HP Looks to Acquisitions for Growth

IDC’s PC Shipment report for the quarter ended June 2013 saw worldwide PC shipments drop 11% over the year to 75.6 million units. Sequentially, shipment volume dropped from 76.3 million units. During the quarter, Lenovo recorded the slowest decline and managed to surpass HP to become the leader in PC sales. With 12.6 million units shipped, Lenovo had 16.7% of the market, followed by 12.4 million units or 16.4% market share commanded by HP. Over the year, Lenovo’s sales fell 1.4%, while HP saw a 7.7% decline in sales. Dell is the third largest vendor, with sales falling 4% to 9.2 million units.

HP’s Financials
Over the past eighteen months, HP (NYSE:HPQ) has tried hard to turn itself around to adapt to this decline in the PC industry. But the task appears to be a bigger challenge than expected. During Q3, HP saw revenues fall 8% over the year to $27.2 billion, missing the market’s expectations of $27.4 billion. EPS of $0.86 fell 14% for the year, but were in line with market expectations. This was the eighth consecutive quarter of revenue and earnings declines.

By segment, revenues from personal systems fell 11% over the year to $7.7 billion as the PC market remained weak. Printing revenues fell 4% to $5.8 billion, and enterprise group revenues fell 9% to $6.8 billion. Revenues from enterprise services fell 9% to $5.8 billion, and software revenues managed to register a 1% increase to $0.98 billion. Revenues from HP financial services fell 6% over the year to $0.88 billion.

The company attributed the latest weak performance to poor execution and announced several senior management changes to recover performance. COO Bill Veghte was made executive vice president and general manager of the enterprise and cloud group. Former enterprise chief Dave Donatelli was reassigned to a role focused on identifying early-stage technologies.

HP expects current pressure on prices and consumer demand to continue. For the current quarter, it expected an EPS of $0.98-$1.02, compared with market projections of $1.01. HP projected to end the year with an EPS of $3.53-$3.57.

HP’s Acquisition Focus
The biggest disappointment about the results was the indication by management that HP may not see growth even in 2014. Till the most recent quarter, HP’s management was under the belief that the worst was over and things were only to improve from then on. However, during the recent call, management announced that they do not expect revenue growth to happen in the next year. Instead, HP will scout for bigger acquisitions of up to $1.5 billion valuation to help the company regain lost ground.

HP’s track record regarding acquisitions has not been stellar. Its last big acquisition was that of Autonomy, and it was fraught with controversies relating to the $11.1 billion acquisition price and the value added by Autonomy. HP had even commented that they were presented false information for sale of Autonomy. An earlier acquisition of EDS was also highly unsuccessful. But CEO Meg Whitman is convinced that things will be better this time round.

HP’s Product Growth
Meanwhile, HP has continued to build its product offerings. During the previous quarter, it announced the release of HAVEn, a big data analytics platforms that is able to leverage the company’s analytics software, hardware, and services to help in real time decision making. It also added a common OpenStack based architecture for private, managed and public cloud offerings to its Converged Cloud portfolio.

As part of its SMB focus, HP partnered with Google and launched a “one-stop shop” to simplify technology solutions for this segment. HP SMB IT in a Box integrates Google Apps for Business with existing HP hardware, including PCs and printers, to offer easy-to-use, cloud-based communication and collaboration tools. HP hopes to be able to deliver lower IT costs for the SMBs that are already operating on Google Apps for business.

HP is in the second year of a five-year turnaround plan. According to the management, they are on track and will not exceed the said timeline. It remains to be seen how successful they will be, but for now, the market is not too pleased. The stock is trading at $22.40 with a market capitalization of $43.20 billion. It touched a 52-week high of $27.78 earlier this month.