Shulou(Shulou.com)11/24 Report--

The performance of the dual main business of personal systems and printers is sluggish, the market capitalization has shrunk sharply, and the "old" Hewlett-Packard has not had a new surprise for a long time.

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Hewlett-Packard, which once attracted a lot of attention for Buffett's buying spree, seems to be running into new trouble.

On August 31, HPQ.US (HPQ) reported results for the third quarter of fiscal 2022 (which ended July 31). According to the announcement, in the third quarter of fiscal 2022, Hewlett-Packard realized operating income of $14.664 billion, down 4.09% from a year earlier; net profit was $1.119 billion, up 0.99% from a year earlier; and net profit, which was not adjusted in accordance with US general accounting standards, was $1.1 billion, down 10% from $1.2 billion in the same period last year.

Before the results were announced, analysts generally expected HP to generate revenue of $15.63 billion and earnings per share of $1.03 in the third quarter. To make matters worse, HP also cut its full-year earnings forecast for fiscal 2022 to $4.02-$4.12 a share from $4.24-$4.38 a share, compared with analysts' estimates of $4.30, adding to investor concerns about HP's future performance.

"like many other companies, our revenue has been affected by deteriorating consumer demand, which we expect to continue into the fourth quarter, perhaps for several quarters," Enrique Lores, HP's chief executive, said in an interview.

It is worth noting that the weakness in terminal sales has also affected the quality of HP's operations. At the end of the third quarter, Hewlett-Packard had a total inventory value of $8.2 billion and 56 days of inventory turnover, an increase of four days from the same period last year.

Hewlett-Packard shares began to fall as the results significantly fell short of market expectations.

At the beginning of this year, Hewlett-Packard attracted a lot of attention because of the arrival of Warren Buffett. Berkshire Hathaway bought 11 million Hewlett-Packard shares between April 4 and April 6, 2022, according to data. As of April 6, Berkshire Hathaway held 120 million Hewlett-Packard shares, with a total position of about $4.2 billion, or 11.4%, making it HP's largest shareholder.

According to position information disclosed by Berkshire earlier this year, the company did not hold Hewlett-Packard stock as of December 31, 2021. In other words, Buffett's big purchases of Hewlett-Packard were mainly between January 1 and April 6, 2022, when HP's average share price was about $37.

After Berkshire Hathaway publicly took a stake in hp, hp shares jumped 15% to $41 a share the next day, the biggest gain in recent years. In terms of market capitalization, Hewlett-Packard became Buffett's tenth largest position and the second largest technology position after Apple.

However, the favor of the stock god did not make Hewlett-Packard look good for long. HP's second-quarter net profit was $1 billion, down 19% from a year earlier, according to earnings data. Hewlett-Packard shares have been falling since June due to lower-than-expected results. As of the most recent trading day, hp shares had fallen to $25.44, down 36% from their peak in early April, with a market capitalization of just $25.6 billion.

As a result, Buffett has lost nearly 30% of his stake in hp. So why on earth did the 92-year-old Buffett favor Hewlett-Packard, which is also in his octogenarian, and was the stock god wrong again?

Founded in 1938, Hewlett-Packard mainly produces and sells minicomputers, personal computers, printers, scanners and other information products. As an established technology company, Hewlett-Packard has made brilliant achievements in notebook computers, desktops, printers and other fields, and is also regarded as a symbol of Silicon Valley. HP's market capitalization peaked at $155 billion in April 2000.

However, Hewlett-Packard has faltered in recent years due to the slowdown in global demand for consumer electronics and the intensification of market competition. At the same time, due to the expansion of the scope of business, Hewlett-Packard's internal organization and personnel continue to expand, inevitably suffering from a serious "big enterprise disease", and missed the key layout of mobile in the first decade of this century.

In desperation, then-CEO Meg Whitman split the company into HP Enterprise (HPQ) and HP Inc. (HPQ) in November 2015, with HP providing enterprise software and services and HP in charge of computers and printers.

Data show that the development of Hewlett-Packard enterprises after the split is not smooth. In terms of revenue data, Hewlett-Packard's total revenue in 2021 was $27.78 billion, equivalent to only 55 per cent of the same period in 2016 ($50.12 billion). As of October 13, Hewlett-Packard had a total market capitalization of $16.5 billion.

