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HP's Pending Split Likely to Cloud Q1 Results

Also expected: An update on how HP Inc. and Hewlett-Packard Enterprise will be structured.


When computing and IT giant Hewlett-Packard reports results for the first fiscal quarter after U.S. markets close Tuesday, analysts and investors will be paying less attention to the earnings results themselves and more to the status of the company’s plans to split in two later this year.

Last fall HP announced that it will break into two companies — one called HP Inc., which will be made up of its PC and printing business, and another called Hewlett-Packard Enterprise, which will be devoted to its corporate IT hardware and services business.

Expect CEO Meg Whitman and CFO Cathie Lesjak to provide some updates on the status of the split during a conference call, including, we hope, more details on how much cash and debt each company will have. We already know that HP Inc. will take on most of the parent company’s operating debt.

Analysts polled by Thomson Reuters expect HP to post per-share earnings of 91 cents on revenue of $27.4 billion and are projecting that HP will report 96 cents per share on sales of $26.8 billion in the second quarter ending in April.

Sales of PCs were an unexpected strength last quarter led mostly by notebooks. Katy Huberty of Morgan Stanley wrote in a Feb. 20 report that sales of notebook PCs are likely to be strong again, led in part by upgrades of older machines running Microsoft’s Windows XP. But desktop PCs, servers and consumer printers are likely to come in lower than expected.

Even so, Huberty writes that HP’s PC business is showing signs of stabilizing, and that might make HP Inc. attractive as a target for a potential buyout by a private equity firm after the split is complete. “The likely underappreciated stability of HP Inc.’s PC business, the recurring revenue stream model of its printer business, relatively low capital intensity and attractive working capital characteristics, in our view, potentially enhance HP Inc.’s value to a private equity buyer.”

One other factor to watch will be the effect of currency exchange rates on HP’s revenue. The strong U.S. dollar makes conversion expensive in cases when HP is paid in other global currencies, especially the euro. And while HP typically tries to manage currency effects with investments intended as a hedge against them, Huberty still expect exchange rates to dent revenue by as much as 2 percent.

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