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More on H-P: The company is taking an $8.8B charge related to Autonomy just a year after buying...

More on H-P: The company is taking an $8.8B charge related to Autonomy just a year after buying it for $10.2B. Some thought a write-down was possible, but few expected one this large. FQ1 guidance is for EPS of $0.68-$0.71, below an $0.85 consensus. Prior FY13 EPS guidance of $3.40-$3.60 is maintained, but there's probably a lot of skepticism. PC sales -14% Y/Y (-10% in FQ3), printing -5% (-3% prior), services -6% (-3% prior), enterprise hardware -9% (-4% prior), software +14% (boosted by Autonomy), financial services +1%. HPQ -10%. CC at 8AM ET (webcast). (PR)
Comments (22)
  • Ashraf Eassa
    , contributor
    Comments (8983) | Send Message
     
    Way to go HP! You guys just keep hitting it out of the park every time!
    20 Nov 2012, 07:54 AM Reply Like
  • BTM
    , contributor
    Comments (354) | Send Message
     
    Chanos was right.
    20 Nov 2012, 07:56 AM Reply Like
  • Ariel Aharonovich
    , contributor
    Comments (433) | Send Message
     
    for god sake, can it go any worse?... LONG (and very disappointed) HPQ...
    20 Nov 2012, 08:01 AM Reply Like
  • Freekizh
    , contributor
    Comments (182) | Send Message
     
    This company doesn't have a freekin clue. With such a serious down move now, by discipline and if you are a real contrarian, you gotta take a look at it because ts gonna hit your screen big time. But it truly makes me sick just looking at the hit on equity on the BS.

     

    Now D/E looking serious as a result - covenant breaches possible?
    20 Nov 2012, 08:03 AM Reply Like
  • DougRk
    , contributor
    Comments (1534) | Send Message
     
    Sad, but not unexpected when you consider the larger competitive position of HP. They are a glorified reseller of foreign merchandise. Doomed to oblivion at some point, as is Dell. They're both microcosms of the US' lack of competitive position in the world.
    20 Nov 2012, 08:20 AM Reply Like
  • mitrado
    , contributor
    Comments (1962) | Send Message
     
    Wasn't this included in Q3 results?

     

    "Operating Income -8,833.00"

     

    What am I missing here?
    20 Nov 2012, 08:21 AM Reply Like
  • Freekizh
    , contributor
    Comments (182) | Send Message
     
    You're missing a lot dude. Read the Q4 properly.
    20 Nov 2012, 08:32 AM Reply Like
  • Ariel Aharonovich
    , contributor
    Comments (433) | Send Message
     
    The only 2 bright spots about HPQ declining share price are:
    1. Management realizes that there's no choice but a break-up of the company to create a sum which is hopefully bigger than its parts.
    2. With such a low valuation, HP may be a target for a takeover. After all ,the franchise, brand, mass and know-how is still there.
    20 Nov 2012, 08:29 AM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (168) | Send Message
     
    You guys are reacting to the price volatility. Take a look at the fundamentals. MUCH better than last year.

     

    Ashraf you keep talking up MSFT, and I agree with you and your well written article, but I would aruge HPQ is just as relevant as MSFT going forward.

     

    Net debt is down 5 billion year-over-year! Combined with a slight pay down of debt plus a significant increase in cash to over $11 billion. As such interest expense is down considerably helping margins long-term.

     

    Overall the margin is up due to cost cutting and change in product mix.

     

    Cash flow is terrific with true free cash flow well above $2 billion for the quarter continuing to improve quarter by quarter since Whitman's hiring.

     

    Revenue was only down 4% on a constant currency basis hardly justifying this decline in stock price and understandable in a soft IT environment.

     

    If Windows 8 will help MSFT it will surely help HPQ as well.

     

    Despite the weakness in PC and consumer printing much of the company's operating margin is generated from other segments which the firm remains a top player in such as servers, storage systems, networking, and services (#1 or 2 share in each). Each of these is highly relevant to the growth of the internet and electronic data over the next decade.

     

    Despite the accounting fraud at Autonomy BEFORE HP software revenue is up significantly with solid margins helped by a big contract with GM.

     

    Whitman continues to writedown the crappy part of goodwill. She is cleaning up well.

