Monday, January 27, 2014

Hewlett-Packard Fourth Quarter Sales Top Estimates-12/05/2013


  1. Total Revenue: 28 billion

    Personal Systems 7,704 27.5%
    Printing 5,803 20.7%
    Enterprise Group 6,786 24.2%
    Enterprise Services 5,843 20.9%
    Software 982 3.5%
    HP Financial Services 879 3.1%
    Corporate Investments 5 0.0%


    Oct. 31, 2013 21.17%
    July 31, 2013 -12.61%
    April 30, 2013 -47.27%
    Jan. 31, 2013 -40.94%
    Oct. 31, 2012 -36.54%
    July 31, 2012 -14.66%

    HPQ 21.17%
    Dell 12.84%
    Apple 29.49%
    Microsoft 29.89%

    - Free Cash Flow
    1, Improved cash cycle
    2, Management has instituted cost cuts and personnel changes designed to streamline various businesses
    3, R&D has trended upwards, which could bring more profitable businesses
    4, Key Reason, reduction in the net debt in the operating side. (difference b/w operating and financial services)

    - Most profitable business unit
    1, The core of HP business is the hardware and infrastructure products, which include PC, server, storage, networking, and imaging and printing products.
    2, HP Personal Systems Group

    - Business unit that seems doing well
    1, The software is the most profitable business unit
    2, They are not large enough to matter given the current scale but they are important enough to make sure HPQ can avoid Kodak’s failure

    - Printer business of HPQ
    1, Still a big deal but for a new style in IT
    2, Compare to the failure of Kodak

  2. Hewlett-Packard Co.

    Seven business segments:
    • Personal Systems, 29%; Earnings margin (from operations) 4.8%; Growth rate -9.9%;
    • Printing, 20%; Earnings margin (from operations) 14.6%; Growth rate -6.5%;
    • Services, 28%; Earnings margin (from operations) 11.7%; Growth rate -2.2%;
    • Enterprise Servers, Storage and Networking; 17%; Earnings margin (from operations) 10.4%; Growth rate -7.7%;
    • Software, 3%
    • HP Financial Services, 3%
    • Corporate Investments, 0.1%

    Free Cash Flow
    • 2012 Free Cash Flow 14,630m; 42.5% increase from 2011
    • 2013 free cash flow is 8,160; -44.2% decrease from 2012; Morningstar
    • In the past quarter, 2 billion FCF generated; 800 million is paid our as dividend; 1.2 billion is reserved.
    • Sufficient cash; the company has $12.16 billion in cash
    • Mycroft/Michaelis Ratio Method. FROIC of 20%; $100 of invested capital, the company generates $20 in free cash flow; reinvestment rate of 88%;12% dividend payout

    R&D focus
    • HP invested $3.39 billion in 2012, $3.25 billion in 2011, $2.95 billion in 2010
    • 32.1% of the net operating cash inflow in 2012; 25.7% in 2011; 24% in 2010

    Printing segment
    • HP's Printing strong margins; 17.7%.
    • Advantages. More memory, and better imaging lenses.
    • Advantages. Usage efficient

    HP’s outlooking
    • HP is less reliant on the PC market
    • Strong revenue growth in enterprise sectors
    • 3D printing business
    • Cloud services

  3. HP has four segments. In terms of revenue, Technology Solutions 48%, Personal Systems 28%, Imaging and Printing 21%, Financial Services 3%. Technology Solutions is the most exciting one as it contains enterprise storage and servers, consulting and outsourcing services, and software. PC segment offers notebooks, desktops, workstations, and handhelds, has very low profit margin, contributing only 9% of the total operating income. Printing segment provides printer hardware, supplies, media and scanning devices, contributing over 1/3 of total operating income. So it is not the largest revenue generator, but definitely a very profitable segment.
    The Bloomberg article mentioned that Meg Whitman renewed product development in areas including printers and servers. I think it was a smart strategic move, as we discussed previously that the PC market has been shrinking, while business demand for enterprise servers is stabilizing. The fourth quarter result was rewarding for Whitman’s strategy, as apparently the enterprise group was growing. I believe the analyst was true about corporations spending more on technology. As the extended support for Windows XP ends in April, 2014, companies will buy both new operating systems and new hardware, and they usually do it 3-6 months in advance to ensure a smooth transition into new technologies.
    I’m not sure what Bloomberg’s article mean by “HP is behind in mobile computing”. HP strategically exited smartphone and tablet business in August, 2011 by shutting down operations for webOS devices, and has a very limited portfolio of tablets. Despite the fact that demand is shifting from notebooks to tablets and smartphones, HP just doesn’t want to compete in this space. As Whitman is looking to cut cost, and as the margin for its PC business is so low, I won’t be surprised if HP announces a deal selling its PC unit. In fact, back in 2011, HP announced that the company looking for strategic alternatives for Personal Systems Group.
    HP has robust free cash flow, which increased by 22% in 2013. This will help HP’s R&D effort in areas including printers and servers. In the earnings conference call, Whitman talked about “the need to improve their pricing discipline and profitability”, but I think as in a highly competitive market with Cisco, EMC, Oracle, IBM, and Dell, HP has little pricing power.