Compared with Hewlett-Packard, Hewlett-Packard has developed relatively well in recent years. Between 2016 and 2021, Hewlett-Packard's total revenue grew from $48.238 billion to $63.487 billion, while net profit increased from $2.496 billion to $6.503 billion, according to the data. Among them, in 2021, Hewlett-Packard's net profit has reached the highest level in nearly a decade.

It is not difficult to see that after the split, Hewlett-Packard's revenue growth and profitability are gradually improving, which should also be the reason for Buffett's massive increase in positions. In addition, Hewlett-Packard has long been trading at less than 10 times earnings, compared with an average price-to-earnings ratio of about 20 for the S & P 500 and more than 25 for Apple.

Obviously, continued growth and low valuation should be the two main reasons why HP attracted Buffett's attention. However, it is important to note that the sharp increase in HP's performance in 2021 is largely due to the increase in PC sales after the COVID-19 outbreak and the blowout demand for household printing. But from the latest data, the two main businesses of Hewlett-Packard are facing challenges and pressure.

According to the latest division, HP's main business is divided into two parts: personal systems and printers, with a proportion of about 7:3. Among them, the personal system includes the income of notebooks, desktops and workstations, while the revenue of notebook business accounts for the largest proportion of total revenue.

In the third quarter, revenue from HP's personal systems segment was $10.1 billion, down 3% from a year earlier. Of this total, net income from consumer business fell 20%, while net business income increased by 7%. In terms of shipments, HP's total shipments fell 25%. Among them, notebook shipments fell 32%, desktop shipments slightly increased 1%.

Global PC shipments fell 12.6% year-on-year in the second quarter of this year (April-June), the biggest quarterly decline in the global PC market in nine years, according to Gartner. Of this total, demand for personal computers in the United States fell by 17.5%, while PC shipments in the Chinese market fell by 16% compared with the same period last year.

In terms of brands, shipments of the world's top three PC suppliers Lenovo, Hewlett-Packard and Dell all declined in the second quarter, with Hewlett-Packard shipments falling 27.5%, the biggest decline of all companies tracked by the agency.

From a regional point of view, Hewlett-Packard suffered a heavy setback in its North American stronghold, with shipments down 43.5% from a year earlier, and its market share fell to 22.3% from 32.5% in the same period last year.

Industry insiders believe that, relatively speaking, Hewlett-Packard still relies on traditional retail channels to sell PC products, while Dell mainly uses order-to-order manufacturing, has more flexible supply chain management capabilities and has a certain advantage of low inventory.

In fact, inventory pressure in the PC industry is becoming the focus of investors' attention. Data show that by the end of the first quarter of this year, finished PC inventories of mainstream manufacturers such as Hewlett-Packard, Dell, Lenovo, Acer, Asustek, MSI and gigabyte had climbed to $14.8 billion, a year-on-year increase of 56 per cent. According to market research data, due to the continued weakness of the PC market, PC inventory continued to rise in the second quarter, which will undoubtedly further increase the sales pressure of major brand manufacturers.

The good thing is that Hewlett-Packard remains competitive in India, an emerging market. In the second quarter of 2022, India shipped 4.6 million PCs, up 12 per cent from a year earlier. Although this growth rate is slower than before, it still looks commendable in the flagging global market.

In terms of brand, Hewlett-Packard (25.0%), Lenovo (21.1%), Dell (11.5%), Acer (11.3%) and Samsung (5.8%) ranked top five in Indian PC shipments (including tablets). Hewlett-Packard has a 27 per cent market share in India's business computer market with the advantage of local supply chains.

Consumer PC demand has weakened since mid-2021, but commercial PC demand has remained strong. The growth of HP's commercial PC in the previous two quarters partly offset the decline on the consumer side. But according to hp's third-quarter data, revenue in its commercial segment grew by just 7%, down from 18% in the previous quarter. Clearly, the continued downturn in the global economy has also affected demand for commercial computers, which is a major factor in the decline in Hewlett-Packard computer sales.

The latest data show that the global PC industry is still in a period of rapid recession. On October 11, Canalys released a report on global PC shipments for the third quarter of 2022, showing that global PC shipments in the third quarter were 69.4 million units, down 18% from the same period last year, the biggest decline in 10 years. Among them, Hewlett-Packard shipped 12.7 million units, down 28% from a year earlier, the biggest decline among the top five manufacturers for two consecutive quarters.

