Question marks hang over PC giants

HP hopes to shift investors’ attention from its internal upheaval to its financial performance, with an imminent quarterly report expected to again showcase its reputation for solid – if unspectacular – growth.

Question marks hang over PC giants

HP shares have suffered after months of grappling with the messy exit of Mark Hurd as chief executive, followed by a nasty public fight with Oracle and its CEO Larry Ellison over the hiring of Silicon Valley outsider Leo Apotheker as its new chief.

HP is really trying to calm the waters with investors

HP’s financial report comes next Monday, following that of long-time rival Dell, which will be closely watched for signs of the same cooling in government spending that plagued Cisco Systems.

Amid the dismal headlines, HP investors have two burning questions: Did performance slip with Hurd’s exit? And what exactly is this Apotheker fellow all about?

Morningstar analyst Michael Holt said there was no evidence HP’s execution was hurt by Hurd’s departure – or the jockeying by executives to succeed him. “They did execute, and I think they will come in and give that signal of stability,” Holt said. “They’re really trying to calm the waters with investors.”

Gleacher & Co analyst Brian Marshall said Wall Street is eager to hear from Apotheker, who started work on 1 November but remains a mystery to many investors. “Leo has to make a good appearance,” Marshall said. “The numbers are important, but it’s more about how he comes across.”

Apotheker’s ride has not been smooth thus far. Oracle claims he is ducking a subpoena to testify in its high-profile copyright case against SAP, where Apotheker was once CEO. HP says Oracle is simply trying to harass him.

Global IT demand

Public relations aside, HP will provide a snapshot of global IT demand when it reports results next Monday. The world’s largest tech company by revenue has hinted at a solid upcoming year and has stressed its investments after years of cost-cutting under Hurd.

For the fiscal fourth quarter ended 31 October, Wall Street expects HP to report earnings of $1.27 a share on revenue of $32.8 billion. HP has beaten or matched analysts’ earnings estimates every quarter over the past two years.

Its shares are still down about 10% since Hurd was forced out in August and – according to Thomson Reuters StarMine – may be undervalued.

IT services and printing are HP’s bread and butter, providing nearly half of revenue and two-thirds of operating profit. But strength in the quarter could come from servers and storage, as well as in networking, where there is evidence that the company is beginning to take market share from Cisco.

Although HP lost two percentage points of PC market share in the July-September period according to IDC, its operating margin should benefit from improved component costs.

Doubts over Dell

Dell is much more of a question mark, analysts say. Investors in the number two PC maker, which reports earnings on Thursday, got jittery last week after Cisco’s weak revenue outlook sent its shares plunging.

Although it is unclear whether the drop in government spending highlighted by Cisco is a broader issue, analysts warned of Dell’s potential exposure. The company’s public business provides around a quarter of its revenue. “Cisco’s commentary raises a red flag on Dell’s above-peer government exposure,” JP Morgan analyst Mark Moskowitz said in a research note.

Dell, which has been in turnaround mode for some time, has been a major beneficiary of the corporate refresh cycle, where companies spend billions to upgrade aging IT hardware.

But the company has struggled to show progress on profitability. Despite efforts to diversify, more than half its revenue still comes from its low-margin PC business.

“The question really is, can it turn the growth they’ve seen into profitability?” said Morningstar’s Holt. “That’s where it has really struggled, in the operating leverage, or lack thereof.”

Still, Dell should benefit from an effort to improve margins in its consumer business and better component costs. Analysts are expecting Dell to report earnings of 32 cents a share on revenue of $15.7 billion.

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