In just over six months, Silicon Valley stalwart Hewlett-Packard will split into two separate companies. Hewlett-Packard Enterprise will continue to provide HP’s corporate IT hardware and services solutions under the direction of current CEO Meg Whitman, while HP, Inc. will carry on the PC and printing businesses. But the outlook, at least for the seventy-six year old combined entity, is not particularly promising.
Non-GAAP earnings of 92 cents per share for the quarter ending January 31 beat the estimates of analysts polled by FactSet, but it was the top line – particularly shrinking sales and margins in key categories – and a tepid forecast for Q2, that have kept “the demise of HP” murmurs alive. The company, which has a market capitalization of more than $62 billion, reported $26.8 billion in revenue for last quarter, a 5% decline from the previous year. Tracing the fall in the top line, shares in HP fell nearly 7% in after-hours trading.
The dip was shared across both of the soon-to-be-separate entities. The company’s Enterprise Services segment, which houses the IT and outsourcing teams, reported an 11% decline in year-over-year revenue and a slim 3% operating margin. While the more profitable Enterprise Group, which includes the company’s server, storage, and networking solutions, maintained its revenues from the previous year and over 15% margins, its networking division suffered an 11% drop in revenue.
HP, Inc. did not fare much better. HP’s Printing division saw revenue fall 5%, on the back of what CFO Cathie Lesjak described as a “particular weakness in Russia.” Total hardware units as a whole were down 4%. An 8% increase in notebook sales, however, could be considered a silver lining. HP introduced several new laptop products, led by the EliteBook Folio, and experienced an uptick in corporate demand.
While Whitman insisted that the “the HP turnaround remains on track,” the company’s internal forecasts for Q2 indicate that relief will not come before the split. It reduced its forecast of free cash flows for the year from $6.5-7 billion three months ago down to a range between $3.5 billion and $4 billion.
All of this being said, HP’s lackluster growth is not entirely strategic or operational; a strong dollar is dragging down revenues for a company that does 65% of its business outside of the United States. Whitman claimed the company lost $1.5 billion in operating profit over the course of the quarter due to volatility in foreign currencies.