HP Q3 Results Shake the August Curse
Computing giant Hewlett-Packard just reported third-quarter earnings that are pretty much in line with what had been expected. Its shares fell about one percent in after-hours trading.
HP said it earned 89 cents a share on sales of $27.6 billion. It saw year-on-year growth in several key market segments like PCs and servers while smaller units like storage and software fell slightly. Analysts had been calling for HP to report a per-share profit of 89 cents on revenue of $27 billion.
The results appeared to shake what has been a recurring August curse, where HP shares have fallen by an average of more than 15 percent every August for the last four years, usually on one-of-a-kind bad news.
HP also raised the high end of its guidance for the fourth quarter and fiscal year, saying it expected to earn between 83 cents and 87 cents per share in the fourth quarter, and to finish the year with a profit of $3.70 to $3.74 per share. That’s higher than the previous guidance range, which topped out at $3.72. HP doesn’t give revenue guidance.
CEO Meg Whitman said she was pleased with the with “progress we’ve made. … When I look at the way the business is performing, the pipeline of innovation and the daily feedback that I receive from our customers and partners, my confidence in the turnaround grows stronger.”
HP has been struggling with a weakening market for personal computers, a business it led until recently, when China’s Lenovo became the market leader.
Overall, most segments turned in increases. Sales of notebook PCs to businesses grew 18 percent year-on-year, well ahead of industry average of about 10 percent. Sales of servers rose nine percent year-on-year. The PC business rose by 12 percent overall. Printing revenue fell four percent. Sales in the Enterprise Group rose two percent. Enterprise Services, the long-troubled IT services business, showed no sign of improvement, and fell six percent. Software sales fell five percent.
Sales have generally declined in almost every one of HP’s market segments over the last two years. Whitman has been on a campaign to turn each of those businesses around while at the same time investing in new initiatives that could eventually lead the company back to growth.
And that’s where the question remains: Where and when will HP start growing again. Whitman disappointed the markets a year ago by conceding that HP wouldn’t grow meaningfully in 2014, setting back her turnaround plan by about a year. Now the pressure will grow to show that growth can happen in 2015. The next significant conversation she’ll have on that topic is likely to be the company’s annual meeting with analysts, now scheduled for Oct. 8.
Update: In an interview with Re/code, Whitman said her turnaround effort remains “just about on track.”
“In any turnaround things happen and don’t go according to plan,” she said. “There still some businesses we need to work on, but I’m encouraged by the progress.”
One of those in the “still needs work” category is Enterprise Services. A $23 billion business in 2013, revenue fell in the third quarter to $5.5 billion from $6 billion a year ago. Part of the problem, and the reason it is taking so long to fix, Whitman said, is the 18 months it takes to woo a customer. “We’re signing customers now we started talking to a year and a half ago,” she said. Operating margin in that unit rose to 4.1 percent, up from about three percent a year ago.
Server sales also perked up, rising to about $3.1 billion from about $2.8 billion a year ago. Whitman said new leadership in the Enterprise Group — it was a year ago this month that Whitman reassigned Dave Donatelli, the group’s previous head, and replaced him with former COO Bill Veghte — was a primary reason for the improvement.
Another reason for optimism, Whitman said, is the decision by IBM to exit the mainstream server business and sell it to China’s Lenovo. “That has created an opportunity,” she said. “When there’s a transition like that, it creates uncertainty that we can capitalize on. … Our win-rate against IBM is up, and we intend to keep the heat on them.”
One metric that should make investors happy: Cash flow. HP said cash flow from operations was $3.6 billion, an improvement of 36 percent from a year ago. CFO Cathie Lesjak says she expects the full-year cash flow to reach $9 billion, which is higher than the $6.5 billion she expected at the start of the year. If you’re an HP shareholder, that’s good news, because the plan remains to return half of that cash to shareholders in the form of dividends and buybacks.