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Identity Crisis at HP

Posted on Monday, Nov 26th 2012

According to Gartner’s latest Worldwide PC shipment report, during the third quarter of this year, worldwide PC shipments fell 8.3% over the year to 87.5 million units. Gartner estimates that the decline was partly on account of delay in consumer buying decisions as many waited for Windows 8 to be released this quarter. HP finally slipped from its position as leading vendor with a 15.5% global market share. It was replaced by Lenovo, which became the leader in PC sales with a 15.7% market share. Dell came in a distant third with a 10.5% market share.

HP’s Financials
HP’s (NASDAQ:HPQ) Q4 revenues fell 7% over the year to $29.96 billion and missed market estimates of $30.4 billion. Adjusted EPS of $1.16 fell 1% over the year and was better than the market’s projected earnings of $1.14 per share.

By segment, revenues from the Personal Systems group fell 14% over the year to $14.79 billion, with Personal Systems revenues of $8.71 billion and Printing Services revenues of $6.08 billion. HP’s Services revenue fell 6% to $8.71 billion, and Enterprise Servers, Storage and Networking revenues were down 9% to $5.12 billion. The software segment showed improvement as revenues grew 20% over the year to $1.17 billion.

The company ended the year with revenues falling 5% over the year to $120.4 billion. Adjusted EPS for the year fell 17% to $4.05.

For the current quarter, HP estimates EPS of $0.68-$0.71, missing the Street’s projections of $0.85 for the quarter.

HP’s M&A Debacle
It is not just PC shipments that are bothering HP. Nearly a year ago, HP acquired Autonomy for a large sum of $11.1 billion to strengthen its software segment as it aligned itself to a high-margin business. After the acquisition, both HP management and analysts were concerned that HP may have paid a bit too much for an acquisition that was bringing in only $1 billion in annual revenues. These fears were confirmed recently when HP announced a write-off of $8.8 billion charge on account of the acquisition.

HP blames Autonomy’s management and auditors and accuses them of defrauding HP by cooking the books. Autonomy’s founder, Mike Lynch, who was replaced earlier this year, denies such allegations. It is still to be determined which of the two companies is speaking the truth. For now, though, the FBI is investigating the allegations.

But this isn’t the first big write-off for HP. Earlier last quarter, HP also took a hit of an $8 billion write-off on account of the acquisition of EDS. HP had acquired EDS in 2008 for an estimated $13.9 billion. Its Palm acquisition for $1.2 billion has also mostly been written off. Including the write-offs, HP’s net loss per share grew to $3.49 for the quarter and $6.41 for the year.

HP Adds to Product Offerings
Meanwhile, HP continued to build its product offerings as its increased R&D investment bears results. Recently it launched its first new line of multifunction printers. These printers integrate standard printers with scanners and software to manage electronic documents. Priced at $2,500-$3,000 each, the printers are the company’s first big launch in the past seven years. IDC estimates that the market of multifunction printers was worth $45 billion in 2011 is being led by Xerox and Canon. HP, which once was known for its printing services, has fallen far behind because of its inability to keep with changes in what consumers demanded of a product.

With Microsoft releasing its eagerly awaited Windows 8, HP launched its own PCs and computing devices that are based on the OS. It also released Elite Pad, an HP tablet that is focused on the enterprise segment. Unlike other players whose tablets are geared toward retail consumers, Elite Pad claims to be the first tablet optimized for the enterprise. The 10.1-inch tablet will be available from January. It comes with features such as HP PageLift, a software that will automatically trim, light, and orient a captured image of a whiteboard or paper document for reading or sharing. The tablet will also be supported by HP Client Management software.

Despite these innovations, the market hasn’t reacted favorably to HP’s write-offs. The stock fell to a ten-year low of $11.35 earlier last week. It is trading at $12.44 with a market capitalization of $24.43 billion. It touched a 52-week high of $30.00 in February 2012.

At the moment, the company looks lost, with a massive identity crisis.

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