     

    Are there problems with the company. Absolutey! But a decline in stock price of this magnitude is pure emotion. Irrational investors are basically betting the company is irrelevant and going bankrupt. Numbers and business lines show this is not the case.
    20 Nov 2012, 08:33 AM Reply Like
  • The_Hammer
    , contributor
    Comments (3959) | Send Message
     
    and 2013 fcf expected at 5 billion according to analyst, cfo did not address down from 7.5 billion 2012. pretty good dropoff. so it is vital that they bring debt down quickly if fcf does not hold after 2013.
    meg was on the board that approved this autonomy transaction. what a bunch of bozos at this company. now the former ceo is denying anything was wrong. These people have NO character. This is one reason the country is in the toilet as leaders SUCK!
    20 Nov 2012, 12:15 PM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (168) | Send Message
     
    The Hammer,

     

    Excellent point. This is by far my worst performing equity so I feel your frustration.

     

    But I thought Whitman handled the question re: Autonomy quite well. She said they used audited financials from Deloitte. They then had another large accounting firm audit Deloitte's work. This is about all a firm can do.

     

    HP certainly overpaid for Autonomy but that was already priced in. Consider the positives:

     

    Increasing software revenue and margins. Certainly helped by the contract with GM.

     

    The writedown was non-cash.

     

    Whitman firmly addressed this issue and is taking all necessary steps to correct it.

     

    By improving the balance sheet, Whitman has eliminated about 50% of the net debt increase that was due to Autonomy. I don't have exact numbers in front of me but Autonomy increased net debt from 12 to 22 billion. It is now down to roughly 17 billion.

     

    Given her statements and current actions, expect the vast majority of FCF to be spent on reducing debt next year which would all but eliminate the net debt increase from Autonomy.
    20 Nov 2012, 12:24 PM Reply Like
  • The_Hammer
    , contributor
    Comments (3959) | Send Message
     
    Matt, thanks for your concern but I do not own it yet. Will I buy?

     

    FCFs are dropping pretty fast and that is what worries me. If this business starts to meltdown then what?
    Technology is moving fast and it it difficult to pick the winners

     

    Here is exchange on CC
    Our next question comes from Kulbinder Garcha from Credit Suisse.

     

    Kulbinder Garcha - Crédit Suisse AG, Research Division
    Just a clarification and question. On the cost savings, maybe to ask a question a different way, can you just maybe answer, of the $3 billion to $3.5 billion of savings that you were targeting to the end of '14, how many -- how much of that benefited HP in the last fiscal year? And then for Cathie, given the strong free cash flow, $7.5 billion last year and $3.5 billion in the quarter, are you still guiding for $5 billion of free cash flow only in fiscal year '13?

     

    Catherine A. Lesjak - Chief Financial Officer and Executive Vice President
    So let me start with the cash flow question. So we're not updating our guidance or our outlook for cash flow in -- for fiscal '13, but I think what is important to kind of take away from the results that we had in Q4 is that when we focus, we achieve results. And we are focused on driving free cash flow for this company, and that means making our earnings, generating cash earnings out of that, focusing on our working capital and driving our cash conversion cycle and finally, really focusing on CapEx and making sure that every dollar of CapEx is returning, is appropriate cost of capital or better. And so that is a renewed focus, I would say, in fiscal '13.
    20 Nov 2012, 04:22 PM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (168) | Send Message
     
    Great point. I heard this exchange and I wish they would give some guidance. But the numbers tell a good story since Whitman has been CEO.

     

    FCF has improved considerably the last two quarters from $1.5 billion in Q2 to $2 billion in Q3 to over $2 billion in Q4. And the cash flow is real and not manipulated by working capital.

     

    Margins have also improved over the past few quarters.

     

    The balance sheet is in much better shape with more liquidity and $5 billion less in net debt.

     

    The lower net interest expense should help improve margins.

     

    But aside from the improving fundamentals the real question which will drive cash flows long-term is: Does HP have relevant products and services for the future?

     

    I think the answer is yes. Internet hardware will be in high demand over the next several years with more internet use throughout the world and a greater need to store electronic data. The cloud and data centers will drive much of this demand.

     

    What is needed and does HP provide the needed products:

     

    Servers: Yes the number one provider of servers worldwide, neck-and-neck with IBM. Will margins be lower because of product shift. Probably. But still necessary for enterprises and data centers. HP has 30% server share. Not an insigificant number.

     

    Storage: Yes. They are #2 behind EMC. More data will need to be stored and HP should benefit from this.

     

    Networking: Yes. They are number two behind Cisco. HP will benefit from the need for more routers and switches due to greater internet traffic.

     

    IT Services: Yes. Although businesses are holding back now they will always need a company like HP to service their network and help manage data, applications etc.....HP is number 2 behind IBM in IT Services worldwide.

