HP Shares Slide Despite Better-Than-Expected Q1 Results
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Despite a quarterly earnings report that included better-than-expected sales and profits, shares of computing giant Hewlett-Packard slid by more than one percent today, as shareholders digested the relative strengths and weaknesses. HP shares closed today at $29.79, down from the closing price of $30.19 on Thursday.
While the company’s results certainly contained some positive news — revenue improved both on PC sales and in the all-important Enterprise Group — what appeared to be missing was a sense that the turnaround that CEO Meg Whitman promised when she took over the job two-and-a-half years ago is beginning to take hold and actually stick.
“Solid where it’s solid, weak where it’s weak,” was the judgment from Evercore analyst Rob Cihra in a note to clients today. “While tactically positive, we’re still not convinced that the January quarter metrics reflect a sustainable turnaround,” he wrote.
Cihra’s biggest worry was in enterprise services, the long-troubled unit devoted to IT service contracts at large companies and made up primarily of the company formerly known as EDS. It saw its revenue fall seven percent year on year, and margins shrank to one percent. That’s a big problem, given that services accounts for about 20 percent of sales overall. Fixing services is HP’s biggest problem both in the short term and the long term, Cihra wote.
Even where there was good news, there were tough questions. Though PC sales were up by six percent on a revenue basis, that unit generates only about 10 percent of profits, Cihra wrote: “We continue to forecast better PC stability in 2014, but at just about 10 percent of profits, PCs look more like noise or profitless prosperity.” Commercial PCs — those sold to corporate customers — grew by eight percent, spurred by upgrades by companies that had until recently still been using Windows XP. Consumer PC sales fell again by three percent.
There was victory on the balance sheet. Free cash flow, at $2.4 billion, was up 17 percent. Cihra called the balance sheet HP’s “biggest success.” And that $16 billion in cash frees up HP to do some acquisitions. Whitman went so far as to say in an interview that “acquisitions will be in HP’s future,” sending a strong signal on the possibility that HP will be on the hunt for deals in the coming months.
Where will that deal be? Software continues to be the most likely candidate. The software unit’s revenue fell four percent, and at $916 million, it accounted for only three percent of sales. “We think software remains too small to play the sort of strategic enterprise role we think HP needs, likely setting up the prospect for a return to M&A in hopes of rebuilding some growth pipeline,” Cihra wrote. Wonder where we’ve heard that idea before?