- HP’s latest quarter brought in a top-line growth for the first time in three years. Earnings improved by 3 cents.
- HP Helion’s ability to incorporate future innovation makes it better than what rivals have to offer.
- Cost-saving measures are on track. Together with an improving top-line, HP should be able to sustain the positive earnings trend.
Hewlett-Packard (NYSE:HPQ) is the last company of this earnings season to report its quarterly result. However, this wasn't the only special thing about HP this season. The company has been making good progress lately. For the first time in three years, it delivered top-line growth on a year-over-year basis. This just improves the future outlook of this computer manufacturer, and explains why the stock price is up by 36% in a year.
In this article, I will tell the investors what HP did during its recent quarter. After that, I will discuss the future potential of this organization.
Riding a recent revival in PC shipments, HP posted a 1% increase in year-over-year revenue to $27.6 billion. The company's Personal Systems "PS" segment, which includes PCs and notebooks, grew by 12% year over year. Volume for PS improved 13% which was very impressive since desktops account for 30% of HP's total revenue. The company's second biggest segment, Enterprise Group "EG" also posted growth, courtesy of greater business in networking and servers.
These two segments make up more than half of HP's sale, and the progress witnessed in these two confirmed that the company is heading toward the right direction. Although sales in other segments were down.
Gross margin for the quarter was 24%, up by 6 bps year-over-year. The increase was driven by the improvement in rates for most of the products offered, partially offset by the strong revenue performance in industry standard servers and personal systems.
Higher investment in research and development led HP's operating expense to increase by 5% to $4.3 billion. The company delivered diluted earnings per share of 89 cents. This was 3 cents more than what HP reported in the same quarter of 2013.
HP has gone through a turbulent time some years back. This slow and steady improvement in performance should keep investors' minds at ease. The company is focusing on reducing its reliance on PCs and moving toward servers, storage and networking for enterprises. The move comes as part of the CEO's effort to return the sprawling company to growth.
For this, HP's greatest effort comes from HP Helion. HP Helion's portfolio of cloud products and services provides customers the ability to install a platform that is not only tuned for the present technology, but holds the infrastructure to incorporate future innovation. At present, a large number of organizations find that their data centers are unable to keep pace with the need to rapidly adopt new processes, products, or new business models.
The distinctive factor of embedding future innovation to present infrastructure separates HP's Helion from what competitors have to offer. The company has seen growth in orders during its third quarter. In fact, HP performed the best in its last quarter as compared to the previous eight. As a result, the company's market share in private cloud increased.
Moreover, HP's Cloud System is also going strong. It experienced double digit revenue growth during the latest quarter. By the end of October, there will be significant enhancements which should further boost the company's top line. HP will be introducing the commercial versions of HP Helion OpenStack and the HP Helion Development platform. The products are designed to help enterprise customers build and deploy OpenStack-based clouds. The product launch will be complemented with extended professional service intended to accelerate customers' cloud implementation.
HP also recently announced HP Atalla encryption and data protection solutions. Attala secures an organization's most sensitive information, whether it resides in a data centre, server or in the cloud. Similar offerings are scheduled for the near future, which explain the company's agenda very well. HP is becoming successful in moving away from PC and printing. The growing volume figures show that customers are happy with what is being sold.
Even if we focus on notebooks, the contracting market of PCs has now stabilized. This is why HP has had revenue growth in personal systems for three successive quarters. Though Windows XP expiration has contributed to this increase, the company's launch of EliteBook series and x360 convertible notebooks have allowed HP to take a bigger market share both sequentially and year over year.
Furthermore, cost-saving measures are also progressing. The restructuring program is on track and 36,000 people exited the company under the program during the latest quarter. According to HP, a total of 41,000 will exit by the end of this fiscal year. The remaining ones will leave in 2015. The cutbacks are expected to save $1 billion in costs from 2016.
HP's return on equity has been 21% during the past one year, above the peer average of 17%. The company is working hard to compensate its long-term investors who have lost 20% on their investment during the past 5 years. The present price to earnings ratio of 12.3 indicates the undervalued status of the company. Even if we leave the ratios aside, expanding cloud-computing market points towards a prosperous future for HP. For these reasons, long investors should continue holding their investment. Potential buyers should consider HP as their next choice. Certainly, the company holds a buy rating.