     

    Software: Yes. A small % of profits but growing despite the Autonomy mess. Unit helps complement the other lines of business.

     

    Above along with financial services is 60% of operating margin. So even withouth PCs and printers the company is still highly relevant.

     

    PCs will still be needed because most serious work cannot be performed on a tablet. While cannibalization from tablets will continue to occur HP should benefit from discontinuation of Windows XP and upgrades to Windows 8 in 2014 as the #1-2 provider of PCs worldwide.

     

    Commercial higher margin printing is still necessary even though fewer printers and supplies will be needed by consumers. Think of product labels. As the number one printing company worldwide, HP should benefit from decent demand for commercial printers and supplies.

     

    The change in strategy from big debt ridden acquisitions to restoring the balance sheet and investing in R & D should also help in the long run.
    20 Nov 2012, 04:58 PM Reply Like
  • The_Hammer
    , contributor
    Comments (3959) | Send Message
     
    found it odd she dodged the question eventhough ceo and cfo addressed gaap and non-gaap eps guidance for 2013. Non Gaap 3.40-3.60
    It is a positive they are reducing debts aggressively.
    20 Nov 2012, 05:03 PM Reply Like
  • The_Hammer
    , contributor
    Comments (3959) | Send Message
     
    How is interest expense down considerably if only net debt is down? I am sure the $5 bil cash is not earning much to offset interest expense. And why are they not paying it down since they have to much anyway.
    The value of this company continues to fall. will it be a buy soon? maybe but for all those bottom feeding in the $20s and high teens they are getting pummeled. If it touches below $10 will probably take a stab at this one.
    20 Nov 2012, 09:07 AM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (168) | Send Message
     
    NET DEBT is down $5 billion (Cash and Investments - STD - LTD - MI). This is why Interest expense is down considerably. So yes they are paying it down and also replenishing cash on the balance sheet.
    20 Nov 2012, 09:12 AM Reply Like
  • inthemoney
    , contributor
    Comments (981) | Send Message
     
    Lol, the clueless management finally killed the company. I left years years ago at the beggining of Mark Hurd era because of middle managers who had no idea what is good for them. Ah, the taste of justice is sweet in the morning.
    20 Nov 2012, 09:21 AM Reply Like
  • Tack
    , contributor
    Comments (13272) | Send Message
     
    HPQ hasn't known what business it was in for years, making foolish changes in strategies and having a penchant for political correctness in leadership, rather than competence. For the moment, it's not clear what strategy they seek to employ for future growth.

     

    Personally, I find MSFT not that much further removed from a similar predicament, even though the market, for the moment, is treating them more kindly. The PC business is moribund, yet, essentially, MSFT's entire life is built around Windows. Now, they're attempting to move Windows into the mobile market in a very belated effort that has a large chance of making very little impact, given the entrenched positions of iOS and Android. And, the radical changes in Windows 8 are not in the least attractive to their large corporate base, who have little need for a touchscreen-centric, icon-laden operating system, so it's broad adoption there is questionable, too.

     

    Two behemoths, both lost in space.
    20 Nov 2012, 09:25 AM Reply Like
  • The_Hammer
    , contributor
    Comments (3959) | Send Message
     
    Could we be seeing the capitulation of a majority of the bottom feeders?
    Maybe a 200 mil share day.

     

    Will new SA articles soon turn real pessimistic now?
    20 Nov 2012, 09:27 AM Reply Like
  • jstratt
    , contributor
    Comments (2342) | Send Message
     
    An even bigger fraud is using the word Management in describing HPQ.

     

    They allege after over a year that 84% (8.8/10.2) of the value was fraudulent.

     

    It is sad but breaking up HPQ and selling pieces is the best solution.
    20 Nov 2012, 09:37 AM Reply Like
  • GaltMachine
    , contributor
    Comments (1140) | Send Message
     
    Funny though I hate cliches sometimes they are appropriate: "Don't catch a falling knife!"

     

    At some point you have to think this will be attractive as a turnaround play (I hope).
    20 Nov 2012, 09:50 AM Reply Like
  • jhu663
    , contributor
    Comments (32) | Send Message
     
    They still have 35b of goodwill on their balance sheet, down from 55b and shareholders equity of 22b. Given the track record of bad purchases over the years would anyone be surprised if they took more writedowns in the future of their goodwill. Their D/E is now over 100% and their net debt/equity is close to 80%, not so great.
    20 Nov 2012, 03:34 PM Reply Like
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