Printers buy Meg Whitman time to save HP
Meg Whitman has a laundry list of things to do at HP: arrest a rapid decline in its PC unit, compete better on enterprise services, and figure out a mobile strategy.
That leaves one still-bright spot in HP’s beaten-up portfolio – printing.
The HP CEO in past months has punctuated talk about her years-long turnaround plan with sweeping goals such as battling IBM and Dell on corporate services and products, using Silicon Valley buzzwords such as “cloud” and “social” and “big data.” In the short run, however, its printers are buying time for the CEO of one year to turn around the sprawling company with over 300,000 workers.
Whitman will today host HP’s annual presentation to investors in San Francisco, and Wall Street is keeping one eye on a division that her predecessor once considered spinning off.
Printing is not as much a problem as some of the other businesses
Though it has lost some of its shine, the unit still generates close to a fifth of total revenue and 35% to 40% of HP’s annual profit.
Printing is “not as much a problem as some of the other businesses,” said Shaw Wu, analyst with Sterne Agee. “It’s still a cash-cow business. The profits have declined but they are still very strong.”
Revenue from all of HP’s main business units fell in the July quarter, with the PC unit seeing a slide of 10%. Operating profit declined by 28% in the PC group, the largest slide among HP’s divisions, followed by a 22% slide in services.
Printing revenue declined 2.7% last quarter, but operating profit increased by 8%. The group accounted for $949 million of HP’s $3.1 billion in operating income that quarter.
HP’s imaging and printing group has historically been a steady business – with an operating margin of 16% last quarter, almost double the company overall – because of recurring sales of printer cartridges.
But the industry is facing some fundamental challenges. Most printer makers are struggling with falling sales: printing has been a target of corporate cost-cutting, and personal computing has moved to tablets and smartphones.
By dint of the printing unit’s sheer scale, any small increase in revenue could have a big impact on HP’s bottom line. Whitman is trying to stabilise the printing business and reduce excess inventory. She has merged the group into the ailing personal computer business to better package product sales to corporations.
In August, Lexmark, never a dominant player in consumer printers, said it will stop making inkjet printers and focus on its more profitable imaging and software businesses. The announcement reminded investors about the intense competition, falling margins, and gradual mobile migration the sector is now coping with.
Lexmark reflected a broader pattern of problems in the industry: Xerox cut its full-year profit outlook in July, while Canon trimmed its operating profit forecast as the companies braced for tough economic conditions in Europe.
Now, the Silicon Valley giant needs to make a big move into the fast-growing sector of industrial printing or three-dimensional printing, analysts said.
“Companies like HP have to look at where the next big opportunity is,” said Terry Wohlers, president of research firm Wohlers Associates. “3D printing is a good fit.”
The market for 3D printing was at $1.7 billion last year and is expected to reach $2.1 billion this year and grow three-fold to $6.5 billion by 2019, according Wohlers Associates.
“With their strong marketing and distribution muscle, HP is in a very good position to dominate the market, and they could buy up most of the companies in this business if they wanted to because it’s a relatively small but fast-growing and vibrant area,” Wohlers said.
HP’s thinking on this point is unclear. In August, the company ended its relationship with 3D printer manufacturer Stratasys, which has been making HP’s exclusive line of 3D printers since 2010. HP mostly marketed the 3D printers in Europe.