HP’s Whitman: Time to Rebuild the Balance Sheet
HP’s numbers are out, and while the quarter was better than expected — earnings were $1.17 per share on $32.3 billion in sales, beating the consensus view — opinions are split on the guidance. HP says it expects to earn “at least $4 a share” in 2012, which is probably an easy bar to jump over — but is it perhaps too easy?
Here are a few other highlights from the press release that will likely be called out in more detail on the call:
Personal Systems Group: This is the PC business that was briefly considered for sale or spinoff earlier in the year, before HP reconsidered. Revenue fell by 2 percent over the year-ago period, and operating margins were 5.7 percent. Business PC sales were up 5 percent, while consumer sales declined 9 percent. Total units shipped were up by 2 percent, with desktop machines growing by 5 percent and notebooks by 1 percent.
Printing: Revenue declined 10 percent year on year and operating margins were 12.8 percent. Commercial sales were up 4 percent. Consumer sales were down 8 percent.
Services: Revenue was $9.3 billion, up 2 percent year on year, with operating margins of 12.8 percent.
Enterprise servers, storage and networking: Sales declined 4 percent and operating margins were 13 percent. Networking sales grew 5 percent. Industry standard servers were down 4 percent, while Business Critical Servers were down a whopping 23 percent, in no small part because of the uncertainty brought on by Oracle’s decision not to develop software for Intel’s Itanium chip, a decision that is the subject of a lawsuit between HP and Oracle.
Software: Sales grew 28 percent and operating margins were 27.7 percent. Licenses and services grew 33 percent and 36 percent, respectively.
Cash flow: HP generated $2.4 billion in cash flow from operations in the quarter.
The conference call is set to begin at 2 pm PT/5 pm ET. I’ll be dialed in, and will fill you in as it happens.
2:01 pm: We’re a minute or two from the call getting underway. There’s what sounds like some Yanni music playing. And now some weird electronic thing.
Soon after the results were released, HP shares started to go higher in after-hours trading. But now, as I look, they’re headed down again.
And now the call is getting underway. Operator is doing her setup.
Steve Fieler is now running through the boilerplate, forward-looking statements, etc.
He has, however, just said that CEO Meg Whitman will be on the call.
2:05 pm: Here’s Meg. “We need to get back to doing what we do really well. … When I took this role, we set three goals: Deliver Q4, complete the PSG analysis and get Autonomy off to a good start.”
“In the last month, we’ve had hundreds of leads pass between the two companies. We’ve combined the HP software business with Autonomy under Mike Lynch and reporting to me.”
“As I travel, the one question I keep getting is, ‘What is HP?’”
Meg: We’re in the software business to deliver value to our customers, not to transform HP.
2:08 pm: Now she’s talking about Project Moonshot as an example of “meaningful and exciting innovation,” and says to expect a boost in research and development spending in 2012.
Meg is reviewing 2011 to help people understand what was so difficult about 2011: We faced some challenges, some were in HP’s control; others were not.
First, we increased our investment, because there are levels where HP underinvested. This is why services revenue and margins came down.
We’ll also increase investments in IT systems and processes.
HP is a company known for execution. But we didn’t execute well in FY11. I’m a big believer in setting priorities.
We also confronted one-time issues like the Japan earthquake and the Thailand flooding. Finally, we had a CEO change, and many news cycles. Through this, we created confusion with many of our shareholders about what kind of company HP is.
Meg: Many of the FY11 headwinds are still with us. But we’re doing the hard work that will put the pieces in place for profitable growth in 2013.
No major acquisitions in 2012. We will be rebuilding our balance sheet.
2:15 pm: Here’s CFO Cathie Lesjak: Running through the numbers.
Gross margins were hit by the strong yen and difficulties with printer supplies.
2:20 pm: Interesting: Nine million Web-connected printers were shipped this quarter.
2:21 pm: We are seeing the macroeconomic slowdown impact industry-standard servers.
2:25 pm: The salesforce is ramping up to start selling Autonomy software in fiscal 2012.
Balance sheet: $8.1 billion in cash.
Channel inventories are a bit higher than we would like in some regions.
Outlook: Fiscal Q1 2012 and full year: We will be managing the business toward earnings performance. Here is some color and assumptions on revenue. The macro environment remains uncertain globally, particularly in Europe. Consumer is soft, and starting to see weakness in commercial spending. Business Critical Server will remain a headwind during the year.
We will continue to be focused on profitable revenue. First, the overall decline in revenue will impact margins at a company level. We are also seeing pricing pressure across the company at a transactional level.
We expect 83-86 cents non-GAAP in Q112. FY12, EPS of at least $4 on a non-GAAP basis.
Reiterating that statement Lesjak made a few minutes back: “The macro environment remains uncertain globally, and particularly in Europe. Consumer spending remains soft, and we have begun to see a slowdown in commercial spending. We expect these dynamics will lead to below-normal sequential revenue performance in Q1, and year-over-year revenue declines through 2012.”
2:31 pm: Time for Q&A. I missed the question, but it was about investments. Meg is answering about headwinds in all three regions. Thailand flooding will affect HP in Q1 and Q2 of 2012. We’re driving more organic innovation by boosting R&D. If we’re going to get out of the M&A business, we’re going to have to invest in R&D. We also have to invest in people who can deliver the products and services. Also expect an investment in sales force. Those are the three areas of investment.
