<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of HP 3Q09 Business Results (Aug 18)

Annex Bulletin 2009-15                            August 18, 2009

A partially OPEN edition



Less Than Meets the Eye - Analysis of HP's 3QFY09 results


Big Blue Blows Lid Off Forecasts - Analysis of IBM's 2Q09 results



Updated 8/19/09, 10:30AM HIT; adds Executive Quotes, MARKET UPDATE

Analysis of Hewlett-Packard's Third Fiscal Quarter Results

Less Than Meets the Eye...

Steep Revenue Contraction for Third Quarter in a Row; HPS - New Moniker for Hocus-Pocus Services?

HAIKU, Maui, Aug 18 – The world's largest computer company is getting smaller quarter by quarter.  HP’s third quarter results, released after the markets closed this afternoon, show a continued contraction that began in the first quarter of its current fiscal year.  Worse for HP shareholders, the latest figures are less than meets the eye.

Most of HP's major business lines suffered a double digit revenue declines.  The only segment that appeared to grow – services, up 93% as reported - rose mostly on the basis of the EDS acquisition a year ago.  Since the company has been refusing to provide detailed EDS-HPS breakdowns which would help reconcile the HPS results to the year-ago quarter, we have to wonder if HPS may not have acquired a new moniker - Hocus-Pocus Services? (for more details, see below).

Yet even such an apples-and-oranges comparisons weren't enough to offset the company's overall revenue decline of 2% in the quarter to $27.5 billion.

As for the bottom line, HP net earnings dropped even more – down 19% since a year ago.  They were even down 4% sequentially from the company’s disappointing second quarter results (see Suddenly, All Lines Point South, May 2009). 


Yet the stock market has boosted the HP stock in the last three months even more than IBM’s, a company that reported far superior results in its latest quarter (see Big Blue Blows Lid Off Forecasts).  Interestingly, Dell has topped them both (see above).  That’s how perverse the current market has become.

Or was it that the market current bullish euphoria is setting aside the negative facts in preference of executive sweet-talk?

"I'm confident HP will emerge from the current market environment as a stronger force in the industry," Mark Hurd, HP CEO, told the analysts in a post-earning teleconference.  "As this quarter demonstrates we are executing in the marketplace, executing on the EDS integration, and executing on our cost initiatives."

Execution, execution... same ghoulish-sounding theme as when the last quarter's results hit the Street.

But the HP shares dropped by about 2% in after-hours trading following the release of its third-quarter results.  That's about by how much they had risen earlier in the day in anticipation of the news.  So "buy on rumors, sell on facts" also appears to be the way the market is greeting financial news these days.

HPS: Hocus-Pocus Services?

The HP stock price drop might have been much steeper had Wall Street and the investing public really dug a little deeper into that alleged 93% surge in its services revenues, and an equally as "impressive" spurt in the related profit margins.

“Record profit in Services, double-digit revenue growth in China, and solid cash flow demonstrate HP’s ability to execute,” claimed Cathie Lesjak, HP's CFO, in a release. “We are investing for the future and executing operational efficiencies with the goal of driving long-term, profitable growth.”


If you take the reported numbers for HPS and EDS for the third HP fiscal quarter of 2008, the combined HPS/EDS revenues were $9.9 billion (see from the detailed HPS Table - for Annex clients only, User ID & Password required).  The just-reported corresponding 2009 figure was $8.47 billion.  That’s about a 15% DROP (!) in revenues for the third quarter, not a 93% revenue jump.

The HPS profit picture is even murkier.  The latest HP release shows an operating profit of $1.29 billion and a 15.2% margin.  A year ago, the combined operating profits of the then two separate entities was $848 million, an 8.5% margin.

Now, how do you suppose did the HPS-EDS merger manage to grow its profit by 52% while its revenue declined 15% since a year ago?  How did the HPS (without EDS) boost its profit margin from 12.9% last year to 25.6% in the latest quarter, an 83% surge? 

Magic, is the only explanation that comes to mind.  Which is why we are starting to think that HPS now stands for Hocus-Pocus Services.  Yet above were the questions none of the Wall Street analysts asked the HP executives during the post-earnings teleconference.  So much for their "independent" analysis.

One analyst, however, did ask a question about new business signings.  The question seemed to rattle a bit the usually unflappable HP CEO. 

"We feel good about the signings," Hurd replied. "We're making progress, but as we said at the security analyst meeting in September (of 2008), our primary focus has been over the last year is really focused on getting the (EDS) integration done and getting the cost synergies, because at the end of the day the leaner cost structure will enable the growth and we're getting to the point where we're starting to really focus on more growth."

Why all this song and dance instead of just releasing the signings numbers, as IBM is doing and EDS used to do?  Because we would all know then which end is up?  And that evidently is not what the HP executives want the marketplace to know right now. 

No wonder the head of HP Investor Relations cut off this analyst's follow-up question, while allowing some other analysts to ask many multiple part questions... on less sensitive subjects.

And where is the SEC in all of this?  Why are the government watchdogs allowing such inconsistent reporting of the same facts by various companies?  Because if the full truth were known, some of HP's $105 billion market cap would evaporate, taking down the portfolio values of some big institutional holders?  Or is it just plain ignorance?

