The Analyst HubHewlett Packard: Secular, Competitive Headwinds Intensify; Notebooks Hit Five-Year Low - The Analyst Hub

Confidence eroding. Secular and competitive headwinds intensify. Restructuring progressing, but will take years. HP is transforming from a PC/printer firm into a diversified enterprise supplier but faces multiple risks tied to execution and competition.

Shares of Hewlett-Packard are likely to remain under pressure in the near term. Jul-Q revenue missed expectations, and the Oct-Q revenue outlook of “well below-seasonal” on a QoQ basis stands to disappoint investors. Channel inventories in PCs and printing also are problem spots, and we note that inventory gluts seldom fade quickly. On a positive note, we think that
value-based investors stand to cheer the revenue and margin turnaround in IPG. Here, the trajectory of revenue declines moderated, and mix boosted operating margin. Meanwhile, the stronger than expected free cash flow generation of $2.1bn is a step in the right direction as investors do not want to see further deterioration in the balance sheet.
Mixed Jul-Q results

HP’s Jul-Q revenue missed consensus expectations, while non-GAAP EPS was better than expected. Printing and cash flow trends were bright spots, but after that, it gets tough. Enterprise systems revenue was roughly in line with our expectations, but PCs underperformed. Plus, channel inventories in both PC and printing were problem spots entering August. Meanwhile, services exhibited some stability in the operating margin profile, but the ITO services revenue decline of -6.0% YoY is a red flag, as we think this segment could be leaking due to both macroeconomic and structural challenges, which appear to have limited remedies.

Weak outlook

HP guided Oct-Q revenue to be “well below-seasonal”, which stands to disappoint investors. The company also lowered its F2012 (Oct.) non-GAAP EPS range to the low end of previous guidance. HP highlighted ma cro uncertainty, challenging industry trends, and company specific execution issues as ongoing headwinds. China appears to be weaker than expected, as EMEA remains a thorn. Also, elevated printing and PC channel inventories will weigh. HP is also realigning its sales force, which could pose some execution risk in the near to mid-term. In total, revenue estimates are likely to fall by $1 billion, and we think that some of the aforementioned factors set the stage for a tough hand-off to F2013.