2:32 pm: Lesjak: We think Thailand flooding problems on hard-drive availability starts to be alleviated after the first half of the year.
2:34 pm: Question from Katie Huberty at Morgan Stanley: Is the lack of revenue guidance to be more selective, or is it more a function of the visibility and disruptions you’re seeing? Also asking about places where HP can take share from others in 2012.
Whitman: The reason we’re not guiding to revenue: We want to manage the company to profitable growth. Our business-unit heads are focused on business mix. This company has always been focused on profitability. That is the reason we’re doing this. We’re going to report by segment, but no guidance on sales.
Lesjak on where HP can take share: Right now, our guidance is reflective of an uncertain economy. We think we can maintain or gain share in many segments.
2:36 pm: Question from Citigroup: Asking about the weaker environment in supplies. Is it a cyclical issue or a secular issue?
Whitman: I completely believe this is not a secular trend toward decline in printing. There is more information to print. In my view, this was all about correcting a channel problem. The slowdown in Q3 and Q4 was a surprise to us. What we know is that supplies is almost a perfect predictor of economic health in almost any region. I do not think this is a secular trend.
Question from Barclays about Industry Standard servers.
Whitman: We’re back to a more normal refresh cycle, but there’s going to be pressure because of the hard-drive supplies problem. Many companies who are building their own servers — like, say, Google — are calling us because they can’t get disk drives.
Whitman: The flooding in Thailand has been a personal tragedy. It remains pretty dynamic. I’ve been on the phone with heads of all four disk-drive partners, and they’re not sure when they’re going to be back up and running. We made strategic buys of drives. We will get more than our fair share. We were on this really fast. This is going to affect the industry pretty dramatically. There are going to be shortages in Q1 and Q2.
Lesjak: We have tried to capture this uncertainty in our EPS guidance. I think what’s going to be key for us is investment in innovation. What’s going to keep people from building their own servers is the kind of thing HP brings to the table.
Whitman: We’re excited about Project Moonshot, which will change the game in the industry.
Question from Toni Sacconaghi at Bernstein: You are placing more emphasis on the tougher macroeconomic environment. You seem to be saying you will be more affected than some other companies. Most companies are coming slightly below normal seasonality; you came in well below normal seasonality. Some simple benchmarking would suggest you are losing some share. Do you believe you are as competitive as you ought to be? Or was there damage to the brand?
Whitman: As you look at 2011, there were three buckets of problems. One-third was macroeconomic trends. Consumer was weak for us, and commercial segment was weak in Q3 and Q4. Other third was HP-specific. We were hurt in China from the Nivida recall and Intel recall, and the mid-August announcement hurt us in China more than in any other market. I had some customers tell us they thought we were getting out of hardware entirely. We didn’t perform as well as the industry.
The other third was the distraction factor. We just need to get back to putting our heads down and ending the drama here. Going forward, we’ve still got macroeconomic headwinds. I don’t think anyone knows what’s going to happen in Europe.
2:46 pm: Whitman: We’ve got work to do in each and every one of our businesses.
2:47 pm: A question on capital allocation, also from Toni at Bernstein. If you’re going to generate $8 billion to $10 billion in cash, you could return more in buybacks and still exit the year better than before. Why can’t you be more proscriptive on buybacks?
Lesjak: We’re always evaluating best options for cash for short and long term. In the midterm, we really want to build back our balance sheet. We have a lot of debt. We don’t want to get ahead of ourselves on this one.
2:49 pm: Keith Bachman at Bank of Montreal: How is HP thinking about revenue growth and margin implications as it goes through the investment cycle? Also about getting the services business back to where it needs to be.
Lesjak: Success in services will be measured in years versus quarters. At the same time we’re doing that, we have to review everything in the portfolio to make sure we’re offering the right services. This is a very big business. In 2011, we are making investments in tools and will accelerate them in 2012.
2:52 pm: Question from Scott Craig of Bank of America: You mentioned a long tail about services. Provide a little more color on what a long tail is. Also, when do you see the drops in business-critical servers?
Whitman: BCS is a business in decline. It’s a slow decline.
Lesjak just mentioned some DEC servers, Digital Equipment Corp., which HP acquired some years back. HP is still selling them and servicing them.
2:55 pm: Whitman: We may make some small acquisitions, but we’re not going to do any big acquisitions in 2012. This is a reset and rebuilding year.
One of the things I have been struck by is that we have a fantastic portfolio of assets. We just have to make them work harder.
2:56 pm: Question: What do you consider large?
Whitman: Sub-$500 million. We might get up to $1 billion, but I doubt it.
2:58 pm: Whitman talking about possible acquisitions again. There are a few assets that may be ready to move in 2012. There may be two or three we take a look at in the software space. If there is a great acquisition that is in the $1 billion range but we don’t want to pay too much for it. I have a history of using acquistions to grow companies, but we can’t continue to rely on them to grow acquisitions at HP.
3:01 pm: Last question: Shannon Cross of Cross Research. Asking about Autonomy and linearity during the quarter.
Whitman: I am really excited about the acquisition. It really positions HP well. It enables HP to manage unstructured information in a way that no one else does. Autonomy is running autonomously, but we have done a great job of integrating going to market. We have a clearinghouse that vets all the sales leads. This will enable Autonomy to grow a lot faster than it would have on its own.
3:04 pm: And we’re done.