Hewlett-Packard's second quarter sees big sales declines, but profits exceed forecast and CEO Whitman says problems are under control.
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HP had few positive figures to report during a conference call with financial analysts on Wednesday, but one key figure, non-GAAP earnings, rose 11%. The 87 cents earned per share exceeded the high end of HP's 80- to 82-cent forecast and was a sign that the company's "fix and rebuild" plan is working, said CEO Meg Whitman.
Whitman sounded comfortable, at ease and in control. She said the company's performance is much more predictable than it was last year, the first year of her tenure at HP. In another sign that financial stability is returning, the company reported a 44% increase in cash flow to $3.6 billion, up from $2.5 billion in 2012.
Most other numbers were not as good. Net quarterly revenue declined 10% to $27.6 billion from $30.7 billion in the same quarter last year, according to generally accepted accounting principles (GAAP). Net GAAP earnings declined 32% year-over-year to $1.1 billion. GAAP operating margins dropped 1.4 percentage points from the year-earlier quarter to 5.8%.
In results by business unit, HP's Personal Systems revenue was down 20% from last year, with Windows 8 failing to lift PC sales, particularly in the consumer segment, which was down 29%. Enterprise Group revenue was down 10%, with a 12% decline in industry standard server sales and a 13% drop in storage revenue. HP's Enterprise Services business was down 8%. Software revenue was down 3%, with a 23% drop in new license revenue.
The slogan "Keep Calm And Carry On" comes to mind. It was posted around London when all hell was breaking loose during the Battle of Britain. HP is restructuring amid a shift away from PCs, an enterprise move toward cloud computing and new types of servers and plenty of unfavorable macroeconomic trends. Whitman is HP's Churchill, saying "we shall never surrender the PC business; we will fight to compete profitably in servers, networking, storage, software and services."
Whitman pointed to bright spots including a 1% increase in networking revenue, a 1% increase in printing revenue and robust gains with new products including Moonshot low-power servers, 3Par midrange storage systems and HP software-defined network (SDN) products. She also detailed progress on efforts to control costs, like the restructuring program that will see 26,000 employees exit the company by the end of this year.
But HP isn't just cutting its way to earnings-per-share targets, she insisted. It's also "protecting its investment in HP's future. You can see that investment in products like Moonshot, multi-function printers, OfficeJet ProX, SDN, low-tier and mid-tier storage and strategic enterprise services," she said.
HP's competitors aren't making a return to profitability any easier. "This quarter you saw Dell completely crater their earnings," Whitman said of that company's 79% drop in profits last week -- clearly grabbing for market share as it's poised to go private. "Maybe that's what you do when you're going private, but it is not what you do if you're running a big, publicly held company that is trying to create the financial capacity to invest in innovation."
HP has been getting aggressive on the consumer front, introducing Android-based tablets to counter the slide in PC sales. "Having Android products helps a lot," Whitman said. "The $169 Slate 7 covers a segment of the market that we didn't have before."
In other segments HP is walking away from some deals, Whitman said, but she noted that the company is redoubling its efforts to be more competitive, with responsive pricing and products that are "appropriately featured rather than over featured." HP's multi-year makeover will require ongoing assessment of margin versus market share, she said.
"We're going to be focused on the deals that are sticky as opposed to the deals that are transactional [with] no long-term relationship," she said.
"Meg has done an excellent job executing in what has been a difficult environment," Bill Kreher, an analyst at Edward Jones & Co., told Bloomberg. "The Street is giving them a pass on this year and perhaps even into next. But the market would like to see a return to growth in 2014."
Server Market SplitsvilleJust because the server market's in the doldrums doesn't mean innovation has ceased. Far from it -- server technology is enjoying the biggest renaissance since the dawn of x86 systems. But the primary driver is now service providers, not enterprises.