HP’s Final Earnings Results as a Combined Company Indicate Tough Road Ahead

by Robert Palmer | 11/25/15

On November 24, Hewlett-Packard Company announced financial results for its fiscal 2015 and fourth quarter ended October 31, 2015. The firm noted that Q4 was the final quarter in which Hewlett-Packard operated as one combined company. The separation into two independently traded public companies was completed on November 1.

During a conference call with analysts, president and CEO Meg Whitman said she was proud of how HP executed on the separation. “Throughout the year long separation process we saw no disruption to our customers and partners, and we continue to drive the business forward,” she stated. “And now, both companies are off and running, each company has a clear, well-defined strategy and is well-positioned to win in its respective market.”

Despite HP’s claims for a promising future, the firm’s Q4 and FY 2015 results demonstrate the significant challenges ahead. From a financial perspective, FY 2015 was not a great year for HP. Fourth quarter net revenue of $25.7 billion was down 9 percent percent from $28.4 billion in the year ago quarter, and down 3 percent on a constant currency basis. For the full year, revenue was $103.4 billion, down 7 percent compared with $111.5 billion in 2014, or down 2 percent in constant currency. As it has throughout the year, HP cited currency fluctuations and challenging market conditions as having continued negative impact on revenues.

Net income in Q4 of $1.3 billion was down 1 percent compared with the year-ago quarter. For FY 2015, net earnings dropped 5 percent to $4.6 billion, compared with $5 billion in the year-ago period. For the full year, HP delivered non-GAAP diluted net earnings per share of $3.59, which is in line with its previously provided outlook range.

The Enterprise Group, which includes storage, servers, and networking services, continues to be a bright spot for HP. Revenue in the Enterprise Group climbed to $7.4 billion in Q4, up 2 percent from the year-ago period. Nevertheless, Enterprise Services revenue dipped 9 percent to $5.0 billion.  

Personal Systems revenue has been faltering in recent quarters and dropped another 14 percent to $7.7B in Q4 2015. Commercial revenue decreased 15 percent, while Consumer revenue in the segment dropped 12 percent. Meanwhile, printing revenue declined 14 percent in Q4 2015 to $5.0B, with an operating profit of $862 million (17.4 percent of revenue). Total hardware unit placements were down a whopping 17 percent in the quarter, with Commercial hardware units down 23 percent and Consumer hardware dropping 14 percent. Supplies revenue declined 10 percent.  

Dion Weisler, who now serves as CEO of the newly formed HP Inc. stated during the analyst call that Q4 was a challenging quarter for the firm’s printing business. Indeed, Weisler admitted that a number of factors have changed HP’s near-term view of the market and the supplies revenue trajectory. Continued effects of currency movements have accelerated pricing pressures, even more than HP expected in certain segments. Weisler also noted that the overall printing market was somewhat weaker than HP expected.

Continued pricing pressure is driving average sales prices (ASPs) downward. One troubling consequence from this trend is that HP is attracting buyers that might have different usage patterns for certain devices than what was originally targeted. Weisler cited an example, saying that pricing for some HP Officejet Pro hardware has fallen into price bands that are within reach of home users, who typically do not print very many pages. “The unintended result is that we are not getting the yield per unit we would have expected on some of these units,” he explained.

Despite these challenges, Weisler says that HP is committed to its strategy to drive growth in core segments while investing in adjacent market opportunities for the future.

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

Our Take

Given the revenue shortfall in recent quarters, HP has actually executed fairly well—thanks in large part to the restructuring program that was launched in 2012 and which is now nearing completion. In fact, the combined HP has reported revenue declines in 16 of its past 17 quarters. Declining revenues and lower profits are trends that HP obviously needs to reverse, which is exactly why it has decided to split its enterprise services business (HP Enterprise) from the PC/printer operations (HP Inc.).

Meanwhile, the turnaround plan has not come without significant pain. HP noted that approximately 4,300 people exited the company in Q4 2015, with just under 56,000 cumulative reductions to date resulting from the program. HP says that even with labor migration it is down a net 59,000 people over this timeframe, and still there are more cuts to come.

The two new companies face similar challenges: where to find growth? HP Enterprise is looking shed its lower margin services businesses while leveraging an acquisition strategy to expand deeper into core areas such as mobility, security, and big data. HP Inc., on the other hand, has targeted 3D printing, A3 pages, and office ink as primary areas for growth.

It is interesting to contrast these strategies against movements from competitors such as Lexmark and Xerox, both of which recently announced plans to review strategic business alternatives. HP was asked about these developments during the analyst call, with speculation that it could be a potential suitor in a move to expand through acquisition. Weisler declined to comment directly, but he did say that HP Inc. remains committed to its previously defined M&A strategy. Meanwhile, HP is hoping to capitalize on any confusion that these moves could create in the market.  

Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. As a market analyst and industry consultant, Palmer has more than 25 years experience in the imaging industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. Palmer is a popular speaker and he 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.