Why Are Analysts Optimistic About HP's Future?

by Sohini Bagchi    May 26, 2015


Hewlett-Packard is in the middle of one of the largest corporate splits in history by announcing its two separate entities - HP Inc. and HP Enterprise. There were a slew of announcements last week. The company missed fiscal Q2 revenue expectations, but topped profit expectations. Also just when folks at HP thought the multi-year cost cutting spree has almost come to an end, there came another blow. The tech major told Wall Street analysts that it is aiming to take $2 billion in costs out of its struggling $22.3 billion enterprise services business.

What all these indicate for the global tech company? While some in the left baffled, wondering whether HP is on the right track, others are optimistic about HP’s renewed emphasis on enterprise services and cost cutting.

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The Q2 woes…

The enterprise services cost-cutting plan comes after HP reported that sales in the business were down 16 percent in its fiscal second quarter ended April 30, to $4.81 billion, compared with $5.7 billion in the year ago quarter.

While its PC division has already PC group was hit harder than expected, with revenue down 5 percent in Q2, the software group was no healthier, down 8 percent year-over-year.

HP’s Enterprise Service Group’s infrastructure technology outsourcing (ITO) business, which is facing severe pressure as corporations move to cloud computing solutions, was down 20 percent in the quarter. Despite this, profit before tax went up 31 percent to $194m, eased by strict controls on overheads.

However, CEO Meg Whitman points out some bright spots. Sales of Intel-based servers—a troubled business a couple of years ago—were up 11 percent year-over-year. “The PC market was tough, but we gained share in every region, in just about every product category.”

Gains from the Spin-off

An obvious reason some analysts are hopeful is that the tech major reported a quarterly profit above market estimates, backed by cost cuts. But more than that they believe the tech company that is hiving-off its computer and printer businesses from its faster-growing corporate hardware and services operations can see bigger gains from this initiative.

According to Cross Research analyst Shannon Cross, the reorganization has been a calling card for Meg Whitman, who took over as CEO in 2011. “I think it will alleviate concerns about what level of dis-synergies they would have to absorb in the first year following the split,”

Some believe the move would prove beneficial to the tech giant as well as for Whitman, who was always known as a person of high ambition earlier pursued a career in politics, a contestant at becoming California’s governor. As Erik Gordon, a professor at the University of Michigan wrote in his blog: “She may have to shift gears now, from having been a very prudent, careful CEO, to being a CEO who’s getting the ball moving…”

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As part of its restructuring, the tech giant has assembled a team of several hundred employees to manage the massive task globally.

Analysts believe the split makes sense as the resulting companies would now offer distinct value propositions offering compelling returns. Tech analyst Jack Clark told Thompson Reuters, he split-up will leave Whitman with close oversight of Hewlett-Packard’s enterprise group, which will allow it to compete directly with IBM, Oracle and a slew of start-ups seeking to sell hardware, software and services.

China deal to benefit

There’s more to the story. Whitman said last week that China’s Tsinghua Holdings Subsidiary would spend $2.3 billion acquiring a 51 percent stake in a newly created business comprising HP’s H3C Technologies Co., a seller of networking hardware, and HP’s server, storage and support business in China. Brian Kelly, founder of Brian Kelly Capital, told WSJ that the China deal would generate “more revenue.

At an analyst call last month, Whitman said “We’re gradually shaping HP into a more nimble, lower-cost, more customer- and partner-centric company that can successfully compete across a rapidly changing IT landscape.”

Experts believe HP is facing many of the same challenges as other big corporate technology companies. It’s struggling to re-invent itself in the age of cloud computing and fighting a new generation of nimble enterprise-technology companies. If the spinoff works, if the deals go as they are meant to be, there’s much we can be hopeful about from the 75 year-old struggling tech giant.