4 Hewlett-Packard earnings release, the market is generally optimistic about its printer business, because Canon, Xerox and other rivals revenue growth in the second quarter is still relatively stable.

According to the results released on July 26, Canon Group achieved a turnover of 998.799 billion yen in the second quarter, an increase of 13.3% over the same period last year, of which the turnover of the printing business was 567.5 billion yen, up 15.9% from the same period last year.

Canon Group said that in the printing business, the market demand for office digital composite machines is gradually recovering, and the services and consumables business are the same as the same period last year; the market demand for laser printers is also relatively strong, and the business has increased significantly compared with the same period last year; for inkjet printers, due to the strong global market demand, the company's sales of ink-fed high-capacity printers have increased significantly compared with the same period last year.

From the perspective of the market pattern, the global printer market share is mainly concentrated in the hands of global head printer manufacturers represented by Hewlett-Packard, Brothers, and Canon, and the overall market share of laser printers of the top five manufacturers has reached 78.7%. According to Huajing Industrial Research Institute, in 2021, Hewlett-Packard, Canon and Epson have a global market share of 40%, 21% and 18%, respectively, ranking among the top three in the industry.

Therefore, the strong growth of Canon printer business in the second quarter once made investors look forward to Hewlett-Packard printer business. But disappointingly, Hewlett-Packard's printer business lags far behind its competitors.

HP's printer division reported revenue of $4.6 billion in the third quarter, down 6% from a year earlier and 8% from a month earlier, below analysts' expectations of $4.8 billion, the lowest since the fourth quarter of 2020.

According to IDC, the global printer market shipped 22 million units in the second quarter of 2022, down 3.9% from a year earlier. Among the top five brands, Canon, Brothers and Pentu saw positive year-on-year revenue growth, while HP and Epson declined.

From a sub-regional point of view, the Asia-Pacific region (excluding Japan and China) and China achieved year-on-year growth of 7.4% and 1.0% respectively, and the market performance was relatively better than that of other regional markets.

Over the past decade, with changes in consumer habits and attention to environmental issues, fewer and fewer users are printing, putting pressure on Hewlett-Packard printer business. HP's printer revenue fell from $23.643 billion to $18.26 billion between 2013 and 2016, down 23% over a four-year period, according to the data.

In November 2017, Hewlett-Packard completed the acquisition of Samsung Electronics's printer business at a transaction price of US $1.05 billion, so as to strengthen its own printer business strength, and at the same time strengthen the dual main business development strategy of PC business and printer business.

After the acquisition of Samsung's printer business, Hewlett-Packard strengthened its business layout in the Asia-Pacific market, and revenue returned to growth at one point. Hewlett-Packard's printer business generated $20.805 billion in revenue in 2018, back above $20 billion.

However, since 2018, Hewlett-Packard's printer business has once again faced anaemic growth and has been mired in layoffs many times. From 2019 to 2021, Hewlett-Packard's printer business generated revenue of $20.066 billion, $17.641 billion and $20.128 billion, respectively, none of which exceeded revenue in 2018.

In addition to the shrinking size of the industry, the business model is also a major challenge affecting the development of Hewlett-Packard printer business. For a long time, Hewlett-Packard printers have pursued the sales strategy of "selling printers at low prices and selling consumables at high prices". Later consumables such as ink cartridges have been the main source of HP's profits.

However, with the popularity of smartphones and the mobile Internet, demand for color inkjet printers has fallen sharply, HP is under constant pressure from the printing consumables business, and operating margins have also declined. Since then, although Hewlett-Packard has expanded its printer services business, the effect of this strategic adjustment is not obvious from the latest financial data.

As the originator of "Silicon Valley entrepreneurship", Hewlett-Packard was once the most innovative and dynamic technology company in the world, and a model for China's first generation of technology companies to emulate. However, judging from the latest financial data, the short-term performance of the company's PC and printer is not very satisfactory. Whether 92-year-old Buffett's investment in 84-year-old Hewlett-Packard is a good investment will take time to verify.

Source: Guishi Finance (lishicaijing), author: Li Ping

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