When Hewlett-Packard Co. (NYSE:HPQ) announced mixed fiscal first-quarter 2015 results and disappointing guidance last week, the market obviously wasn't impressed. Shares of the computing giant plunged almost 10% that day, even though HP owed its underperformance almost entirely to foreign currency exchange headwinds.
Nonetheless, as usual, HP management offered some much-needed insight on the company's results during its subsequent hourlong conference call with analysts. Here are five of the most important points made during that call:
1. There's a reason currencies headwinds are hitting Hewlett-Packard hard
We're all aware that the global environment and currency movements have been a challenge for U.S.-based companies. For HP, the challenge is particularly acute with 65% of our revenue coming from outside the United States and over half of that from EMEA. -- HP CEO Meg Whitman.
Whitman also noted while revenue declined 5% year over year, it would have only fallen 2% on a constant currency basis. There's only so much a U.S. company can do to offset that impact with nearly two-thirds of its revenue originating abroad.
Whitman said HP could, if it chose, fully mitigate these currency movements. But to do so "would require reducing investments in areas like innovation, key systems and tools, and placement of printer units," all of which would negatively affect the company's long-term prospects, she said. All told, that makes a strong case for HP investors to be relieved their company isn't caving to Wall Street's short-term demands.
2. Personal systems are still (mostly) leading the charge
In personal systems, the team is executing well. We out grew the market and gained share across all regions. We saw particular strength in notebooks where we regained our number one share position worldwide. Commercial remains a key focus for us. [In] December we announced the industry's thinnest and lightest business class notebook, enabling our customers to be more productive in more places. -- Whitman.
For reference, HP's personal systems business has outperformed both the rest of the company and the industry as a whole for the better part of the last year. The latest quarter was no different, with personal systems revenue coming in flat over the same year-ago period thanks to a 21% increase in notebook sales. But it should also come as no surprise that commercial clients are a focus, as commercial revenue held back the segment by falling around 1% year over year.
Personal systems wasn't the only segment holding steady this time; HP's enterprise group revenue was also flat on a year-over-year basis, hurt by a 9% decline in business critical systems, but helped by 7% growth in industry standard servers and a surprising return to growth -- at least on a constant currency basis -- in storage sales. Revenue from every other segment continued to fall, including a 5% drop in printing, 11% in enterprise services, 5% in software, and 8% in financial services sales.
Speaking of which ...
3. The Deutsche Bank deal was a (Hewlett-Packard Enterprise) team effort
[W]e're very proud of the Deutsche Bank win, and it was a full on one HP effort including our enterprise group, our software business, our cloud business, as well as our services business -- and it was a services-led win. I believe the reason that we won is we had the best technical solution for what Deutsche Bank needed, which was to reduce cost -- significantly by the way -- increase agility, and migrate to a new world order of CICD DevOps and a cloud-based environment. -- Whitman.
There's a reason Whitman felt the need to reiterate that HP's recently signed 10-year, multibillion-dollar agreement with Deutsche Bank was won thanks to a combined effort between its enterprise, software, cloud, and services businesses. Those segments will all be split off as part of the "Hewlett-Packard Enterprise" half of Hewlett-Packard's impending separation into two distinct entities. The other half will be called simply "HP," and will contain its personal systems and printing businesses.
4. The 2012 restructuring plan is almost complete
We are nearing the completion of our 2012 restructuring plan. In Q1 about 2,800 people exited the company, making the total reduction to date approximately 44,000. We are on track to complete this existing program with a total of 55,000 people expected to exit by the end of fiscal 2015. -- HP CFO Cathie Lesjak.
It's no coincidence this comment came immediately after Lesjak pointed out HP's adjusted operating profit just rose 0.3 points year over year. Part of that improvement can be chalked up to its ongoing multiyear restructuring plan. For perspective, when HP initially unveiled the plan in May 2012, it expected around 27,000 employees to exit the company -- many via an early retirement plan -- by the end of fiscal 2014. Combined with nonheadcount actions such as supply chain optimization and business process improvement, HP was aiming to generate annualized savings of $3 billion to $3.5 billion.
Of course, HP has exceeded that headcount number by a great deal so far. But even then, Lesjak said once management's revised headcount reductions are complete at the end of this year, it still expects to pursue incremental opportunities for operational cost improvements identified through the upcoming business separation.
5. Separation charges are about to ramp up, but ...
The scale of this separation is unprecedented in its size and complexity. ... The Q1 GAAP charge associated with the separation was $80 million, and we expect the Q2 GAAP charge to be approximately $250 million. For the year fiscal 2015, charges are expected to be $1.3 billion, and the fiscal 2016 estimate is $500 million. While these are large numbers, they represent less than 2% of our annual operating cost and are necessary to realize the potential of the separation into two world class companies. -- Lesjak.
Finally, at nearly $2 billion between this year and next, the huge dollar amount in separation charges HP expects to incur understandably came as a shock to some investors. That's why Lesjak emphasized the "unprecedented ...size and complexity" of the separation, and put it into context by comparing those charges to Hewlett-Packard's already enormous base of annual operating costs.
In the end, if HP's split has the desired impact of helping the two resulting companies better seize their respective market opportunities, long-term investors might just find themselves looking back and laughing about the market's knee-jerk reaction to this short-term concern.