Hewlett-Packard's (NYSE: HPQ) preliminary third-quarter report reminds readers that the word execute has more than one meaning. At HP, heads roll when you fail to execute.
First, let's start with the good news. Revenue and earnings were up. On the surface, that is good execution (performance).
Next, there is the disappointing execution. Excluding certain items, earnings, expected to be $0.31, were $0.24 a share. Next quarter's earnings, also excluding items, were forecasted to be $0.43, but now the company is targeting $0.35 to $0.39 a share on that basis.
And here is execution on two fronts. In an earnings report littered with generally accepted accounting principles and non-GAAP numbers, the company's laser focus fell on the "unacceptable execution in Enterprise Storage and Storage." The result: Immediate management changes will be made, and the company will accelerate the margin improvement (performance) plans in this business.
Given the choice between margin improvements and accelerated margin improvements, wouldn't accelerated always win? Aren't stock options supposed to encourage accelerated performance? Why do disappointing results yield an accelerated plan? Ah, sweet mysteries of life.
If you really want to be confused, look at operating margins. GAAP margins improved from 1.7% a year ago to 3.5%. Non-GAAP margins declined from 4.9% to 4.5%. Is this mixed bag good execution or bad?
Consider competitor execution (performance). Operating margins are 14.2% at Canon (NYSE: CAJ), 8.5% at Motley Fool Stock Advisor recommendation Dell (Nasdaq: DELL), and 10.2% at IBM (NYSE: IBM). Based on those comparisons, HP has a lot of accelerating to do to get to peer-level performance.
HP is not a basket case. With total debt of $7.1 billion, and cash and short-term investments of $14.3 billion, the company is flush with cash and has a strong research and development department.
If heads roll, let's hope it's in financial reporting. One set of numbers, please. Simple is better. Let management changes be based on improving operating margins. Set the targets high. Replace those who cannot perform. And if execution is poor, then please do not issue options.
And, speaking of public Wall Street executions, HP is the volume leader and down 17% to a new 52-week low.
While devices continue to fail on W.D.'s just over 1-year-old Dell, a 3-year-old HP continues to chug along. Go figure.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
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