—Hewlett-Packard Enterprise, which will sell enterprise IT solutions and services, and HP Inc., which will focus on PCs and printers—in an effort to make both businesses more agile and flexible to better compete in a rapidly changing technology market.

The company's myriad challenges were on display Aug. 20 when HP President and CEO Meg Whitman and other executives released the company's latest quarterly financial numbers that included an 8 percent year-over-year drop in revenue (to $25.3 billion) and a 13 percent decline in profits (to $900 million).

"We did face a challenging macroeconomic and IT spending environment in the third quarter," Whitman said during a conference call with analysts and journalists to talk about the quarterly earnings, noting weak consumer spending, a softness in the company's business in Russia and China, and a volatile stock market environment.

Some businesses showed strength during the third quarter, particularly the Enterprise Group (up 2 percent revenue growth), buoyed by the company's x86 Industry Standard Server business (8 percent) and a networking unit (22 percent) bolstered by the addition of wireless networking vendor Aruba Networks, which HP bought for about $3 billion.

However, other business units struggled: PC revenue dropped 13 percent over the same period last year, printing dropped 9 percent, Enterprise Services fell 11 percent and software fell 6 percent. Even within the Enterprise Group, there were units that fell, including storage (2 percent, though revenue declines are slowing) and Business Critical Systems (down 21 percent).

PCs have continued to be a problem not only for HP, but for other OEMs and component makers. The market worldwide has fallen since 2011, though the decline slowed last year when Microsoft stopped supporting the aged Windows XP operating system, forcing businesses to refresh their fleets of PCs. However, the release of Windows 10 in July is not expected to have a significant impact on the PC market until sometime next year, particularly given Microsoft's offer of a free upgrade to the new OS for the first three months.

In addition, HP seems to be putting more effort behind selling entry-level PCs, which is keeping its market share up (it is the world's second-largest PC maker behind Lenovo) but prices down, which is impacting revenues, according to Stephen Belanger, analytics with Technology Business Research (TBR).

"HP's PC sales mix is increasingly shifting toward lower-priced devices, which reduces [average selling prices] and pressures profitability," Belanger wrote in a research note.

Whitman and Dion Weisler—currently executive vice president of printing and personal systems and the person who will become HP Inc.'s CEO in November—said during the conference call the PC market will continue to be difficult.

"We think it will be challenging for the next several quarters," Weisler said, according to a transcript on Seeking Alpha. "We're generally aligned with the industry on that. … We see notebooks being stronger than desktops. We see opportunity in commercial mobility, in accessories, in services."