HP's profitable printers to buy Whitman time

Reuters News

10/2/2012 11:42:41 PM - Reuters News

By Poornima Gupta

SAN FRANCISCO (Reuters) - Meg Whitman has a laundry list of things to do at HP: Arrest a rapid decline in its personal computer unit, compete better on enterprise services, and figure out a strategy as mobile devices eat into personal computer sales.

That leaves one still-bright spot in Hewlett-Packard's beaten-up portfolio - printing.

The HP chief executive in past months has punctuated talk about her years-long turnaround plan with sweeping goals such as battling IBM and Dell Inc 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 on Wednesday will 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.

Though it has lost some of its shine, the unit still generates close to a fifth of total revenue and 35 percent to 40 percent 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 percent. Operating profit declined by 28 percent in the PC group, the largest slide among HP's divisions, followed by a 22 percent slide in services.

Printing revenue declined 2.7 percent last quarter, but operating profit increased by 8 percent. The group accounted for $949 million of HP's $3.1 billion in operating income that quarter.

Wu is expecting HP's annual printing revenue to decline by about $1 billion to $25 billion this fiscal year, which ends in October.

HP's imaging and printing group has historically been a steady business - with an operating margin of 16 percent 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 stabilize 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 Corp 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.

3D OPPORTUNITY

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.

Three-dimensional printing - a process by which an object or prototype is built from a digital model - is commonly used in the automotive, aerospace and dental industries.

"Companies like HP have to look at where the next big opportunity is," said Terry Wohlers, president of research firm Wohlers Associates Inc. "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.

The largest U.S. technology company by revenue is trying to keep its core personal computing business profitable as competition from mobile devices erodes sales. HP is trying to transform itself into a major enterprise computing provider, while slashing expenses to boost the bottom line.

The company is laying off 29,000 employees over the next two years, has written off $10.8 billion that was mostly related to the writedown of its EDS services business, and its business continues to be hit by a slowing economy in most of its biggest regions, including Western Europe and China.

Whitman is expected to provide HP's outlook for the next fiscal year and an update on the company's restructuring plans.

The analyst meeting "comes at a crucial point in the company's struggle to maintain its relevancy in an increasingly competitive IT industry," said Topeka Capital Markets analyst Brian White, who expects HP to offer a conservative outlook.

Wall Street analysts on average expect HP's revenue to decline to $120.08 billion in fiscal 2013 from an estimated $121.14 billion this year, according to ThomsonReuters I/B/E/S.

Jefferies analyst Peter Misek said he expects HP's outlook for 2013 to come in well below Wall Street estimates given "cyclical and secular headwinds for HP's PC, services, and printer businesses."

(Reporting by Poornima Gupta; Editing by Prudence Crowther and Ryan Woo)