Is HP (NYSE:HPQ) in Trouble?

Is HP (NYSE:HPQ) in Trouble?

Is HP NYSE HPQ in Trouble Is HP (NYSE:HPQ) in Trouble?PALO ALTO, CA – Under CEO Meg Whitman, Hewlett-Packard (NYSE:HPQ) appeared to regain a measure to stability, and results, in most cases, were in line with analyst’s expectations.  However, in the third quarter revenue declined by 8.2 percent and earnings per share fell by 14 percent, leading the company to revise guidance for 2014 downward.


According to Whitman, ‘as you know, I stated in May that I believe that company level revenue growth was still possible in fiscal 2014, particularly given the challenges I just highlighted in enterprise group and personal systems as well as the fact that 2013 revenue from key accounts in enterprise services is running off more slowly than anticipated.  We now expect that total company year-over-year revenue growth in fiscal 2014 is unlikely.’

This represents a significant change in outlook as it would appear that revenues will continue to fall in printing, personal systems, and enterprise.  The printing division, once a major part of the company’s portfolio, has become less crucial to the broader company; however, it continues to provide reliable cash for investment elsewhere.

Personal systems are contracting by more than 10 percent per year, and while the division is more profitable that Dell (NASDAQ:DELL), the margins have fallen to almost 2 percent in the most recent quarter.  However, the user based still has some value for the company and a move to sell this division might be the company’s best option as it has missed out in smartphones and tablets – remember the slate?

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On the other hand, HP’s enterprise business appears to be in significant trouble as revenue slipped by 9 percent year-over-year.  While management noted that the entire sector is under pressure, Whitman admitted that HP’s performance was particularly distressing.  In an effort to improve performance, Chief Operating Officer Bill Veghte will assume responsibility for the division while Group General Manager Dave Donatelli has been reassigned to ‘special projects’.  Yet the performance might be indicative of HP’s preference for bottom line stability over top line growth, which has left the company vulnerable to leaner competitors.

The software division was the lone bright spot for HP, relatively speaking.  Revenue increased by 1 percent to $ 982 million, and operating profit rose by 12 percent in the third quarter.  However, the division is more than five times smaller than the next smallest division and the meager growth is almost negligible when compared to the losses elsewhere.

Based on recent results it would appear that HP’s turnaround under Whitman has hit a bump in the road.  While free cash flow remains strong at 7.8 percent of total revenue, it is likely to fall in 2014, leaving the company much more vulnerable.  Shares in HP were down in after-hours trading on Tuesday.