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General


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?



1 comments
Bill Herbert
Bill Herbert

>>> 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.<<<


Uhhh....yeah. The sad truth is that "Meg" is no Golden-Child CEO or amazingly smart manager, nor does she have a magic touch at turnarounds. Far, far from it.


Take a look at the gigantic debacle re: the acquisition of Autonomy. It makes the entire Board of HPQ look like a bunch of grossly-overpaid morons who


1) have little actual understanding of the type of business they were about to pay triple for, and


2) have woefully inadequate financial skills, and


3) aren't workin' too hard to protect the shareholders - but then, they get truckloads of shares for free, essentially raping those very same shareholders that they have a fiduciary duty to protect.


Meg was on the Board, had plenty of time to review it, had teams of people to call on to analyze, number-crunch, consult, criticize, etc. - yet she still signed off on this hugely flawed deal, and has to bear the same responsibility as all the other disgraced (and mostly discharged) Board members. This alone is enough to prompt her immediate firing for incompetence, in a world where Boards are something more than daisy-chain corporate social clubs. But that's not the world we live in.


Meg is a typical MBA-playbook-quoting management hack, who after her "success" working under Mitt Romney at Bain, in an enormous bull market, made a cagey move to eBay, where a trained monkey could have looked good managing a growth rocket ship to a higher stock price. Almost all of its success under Meg was due to the PayPal acquisition, and I give her credit for that - - - job well done, for sure.


But that was also an obvious no-brainer, not a stroke of genius by any means. There were a few other bolt-on acquisitions made that benefited eBay, and almost no internal growth initiatives panned out under her tenure. She was incredibly lucky to waltz away with about a billion dollars, a ludicrously huge payout for her contribution and ride-the-wave perfunctory execution.


Now she has a MUCH bigger challenge before her, and the BS meter is starting to go on tilt. Although she was guaranteed to look good replacing a hapless CEO who seemed to be almost a corporate saboteur, the clock has kept ticking and the afterglow has faded from the hype of her ascension to the C-Suite at HPQ.


HPQ has a boatload of problems, IMO, and few good alternatives. While still having great tech behind it, and making the best printers out there, the fact is that printing is rapidly fading away as everything "goes digital" and the suite is grossly overpriced and facing fierce competition.


The server business is doing OK but also faces tough sledding going up against Dell and a host of lesser players, not to mention the far-cheaper homebrew server market, e.g. GOOG and FB just building their own custom boxes and giving HPQ the boot. The product is very good, but the margins are stagnant and headed south.


I believe that HPQ will once again get knocked for a loop if they try tablets again - too bad, 'cause that's where the money is. But they are too slow-footed, clunky and innovation-deficient to play in this very fast game. Even MSFT with its vault of cash has failed to make a dent, and HPQ simply doesn't have throwaway billions to chase this dream, like the now-deposed Mr. Ballmer.


In short, platitudes, hype, and a nostalgic look back on a puffed-up resume will not work for Meg. She will have to show something in the next year, or the market will punish the stock (which is up mainly because all things tech soared last year).


Meg only looks good compared with Carly Fiorina, the most laughably misplaced CEO in HPQ history (or perhaps Fortune 50 history), who produced a non-stop parade of failures and value destruction for shareholders. When she was canned, the stock practically doubled the next morning.


It won't double if Meg is canned, but you can bet that the downside is more likely than the upside here, unless Meg can begin to add value. Thirty months into this, shareholders are still waiting for her to earn her paycheck, and their respect.



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