Hewlett-Packard Earnings: Is This the Start of the Turnaround?

With tech behemoth Hewlett-Packard (NYSE: HPQ  ) announcing its results for the fiscal second quarter on May 21, the company's greatest problem continues to be its inability to develop a secure, alternate source of revenue that can help offset its dependence on the rapidly shrinking PC industry. While CEO Meg Whitman deserves a pat on the back for finally putting the brakes on the company's continued revenue slide, HP's return to profitability still seems like an elusive dream to a majority of investors.

One of the highlights of the company's performance during the recent first quarter was the poor performance of two of its main operating divisions, enterprise computing and printing, that together account for around 40% of its overall revenue generated.

HP's enterprise division posted revenue that stayed largely flat on a year-over-year basis, but the real cause for concern was a slight fall in its operating margin, a sign of lowered profitability going forward. Things were further complicated by the emergence of Chinese tech giant Lenovo as a powerful near-term competitor, following its deal with industry rival IBM (NYSE: IBM  ) to acquire the latter's low-end server business. HP's printing division, the other major contributor to its operating profit, went on to record a 2.2% year-over-year drop in revenues during the quarter.

It's exactly this scenario that prompts us to take a look at the company's recent extension of strategy that includes one of the most popular aspects of the modern tech scenario -- cloud computing. It's time to find out its real potential as a contributor to HP's future success.

The cloudier part of it
HP recently announced plans to invest as much as $1 billion over a period of two years as part of an initiative to develop its very own cloud-computing products and services. The company also disclosed its intention to make its cloud services available in as many as 20 data centers over an 18-month period. HP's cloud-based offerings would be sold under the brand name HP Helion and would be based on OpenStack, an open-source cloud-computing platform that was co-founded by the company.

HP Helion leverages the OpenStack platform to connect public cloud services -- or computer systems based on the public Internet -- with private cloud systems that are synonymous with individual companies. By offering a free version of the software initially, HP is hoping that this "hybrid cloud" concept would prove attractive to potential customers, many of whom are dependent on public cloud services offered by bigger competitors such as Amazon.com and Google.

Something to read between the lines
Having failed to capitalize on the dominant boom in mobile devices, HP's broader push into cloud computing is a welcome, better-late-than-never initiative. Pricing will be an important aspect to watch out for, though, given that Amazon and Google have recently slashed charges for their cloud-based offerings in an attempt to stay ahead of the rapidly growing competition.

At the same time, HP is taking a big internal risk through this venture as its cloud-computing offerings may well prove to be the final death knell for its already pressured enterprise-computing group. With the OpenStack platform having the capability to run a complete data center, HP's sale of computer servers and related hardware is sure to take a big hit sooner or later.

What about the others?
But HP is not the only company that's taking such a risk at the expense of one of its key operating divisions. And it's certainly not the only potential entrant into the cloud computing realm. Industry peer IBM, which has already sold off its low-end server business operations to Lenovo, also disclosed ambitious plans as early as January to invest $1.2 billion toward setting up 40 cloud-based data centers spread across 15 countries by year's end.

Another competitor, Cisco (NASDAQ: CSCO  ) , the planet's biggest manufacturer of networking gear, also revealed plans to make $1 billion in investments to build cloud-based data centers -- part of its new portfolio of offerings under Cisco Cloud Services.

Foolish final thoughts
A recent survey conducted by research firm IDC has revealed a whole new angle to the domestic cloud services scenario. More than 400 U.S. companies have rated HP as being third on the list of the top-ranking suppliers for cloud services for both public and private cloud platforms, after IBM and Cisco. That also places HP above Google and Amazon, which rank fifth and seventh on the list, respectively.

HP also has big plans to revive its fortunes in the printing industry by foraying into the 3-D printing market later this year. With the company already being the leading player in the 2-D printing segment, with a market share of 39.9% in 2013, according to IDC, HP should have the necessary expertise and distribution networks to make a big splash in the 3-D printing market as well. IDC expects the total number of 3-D printing units sold to grow by a whopping 67% this year, over 2013.

This is definitely the time to sit up and take notice of HP's recent progress. While this still may not be the time to make any fresh acquisitions, the company's upcoming declaration of quarterly results should be an eagerly anticipated event among smart investors.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2014, at 8:34 AM, petaone wrote:

    Basically, wait and watch. :)

  • Report this Comment On May 18, 2014, at 2:38 PM, davidmdavid wrote:

    The author of this article really goes out on a limb when he says,

    "This is definitely the time to sit up and take notice of HP's recent progress. While this still may not be the time to make any fresh acquisitions, the company's upcoming declaration of quarterly results should be an eagerly anticipated event among smart investors."

    It takes balls to say something like that. This is advise that I can act on. Looks like I will be able to retire early. Thank you, Fools!

  • Report this Comment On May 18, 2014, at 9:46 PM, PropioFurbo wrote:

    Subhadeep,

    You obviously didn't mean what you wrote in the last sentence of the first paragraph. You stated, "HP's return to profitability still seems like an elusive dream to a majority of investors." Surely, you meant to use the word growth not profitability.

  • Report this Comment On May 19, 2014, at 2:21 AM, davidmdavid wrote:

    I'll say it again, this author is out of control.

  • Report this Comment On May 19, 2014, at 4:19 PM, hg5096 wrote:

    HP is a certainly cheap and they are making good money from their service business.

    HP shares were UP 9 times out of last 13 qtr after Earnings as per this website.

    http://stocksearning.com/stock_detail.aspx?Sys=HPQ&ComNa...

    So, I am going to buy some calls.

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