Revenue, Earnings and Cash FlowConsolidated GAAP operating margin of 7.1% was up 90 basis points over the prior year period; on a non-GAAP adjusted basis operating margin of 8.5% increased 60 basis points year-over-year.
GAAP diluted EPS of $0.74 per share increased 17% over the prior year period level of $0.63. The company had bracketed its expectation between $0.60-$0.64, a flat to down quarter year-over-year.
Non-GAAP diluted EPS came in at $0.90, representing a 10% increase over the prior year quarter's level of $0.82 per share. The company's guidance had been in the range of $0.82-$0.86.
CFO was $2,990 million, compared to $2, 562 million in 1Q FY13, an increase of 17%, well ahead of all expectations. Free cash flow cited by the CFO was $2.4 billion. The company did a large, well received institutional debt offering of $2 billion in the quarter. Return on equity was 18%.
$843 million in cash was returned to shareholders in 1Q FY14, comprising $278 million in dividends and $565 million in share repurchases at an average price of about $28.25. The percent of free cash flow returned in the quarter was about 35% compared to the target of 50%, which I still believe should not be a focus for management's energy or shareholder capital at these levels.
Surprises in Business Segments
Two Challenging Areas
"The CEO reviewed the major businesses. Enterprise Services, a $17.5 billion business (based on nine months, YTD), accounts for 21% of the YTD revenues but only 5% of the non-GAAP operating income. Whitman cited the inconsistent leadership, strategy, lack of EDS integration, and inadequate internal systems as the biggest reasons for its historically poor performance. This business needs some portfolio pruning, in my opinion, but the CEO said that there would be no major restructurings in fiscal 2014. The segment's non-GAAP operating margin was said to be at the high end of the outlook given at last year's meeting, but that doesn't change the fact that this is an albatross that needs to take flight. It clearly has the CEO's attention.Listening to the CEO on this quarter's conference call, it sounds like the group has its sales tools, new leadership and new processes, but the kind of change from putting a bucket out and waiting for renewals to going out and proactively marketing new ideas takes time and nine months of fiscal 2014 seems like a short time. Let's see.
Whitman cited a pretty extensive list of new leadership within Enterprise Services, including executive promoted from within and new hires from Bain, Accenture, Microsoft, and Elastic Intelligence/BMC. The leadership group has pretty easy comps to have a strong 2014, let's hope that they get there."