On Thursday evening, Hewlett-Packard (HPQ) announced its quarterly results and future plans for the company. It looks like after letting multiple bad CEOs take the driver's seat in the company, Hewlett Packard has finally found a decent driver who can turn the company around successfully. While more work needs to be done, the company is on a good path.
The company's revenue of $28.4 billion and profit of $1.2 billion was down from the $30 billion in revenue and $1.5 billion in profit in the same quarter a year ago. On a positive note, the analysts were expecting the company to perform even worse than that and HP was able to beat the analyst estimates. The analysts thought HP was going to generate $27.8 billion in revenue and 38 cents per share in earnings; whereas the company earned 63 cents per share.
Furthermore, this quarter's earnings call lacked any of the bad surprises very typical of HP over the last several quarters. Every quarter, the company would come up with an update that would shock the investors, such as an acquisition that turned out to be a bust or a decision to break the company up to different parts. This year, the conference call went very smoothly and there wasn't any news that would shock the investors.
The company broke the results down to six business sections: PC, Printing, Enterprise Group, Enterprise Services, Software and HP Financial Services.
In PC section, the company sold more 10% desktops and 14% fewer notebooks compared with the last year, resulting in a volume decrease of 5%. The revenue of the section was down by 8% compared with the same period, which is bad but not as bad as analysts were expecting. The operating margin was below 3%, which is problematic for the company. HP will have to sell more computers to consumers in order to increase its margins.
In printing section, HP saw a decline of 5% in revenue. The commercial hardware sales were down by 6% whereas the consumer hardware sales were down by 13%. The fall in commercial hardware sales was expected due to the cost cutting that's been going on in many companies, but HP will have to do a better job of selling its printers and related supplies to the consumers. The operating margin in this section was around 16%, which is acceptable. It looks like some of the competition like Xerox (XRX) is catching up with HP in the printing division, but this is still one of the most profitable divisions for the company.
Enterprise Group and Enterprise Services both announced a mild decline in their revenue, the magnitude of which was around 4% and 7% respectively. Enterprise group was an operating margin of 15.5% whereas Enterprise Services struggled with an operating margin of 1.3%. In Software section, the revenue was stabilizing where the drop was as little as 2%. This business section was able to maintain its operating margin at 17%. While the support revenue was on the increase, the license revenue was down by 16%. Many companies are cutting their software costs because of the uncertainties in the economy. Once this trend reverses, things can improve for HP.
In Financial Services, the company posted a tiny revenue increase, which was caused by an increase in net portfolio assets, despite the financial volume being down.
The company's CEO Meg Whitman assured investors that the turnaround story was still intact but this was a multi-year project. She also stressed that the company would remain as one piece, and not break up into pieces, because it was better and stronger when all the pieces are working together.
The best thing about HP right now is the fact that the company isn't likely to repeat the past mistakes anymore. It looks like the company's management learned some valuable lessons from these past mistakes. I don't see HP making any expensive and bad acquisitions anymore. Because the company lost a lot of value in the last few years, it will be far more cautious when making big business decisions. Meg Whitman really seems to understand investors and know what they want to see from the company. She doesn't overpromise, but she doesn't draw a totally pessimistic picture either. She is very straightforward and honest about the turnaround efforts of the company. By now, every HP investor knows that the company's turnaround will take multiple years and a lot of hard work. The company's turnaround will not be an easy job; however, it can be accomplished.
HP generated $1.29 billion in cash flow in the last quarter. In the last four quarters, the company generated a total of $4.48 billion in positive cash flow. While the company might have negative earnings because of some write-offs related to some bad acquisitions, the cash flow has been definitely positive in the last four quarters. Many people forget that HP still makes money and it's still a profitable business. Given the company's current market value of $36 billion, we still have a price-to-cash-flow ratio of 8 despite the 30% rally we've seen in this stock price since the beginning of the year. There is still plenty of upside for HP.
Moving forward, even if HP can keep its earnings flat, the company is still undervalued by about 20-30% due to its low price-to-cash-flow ratio. HP enjoys a nice dividend yield of 2.8% and the company is known for stock buybacks. I expect more stock buybacks and increased dividends in the future as the company's transition gets closer to conclusion.
All in all, HP's quarterly report was decent. It didn't involve anything scary like the last few times. As long as Meg Whitman is given time and room to play, she will do a great job at this company. I'm long HPQ and I kept adding to my shares every time the share price plunged. I will continue to be long HPQ as long as the company generates cash like it does today.