Wednesday 18 May 2005

f's analysis of HP's Q2 results

This is a guest post by the infamous "f" Richard Hancock...

Here's my summary - produced by combining the "consolidated condensed statement of earnings" and the "segment information".

Looking at the 33 cents diluted EPS for the quarter yields a very rough valuation of $26 per share. Alternatively, looking at the diluted EPS for this and the previous three quarters, yields a very rough valuation of $24 per share. (I've assumed that it's reasonable to use a PE ratio of 20.)

Comparing this quarter with Q1/2005, it's great to see that ESS is back to generating more profit than PSG, and that software is moving back towards breaking even.

It's interesting that net interest has fallen from a positive $25 million to a negative $87 million. (It's not immediately obvious to me why this should be. It's possible that stock repurchases consumed a significant amount of cash and so reduced interest income, but I'm not convinced that this explains *all* of the fall in net interest.)

Numbers in the table are in millions of dollars and numbers in brackets should be read as being negative: so "(40)" should be read as "-40".

Segment                             Net revenue     Earnings from  

Imaging and printing 6,390 814
Personal systems 6,369 147
Enterprise storage and servers 4,184 184
Software 277 (6)
HP Services 3,984 292
Financing 544 58

Restructuring (4)
Acquisition related
Amortization (151)
Eliminations/other (178) (168)
Net interest and other (87)
Taxes (113)

Total 21,570 966

As always, the HP quarterly results conference call is worth listening to.

Company-wide pay r[a]ises - after, I believe, a 2 year freeze - will cost 3 cents per share per quarter on an ongoing basis! (While workforce reduction costs will also be 3 cents per share in Q3, you can't equate the two and say that job cuts have paid for pay r[a]ises. But there is an element of "be careful when you wish for a pay r[a]ise, because what you're really wishing for is someone to lose his or her job".)

Just to confuse us, workforce reduction costs going forward will be reported as a separate item - as they used to be - rather than being "hidden" in the segment results. (In fact, the Q2 segment results are even better than they look because they "hide" $169m of workforce reduction costs: $71m in IPG; $24m in ESS and $74m in HPS.)

So given the "strong" Q2 results, was HP wrong to bin Carly? From Mark Hurd's comments, it sound like her mistake was to not cut deeply enough. Look for action - including in Software - to really cut out costs. Bob's comments (@39 minutes in) were along the lines of "we expect a new CEO to want to cut more deeply". (Mark comments on Software are @50 minutes in.)

Having listened to George Galloway berating members of the US Senate ;-), it's a shame George couldn't have found an excuse to attend the HP conference call. "Mister Hurd, with your excessive job cutting, you are a toady and lickspittle of Adam Smith."

(If the above is far too depressing for you, take a look at the BAA results presentation. While the speakers could do with an injection of charisma, the results themselves are tres charmant.)

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