HP’s Q1 Results Marked by Weak Revenue and Tempered Outlook

robert palmerby Robert Palmer | 2/26/15

On February 24, HP announced financial results for its fiscal 2015 first quarter ended January 31, 2015. Despite what president and CEO Meg Whitman described as “excellent execution” during the quarter, HP missed most analyst expectations, reporting declines in both revenue and income and flat to declining sales in most areas of the business. First quarter net revenue of $26.8 billion was down 5 percent from the year-ago quarter, and down 2 percent on a constant currency basis. Net earnings also declined 2 percent on a non-GAAP basis.

HP pointed to “currency headwinds” as particularly problematic, noting that the strength of the U.S. dollar continues to impact sales and operating profit. Even so, Whitman believes that HP is right where it needs to be in its turnaround strategy and the firm pointed to a couple of high-profile recent wins, including a multi-billion dollar IT outsourcing deal with Deutsche Bank, as an indicator of future business strength. “We grew operating profit margins across all of our major business segments, increased investment in innovation, and executed well across key areas of our portfolio and in our separation activities.  Our progress continues as we head into Q2,” she said.

Most of HP’s operating units experienced flat to negative performance in the quarter. Personal Systems revenue was flat year-over-year with a 3.7 percent operating margin. Commercial revenue decreased 1 percent, while Consumer revenue in the segment increased 2 percent. Total units were up 9 percent with Notebooks units up 21 percent and Desktops units down 7 percent.

Printing revenue declined 5 percent to $5.5B, with an operating profit of $1.07B (19.2 percent of revenue). Total hardware units were down 4 percent, with Commercial hardware units flat and Consumer hardware units down 6 percent. Supplies revenue was down 5 percent. Revenue from the Enterprise Group was flat on a year-over-year basis. Hardware revenues were flat or down in all group segments, while Enterprise Services revenue declined 11 percent compared with the year-ago period.

HP says that it continues to invest in innovation and that it is excited about forthcoming products in various business segments. Even so, the firm lowered its outlook for the remainder of the year due to continued issues with currency fluctuations. “While we were able to manage the impact of currency in the quarter and deliver earnings as expected, we believe the impact on FY15 will be significantly greater than we anticipated in November,” Whitman added.  “We’ll work hard to offset these impacts through re-pricing and productivity, but fully mitigating currency movements of this size would require reducing investments and mortgaging our future.  We won’t do that.”

To see the full earnings release from HP, see press release here.

Our Take

HP continues to struggle in many of its core business segments, such as printers, personal computers, servers, and data storage. Some of this can be attributed to the natural competitive pressures associated with mature markets. In some cases, analysts have also pointed to a lack of innovation in certain product categories, which CEO Whitman continues to point to as key to the firm’s ability to execute on its turnaround plan.

Of course, the firm’s recent decision to split its Enterprise Services business from the PC and Printer operations is also an important part of that turnaround strategy (see story here). Separating PCs and printers into a separate business unit should allow these hardware-centric segments to gain greater access to R&D spend and other resources, with the added ability to respond more quickly to competitive threats and market opportunities.

But one of the primary benefits of the split, according to HP, was to foster renewed focus and momentum for the firm’s Enterprise Services business. As mentioned, Enterprise Services revenue declined 11 percent in Q1, and Whitman noted that HP must strengthen its Enterprise Services business and quell the current trend of shrinking revenues, or at least slow the rate of decline. It will be interesting to see how well the Enterprise Services business performs once it is a standalone business unit.  

 

Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. He is an independent market analyst and industry consultant with more than 25 years experience in the printing industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. In December 2012 he formed Palmer Consulting as an independent consultancy focused on transformation, mobility, MPS, and the entire imaging market. Palmer is a popular speaker and presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA). Contact him at robert@bpomedia.com.

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