HP Q3 Earnings: Challenging Market Conditions Ahead of Upcoming Split

by Robert Palmer | 8/26/15

On August 20, HP announced financial results for its fiscal 2015 third quarter ended July 31, 2015. In what will be the last financial report before it splits into two independently traded companies, HP reported declines in both revenue and income. The results were met with mixed market reaction. Revenues were slightly below most market projections, while profits, excluding restructuring costs and acquisition-related charges beat most analyst expectations.

Third quarter net revenue of $25.3 billion was down 8 percent from $27.6 billion in the year ago quarter, and down 2 percent on a constant currency basis. Net income of $900 million dropped 9 percent compared with $1 billion in Q3 2014. HP cited currency fluctuations and challenging market conditions in multiple segments as contributing to the revenue shortfall.

The Enterprise Group, which includes storage, servers, and networking services, was the lone bright spot for HP. Revenue in the Enterprise Group climbed to $7 billion, up 2 percent from the year-ago period. “HP delivered results in the third quarter that reflect very strong performance in our Enterprise Group and substantial progress in turning around Enterprise Services,” said Meg Whitman, chairman, president and chief executive officer, HP. “I am very pleased that we have continued to deliver the results we said we would, while remaining on track to execute one of the largest and most complex separations ever undertaken.”

Other HP operating units did not fare as well as the Enterprise Group. Personal Systems revenue declined 13 percent to $7.5 billion in Q3 2015. Commercial revenue decreased 9 percent, while Consumer revenue in the segment dropped a whopping 22 percent. Printing revenue declined 9 percent to $5.1 billion, with an operating profit of $910 million (17.8 percent of revenue). Total hardware units in the Printing unit were down 4 percent, with Commercial hardware units down 6 percent and Consumer hardware units flat during the quarter. Supplies revenue declined 6 percent.

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

Our Take

These latest results are likely not what HP was hoping for ahead of the upcoming split. As we have discussed, both of the new companies face different challenges moving forward. During a conference call with analysts, HP seemed to indicate a much tougher road ahead for HP Inc. (HPI), the company that will be responsible for PCs and printers. HP pointed to challenging market conditions that exist in the PC business, which has struggled for years as mobile technologies have continued to carve out a greater share of overall spend for IT products. 

Meanwhile, Whitman and other executives cited the recent strong performance in the Enterprise Group, combined with progress in its turnaround strategy as indicators of a bright future for Hewlett Packard Enterprise (HPE). Earlier this month, HP introduced the expected members of the boards of directors for both Hewlett Packard Enterprise and HP Inc., which become effective upon the completion of the separation.

All eyes will be squarely focused on HP as it moves forward as two separate businesses. The challenges faced by HPI in the printing and personal systems business are undeniable. Dion Weisler, who will lead HPI as its new president and CEO, has stated that HP will leverage R&D investment to increase market share in core segments while expanding into new territory. That sounds good on the surface, but the printing business is very mature and there are very few net new opportunities to pursue. On the printing side, HP clearly views A3 office pages and the commercial print segment as prime opportunities.

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.