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HP’s Turnaround Now Focusing on the Cloud

Posted on Wednesday, May 28th 2014

According to Gartner’s quarterly report, during the first quarter of 2014, Worldwide PC shipments fell 1.7% over the year to 76.6 million units. The market was led by Lenovo, which saw PC shipments grow 10.9% over the year to 12.9 million units. HP was the second largest vendor growing 4.1% over the year to ship 12.2 million units and claiming 16% of the market.

HP’s Financials
PC sales may have improved over the year for HP (NYSE: HPQ), but their quarterly performance has not. Q2 revenues fell 1% over the year to $27.3 billion, falling short of the Street’s target of $27.43 billion. EPS of $0.88 was in line with market expectations. This was the 11th consecutive quarter when HP reported a revenue decline.

By segment, Personal Systems revenue grew 7% year over year to $8.18 billion. Printing revenues fell 4% to $5.83 billion. The Enterprise Group saw revenues fall 2% to $6.66 billion and Enterprise Services revenues fell 7% to $5.70 billion. Software revenue remained flat at $971 million while HP Financial Services revenues fell 2% to $867 million.

For the current quarter, HP projected EPS of $0.86-$0.90 compared with the market’s projections of $0.89. The year’s EPS is projected at $3.63-$3.75 falling short of the Street’s consensus of $3.71. The miss on the earnings is despite HP’s plans for an additional 16,000 job cuts, which takes their initial restructuring target to 50,000 jobs.

HP’s Cloud Focus
Despite the weak results, HP’s management is convinced that they are on track for their promised turnaround as they continue to focus on high growth services. Earlier last month, HP entered into a joint venture with Foxconn to create cloud-optimized servers that will focus on low cost servers for service providers. Till now, companies like HP and IBM have had trouble selling their servers to the likes of Amazon and Google who are looking for low cost options. Most of these companies buy their products directly from Asia-based manufacturing firms. HP hopes to be able to change that with the help of this venture.

Recently, they also announced plans to invest $1 billion over the next two years on products and services on the open source cloud software OpenStack. HP will begin by offering their free version of OpenStack and move all their existing cloud offerings under the Helion brand. HP also plans to indemnify the use of their OpenStack code not only for their direct customers but also for their service provider’s customers. HP believes that this will help their customers deploy OpenStack without the risk of getting sued over the use of intellectual property in the OpenStack code. HP will also offer a commercial version of Helion OpenStack that is expected to enable big organizations and telecommunications providers to be able to run a private cloud.

Additionally, HP is also expanding their SaaS offerings. Last week, they announced the launch of HP Optimost VisualTest, a new self-service testing offering that enables marketers to analyze combinations of digital content by market and customer segment thus enhancing customer engagement, conversions, and revenue. The digital marketing offering includes an intuitive application that lets marketers choose web pages and run tests along with offering analytics that leverages data from multiple marketing systems and channels to identify customer behavior trends.

Their stock is trading at $31.78 with a market capitalization of $60.2 billion. It touched a 52-week high of $33.90 last month.

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