HP Loses PC Top Slot

Hewlett-Packard (NYSE:HPQ), the leader in the PC market with annual revenue of $118.4 billion, reported third quarter results that just managed to beat estimates. CEO Mark Hurd observed that the US market remained stable in the quarter, but things are not looking so good in Europe. According to a recent report from Gartner, Acer overtook HP as the No.1 PC vendor in Western Europe. In the US market, Dell overtook HP as the No.1 with a difference of just 0.3%. Let’s take a closer look.

Q3 revenue declined 2% to $27.5 billion, beating analyst estimates of $27.2 billion. Net earnings were $1.6 billion or $0.67 per share, down from $2.03 billion or $0.80 per share last year. Non-GAAP EPS was $0.91, beating analyst estimates of $0.90 per share. Q2 analysis is available here.

By segment, all segments except Services reported revenue declines. Mainly due to the $14 billion EDS acquisition last year, Services revenue increased 93% to $8.5 billion. The segment also achieved a record profit of $1.3 billion, double last year’s profit of $567 million. As per Gartner’s report for 2008, HP is No.2 in the Services market with a 4.8% share while IBM leads with a market share of 7.3%.

However, in the Server market, IBM and HP share the No.1 spot with 29.3% market share in Q109. HP’s Enterprise Storage and Servers (ESS) revenue was $3.7 billion, down 23% over the year but up 14% sequentially driven by the success of its new G6 platform. HP is also doing well in networking as its ProCurve segment is gaining market share.

Personal Systems Group (PSG) revenue declined 18% to $8.4 billion but shipments increased 2%. Revenue from Notebooks declined 10%, while Desktops declined 26%. Globally, HP led the market with 19.6% while Acer and Dell were neck-and-neck at No.2. In the US market, HP had very aggressive pricing in the low-end consumer mobile PC market and gained 1.2% of the market for a 25.7% share. However, it lost its No.1 spot as Dell has been doggedly defending its market share.

Imaging and Printing Group (IPG) revenue declined 20% to $5.7 billion. HP Software revenue declined 22% to $847 million with Business Technology Optimization and Other Software revenue declining 22%. HP Financial Services (HPFS) revenue was $670 million, down 1%.

Revenue increased sequentially across all regions except EMEA. Revenue from the Americas grew 8% to $12.6 billion, EMEA declined 12% to $9.9 billion and Asia Pacific declined 4% to $5 billion.

Gross margin was 23.7%, down 70 basis points. Non-GAAP operating expenses were down 13% to $3.5 billion as the company kept its cost structure leaner and more flexible. During the quarter, HP paid dividends of $191 million and bought back shares for $999 million. It generated $3.9 billion in cash flow and ended the quarter with $13.7 billion in cash. However, HP continues to have a negative net cash position of $3.2 billion and aims to make its cash position positive before considering acquisitions.

Overall, HP’s strategy seems to be leaning towards data centers. Last month, it announced plans to acquire IBRIX, a maker of software that allows customers to build out scalable storage clouds. Data centers have been a hot space with the rise in cloud computing and Cisco announced its data center plans earlier, threatening HP and IBM.

The Fibre Channel over Ethernet (FCoE) standard was approved recently, but unlike Cisco, which is aggressively pushing the technology, HP is holding out till all other related standards are approved. FCoE is a convergence of two technologies—Ethernet networking and storage, and it is expected to be in widespread use in 2010 and 2011. Meanwhile, the high prices of FCoE switches are likely to delay its adoption in the current environment.

For the fourth quarter, HP expects revenue to be up 8% sequentially, GAAP EPS to be $0.97 and non-GAAP EPS to be $1.12. Analysts expect a 9% sequential increase in revenue and EPS of $1.07. For the full year 2009, HP expects revenue and earnings to be in-line with the mid-point of its previous guidance of a 4% to 5% decline in revenue and EPS in the range of $3.76 to $3.88. It is currently trading around $44 with market cap of about $105 billion, recovering well from its 52-week low of $25.39 on March 9.