HP: Q2 sales likely weak, restructuring to help earnings

Hewlett-Packard's second quarter is likely to miss estimates on revenue, but earnings should hold up due to restructuring. The big question: Can a company cut its way to a sustainable turnaround?

Wall Street is expecting earnings of 81 cents a share on revenue of $28.08 billion for the second quarter. Analysts are modeling that HP will project a weaker third quarter sequentially with sales of $27.78 billion.

Evercore Partners analyst Rob Cihra said that he sees "almost no way for HP to meet consensus revenue expectations." Earnings, however, can do well do to a weaker Yen — HP's printing components are made in Japan — and restructuring. Weak PC sales should also help gross margins.

Cihra projects that HP's PC sales will be down 21 percent year over year due to bloated inventory levels with enterprise revenue down 7 percent due to weak results from x86 servers, business critical systems and storage. Services sales are likely to also be weak.

The bottom line:

We continue to see much of HP's hoped-for fiscal year 2013 stability flowing from its most recent, deep rounds of restructuring cuts. But HP has already booked more than $7B in pre-tax restructuring charges over the past 8yrs and yet we do not think that has helped its revenue or competitive momentum, with year over year revenue erosion continuing across every business and margin compression in every segment but printing. We just don’t see how HP can cut its way to a sustainable turnaround.

Deutsche Bank analyst Chris Whitmore had a similar view. "We believe underlying fundamentals at HP remain under significant pressure due to challenging demand conditions in PCs, printers, servers and storage," said Whitmore.

There are a few things that can go right. For starters, HP recently launched new printers and that could help that unit. The printing industry overall remains weak. HP's launch of Project Moonshot should give the company something positive to mention for its server business.

Dell makes HP's life difficult

After multiple quarters of deciding market share in PCs didn't matter, Dell went to bolster its position in its most recent quarter. Given Dell is going private, the company needs to fortify its sales base amid the uncertainty. As a result, Dell's share vs. profit approach on PCs likely hurt HP in a big way.

Whitmore added:

Dell’s recent earnings results show it was very price aggressive in PCs (focused on share vs. profitable growth) which points to material weakness for HPs PC revs and profitability.

In other words, HP's PC results are going to struggle largely due to a price war initiated by Dell. Dell's plan is to acquire customers at the expense of profit margins. "We believe Dell’s pricing strategy is in response to aggressive tactics from Lenovo and HP last year, which resulted in Dell share losses," explained Morgan Stanley analyst Katy Huberty.

Dell CFO Brian Gladden said last week on the company's earnings conference call:

We are trying to run the business based on that and be in a position where we are in this thing for the long term, and we position the business for success for the long term.

Most analysts said they expected HP to forgo market share and preserve profits this quarter. Dell did the same thing in recent quarters, but then cracked.