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Hewlett-Packard (NYSE: HPQ) is in the news in a big way. First, the company released quarterly earnings that were a mixed bag. Then, it announced it would sell a majority stake in its newly-formed data networking business.
These revelations leave shareholders in a curious position, because there is no clear judgment on how Hewlett-Packard investors should view these developments. Sentiment from analysts and large investors was fairly mixed on both news items.
Here’s a clearer takeaway for investors.
First, with regard to HP’s fiscal second-quarter earnings, there wasn’t a whole lot to like. Revenue totaled $25.4 billion, a 7% decline year-over-year. This missed analyst expectations by about $200 million. At the same time, earnings per share was $0.87, which actually beat expectations of $0.85 per share.
HP’s earnings results were a familiar story. Over the past few years, the company has a history of missing on the top line and beating on the bottom line. Revenue is in decline, as HP is still heavily reliant on older areas of technology hardware – namely PCs and printers – which are seeing lower demand.
But HP has had the ability to produce profits by aggressively cutting costs. In Meg Whitman’s tenure as CEO, the company has cut tens of thousands of jobs and taken an axe to its cost structure.
Separately, HP announced it will sell 51% of its China server and storage business, called H3C, for $2.3 billion. HP is selling the stake to Tsinghua Holdings in a joint venture. With the transaction, HP hopes to boost sales of enterprise hardware products in China.
This is a smart deal. The joint venture should be very valuable to HP, which desperately needs a new revenue stream. At the same time, it could really use a means of penetrating China, which has so far been fairly elusive to the technology giant.
The immediate cash infusion from the sale will allow HP to pursue a bolt-on acquisition or retire outstanding debt, which would both be savvy moves given the company’s tough industry position. As previously mentioned, HP is still too closely tied to “old technology.”
For example, printers accounted for 21% of HP’s total revenue last quarter. It should go without saying that this is a problem. In the digital age, people are using printers far less than they used to. To that end, printing revenue fell 7% year-over-year.
Another core group for HP is personal computers, which represented 30% of its total revenue. Again, this is not a growth area, because global PC shipments are declining.
Technology research firm IDC stated that global PC shipments fell 2.4% in the fourth calendar quarter last year. PC sales were 80.8 million for the quarter, down from 82.2 million units the previous year.
Not only is the declining PC market cause for concern, but the nature of PC sales is changing as well. IDC noted that consumer purchasing decisions were based on simply refreshing very old PCs. It would be far more encouraging to see that consumers were buying new PCs because they really wanted to, not simply because they had to.
In addition, IDC estimated that some calendar fourth-quarter production was attributed to getting ahead of holiday-related production constraints in Asia in the first quarter. This means the better-than-expected fourth-quarter results likely just shifted volume from early 2015 to the end of 2014. This set the stage for a disappointing first-quarter 2015 shipment total.
As one of the world’s biggest PC vendors, this is a very stiff headwind for HP. The company’s desktop sales collapsed 14% last quarter.
Still, there is reason for hope. HP is about to split itself, which should create value for shareholders. In addition, the company’s joint venture is a promising development. Gaining access to the large Chinese market would be a great way to stem the decline in revenue over the past several years.
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