Is Hewlett-Packard Company Irrelevant?

The popularity of handhelds has led to trouble for Hewlett-Packard. HP has been badly hurt by this growth, but it's bouncing back with more focus on cloud services.

Jun 9, 2014 at 1:11PM

The popularity of handhelds has triggered the decline of PCs and has also reduced the demand for printed material. On the other hand, this smartphone revolution has triggered the growth of data centers, the cloud, and storage. Hewlett-Packard (NYSE:HPQ) is managing the PC and printer slowdown by reducing operational expenditures and focusing on the cloud and related services.

Segments
HP is a leading technology company and has a 26.9% share of the server market. It generates around 50% of its revenue from printing and PCs. The PC segment has been showing negative growth due to slow demand and competition from Lenovo. Recent financial results have fallen short of analyst estimates, and this has created a wave of uncertainty about the future prospects of the company.

HP is primarily banking on its unique Moonshot servers, private cloud OS, storage solutions for data centers, and Android OS-based laptops to spur its growth in the years to come.

Recent financial performance
Hewlett-Packard posted revenue of $27.3 billion in the last quarter, translating to a 1% year-over-year decline. This slight decline was due to the reduction in printing supplies and storage revenue. HP's enterprise services group also posted disappointing results that contributed to the overall decline. On a positive note, servers grew slightly. The primary notebook business experienced 7% year-over-year growth, and the software segment, which makes up just a small fraction of revenue, also saw growth.

 HP posted EPS of $0.66, an improvement over the $0.55 posted in the same quarter last year. The improved EPS was mainly because of a 2% year-over-year reduction in operating expenses, which are expected to decreased due to lower amortization, restructuring, and acquisition-related charges. The company's management is focusing on lowering costs further, as it plans additional worldwide job cuts of 16,000. This will bring the total planned job cuts to 50,000. This downsizing will aid the company in sustaining its profitability in the negative-growth PC industry and stagnant printing industry.

HP is trying to drive shareholder value through increased margins, which is a good move in the short term. In the long term, it seems that the company will be banking on the growth segments mentioned earlier. The servers segment has shown a slight improvement, which can be seen from the quarterly results. Moonshot has a lot of potential for the company in the future. Software license revenue is also up in the current quarter, and HP's virtualization and cloud software portfolio will be worth keeping an eye on going forward.

Recent developments
Hewlett-Packard recently launched the Helion portfolio of cloud products and services. The company is extending its commitment to OpenStack. It is focusing on hybrid IT delivery in public, private, and managed clouds, and it plans to invest $1 billion in cloud in the next two years. HP's cloud products are already featured in 37% of the Fortune 100 companies, and the firm is currently the third-largest contributor to OpenStack. According to a report, OpenStack related business will exceed $1 billion by 2015.

Cloud services, in general, are expected to follow an upward growth trend. HP was recently ranked as a leader in The Forrester Wave for private cloud solutions. Even though HP may not be the leader in cloud services, it will have its share of growth going forward.

HP also announced a virtual workstation solution recently that gives access to workstation class applications from devices including thin clients, laptops, and tablets. HP DL 380Z utilizes Nvidia Grid K2 and supports up to eight units on a single workstation.

The company is joining the virtualization and cloud graphics bandwagon through this development. It recently introduced its HP 3PAR Online Import support, which is by far the most important development this month. This will result in time and money savings by enabling self-directed platform migrations.

HP claims that it will be relatively easy to migrate from EMC (NYSE:EMC) VNC to 3PAR in contrast to the migration from EMC VNC to VNC2. This is an impressive development as it puts HP at the forefront of the storage array market. It enables HP to offer a 50% capacity savings guarantee to EMC customers, and the company claims that it is a faster and more cost-efficient solution.

Bottom line
HP is generating most of its revenue from slow-growth segments like PCs and printing. This is one of the primary reasons behind HP's poor financial performance.

However, HP will generate value from these segments in the next few years with the help of its cost-cutting strategy. The company is also exploring new avenues of growth in the form of Moonshot servers, cloud solutions, virtualization, and storage. The short-term cost management and long-term growth strategy seems well-defined, and the industry giant is not going to become irrelevant any time soon. 

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Muhammad Saeed has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and EMC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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