Last year, was the year of the write down at Hewlett-Packard (HPQ). New CEO Meg Whitman finally began cleaning up the messes of her predecessors and took an $8.8 billion write down on Autonomy and another $10.8 billion related to the 2008 acquisition of EDS and the stock retreated back to 2002 levels, the year when HP acquired Compaq for $25 billion ushering in the days of cheap laptops and board room squabbles. But to start 2013 HP finally delivered news that wasn't outright awful and for that the market responded with a massive short-covering rally.
Its latest quarterly results beat analysts' estimates and it raised its FY-2013 outlook somewhat. After destroying more than $30 billion in ill-advised M&A deals over the past decade, HP finally showed up for work. I hate to be mean about this but, frankly, the situation is embarrassing for one of the truly innovative companies of all time.
HP's revenues for the first quarter ending 31st January dropped by 6% year over year to $28.36 billion while income fell 20% from $1.5 billion to $1.2 billion, an adjusted $0.82 per share. It guided similar results for the current quarter, and raised full FY-2013 GAAP-EPS forecast $0.20 to $2.30-$2.50 per share. Adjusted EPS forecast has been guided to $3.50; analysts were expecting $3.32 per share.
Negative Vertical Leap
The company has reported falling revenues in almost all of its segments. Within the personal systems group, only Desktop sales saw an increase, just 4%, to $3.32 billion coming from s 10% increase in shipments but obviously lower ASPs. The real driver of the unit, however, is laptops and they dropped 16% in revenue due to 14% fewer units sold.
HP Financial Services
In the printing segment, all of the three operational areas; supplies, commercial hardware, and consumer hardware recorded falling revenues, simply because people are not printing photos or much of anything else anymore. This is a real trend and one that HP has no answer for. To be fair, management has been aware of this but there is little to suggest that the other verticals are beginning to take up the slack.
The company retained its lead as the world's leading PC maker and retaking its title from the rising Chinese technology behemoth Lenovo (LNVGY.PK), according to Gartner's latest data. That said, Lenovo put up the highest growth out of the top five PC manufacturers with 8.2% growth. At this point with Dell (DELL) looking to go private and HP struggling to find growth at all, the post-PC era is looking like it is for real. The failure to lead by the Wintel platform is having serious spillover effects for PC OEMs. The tepid response to Microsoft's (MSFT) Windows 8 coupled with Intel's (INTC) incompetence at low power computing has left these PC majors without any longer term strategy.
Both tried to go into the tablet or phone space to compete with Apple (AAPL) and Samsung (SSNLF.PK) and failed miserably. The latest IDC data has indicated that global PC shipments dropped by 6.4% in the final quarter of CY-2012. Intel had better hit it out of the park with the upcoming Haswell SoCs or the sub-$600 computing space will belong to ARM SoCs.
Finally, a Competitive Tablet
If anything the smartest move I've seen from HP, other than coming clean on Autonomy, in the past six months was the recent news that they will be entering the tablet space with the low-power Temash SoC from AMD (NYSE:AMD). This is the low-power solution the x86, Wintel crowd has been waiting for, not Clover Trail. Intel's GPU technology is so far behind the curve that as time goes along AMD's advantage here will further differentiate it in the sub-$600 mobile device space, be it a laptop, ultha-thin or tablet of some form factor.
With Samsung's CEO openly trashing Windows 8 and Samsung dropping support for Windows RT HP becomes an even more important OEM for Microsoft and I'm sure that Meg Whitman had something to say to Steve Ballmer about the absurd pricing for Windows 8/Office combo -- $120 per machine. Dropping the price to $30 seems to be a move that will drive cost competitiveness with Android tablets. And, this is where HP can regain some momentum. Only Microsoft's Surface Pro can be considered a good, or even well-received, Windows 8 tablet and only if one thinks of it as a slightly more portable netbook, sporting an Ivy Bridge Core i5 running at 17W.
Enter HP and Sony (SNE) putting Temash-based tablets into the market starting in Q2 and competing on price with the average 10" Android tablet. At least they better or both companies are still partying like its 2009.
More Cutting to Growth
Mark Hurd's tenure was all about cutting expenses to drive earnings growth with a continually commodified product line. Now, Whitman is having to cut again simply to get rid of the dead wood that the much smaller HP no longer needs even in a more efficient and lean company. So that means 29,000 job reductions by the end of its next fiscal year, of which 15,300 have been laid off so far. The restructuring will save up to $3.5 billion annually. As indicated by IDC, PC sales are still falling and will do so until someone can credibly compete with ARM at building a mobile device. As good as the new Jaguar cores from AMD are, they are not quite there. Haswell will be a big step for Intel but do not expect miracles - Intel's PR department and the tech media are very good at their jobs. The personal systems segment alone forms 31% of HP's sales of which Notebooks and Desktop constitute 14.5% and 11.7% of HP's net revenues. The success of HP depends entirely on its own efficiency. Whitman knows now that re-making HP is a much bigger job than it was when she took over. At least the worst of the skeletons are out of the closet the focus can be on driving operational and sales efficiency while the engineering and R&D departments rebuild themselves. This is a turnaround that will take years, not quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.