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Challenges and Opportunities for Split HP

Posted on Monday, Nov 30th 2015

Early this month, Hewlett Packard split into two companies — HP Inc. (NYSE: HPQ) and Hewlett Packard Enterprise Co. (NYSE: HPE). HP Inc. will be dealing with the computers and printers business while HP Enterprise will include the software, storage, services, cloud, and financial segments. This post will look at the challenges as well as the opportunities for these two companies.

HP’s Combined Financials
HP recently reported the results of the final quarter of combined operations before the split on November 1. Fourth quarter revenue was $25.7 billion, down 9% or down 3% in constant currency. EPS was $0.93 cents, down 12%.

For the full year, revenue was $103.4 billion, down 7% or down 2% in constant currency. EPS was $3.59 in line with the previous outlook range.

By segment, fourth quarter revenue from Personal Systems was down 14% to $7.7 billion and Printing was down 14% to $5 billion. Revenue from Enterprise Group was up 2% to $7.4 billion, Enterprise Services was down 9% to $5 billion, Software was down 7% to $958 million, and HP Financial Services was down 11% to $802 million.

By region, revenue from Americas accounting for 48% of revenue was down 4%, EMEA accounting for 34% of revenue was down 15% and Asia Pacific accounting for 18% revenue was down 11%.

Challenges and Opportunities for HP Inc.
The main challenge for the printer and computing company HP Inc. is that worldwide, the trend is increasingly mobile and shifting away from printers and computers. In these contracting markets, competitive pricing environment is also another daunting challenge. The fourth quarter results reflect the impact of these challenges.

HP Inc. expects forecast fiscal 2016 EPS in the range of $1.59 to $1.69, below the analyst estimate of $1.77. EPS for Q1 2016 is expected between $0.33 and $0.38, missing the analyst estimate of $0.42.

However, HP Inc.’s strength is its market position in both the computing and the printing industries that could provide it with a competitive edge for its advances in adjacent markets.

In the printing market, HP finished 2014 as the global leader. It has a 41% market share followed by Canon with 20% and Epson with 19.3%. HP expects to begin delivering its first 3D printers in late 2016 and will target sales to businesses and other enterprises. Sales in the 3D printer market are expected to reach $5 billion in 2015 and $20 billion in 2020.

In the PC market, worldwide PC shipments as per Gartner declined 7.7% to 73.7 million units in the third quarter. Lenovo continued to lead the worldwide market followed by HP while in the US market, HP leads the market with 27.8% followed by Dell with 24.2% and Apple with 14.8%. Another redeeming factor in its favor is that the US consumer PC market including laptops and desktops is witnessing slightly positive growth in 2015 strengthened by the slowdown in the tablet market and replacement of older PCs. The worldwide market is expected to stabilize next year and HP might just gain by staying on.

HP’s printing business is the more profitable of the two with profit margin of about 17% and is what will carry the burden of the computing business till it stabilizes. It will be interesting to see how its 3D printing move plays out. Following the disappointing results and outlook, its stock declined nearly 14%. Its stock is currently trading around $12.61 with market cap of $22.68 billion.

Challenges and Opportunities for HP Enterprise
The main challenge for HP Enterprise is that companies are shifting to the cloud for services and HP has been slow to take to the cloud. Just before the split, HP abandoned its public cloud plans to focus on “hybrid cloud” installations instead. A Gartner report estimates that about half of all large enterprises will use hybrid cloud installations by 2017.

The hybrid cloud move is probably better than the public cloud strategy for HP, as it will not be able to compete with the pace of Amazon and Microsoft. HP Enterprise should focus on its strengths for now.

HP leads the server market with 26.2% share followed by IBM with 18.4% and Dell with 17.6% in 2014. For the full year 2014, worldwide server revenue increased 2.3% to $50.9 billion while unit shipments increased 2.9% to 9.2 million units, a record high.

HP has teamed up with Microsoft and recently unveiled Cloud Productivity and Mobility Solution Offerings (CPM), which will integrate HPE’s consulting services with Microsoft services within Windows 10. HPE will integrate its consulting services into Microsoft’s SaaS platforms such as Office 365, Skype for Business, Dynamics CRM, and Enterprise Mobility Suite.

In the earnings call, HP Enterprise CEO set five priorities for the year ahead: Grow revenue, grow operating profits and free-cash flow, execute on the “innovation road map” and stabilize revenue in the long-troubled Enterprise Services business.
For the first quarter, HPE expects to earn between $0.37 and $0.41, slightly below analyst estimate of $0.43. Fiscal 2016 EPS is expected to be between $1.85 and $1.95. Prior to the results announcement, HPE was seen as the weaker company due to the significant restructuring charges. However, after its slightly better outlook, its stock gained 2%. Its stock is currently trading around $14.35.

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