Things worth hearing on H-P earnings call
SAN FRANCISCO -- We speculated earlier this week that another sudden move in Hewlett-Packard's share price would follow its earnings report -- and after the fiscal-year performance turned in by CEO Meg Whitman and CFO Catherine Lesjak, the mood on the company was upbeat Wednesday.
Whitman made it clear company executives and the stock analysts who cover the company are very much on the same page these days, with H-P's fiscal 2014 profit forecast precisely in line with Wall Street estimates.
H-P shares remain attractive to income investors hungry for fat dividends because Whitman, in her second year with the company, made major progress turning around the venerable company's struggling operations.
And Lesjak's balance sheet and cash flow management allowed the company to pay down debt even while its sales fell and it paid its bills on time.
In the just completed year, H-P's free cash flow rose 21% to $9.1 billion, $1 billion more than the company's original forecast.
That helps explain why its shares are up about 80% this year.
On the revenue side, H-P beat Wall Street's estimate by $1 billion through incremental market share improvements in several large hardware markets, including servers, storage gear and PCs.
Commercial PC sales revenue rose 4% from a year earlier.
H-P also said it plans to hire more engineers to win business through innovation.
Given the chaos Whitman inherited near the end of 2010, H-P's performance is a feather in her cap on Wall Street. "It was a good, solid quarter," Whitman told USA TODAY in a phone interview Tuesday. "The innovation engine (at H-P) is alive and well."
Still, the Silicon Valley company either laid off or bought out 24,600 H-P employees during the just-completed fiscal year -- and the jury is still out on the stock for value growth investors on the hunt for a turnaround story.
That's because most of H-P's business units compete in markets whose near-term future growth is forecast to be weak.
Whitman, near the end of an analysts' call Tuesday, agreed with the current 2014 forecast from market researcher IDC, which calls for the PC business to shrink 6% to 7% next year.
Wall Street's 2014 revenue forecast still calls for a slight overall revenue decline for H-P.
It could rise if H-P takes more market share in servers, storage or networking gear, and Whitman is competing harder for all of it.
The company's gross margins on hardware fell in 2013 as it traded profitability for market share.
Even so, in fiscal 2013, sales fell 7% overall and 6% in the Americas region. They dipped 9% in H-P's European region.
In China, H-P's businesses posted year-over-year revenue drops – except for networking equipment, which rose 3%.
Lastly, H-P's free cash flow, which helps fund dividend payments, is about to make a major reversal in trajectory.
The company's forecast on the call was for 2014 free cash flow to drop about 28%, to a range between $6 billion and $6.5 billion, as severance payments, restructuring costs and employee bonuses that are now payable will create "working capital pressure" that is "front-end loaded" in the new fiscal year, Lesjak said near the end of the call.
The company's very efficient use of cash – H-P's cash cycle dropped to an average of 17 days during the period – is about to become less efficient, though also more sustainable.
"We pulled cash into 2013 by reducing our cash position to 17 days," Lesjak said. "We'll give some of that back" in the early part of the new fiscal year, she added, returning to a long-term sustainable cash flow position of about 20 or 21 days.
These working capital headwinds mean the company won't be able to reduce debt the way it did in the just-completed year.
It will, however, keep paying a hefty dividend.
To shareholders who own the stock on Dec. 11, H-P will pay a dividend of $14.52 a share on Jan. 2, 2014.
That will help make H-P shares a likely holiday present for income investors unworried by short-term market swings.
For growth investors who do, H-P's success will depend on whether Whitman and H-P's sales people can find some respectable growth among slow-growing markets.