Luckily for smaller investors, and unfortunately for HP management, the apples-and-oranges EDS comparisons will have to stop after this quarter (HP acquired EDS about a year ago).  Hopefully by then, some of the Wall Street analysts may also start to “analyze” the HP numbers rather than just lap up the sugar-coated statements the HP management has been serving them. 

Just in case this doesn't happen, however, the above HPS Table contains in blue-shaded lines marked as ("est") our estimates for both EDS and HPS operations’ latest results.  These figures our attempt to reconcile the apparent dichotomies due to HP's apples-and-oranges comparisons. 

As you can see, we figure that the EDS portion of the business has probably declined more sharply since a year ago, perhaps by 20%.  Call it a “merger fallout,” if you will.   Which means that the original HPS revenues would be down about 8%, in line with the decline of the ACTUAL maintenance revenues since a year ago.  Both figures are a far cry from the 93% HPS evenue increase Mark Hurd (HP CEO) and Cathy Lesjak (CFO) boasted about.

Business Segment Analysis

Now that you have seen the "rosy" part of HP's latest report card, you can probably surmise that the rest of the businesses are mired in an even deeper slump.

Enterprise Storage and Servers (ESS) revenue was down 23%. Storage revenue declined 21%, with the midrange EVA product line down 23%.  The Wintel servers dropped 21% , while its other servers' declined 30%.  Even the blade revenue was down 14%, another former illustrious part of HP joining the group of laggards.

ESS operating profit was $356 million, or 9.7% of revenue, down from $544 million, or 11.5% of revenue, in the prior-year period.

Imaging and Printing Group revenue declined 20% to $5.7 billion. Supplies revenue was down 13% , while Commercial hardware revenue and Consumer hardware revenue declined 37% and 21%, respectively.

Operating profit was $960 million, or 17.0% of revenue, versus $1.0 billion, or 14.8% of revenue, in the prior-year period.

Personal Systems Group revenue declined 18% to $8.4 billion. Notebook revenue for the quarter was down 10%, while Desktop revenue declined 26%. Commercial revenue was down 22%, while Consumer revenue decreased 13%.

Operating profit was $386 million, or 4.6% of revenue, down from $587 million, or 5.7% of revenue, in the prior-year period.

HP Software revenue declined 22% to $847 million. Business Technology Optimization declined 22%, and Other Software revenue declined 23%.

Operating profit was $153 million, or 18.1% of revenue, up from $135 million, or 12.4% of revenue, in the prior-year period.

And so on and so forth... all HP business lines continue to point south, declining in double digits.  

Summary & Outlook

Overall, HP's business results this year show that there is less than meets the eye.  This will become apparent when HPS and EDS figures are finally compared on an apples-to-apples basis, at the end of this fiscal year. 

Meanwhile, HP executives keep promising a rosy future instead of delivering bright results today.  That's typically what troubled companies do, not the HP that Mark Hurd had led to tremendous success in his first four years as the HP CEO.  So stand by for a stock price contraction to follow the HP revenue and profit declines, when Wall Street finally catches up with reality.  Which may not be any time soon, if its past record is any indication.

Click here for detailed tables and charts (Annex clients only)

Happy bargain hunting!

Bob Djurdjevic

Click here for PDF (print) version


High Tide Lifts All Boats, Including Leaky Ones; Some Pearls of Wisdom

HAIKU, Maui, Aug 19 – High tide lifts all boats, including the leaky ones.  Time after time, this has proven to be true on Wall Street.  What happened with HP shares this morning is another case in point.  After dropping initially by about two points, the stock rose to match the closing price of the day before the third quarter earnings announcement.

Just like last fall the Bears ignored all good news emanating from solid companies, such as IBM, Accenture and HP, this summer a dearth of strong earnings or revenue growth hasn't scared the Bulls away.  Nor was the HP stock the only anomaly that defies logic and reason.

Take Fujitsu, for example, the largest Japanese computer company and a major global contender in both hardware and services.  The company actually reported a first quarter loss, not just a drop in sales.  Yet the Tokyo stock market ignored the bad news and boosted its share values anyway (see above).

Ditto, re. Capgemini's shares, which are traded on the Paris Bourse.  The company reported flat revenues and sharply lower profits in the first half of 2009.  Yet the stock traders "loved" what they heard and boosted the share prices anyway.

So what are we to conclude from the foregoing?  That the Wall Street's strain of "swine flu" is spreading globally in the form of Greed, substituting emotion for fact and fancy marketing footwork for calm logic and reason.

Which is why it may be time to remind ourselves of some pearls of wisdom offered to humanity by some great minds in Homo Sapiens history...

"Where ignorance is bliss, 'tis folly to be wise." (Thomas Gray)

"At a time of universal deceit - telling the truth is a revolutionary act." (George Orwell)

"All truth passes through three stages. First, it is ridiculed, second it is violently opposed, and third, it is accepted as self-evident." (Arthur Schopenhauer)

"Great spirits have always encountered violent opposition from mediocre minds." (Albert Einstein)

We would like to add a thought of our own: "Every so often, there comes a time when fools speak, and wise men shut up in embarrassment." 

This may be one of those times.  For, as Plato noted more than 2,400 years ago, "wise men speak because they have something to say; fools because they have to say something" (Plato, 427 BC-347 BC).

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Volume XXIII, Annex Bulletin 2009-15
August 18, 2009

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

Tel/Fax: +1-602-824-8111

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