Is This Really a Sign of Good Times for HP?
Technology bellwether Hewlett-Packard's improved performance during the fourth quarter fueled optimism about the company's recent efforts to stage a turnaround. While revenue for the period managed to beat analyst expectations by coming in at $29.1 billion, HP's adjusted earnings also remained ahead of Street estimates at $1.01 per share. The market responded as company share prices went up by a healthy 8.3 %.
However, the overall scenario continued to remain bleak as HP's top and bottom lines both fell on a year-over-year basis by 3% and 13%, respectively. To add to it, company CEO Meg Whitman repeated her earlier guidance of declining revenue for the financial year ending 2014. These are certainly not good signs for a company that has recently gone through a period of significant management turmoil, coupled with the ill-conceived Autonomy acquisition -- two things that have dented investor confidence in HP's ability to reinvent itself.
That also means it's time to ponder a few things, even as we try to find out what lies beneath HP's present bright spark.
The "enterprise spending" factor
The main reason for HP's decent fourth-quarter earnings has been a welcome 1.8% rise in revenue from the enterprise division that accounts for roughly 25% of overall sales. In fact, the results have been a complete turnaround, considering that HP's enterprise division revenue actually fell by as much as 9% during the earlier quarter, indicating that the company may still be able to count on its corporate customers.
The "ifs" and "buts"
A major part of HP's current enterprise division results may be attributed to the fact that a lot of companies are scrambling to upgrade to Microsoft's newest version of Windows operating system, even as the latter officially ends support for the earlier Windows XP in April 2014. In effect, this might be a temporary bright spot for HP.
HP may not be in a position to derive much solace from the current 10% uptick in server sales because many companies continue to move systems to the cloud, instead of purchasing expensive on-site equipment, a primary reason why companies like Amazon.com and Salesforce.com are thriving in today's tech environment.
Declining server and networking equipment sales to HP's enterprise customers seems to have prompted competitor Cisco to predict a fall in its current quarterly revenue, the first in four years. Cisco continues to bear the brunt of a slow pickup in the economy in crucial markets such as Europe and China, a fact which HP's management has also acknowledged.
More pain points
Apart from enterprises, the tendency among individual customers to upgrade to the newest version of Windows may also have been the reason why revenue for HP's personal systems division -- the one that includes PCs -- fell by a less-than-expected 2%. With research firm IDC predicting a continued decline in PC shipments through 2014, the gap in revenue is expected to widen further.
HP also faces the problem of competitive pricing by industry competitor and fellow PC manufacturer, Dell. After the latter's LBO, Dell faces a heavy debt burden that has prompted it to follow a "no holds barred" price-cutting policy in a desperate bid to gain more market share, a fact that has resulted in thinner profit margins for HP.
To add to its woes, HP seems destined to continue facing macroeconomic headwinds for quite some time, as the global economic recovery has been much slower than expected. The company can't even fall back on generating sales in emerging markets such as China, whose economy faces an uncertain future, a fact corroborated by rivals Cisco and IBM. Although HP has, supposedly, taken corrective measures (such as the recent appointment of Robert Mao, a market veteran, as its head of operations for China), only time will tell how things will actually shape up there.
The only good things that can be attributed to Whitman, so far, are a substantial reduction of the company's once-massive pile of debt and an increase in free cash flow by almost $9 billion this fiscal year. But beyond that, I'm not very confident in HP's turnaround efforts, given that the company still hasn't been able to zero in on a substantial revenue stream that can offset the continued downslide in PC-based fortunes.
Although HP's planned dividend and buyback scenario are impressive and provide very good reasons to hold on to the stock, I doubt if it will be worthy of remaining in your portfolio by this time next year.
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The article Is This Really a Sign of Good Times for HP? originally appeared on Fool.com.
Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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