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HP Is Getting There Slowly But Steadily

September 02, 2014 | About:

Hewlett-Packard (NYSE:HPQ) may be in the news recently for the faulty computer power cords, but a few days ago the tech major came out with strong third-quarter numbers, with personal systems business delivering solid performance. Net revenue for the quarter grew 1% to $27.6 billion from $27.2 billion a year ago and met analysts’ expectations. Though in percentage terms the rise might not seem impressive, but considering this quarterly sales increase is the first in around four years, is definitely something to write home about. Buoyed by the numbers, HP has upwardly revised its profit guidance for the fiscal year to $2.75-$2.79 per share, from $2.68-$2.80 projected earlier.

Personal Systems Group’s revenue goes up, offsets weakness in others

The personal systems business, contributing more than 31% to the total revenue, clearly outperformed in the quarter. The segment’s revenue in the three-month period grew 12% year over year to $8.65 billion, and was the third successive quarter of growth. Unit sales of the desktop and notebook division saw a rise of 9% and 18%, respectively, which led to 14% growth in commercial revenue, and 8% growth in consumer revenue for the segment. CEO Meg Whitman feels the PC market has stabilized but is still shrinking. She said, “We believe we can continue to gain share in PCs, despite the challenges in this market as it consolidates.”

Though Microsoft’s (NASDAQ:MSFT) decision to stop supporting an older version of Windows operating system played a part in the HP’s PC sales increase, Whitman said the company’s product line, led by EliteBook Series and x360 convertible notebooks, has been the "strongest in years". Moreover, customers are also replacing their old installed base, boosting sales.

In fact, growth in the Personal Systems Group managed to offset the year-over-year decline witnessed in rest of the operating segments, except in Enterprise Group. The Enterprise Group, which focuses on industry standard servers, storage and networking, was up 2%, while Printing, Enterprise Services, Software and Financial Services were down 4%, 6%, 5% and 3%, respectively.

Earnings improved due to cost reduction efforts

HP reported earnings (non-GAAP) of $0.89 per share, up 3% from $0.86 per share a year ago and meeting analysts’ expectations. The PC maker has been trying to rein in costs through thousands of job cuts.

In May this year, HP launched a massive turnaround plan stating job cuts would be a primary measure for keeping operational costs under tight reins. The management said that the cuts would be between 11,000 and16,000 jobs, in addition to the 34,000 previously announced.

Taking such optimization measures into account for the full year, management now expects non-GAAP diluted earnings per share of $3.70 to $3.74.

Solid cash flow to help investments, and reward investors

The company generated $3.6 billion cash from operations, a good 36% increase over the same period year ago, and ended the quarter with $14.8 billion gross cash in its kitty. This increase in cash position is critical for HP’s investments in cloud computing, security software and big data analysis. The company is betting on these three to drive future revenues, and has been investing heavily in acquisitions. Its past takeovers like Autonomy, Vertica and Fortify have been paying off well.

In the quarter, HP paid $299 million as dividends and bought back 17.5 million shares worth $582 million under its repurchase program.

Ending note

Amid the upbeat mood, Whitman threw in a word of caution, “…turnarounds are not linear and we face some tough comparisons in the fourth quarter, but overall I continue to be very encouraged by the progress we're making.” The management is taking cost optimization measures to keep the earnings and cash flow at a decent level. Through its investments in cloud computing and big data, HP is looking to perk up the software segment, which has immense growth potential. The strength in its PC market is reassuring and augurs well for the future. HP is weighing the challenges in its path wisely and is sorting them out slowly but steadily.

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