Thursday, March 3, 2011

a kinda slow February for HP

The first quarter earnings report was really quite interesting for the "HP Student"
Consumer-facing products, e.g. PCs and such, down 12%. Hummn. Along with the 'new' HP version of the i-PAD, announced a week earlier, which got reviews ranging from tepid to scathing. Hummn. And then yesterday, the i-Pad 2.0 with Steve Jobs himself going on-stage despite his medical leave of absence. Prediction -- as it once was, HP is once again struggling with the consumer side of things, for lack of excitement and Wow factor. Margins, which hit 6.4% (highest on record for a long time), will get hurt; revenue will get hurt more.
Does it matter? Probably not, in the middle term.
Services was down 2%, and margins were under pressure, according to the same press conference. But -- and it is a mighty big "BUT" -- this is essentially the largest segment of HP's total business revenue today, and the margins are 16%, not 6%. Guess what. This is the one that matters. This is the one where HP creativity, and EDS relationship building, can put new lead in the pencil, so to speak. Small wonder that this is where Apotheker moved to restore salary cuts, to help strengthen morale in a group that felt under-loved.
Does it matter? Absolutely, short-term, middle-term, but especially long-term
Printing and imaging. Up, surprisingly, 7%, with 17% margins. Same size as Services, same margins, still growing. Whew! This one perennially feels like it is vulnerable, but somehow keeps delivering. And the emphasis on commercial grade hardware units, up 33%, has to feel like a punch in the arm. Without it, and without ink, the rest feels plateau'd, but if this can stay the course for a few years, it will be the cash-cow HP has to have to make real inroads into the newer arenas.
Does it matter? Yes, for the short-term, and yes for the middle term. For the long-term, this is still best thought of as an annuity.
Which leaves servers and enterprise level stuff. And here there is a real story. Note that PCs for Commercial Clients were up 11%, servers were up 22%, and the i-Pad 'answer' and the Palm WebOS are all being positioned as Enterprise Tools. Margins for the aggregate approach 15%, with an aggregated growth with Software of better than 15%. This is the 'new' version of the 'old HP' -- not the one of voltmeters and scientific measurement, that divested long ago -- but the 'hardware centric' side of HP. This, not the consumer side, is the sweet spot for HP, just as IBM realized when they sold their PC group to Lenovo. Yes, HP has done a terrific job viz Dell and Lenovo and the old IBM PC guys, and their printers are still the class act (though tell my wife that as her 'high end home office machine fails yet again), but this set of focused products is where HP's edge can still shine, and is about to see even more emphasis. Shane Robison's focus for several years has been in this area; it has been a semi-invisible story, but believe me, it is crucial to HP's future. And the evidence is actually looking good, if we believe these numbers.
Does it matter? Didn't I already make that case?
Finally, what's to make of a quarter that is UP 27% in GAAP (or non-GAAP) earnings, given how tight a ship the last guy reportedly ran? This is an anomaly that is hard to understand. Yes, margins improved, but 27% is astonishing for a company that is up 4% overall in revenue. And it happened in a quarter when R and D got 're-invigorated' and salary cutbacks got restored, so everything is counter-intuitive here. I know Hurd took huge salary and perks for himself and a few others, but the firing bonus doesn't get compared until 3rd quarter -- what are we missing here? Nice that it went in the right direction for shareholders -- its time that they and employees both get treated well at the same time.


John said...

"27% [in earnings] is astonishing for a company that is up 4% overall in revenue...Nice that it went in the right direction for shareholders...."

Chuck, I must be blind, or I'm missing something here; Didn't shares clearly go 10% in the wrong direction?

chuck said...

Yup, you're right. I made the classic error of imagining that shareholders would be pleased that earnings are going way up while the right expenses for the longer term are being attended to. They of course should be and will be pleased 'eventually' if there is any rationality to things, but you are quite right -- the market instead keyed on the 4% revenue growth and the desultory PC results without thinking about the rest. Thanks for the correction

papwalker said...

Regarding the HP 'iPad'
What did Bill say about bringing out a product because you can? some measure better than everyone else

...following along and always being at the back end.

I think the PAD is a golden opportunity for HP to show innovation and invention. Don't just rush something out because everyone else has, do the R&D and put the effort in.
That format has a long way to go yet.

Swanmotion said...

The "ipad wanna be" is reminiscent of the English pantomime where the audience are screaming at the hero "behind you, behind you" and the hapless hero can never turn around quickly enough to see what they're talking about.

Remember Sun's approach to selling Unix in an already established market ? It's the software that counts not the hardware. Give the hardware to ISVs, establish a supported application base.

..and so it is for this new market, without the "apps" it's just an expensive coffee coaster.

I agree Pap, it is an opportunity, but I don't see the innovation.