Earnings Preview: PC slump hangs over HP's 2Q
SAN FRANCISCO (AP) — Hewlett-Packard's latest quarterly results will show how badly the deteriorating personal computer market damaged the company while CEO Meg Whitman tries to expand into more profitable areas of technology.
WHAT TO LOOK FOR: It's a foregone conclusion that the results, due out Wednesday after the stock market closes, are going to be worse than they were at the same time last year. Hewlett-Packard Co. telegraphed that news in February with its forecast for its fiscal second quarter.
The only question is whether the regression will be more severe than investors are anticipating. That would be bad news for HP's stock, which remains below its levels during the Great Recession despite an uptick since the shares sank to 10-year low last November.
As has been the case for the past two years, the company's PC division looms as the biggest concern. Like other PC makers, HP has been stung by a growing preference for smartphones and tablets instead of laptop and desktop machines. No company has been as hard hit as HP, the world's largest PC maker.
The waning demand for PCs is the main reason that HP's revenue has fallen from the previous year in six consecutive quarters.
All signs point to that unwelcome streak extending with this report, which covers the three months ending in April.
Although its measurements don't precisely align with HP's fiscal quarter, the research firm International Data Corp. said HP was having a tough time selling PCs to start the year. HP's PC shipments plunged 24 percent during the first three months of the year, according to IDC. That was worse than the erosion in the overall PC market, which dropped 14 percent from last year.
HP probably had to reduce its prices to spur PC sales. That's what one of its biggest rivals, Dell Inc., did in its latest quarter, to the detriment of its profit margins. Dell announced a 79 percent decrease in its quarterly earnings last week.
Whitman thinks HP can bounce back by building more PCs with touch-control screens, selling more tablets and expanding its product lines in business software, data analysis and storage and technology consulting.
HP's PC headaches have been compounded by several high-priced acquisitions that have gone bad quickly. The purchases of technology consultant Electronic Data Systems, business software maker Autonomy and device maker Palm have performed so poorly that HP has written off most of their value, lumping the company with losses totaling $15.3 billion in two quarters alone last year.
The shareholder outrage over those soured deals led to the recent resignation of HP Chairman Ray Lane, who remains on the company's board of directors. Another director, Ralph Whitworth, is serving as HP's interim chairman until a replacement is found.
WHY IT MATTERS: HP is a Silicon Valley pioneer and one of the tech industry's largest employers with about 330,000 workers. The company, which is based in Palo Alto, Calif., is still jettisoning employees as part of a cost-cutting plan that began last year when HP had about 350,000 employees. Whitman is aiming to get the payroll down to around 320,000 workers by October 2014, but the cuts could run even deeper if HP can't revive its revenue growth.
WHAT'S EXPECTED: After subtracting certain accounting charges, analysts polled by FactSet predict the company will earn 81 cents per share on revenue of $28.1 billion.
LAST YEAR'S QUARTER: HP earned $1.6 billion, or 80 cents per share, on revenue of $30.7 billion. If not for certain accounting charges, HP would have earned 98 cents share last year.