Hewlett-Packard (HPQ – Free Hewlett-Packard Stock Report), a Dow-30 company and a leading worldwide provider of computer hardware, software, and services, has finished fiscal 2011 (ended October 31st) on a disappointing note. The company, under its new CEO Meg Whitman, reported earnings for both the October quarter and fiscal 2011 that were well below year-earlier results. H-P shares had pulled back more than 4% on Monday, before results were announced, in a general retreat by Dow stocks, and slipped further on Tuesday. Nonetheless, there were signs that the company may be finally addressing its problems.

The company reported October-quarter net of only $0.12 a share, far short of the $1.10 earned in the comparable period of fiscal 2010 and our estimate of $0.45. For the full year, H-P earned $3.32 a share, compared with fiscal 2010's tally of $3.69 and our estimate of $3.60.

Results were hurt by three one-time expenses totaling $1.05 a share, including an item related to the wind down of the WebOS segment that was acquired when H-P bought Palm. That charge included a revenue reduction related to a sales incentive program and various expenses, including for supplier obligations. It also included items related to the acquisition of Palm and the expense of British pound options purchased to hedge exchange rate risks tied to the early October acquisition of software provider Autonomy.

The company's underlying operating performance was also disappointing. Revenues in the final fiscal quarter fell 3% from the prior-year period, pulled down by weakness in the Europe/Middle East/Africa region and the Americas. Personal system sales slipped 2%, with an increase in workstations offset by a decline in notebooks, reflecting lower selling prices. Imaging and printing sales declined 10%, hurt by excess channel inventory, weakness in Europe, and soft consumer demand for printing supplies. Services sales rose 2%, but fell 1% in constant currency terms, and margins contracted. Management indicated that it will take time to shift the mix to higher-margined services. Server, storage system, and networking revenue declined 4%, reflecting economic uncertainty. Software sales rose 28%, including a one-month contribution from Autonomy.

Meanwhile, gross margins were squeezed by the lower mix of higher-margined printing supplies, narrower services margins, and the strong yen. Operating expenses rose slightly due to an increase in field selling costs. The decline in share net was slightly mitigated by a 13% year-to-year reduction in the share count, reflecting repurchases in fiscal 2011.

Looking ahead, the company expects to earn $0.61-$0.64 a share in the January quarter, and at least $3.20 a share in fiscal 2012. Our current full-year estimate for 2012 also stands at $3.20. Management did caution that the operating environment will likely remain challenging, particularly in Europe, where a mild recession may take hold. The company also expects consumer spending to stay soft, and is reporting a slowdown in commercial spending and in sales of its business critical systems. In addition, the flooding in Thailand probably will restrict supplies of hard disk drives. And it doesn't expect channel inventories in the imaging and printing business to quickly return to normal levels. Meanwhile, the likely decline in revenues, coupled with competitive pricing and lower mix of business critical systems, is expected to continue to pressure margins. Interest expense is also liable to rise, reflecting an increase in debt on the balance sheet.

These headwinds notwithstanding, the company may now be better able to tackle its problems without the past fiscal year's distractions, including the change in the CEO position, the natural disasters in Japan, and the flip-flop over whether to sell the personal computer business (which it now plans to retain). It intends to selectively increase investments in its businesses, but doesn't plan to make any large acquisitions. Over the long haul, it expects revenues to advance in line with its markets.

Although the stock remains quite depressed, H-P still has a lot of work ahead of it, and faces very difficult market conditions. Its comeback probably will take time. Even long-term investors may want to exercise some caution for now, in spite of the issue's wide 3- to 5-year recovery potential.

About The Company:Hewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2010 revenue), Personal Systems, (32%), Enterprise Storage & Servers (15%), Services, (27%), Financing (3%), and Software, (3%). Research and development costs amounted to 2.3% of 2010 revenue.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.