Is This PC Maker Dead?

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The road ahead for Meg Whitman could be tough with HP’s declining revenue and decreasing PC shipments. Whitman is the third CEO of the company in the last two years after Mark Hurd and Leo Apotheker, who resigned earlier either due to a sexual-harassment investigation or poor performance. Whitman was hired with the hopes of completely overhauling HP Machinery, but repetitive poor earnings and failed acquisitions, aren’t inspiring any hopes for the future.

Not only its PC segment is facing slowdowns but sales from other segments are also down in the fourth quarter of FY2012.

Let’s have a quick look at the segment wise revenue decline –

• PCs were down 14% Y/Y dragged by less revenue earned in both the Commercial and Consumer revenue streams with decrease of 13% and 16% respectively in both the segments; Desktop and Notebook units were also down by 12% Y/Y.

• Printers were down by 5% Y/Y with number of units declining by 20% Y/Y.

• Services declined 6% Y/Y in spite of the segment being part of the company’s restructuring efforts. Declines were also seen in IT Outsourcing (-6% Y/Y), App/Business Services (-7% Y/Y), and Tech Services (-4% Y/Y).

• Servers, Storage, and Networking (ESSN) declined 9% Y/Y; due to the declining industry demand. 3PAR grew ~60% Y/Y.

If we compare the company  with its competitors, its closest rivals Dell and IBM have also faced falling revenues but are more focused on the non- PC segment to stay ahead.

Dell (NASDAQ: DELL) whose PC segment still contributes 50% to its total revenue, saw its sales decline by 19% Y/Y to $6.6 billion and shipments were down by 14% Q/Q. But, Dell is having a diversified portfolio and is transitioning its business from a PC maker to a complete IT solutions provider. It’s acquisition of Gale Technologies, a software company that specializes in Cloud management will increase its reach in the Enterprise services. Additionally, Dell has won a contract from VMotion IT Solutions to supply storage and computing solutions.

IBM (NYSE: IBM) is giving a stiff competition to HP in Servers and IT Services. As discussed in my last post, IBM is well positioned with its acquisitions of Kenexa and Butterfly Software. The leading products range of Kenexa with its unique combination of Cloud and Consulting services will benefit IBM to increase its footprint in the Talent Management Software business. On the other hand, Butterfly will enhance its Software and Hardware Storage solutions through its cost effective offerings. 

Talking about HP (NYSE: HPQ), I don’t see similar fundamentals in past two acquisitions which have had a questionable performance. Let’s see why.

Autonomy-

HP purchased Autonomy, one of Europe’s fastest growing companies for $11.1 billion in October 2011. Within seven months HP fired its founder/CEO Mike Lynch due to poor performance. And now HP is accusing former Autonomy managers with $8.8 billion in charges out of which $5 billion is tied to the accounting problems. HP has said that its managers had falsely hyped the balance sheet details to make them look appealing and found "serious accounting improprieties" and "a willful effort by Autonomy to mislead the shareholders". HP has asked for an inquiry by the U.S. Securities and Exchange Commission's enforcement division and the UK's Serious Fraud Office for civil and criminal investigation. Following this, an investor Allen Nicolow with just 200 shares has filed a lawsuit against the company alleging that HP already knew the wrongdoings on Autonomy’s part.

EDS

HP’s EDS Acquisition which was supposedly a playoff for competing against its rival IBM, has now resulted in a write-off of $8 billion in the last quarter. HP acquired EDS for $13.9 Billion in 2008 with the hope of increasing its reach in the outsourcing market but wasn’t able to manage the operational and cultural out-comings of this deal. Also I feel the company overpaid than the benefits expected to be achieved from this deal.  

Summing it up, I don’t see any upside movement in the stock and recommend a sell. As per the Gartner and IDC estimates, the worldwide PC shipments declined by 8.5% to ~88 million Y/Y. The continuing new innovations in this sector and the consumer’s preference for Tablets and Smartphones combined with the ambiguity over Windows 8 are the major drivers for the slump in PC sales. HP’s broken down business execution has also impacted its share price which has slid down by over 52% year to date and is currently trading at $12.74. HP could perform well only if it considers a transition and by tuning with the market, shifts its focus towards growth. 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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