Five Key Questions For HP As Q3 Earnings Loom

Hewlett-Packard will report its fiscal third quarter earnings Thursday after the bell, and industry analysts and channel partners are eager to see how the Palo Alto, Calif.-based computing giant fared in Q3, and what to expect for the coming quarter.

There's already reason to believe that HP could be in for a rough ride in Q3: In an internal HP memo that surfaced in May just prior to the company's Q2 earnings, CEO Leo Apotheker warned that Q3 could be "another tough quarter" and that HP would have to keep a close eye on expenses and hiring.

HP will also no doubt be asked to explain several recent TouchPad price cuts, as well as ongoing efforts to revitalize its Technology Services business with a view toward capturing higher-margin engagements. Analysts will also be curious to see if HP lowers its guidance for Q4, something it has done in its two previous quarters.

Here CRN offers five key questions HP faces as it heads into its Q3 earnings.

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1. What's With The HP TouchPad Price Cuts?

It's not often you see a company cut the price of an important new product just five weeks after its launch, but that's what happened earlier this month when HP offered three separate TouchPad discounts in the space of a week. The HP TouchPad is now $100 cheaper than the iPad, which puts it in the range of tablets from Acer and Asus.

Analysts will probably ask HP for insight into its rationale for lowering the price of the TouchPad, and they'll likely be looking for sales figures, too. But given that the HP TouchPad has only been on sale since July 1, it's unclear if HP has enough sales data yet to answer these questions.

2. Will HP's Services Business See An Uptick?

One of the biggest developments to arise from HP's Q2 earnings was its decision to move its Technology Services division into its successful Enterprise Servers, Storage and Networking (ESSN) business. HP is also searching for an executive vice president of services, who will report directly to Apotheker.

In the Q2 call, Apotheker expressed his desire to see HP shift its services focus to "higher-value, higher-margin and higher-growth categories". HP's Q2 services sales grew just 2 percent in Q2, with a 15.2 percent operating margin.

HP is in the process of reshuffling its executive leadership for Technology Services. Earlier this month, 31-year HP veteran Joe Bottazzi left his post as senior vice president and general manager of HP's Technology Services Americas business for a position outside the company.

Last week, HP promoted David Twohy, former vice president of Americas channel sales, to vice president of global channel sales.

Next: Will Apotheker's 'Tough Quarter' Prediction Come true?

3. Will Q3 Actually Be A Tough Quarter?

Apotheker warned in a May 4 internal e-mail to HP executives that HP would need to tighten its belt in the coming quarter and also hinted of possible layoffs.

"Q3 is going to be another tough quarter, one in which we will be driving hard for revenue and profit. We have absolutely no room for profitless revenue or any discretionary expenditures," Apotheker said in the May memo.

The hinted-at layoffs have yet to happen on a mass scale, and this particular aspect will be one of the most closely watched in Thursday's Q3 call.

4. Can HP Fend Off The Tablet Cannibals?

HP's consumer PC client sales dropped 23 percent year-over-year in Q2, and that amounted to an unwelcome surprise for the computing giant. "The steepness of our Q2 decline is greater than we anticipated," Apotheker said in the Q2 call.

The consumer PC weakness was spread evenly throughout HP's global business, but the news wasn't all bad, as commercial PC sales jumped 13 percent. But if HP's consumer and commercial PC business figures drop in Q3, industry watchers will no doubt attribute it to the cannibalizing effect of tablet sales on the PC market.

5. Will HP Maintain Its Outlook For Q4?

BMO Nesbitt Burns' Keith Bachman is one Wall Street analyst who believes Apotheker's gloomy Q3 forecast will come to pass. On Wednesday, Bachman cut his rating on HP shares to "market perform" from "outperform," slashed his price target to $36 from $43 and predicted that Q3 would be the third consecutive quarter that HP lowers its guidance.