HP's July quarter expected to be mixed bag

Hewlett-Packard is expected to report a solid fiscal third quarter, but worries have analysts questioning whether the company is ultimately about growth or an "IT superstore" that will live and die by cost cutting.

HP on Tuesday is expected to report third quarter earnings of 90 cents a share on revenue of $27.2 billion, according to Thomson Reuters.

Analysts generally expect HP to at least match Wall Street estimates and most likely top them. JP Morgan analyst Mark Moskowitz said in a research note that HP has enough moving parts to top estimates. "The segment performance should be mixed with PCs and services faring better than expected, and printers and servers choppy," said Moskowitz.

Among the notable mileposts:

The PC business: HP is expected to report snap-back PC sales as consumers bought notebooks and netbooks. Overall, analysts are expecting HP to benefit from the inventory gains ahead of back-to-school shopping. Caris & Co. analyst Robert Cihra expects HP to report PC revenue of $8.4 billion. HP is also expected to gain market share at the expense of profit margins.

Enterprise hardware: HP's July quarter is likely to show continued weakness in servers and storage. Sure, HP is likely to gain market share on Sun, but enterprise spending is weak. Jeffrey Fidacaro, an analyst at Susquehanna Financial Group, says enterprise results are likely to be weak. For instance, storage revenue is expected to fall 23 percent from a year ago.

Services: HP has integrated the EDS acquisition and cost cuts abound. However, there's a potential morale problem to monitor. Cihra writes:

While we do model HP's Services operating margin continuing to improve further to >16% in FY10 (e.g., ongoing headcount reductions, salary cuts), we expect “easy gains” to get tougher, since at 15% HP would already now match IBM’s Q2 Services margin, and deepening salary/expense cuts start to pressure morale/culture.

The printing business: The printer business used to be HP's flagship business, but is now in decline. Rest assured that HP's printing business remains a cash cow, but some analysts think the unit is in decline. Supplies revenue is expected to fall about 14 percent, printer units are under pressure and it's unclear whether there will be growth ahead.

Cihra notes:

We believe the only growth in consumer photo printing likely now comes from those much cheaper alternatives to a home printer, namely retail kiosks and online services. Worse still, we expect fewer people to even bother printing a hard-copy photo at all, rather just directly displaying them via Facebook, etc. Meanwhile, HPQ may get more price-aggressive in an attempt to revive consumer units/share, but we question how many levers it really has to pull, since it already sells most consumer units at a loss and already dominates market share.