Hp's Possible Secular Decline in Printing Should Be Watched

[Anonymous]

http://www3.cfo.com/article/2012/2/technology_hp-earnings-decline-software-cloud-strategy

HP CFO Acknowledges Supply Chain Woes
Finance chief Kathie Lesjak cites last year’s Thailand floods, which created a shortage of hard-drive disks.It was, Meg Whitman said simply in her first quarterly earnings call as HP’s CEO, “a tough quarter.”

On the call, both Whitman and HP CFO Kathie Lesjak repeatedly referenced last year’s Thailand floods, which created a shortage of hard-drive disks that led to a 30% imbalance between supply and demand in HP’s PC business and also affected its server sales — forcing the company, said Lesjak, to ship a “less richly configured product.”

Lesjak said she expected the supply of hard drives to remain constrained in the second quarter, putting pressure on HP’s supply chain, which, Whitman admitted, needed to get better at moving from order to delivery. While saying she believed HP was “world class” in procurement, Whitman allowed that the company needed to improve its supply-chain execution.

More bad news was reported for HP’s Imaging and Printing Group (IPG), which Whitman called the company’s “lifeblood.” Overall, IPG sales declined 7%, with operating margins down 3% from 2011. Consumer printer hardware sales fell 15% compared with the same quarter last year, and Whitman said HP had much work to do to capitalize on the analog-to-digital trend.

All these hits to HP’s hardware businesses were not offset by its modest gains in services (revenue grew 1%) and software (software sales were up 30%, with most of that attributed to the company’s August 2011 $10 billion acquisition of cloud enterprise search company Autonomy).

But gains are better than losses. Indeed, it could be said that former HP chief executive Leo Apotheker, who was replaced by Whitman last fall shortly after he proposed selling off the company’s PC business, was right in trying to position HP as a software-and-services company rather than a hardware company.

To be sure, Whitman affirmed HP’s commitment to its printing and imaging business — and proposed that what the company really needed to do to right the ship was to remove complexity and integrate silos to reduce operating costs. But she also said HP needed to “own” the cloud, security, and information-management businesses.

Lesjak was enthusiastic about HP’s software revenue growth, called the increase in leads in the software sales pipeline “compelling,” and attributed the uninspiring increase in services revenue to the fact that contract renewals tend to come in at a lower price.

HP, said Lesjak, “needs to be nimble to take costs out to offset price reductions in renewals and sell new services.” She expected service margins to continue trending lower in the second quarter of 2012. But, as she told CFO in an exclusive interview last month, she sees cloud computing bursting out, as CFOs become more comfortable with cloud security and the cloud computing business model.

Both Whitman and Lesjak pleaded for patience, with Whitman saying her first order of business was to grow revenue by gaining share in all markets. She noted the universal decline in unit prices in the technology space, saying that therefore HP needed to sell more. It would, she cautioned, take time. Turnarounds, she said, are not quick, and she indicated a horizon of between three and five years.

 

http://www.marketwatch.com/story/h-ps-big-problem-hardly-anyone-prints-any-more-2012-02-28?reflink=MW_news_stmp
H-P’s big problem? Hardly anyone prints any more
Commentary: Possible secular decline in printing should be watched
SAN FRANCISCO — As investors ponder the long road ahead for Hewlett-Packard Co.’s turnaround, they need to pay close attention to the technology giant’s cash cow: its printing and imaging business.

In the aftermath of last week’s earnings, a lot of the focus was on the company’s PC business, which was hurt more than its rivals by the disk-drive shortage. Hard-disk drives have been in tight supply, due to flooding in Thailand, and H-P decided to focus on profitability instead of market share. Overall, revenue in H-P’s PC business fell 15%, with even steeper declines in sales of consumer PCs. Read more about H-P earnings.

In last week’s conference call with Wall Street, H-P HPQ +0.11%  Chief Executive Meg Whitman also talked a lot about the imaging and printing business, which is “still a great business,” and the “undisputed leader.” But she cautioned that “the business is being pressured on multiple fronts.”

Whitman also noted that printing was one area that was going through some secular changes and macroeconomic challenges. Weaker consumer demand is one factor, as consumers are doing less printing at home, especially of photos. Some likely culprits are smartphones, iPads and Facebook, where people now show off their latest baby or vacation photos.

The printing business, Whitman noted, “has been the lifeblood of our company for a long time, with great margin and very resilient revenues.”

Before H-P made a bigger foray into the services business, printing and imaging was its most profitable business. Even as services is now its largest profit generator, printing and imaging has remained H-P’s second-most profitable business, with the bulk of its profits coming from supplies, mostly ink. And that is where things may get worse, before they get better.

Whitman noted that “the sell-through of ink in particular is at pretty low levels,” she said last week. “And it’s not just our ink, it’s industry ink.”

Because consumers and businesses typically buy ink when it runs out, revenue from supplies could shrink further. In the fiscal first quarter, H-P said unit sales of commercial printers were down 10%, and consumer printer units were down 15%. This decline was steeper than in the fiscal fourth quarter of 2011, ended Oct. 31, where units of printers for commercial use rose 5%, and units sold to consumers fell by 8%
“The question on investors’s minds is if the problem is really secular (less printing), versus inventory and macro issues,” wrote Collins Stewart analyst Louis Miscioscia, in a note last week.

Indeed, H-P’s printer business was also hampered with a currency issue in the quarter, as the stronger Japanese yen hurt its profits because it purchases its laser supplies from Canon in Japan. “When the yen moves against us, it has actually a pretty big effect,” Whitman said.

Investors who are trying to weigh whether there is a secular shift in printing, as Whitman suggested, or not, might want to look at their own printing habits. You might notice you are printing far fewer photos, documents, even boarding passes, thanks to the portability of iPads and smartphones.

As more people print less, this will continue to hurt H-P’s ink business, which is where the real profits come from imaging and printing, in this razor/razor-blade type business, where printers are cheap, but not the ink.

Many analysts on Wall Street are prepared for a multi-year turnaround, as the company is struggling with declining revenue in all its businesses except software. Some are also expecting eventual cost cuts or layoffs. Bernstein Research analyst Toni Sacconaghi wrote that he expects a work-force reduction as “likely at H-P, but the size and magnitude are difficult to predict.”

So while H-P looks for additional sources of revenue in new growing business such as cloud computing, it’s hoping to fix some of the issues in its older businesses through innovation ,But a change in consumer behavior could be the hardest one to fix.

[Author]

February 28, 2012 at 8:34 AM