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Hewlett-Packard (HPQ) Company Q1 Earnings Preview: What To Watch

 February 19, 2013 10:14 AM

(By Mani) Hewlett-Packard Company (NYSE: HPQ), widely known as HP, is expected to report another gloomy financial performance when it reports its first-quarter financial results on Feb.21.

Results of HP, a Dow component, is closely watched to get a glimpse of PC market and enterprise spending by IT giants and government. Rival Dell, Inc. (NASDAQ: DELL) would be reporting its quarterly results on Feb.19.

Wall Street expects Palo Alto, California-based HP to earn 71 cents a share for the first quarter, according to analysts polled by Thomson Reuters. This implies a 23 percent drop from 92 cents earned last year.

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HP may want to keep its momentum of positive earnings surprises as it has managed to beat consensus in the past four quarters. In the past 90 days, consensus estimate has decreased from 80 cents a share to the current 71 cents a share.

For the first quarter of fiscal 2013, HP estimates non-GAAP earnings of 68 to 71 cents a share and GAAP earnings of 34 to 37 cents a share, which includes one-time charges of 34 cents a share.

Quarterly sales are expected to drop for the sixth consecutive quarter, with a projected decline of 7.6 percent to $27.76 billion on weak PC market. The company, which is the world's leading PC maker, has recorded single-digit revenue drop for the past four quarters, with an average decline of 5.5 percent.

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The company faces headwinds multiple segments such as PCs, printing and servers, with all the three core units' revenue falling in the fourth quarter ending October.

In this era of software-as-a-service, smartphones and tablets, cloud computing, bring-your-own-device, HP is finding difficult to get new avenues for growth.

In addition, the availability of compelling low-cost tablets caused PC users to shift consumption to tablets rather than replacing older PCs. Global PC shipments fell nearly 5 percent in the final three months of 2012 to 90.3 million units, indicating likely structural changes to the market rather than weak demand, according to market research firm Gartner.

Among the top five PC vendors, only Lenovo registered 8.2 percent growth year-on-year. HP's shipments declined 0.5 percent from the year-ago quarter despite regaining the top spot.

Investors remain concerned about HP's deteriorating fundamentals. Beyond the obvious decline in PCs, there are issues with printers and technical services – both high-profit segments.

For the fourth quarter, revenue from PC business was down 14 percent, with printing revenue falling 5 percent and services revenue edging down 6 percent. Enterprise Servers, Storage and Networking (ESSN) revenue also dropped 9 percent, while software revenue grew 14 percent.

All the above segments should be closely watched as any improvement would provide some solace to investors, who, apart from weaker sales, digested an $8.8 billion charge last quarter over the $11.7 billion Autonomy deal.

Investors might be happy if the company doesn't incur more charges over the deal, which is being probed by the U.S. Department of Justice after HP's allegations of accounting improprieties at Autonomy prior to its acquisition by HP in October 2011.

For the fourth quarter, HP reported a hefty net loss of $6.85 billion or $3.49 a share, compared to net earnings of $239 million or 12 cents a share in the prior-year quarter. Excluding items, adjusted net income for the quarter was $2.28 billion or $1.16 a share, compared to $2.35 billion or $1.17 a share in the year-ago quarter. HP's revenue for the fourth quarter declined 7 percent to $29.96 billion.

Meg Whitman, who was appointed as HP CEO in September 2011, has been making sweeping organizational changes for the past one year in a bid to make HP a leaner and meaner company. In May 2012, HP said it would cut about 27,000 jobs by the end of fiscal year 2014 as part of a restructuring drive that is expected to generate annualized savings of $3.0 billion to $3.5 billion, majority of which will be reinvested back into the company.

HP shares fell 66 percent in the past two years, when it was trading around $50. With rival Dell, Inc. (NASDAQ: DELL) opting to go private in $24.4 billion deal, investors have hoped a similar move from HP. But, HP not only declined the idea but also mocked Dell's move.

As fundamentals deteriorate, private equity investors and activists may seek a restructuring, probably breaking into enterprise and PCs/printers. As a result, analysts may ask about Whitman's comments over the potential splitting of the company after she had warned that HP might not be firing on all cylinders until 2015 or 2016.

Shares of HP, which trades about 5 times its 2013 consensus earnings estimate, were trading between $11.35 and $29.72 during the past 52-weeks.



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