Has Hewlett-Packard Become a Safe Bet Overnight?
Hewlett-Packard is largely perceived as an older-generation technology company that has struggled to maintain its profitability, as consumers have shifted toward mobile devices and cloud computing. Given the fact that this is a company that continues to be primarily dependent on the fast-fading PC industry, HP's recently reported fiscal first-quarter earnings seemed to be a pleasant surprise.
Its $28.2 billion in revenue managed to beat Street estimates of $27.2 billion, and the company's non-GAAP profit of $0.90 per share also remained ahead of analyst expectations of $0.84 per share. HP issued non-GAAP profit guidance for the current quarter that remained at the high end of analyst estimates, prompting an initial 2.5% rise in the company's stock price.
It's good that HP's revenue fell by around 1% on a year-over-year basis, compared to the 4.1% decline that some analysts were expecting. But two of the company's most important divisions, which include enterprise computing and printing, failed to live up to growth expectations.
That brings us to the big question: Are HP's future prospects really based on solid foundations?
One good thing about PCs
A surprising component of HP's first quarter earnings story is its personal systems division -- the one that includes PCs. For the first time in seven successive quarters, this division posted an increase in revenue -- up 3.6% to $8.53 billion -- due largely to an 8% uptick in commercial PC sales. However, a large part of this success may have been prompted by Microsoft's decision to withdraw support for its Windows XP operating system after April this year, which led to a lot of companies rushing to upgrade their existing machines. That would make this a one-off scenario that's unlikely to be replicated anytime soon.
On the other hand, HP's consumer PC-based revenue posted a 3% decline, which seems to be more in sync with the real picture, where PC shipments have recorded their seventh consecutive quarterly decline as at the end of 2013, according to research firm Gartner.
What about the others?
What's really surprising is HP's continued dependence on the PC industry at a time when most of its industry peers, such as Cisco and IBM , are trying to move away from it. But that does not mean they have fared any better in recent months.
Cisco, the world's largest manufacturer of networking gear, has been forced to issue negative revenue guidance for the current quarter after experiencing weak sales because of a dominant shift in consumer preferences toward cloud computing. IBM's revenue continues to be dragged down by the same shift toward cloud computing, and the company's systems-hardware division saw a whopping 25% drop in revenue during the recent fourth quarter.
Coming back to HP, its biggest cause for concern seems to be the lackluster performance of two key divisions: enterprise-computing and printing.
Someone new on the server horizon
The enterprise-computing group that caters to the server and related hardware markets posted revenue of $6.99 billion that was largely flat on a year-over-year basis. However, potential investors need to focus on a slight decline in the division's operating margin, a possible sign of lowered future profitability.
Although HP currently leads the worldwide server market with a 28.1% share, according to research firm IDC, the company faces stiff competition. Servers are increasingly becoming commoditized as a product segment, and brand names tend to matter less. Even worse news is IBM's recent decision to sell its server business to Chinese tech giant Lenovo, the current global leader in PC shipments .
With Lenovo having a history of settling for lower margins in order to gain greater market share, HP has every reason to feel threatened. With the enterprise-computing division accounting for around 40% of its operating profit, the company simply cannot afford such a scenario at this juncture.
Printing a new chapter
The printing division, the other major segment for HP in terms of operating profit share, also put up a poor showing, with a 2.2% year-over-year decline in revenues to $5.82 billion. The division's only bright spot was a 5% uptick in hardware unit sales as compared to an 11% decline during the same period last year. What remains to be seen is whether the company's plan to make a big splash into the 3-D printing industry by the middle of this year makes a significant difference in the division's revenue.
Some Foolish final thoughts
The disappointing performance of two of HP's main operating divisions does not bode well for a company that has already seen significant management turmoil and continues to undergo the pains associated with what seems to be a highly mismanaged acquisition.
The rise of new competitors such as Lenovo should be enough to set alarm bells ringing at HP, which has failed to make a significant transition into either mobile or cloud computing. Although the company's debt and free cash flow are impressive, investors should probably do little else other than sit back and keep a close watch on HP's near-term developments.
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The article Has Hewlett-Packard Become a Safe Bet Overnight? originally appeared on Fool.com.Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. 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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