  4. Business Overview (7 business segments):
    - Segments really matter:
    • Personal Systems: 29% of net revenue and 14% of segment earnings in 2012. Net revenue decreased 9.9% in 2012.
    • Printing: 20% of net revenue and 29% of segment earnings in 2012. Printing net revenue decreased 6.5% in 2012.
    • Services: 28% of net revenue and 33% of segment earnings in 2012. Services net revenue decreased 2.2%.
    • Enterprise Servers, Storage and Networking: 17% of net revenue and 17% of segment earnings in 2012.
    - Other segments:
    • Software: 3% of net revenue and 7% of segment earnings in 2012
    • HP Financial Services: 3% of net revenue and 3% of segment earnings in 2012
    • Corporate Investments: 0.1% of net revenue and a loss of 238m

    Financial Overview:
    - Q4 Revenue: 29.1b vs. 29.96b last year. 3% drop from last year. For the full-year, 7% year-over-year decline in revenues to $112.3 billion and $2.62 earnings per share.
    - Revenues from the enterprise group grew 1.8% over the year to $7.59 billion. Enterprise Group is the only one growing, however, not big enough to bring up the total revenue.

    Free Cash Flow
    - Ended Q4 with $12.2 billion in cash and equivalents. 11% of annual revenue. For the full year, delivered more than $9 billion of free cash flow, a free cash flow to enterprise value of approximately 16.8%.
    - The company returned $763MM to shareholders in the form of dividends and share repurchases in the 4th quarter
    - Using FCF to improve the operating company net debt position by $1.3 billion. D/E ratio: 0.6 dropped from 0.69 from last quarter and 0.83 two quarters previous.

    Shifting toward Enterprise:
    - Only growing segment Enterprise group
    - Has initiative to increase its enterprise offerings. Tied up with cloud CRM leader
    - HP reported a 30% year-over-year improvement in signings as the renewal rate increased during the quarter
    - HP reported double-digit revenue growth in its strategic enterprise services such as cloud, security and big data

    - Third largest division, have a market share of 40%
    - Ink Advantage program: boost sales and bring up operating profit margin to 17.7%
    - Invest in 3D printing market

  5. Business Segments:
    Personal Systems 29% of total revenue 2012 4.8% gross margin
    Printing 20%, 14.6%
    Services 28%, 11.7%
    Enterprise Servers, Storage and Networking (ESSN) 17%, 10.4%
    Software 3%, 20.4%
    HP Financial Service 3%, 10.2%
    Corporate Investment Less than 1%

    Core Business:
    Traditional: Personal Systems 29% of total revenue
    - Net revenue decrease 9.9% due to a decline in unit volumes and demand weakness in PC market
    - HP is a market leader in PC shipments in the U.S
    Emerging: Services segment has a higher gross margin and net operating income
    - HP Services segment provides consulting, outsourcing and technology services
    - Net profit 4 billion 33% of total income (large proportion of operating income)

    Financial Analysis
    - FCF 11.3 billion (strong operating cash flow), HPQ's current free-cash-flow yield is 18%
    - Company use strong cash flow to make strategic acquisitions, invest in R&D and maintain regular dividend
    - Return cash to investors through regular quarterly dividend and share repurchases.
    - The company returned $283.0 million in the form of share buybacks and dividends at Q3 2013.
    - Increase buybacks for Q4. This will instill investors’ confidence and boost the company s earnings.

    - R&D Expense is $3.4 billion in fiscal 2012
    - Investing in innovation-focused spending for storage, networking and HP converged cloud.
    - Q4 2013, revenue in the company’s enterprise group (ESSN) rose 1.8 percent from a year earlier.

    Strategic Business Portfolio Shift
    - HP has diversified and enhanced its business via acquisitions, adding service and hardware & solution for data centers and for mobile computing.
    - HP shift to a high-margin software and services business
    - Cost savings of approximately $3.0 billion to $3.5 billion