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HP to Report Q2 Amid Sale of China Networking Stake

Six months remain before HP splits in two.

Computing and IT giant Hewlett-Packard will report results of its second fiscal quarter later today, hours after announcing a deal to sell a controlling stake in its China-based networking operation H3C Technologies to Tsinghua Holdings, a state-controlled company.

HP will get $2.3 billion in exchange for a 51 percent stake in a new company to be called simply H3C, in a deal that values the total enterprise at $4.5 billion net of cash and debt. It employs about 8,000 people and brings in about $3.1 billion in annual revenue.

The deal was announced on a day when analysts expect HP to post per-share earnings of 86 cents on $25.6 billion in revenue and to forecast earnings of 87 cents on $25.9 billion for the third quarter ending in July.

Several issues are likely to cloud HP’s results today. The big one will be the currency exchange rate. As a U.S.-based company that does about two-thirds of its business in international markets, HP suffers a revenue hit when it is paid in non-U.S. currencies like the euro and the Japanese yen. When it last reported earnings, it lowered its sales and profit expectations for this quarter because of currency worries stemming from the strong U.S. dollar. At the time, HP said it expected sales to come in 6 percent lower from currency effects alone. In 2014, the currency effect averaged about 2 percent.

There are other worries: Sales of personal computers, after showing modest gains at the end of 2014, turned south again in the first quarter of the year. HP is the world’s second-largest supplier of PCs in the world after China’s Lenovo.

In another key hardware market, server computers, HP leads the world with a commanding market share of nearly 27 percent. But for HP, growth in this segment has been harder to find while a resurgent Dell, now privately held, has made significant gains.

Today’s earnings report is also likely to be the second-to-last before HP completes its massive corporate split into two companies: Hewlett-Packard Enterprise, devoted to corporate IT and networking, and HP Inc., devoted to personal computing and printing. Expect more questions from analysts about restructuring costs — HP has already advised the street to expect about $1.3 billion in break-up costs plus another half billion or so next year — and the potential for further layoffs between now and then.

Other questions may focus on HP’s M&A intentions. In a Feb. 25 interview with Re/code, CEO Meg Whitman sent a strong signal that she was on the hunt for acquisitions. A week later HP said it would pay $3 billion for Aruba Networks, a maker of corporate Wi-Fi networking gear. Before that deal HP had about $13 billion in cash on the balance sheet. As Whitman gets ready to run Hewlett-Packard Enterprise after the split, it’s possible that more small- and medium-sized deals could materialize before then.

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