Wednesday, February 25, 2015

HP's First Quarter 2015 Surprises Some

HP reported revenue of $26.8 billion for the first quarter of fiscal 2015, a year-over-year decline of 2% on a constant currency basis.  Diluted EPS on a GAAP reporting basis was $0.73 per share, and $0.92 on an non-GAAP basis, which was at the high end of the guidance range for the quarter.

All of the operating businesses has yr/yr improvements in their non-GAAP operating margin rates, the CEO noted.  65% of corporate revenue was recorded OUS.  Despite hitting the top end of the non-GAAP EPS guidance range, the impact of currency in the quarter was stronger than expected, and will be substantially stronger than prior expectations for the balance of FY15.

As happens in corporate reporting, especially in a behemoth like HP with distinct businesses with some many moving parts, a number might have been reached, but it was reached in a completely different way than the forecast assumed.

Currency headwinds seem more appropriately characterized as currency typhoons.  Current expectations for EPS impacts of currency were characterized as $0.60 per share gross, and $0.30 per share net, on an annual basis.

The forecast of flat revenue for FY15 yr/yr seems particularly challenging in light of the heightened currency impact, but management cited continuing progress in printing revenue, enterprise businesses, as well as a meaningful improvement in Enterprise services revenue.

All of the analysts completely missed on cash flow from operations for the quarter, as the costs of separating the company in to HP, Inc. and HP Enterprise were omitted from their models, even as guesstimates.  $80 million of expense was recorded in the quarter, $250 million is now expected in the second quarter, and $1.3 billion in corporate cost and additional taxes are expected for the full fiscal year 2015.

Printing, 20% of the consolidated revenue for the quarter, generated a non-GAAP operating profit of $1,067 billion, 39% of the segment total, with an operating margin rate of 19.2%.  The margin rate was consistent with the prior period and described as "unsustainable" and "bad for business" by the new business leader.  Supplies were down 5% and total units down 4%, as competition from Japanese vendors in corporate accounts was strong due to a weakening yen.

Personal System sales were 31% of revenue, producing non-GAAP operating margin of $313 million, a margin rate of 3.7%; PS contributed 11% of segment income, and HP reestablished itself as the leader in the notebook segment.

So, the core of what will become HP, Inc. accounted for 51%  of quarterly consolidated revenue and 50% of segment operating income.

The Enterprise Group accounted for 25% of quarterly revenue, earning $1,090 in operating profit, a margin rate of 15.6%, which was a healthy 40% of the segment operating profit total.

Enterprise Services accounted for 18% of quarterly consolidated revenue and only 5% of segment operating profit, but  the stage was being set, management said, for a better performance in the back half of FY15.  The latter two groups, plus Software, will comprise HP Enterprise.

The CEO pointed out that two Fortune 50 global companies were being created out of the separation of HP.  As complicated as the separation sounds, it is ultimately lots of nitty gritty work, expensive but very doable.  Changing the culture of one behemoth serving two distinct markets with so many different offerings would be well nigh impossible.  In this sense, the split is better for the businesses, their employees, for customers and shareholders.

Referring to our recent post the go-to-market problems facing companies like HP, the CEO noted that some "realigning of sales incentives" had occurred in the Enterprise businesses in the quarter, and it's clear to us that a different kind of sales team with different incentives will be an indispensable part of a successful tech company in the future.

A big corporate client win at Deutsche Bank was highlighted during the call, and it illustrated the nature of such wins for the future HP Enterprise.  It involved lots of different strategic business units, was led by Enterprise Services, and the Helion offering was a pivotal differentiator.

CEO Whitman noted that despite the fact that 44,000 employees have left the company since the beginning of the restructuring and more is to follow, employees with new, client-facing skill sets will have to be hired, and there are even more opportunities for HP and HP Enterprise to become internally much more efficient in their own systems and processes.

Currency aside, the softer items in the call seemed the most encouraging.

No comments: