HP Beats Street, but Whitman Misses

Not much was expected ahead of Hewlett-Packard's (NYSE: HPQ  ) fiscal Q1 earnings report. The company's CEO, Meg Whitman, had already tossed the kitchen sink out the window for all of 2013. The Street had already priced in the many challenges and deficits that this company needs to correct. Still, investors were nonetheless looking for validation that these shares were as cheap as they appeared. In many respects, HP delivered.

Good start to long journey
Revenue arrived at $28.4 billion, falling 6% year over year, and 5% sequentially. However, this was enough to top Street estimates of $27.79 billion. For that matter, revenue was down across all segments. Again, this is not a surprise, given Whitman's prior comments. But remarkably, the networking division did well -- posting 4% year-over-year growth. While this should be celebrated, it's not as if Cisco has been actively pursuing new hardware business. For that matter, this is an area where HP should see some improvement going forward.

Meanwhile, software revenue plummeted 21% sequentially, and 2% year over year. This is important to note, because it contradicts Whitman, who, while offering guidance in a conversation with CNBC, told investors to expect revenue declines across all segments this year except software. She was wrong. I recently discussed Whitman's managerial ability, and suggested that she deserves the benefit of the doubt, but these conflicting results don't support notions that she has a firm handle on what ails the company. She also went on to say that investors should begin to see revenue growth by 2014. How much of this should be believed?

As expected, the PC business dropped roughly 8% year over year, and 6% sequentially. But the rate of the drop was 6% slower than in Q4 (14%). But don't mistake this for a slowdown in PC sales. These numbers are encouraging, yes. But HP's coming off a holiday quarter that coincided with the release of its new Ultrabook, which featured Microsoft's (NASDAQ: MSFT  ) new Windows 8 operating system. And it's not as if Microsoft has been impressed with consumers' acceptance of its new flagship software. It's not great for HP when the world's dominant PC software maker puts out an operating system that no one likes. But for HP, any sign of progress should be welcomed.

In that regard, the rest of the business segments, although unimpressive, were not any worse off than before. Printing revenue fell 5%, which is consistent with the prior quarter. Likewise, consolidated servers/storage revenue fell 4%, which is 5% slower than Q4 (9%). But it fell by 6% on a sequential basis. This means that HP has been unable to exploit the recent declines of IBM and Dell in servers and storage. Despite this weakness, the company did well where it matters the most -- in profitability.

Non-GAAP earnings per share arrived at $0.82. While this is down 11% year over year, it beat Street estimates of $0.71 per share, while topping HP's prior EPS guidance of $0.68. For that matter, the outlook for fiscal 2013 arrived better than expected. HP projects earnings of $2.30 to $2.50 per share, which is a raise from the previous guidance of $2.10 to $2.30 per share. Moreover, the company sees adjusted EPS to come in between $3.40 and $3.60 -- higher than Street estimates of $3.32 per share.

Are better days truly ahead?
Placing a bet on this company today first requires answering this question. It's not as if the PC industry is suddenly going to rebound. After all, this is why Dell is going back into the huddle as a private company. HP still faces major hurdles going forward. And although Whitman lost a bit of credibility, the results show that she's doing better than a decent job. And investors have to be encouraged that her big restructuring moves appear to be working. But does this make HP viable? Making matters worse, while the company is busy trying to stop its bleeding, Cisco and Oracle are making investments into new end-markets. This means that, regardless of any progress seen in HP, the company will still be behind.

Whitman's miscalculation on the software business notwithstanding, there's a reason why it was discussed with such optimism several months ago. It means that software will be HP's new focus going forward. But there has to be a leap at some point. Perhaps that leap is the rumored partnership with Google, and branching away from Windows, which would be devastating to Microsoft. But that's not HP's problem. And one thing is certain -- with cash flow jumping up 115%, to $2.6 billion, HP does not look like a company ready to be sent to the glue factory.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP's rapidly shifting its strategy under the new leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2460127, ~/Articles/ArticleHandler.aspx, 10/20/2014 7:55:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement