HP: Q3 likely to show more revenue erosion

HP job cuts are boosting earnings, but the long-term question is whether the company can boost growth by nixing expenses.

Hewlett-Packard's earnings Wednesday are expected to be at least on target for the fiscal third quarter, but revenue will continue to erode as PC, server and enterprise sales fall.

Cost cutting has analysts optimistic about HP's ability to deliver earnings. Wall Street is expecting the company to report a third quarter non-GAAP profit of 86 cents a share on revenue of $27.3 billion. The longer term question: Can HP cut its way to prosperity?

The consensus seems to be that HP's cost cutting will only go so far.

Evercore analyst Rob Cihra lays out his estimates on HP's various parts. The overview goes like this:

  • Printing revenue will be down about 2 percent in the third quarter compared to a year ago. That sales decline is as good as it gets.
  • PC revenue will be down 11 percent from a year ago.
  • Enterprise will fall 10 percent as x86 server sales continue to fall. HP's Integrity server line continues its free fall.
  • Services will be down 10 percent from a year ago.
  • And software sales will be down 3 percent.

Cihra said:

We think recent hopes for stability have mostly come from yet another round of big cost cuts (HP has booked $8 billion in pretax restructuring over the past 8 years). But looking at fiscal 2014, we think revenue is near certain to decline again.

HP CEO Meg Whitman has said that HP is a work in progress and in the middle of a multi-year turnaround. Her message has landed with Wall Street followers.

Indeed, HP is two-thirds of the way done with a 26,000 workforce reduction. Those savings are expected to flow to the bottom line. HP's cost cutting has some analysts upbeat.



Morgan Stanley analyst Katy Huberty said:

With cost per employee at the lowest level in five years, new product introductions, a revamped channel program, and improving U.S. enterprise IT demand should begin to drive operating leverage in F2H13.

Huberty expects HP's revenue growth to be in the low single digits in the years ahead if it can hold market share. Huberty's argument is that HP's cost per employee is down, but reinvestments have delayed operating margins.

Stifel analyst Aaron Rakers said that fiscal 2014 should be a recovery and expansion year for HP as products like 3Par converged storage eclipse traditional storage. In addition, HP's Moonshot servers should boost enterprise servers sales in 2014.

Add it up and HP's third quarter falls into the rebuilding category. All eyes will be on HP's October analyst meeting to see where Whitman takes HP's turnaround next.