Overall, the quarter ending 7/31/13 was greeted by Wall Street sending the stock down 12% on the day: a pretty strong reaction. But, putting it in perspective this left the stock's YTD run up at over 66% versus the prior day's number of 78%. This is still an extraordinarily robust gain, no matter how an investor looks at it.
GAAP revenue was down 8%, and down 7% on a constant currency basis. Clearly this was a disappointment to the CEO, and a brave face couldn't disguise that it took some air out of her best positive face.
Total Personal Systems sales were down 11%, but really this shouldn't have been a surprise in direction, but perhaps in degree; industry reports on PC shipments and other anecdotal information intra-quarter would have suggested that it was going to be a tough quarter. Notebook sales were down 16% in dollars, 14% in units and 2% in price. Desktops were down 10% in sales, 9% in units and 1% in price. Given the bad timing for the release of Windows 8.1, the notebook retail channel is probably congested with stale product. Pricing didn't collapse, but the fourth quarter might not be pretty either. Again, none of this is new.
Total Printing sales were down 4% y/y, with consumer hardware sales flat. Overall, not a real negative surprise.
The real stinkers in the quarter from the revenue perspective were the Enterprise Group and Enterprise Services. Again, the CEO made reference to the Enterprise Group's go-to-market issues which were clearly not something she expected with a mature product offering and long-serving executives. ISS revenues were down 11%, but again this shouldn't have been much of a surprise since Dell's quarter showed a phenomenon, namely that industry standard servers are commodity products whose scale, cost, energy performance and computing power per rack will make them dinosaurs in an industry transition. Overall, Enterprise Group revenue of $6.786 billion were down 9% y/y, with the higher margin Technology Services business declining 7% also. The Enterprise Group's operating margin had compressed sharply in the fiscal first quarter, and with continuing sales declines, this business needs to get its act together, but it's not exactly rocket science to determine what needs to be done.
The Enterprise Services Group, a business which we don't think is critical to HP's future in the current configuration, declined 9% y/y with the fading BPO business declining 7% and the Application and Services Business declining 11%. This business carries a 3.3% operating margin which is comparable to that of the PC business, and yet this ESG gets no discussion on the investor calls.. We've said it before: HP can't be Accenture or IBM in this business, and it doesn't need to be in order to succeed.
So, to this point, the answer to my friend's question would be "It was a lousy quarter." GAAP diluted EPS was $0.71 versus ($4.49), but clearly this isn't a useful comparison and it meant nothing to a trader reading the headline. Adding back $0.15 per share for amortization of purchased intangibles, restructuring charges and acquisition-related charges, third quarter Non-GAAP diluted EPS was $0.86 versus $1.00 in the prior year period, on a comparable basis; the prior year period had $5.57 per share in charges for the same categories. Without the promised and delivered cost cutting, the comparison would have been much worse because of the revenue shortfalls discussed above. The non-GAAP operating margin in the quarter was 8%, a 100 bp decline over the prior year period margin, despite an 8% decline in net revenue.
Cash flow from operations surprised most analysts to the upside with $2.7 billion in CFO, declining 6% y/y; total cash returned to shareholders is something we liked because of the $253 million returned in the fiscal third quarter, only $3 million came from share repurchases and $250 from dividends. Altogether, looking at Non-GAAP EPS, CFO, funds returned to shareholders and paydown of debt it was really a solid quarter of financial performance.
Here are some bullet points from the Wall Street Journal's discordant story, "H-P's Separation Anxiety"
- Meg Whitman is shuffling deck chairs;
- Her strategy could "still sink Hewlett-Packard;"
- Ceding market share in order to maximize profitability "seems misguided."
- The company seems as "strategically moribund and unmanageable as ever."
- Lenovo could be a strategic bidder.
- Dell is "cutting price on its gear so that it can grab customers who then sign higher-margin service contracts."
- Bernstein analyst says the company is worth 50% more than its "current" price being sold for parts.
P.S. Another company in Redmond, WA announced earnings and an executive change. Now this one should be drawing a lot more attention than it has. More later.