Large Cap Technology - Break It Up, Baby (Part 2)

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 |  Includes: DELL, HPQ
by: Yale Bock

In part one of the article, I proposed the idea that large cap technology companies should strongly consider breaking their companies up into smaller pieces in an effort to produce better shareholder returns over the next decade. Please note this is an intellectual exercise and I have no knowledge that any of these companies are considering such a corporate action. Now lets take a look at Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL).

Hewlett Packard and Dell are very similar in many respects as they sell the same product lines -- especially with personal, and notebook (laptop) computers.

Let's take a look at Hewlett Packard's most recent quarter company wide results.

Hewlett Packard 3rd Qtr 2012 Financial Results ($ In Billions)
2012 Q3 2011 Q3 Year Over Year Change
Revenues (GAAP) 29.7 31.2 -5%
Operating Margin Pct (GAAP) (29.7) 8.1 -37.8%
Net Earnings (GAAP) (loss) (8.9) 1.9 -568%
Earnings Per Share (GAAP) (4.49) .93 -583%
Operating Margin Pct (Non-GAAP) 9.2% 9.8% -.6%
Net Income (Non GAAP) 2.0 2.3 -14%
Earnings Per Share (Non-GAAP) 1.00 1.10 -9%
Click to enlarge

(All financial information provided by Hewlett Packard)

Now let's look at each business segment to see how they contribute to the total results.

Hewlett Packard Segment Results Q3 2012 ($ In Millions)
Net Revenue 3 months Ended 7/31/2012 3 Months Ended 4/30/2012 3 Months Ended 7/31/2011 Q/Q Change Y/Y Change
Personal Systems 8,620 9,452 9,592 (9%) (10%)
Services 8,754 8,831 9,030 (1%) (3%)
Imaging and Printing 6,017 6,132 6,183 (2%) (3%)
Enterprise Servers, Storage, and Networking 5,143 5,211 5,348 (1%) (4%)
Software 973 970 822 0 18%
HP Financial Services 935 968 932 (3%) 0
Corporate Investments 19 18 235 6% (92%)
Total Segments 30,461 31,582 32,142 (4%) (5%)
Eliminations of Intersegment Net Revenue and Other (792) (889) (953) 11% 17%
Total HP Consolidated Revenue 29,669 30,693 31,189 (3.4%) (4.9%)
Click to enlarge
Hewlett Packard Earnings Before Taxes ($ In Millions)
Earnings Before Taxes 3 Months Ended 7/31/2012 3 Months Ended 4/30/2012 3 Months Ended 7/31/2011 Y/Y Change
Personal Systems 409 524 567 (28%)
Services 959 997 1,240 (23%)
Imaging and Printing 949 808 879 7.9%
Enterprise Servers, Storage, and Networking 562 585 690 (18.6%)
Software 175 172 160 9.4%
HP Financial Services 97 96 88 10.2%
Corporate Investments (58) (49) (334)
Total Segment Earnings From Operations 3,093 3,133 3,290 (6.1%)
Corporate and Unallocated Costs and Eliminations (314) (203) (114)
Unallocated Cost due to Stock Based Compensation (150) (168) (130)
Amortization of Intangible Assets (476) (470) (358)
Impairment of Goodwill and Purchased Intangible Assets (9,188)
Restructuring charges (1,795) (53) (150)
Acquisition-related charges (3) (17) (18)
Interest and other, net (224) (243) (121)
Click to enlarge

Dell

Here are Dell's most recent financial results-

Dell 2nd Qtr 2012 Financial Results ($ in Millions)
3 Months Ended 8/3/2012 3 Months Ended 5/4/2012 3 Months Ended 7/29/2011 % Sequential Change % Yr/Yr Change
Revenues 11,403 11,423 12,610 0 (10%)
Operating Income 901 824 1,146 9% (21%)
Operating Margin Pct 6.2% 5.7% 7.3% .5% (.9%)
Net Income 732 635 890 15% (18%)
Earnings Per Share .42 .36 .48 17% (13%)
Click to enlarge

(All financial information provided by Dell Inc.)

Now we will see how each segment fared:

Dell Revenue by Product Segment ($ In Millions)
Product Categories 3 Months Ended 8/3/2012 3 Months Ended 5/4/2012 3 Months Ended 7/29/2011 % of Total Net Revenue % Sequential Change % Yr/Yr Change
Servers and Networking 2,332 2,017 2,054 16% 16% 14%
Storage 435 444 502 3% (2%) (13%)
Services 2,106 2,071 2,036 15% 2% 3%
Software and Peripherals 2,338 2,386 2,569 16% (2%) (9%)
Mobility 3,870 4,236 4,761 27% (9%) (19%)
Desktop PC's 3,402 3,268 3,736 23% 4% (9%)
Total net Revenue 14,483 14,422 15,658 100% 0 (8%)
Click to enlarge

Unfortunately, Dell does not break out their operating income on a segment by segment basis. Still, the next step is to look at how I would break up these large enterprises in an effort to improve shareholder returns.

How to Break These Giants Up

Dell and HP both suffer from the explosion of popularity in the tablet and mobile phone sectors. In the last quarter, HP saw year over year revenue growth decline by 10%, and Dell's total revenues declined by 8%. Operating margin at HP decline .6%, and at Dell it increased by 15 basis points.

I believe each company should be broken up into three basic companies, but Hewlett Packard would have these basic groups, and a printing division as well. The core businesses would be one with a combination of desktops, notebooks, software, and services. The next would center around mobility, including mobile phones and tablets type products, including software which is applicable to those products. The third enterprise would have storage, servers, and networking based products.

You could imagine reconfiguring each company in different ways, with different divisions included in various combinations. Certainly, the job of investment bankers and management would be to figure out what makes for the most efficient groupings.

Again, the key point investors should take away from the article, especially shareholders of any of these companies, is to consider how management might rethink the structure of their enterprises as public holdings in an effort to have better equity performance over the next ten years. Thank you for taking the time to read the articles.

Disclosure: I am long MSFT, CSCO, HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.