Shares of Hewlett-Packard Company (NYSE:HPQ), the world’s largest PC maker, recently surged after the company reported second quarter earnings that exceeded analyst estimates. That rally came as a relief to shareholders of the Palo Alto, Calif.-based company, which has lost over half its market value over the past five years.
During that time, Hewlett-Packard Company (NYSE:HPQ) lost its bread and butter PC business. Unexpected disruption from Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) caught it off guard, while internal troubles brought in four CEOs over the past six years. The company also made a series of disastrous and wasteful acquisitions, such as Palm, EDS and Autonomy, which undermined shareholder confidence. Lastly, it lost market share in the server business to rivals such as Dell Inc. (NASDAQ:DELL) and International Business Machines Corp. (NYSE:IBM). In other words, everything had fallen apart by the time current CEO Meg Whitman took the reins in September 2011.
For now, though, the pain seems to have subsided. Therefore, should investors consider Hewlett-Packard Company (NYSE:HPQ)’s second quarter earnings to be a sign of improvement and an ultimate bottom, or is the company still perched atop a precarious ledge, with a long way to fall?
Second quarter earnings
For its second quarter, Hewlett-Packard Company (NYSE:HPQ) earned $0.55 per share, or $1.1 billion, a 31% decline from the prior year quarter. Adjusted earnings per share came in at $0.87, topping the analyst forecast by six cents. Revenue dropped 10% year-on-year to $27.6 billion, which missed the consensus estimate of $28.12 billion.
Sales at 13 of Hewlett-Packard Company (NYSE:HPQ)’s 15 business segments fell during the quarter. Sales of notebooks and consumer PCs declined 24% and 29%, respectively. This segment makes up nearly a third of HP’s top line, and is the company’s weakest spot. Ever since Apple Inc. (NASDAQ:AAPL)’s disruptive launch of the iPad in 2008 and the subsequent flood of Google Inc (NASDAQ:GOOG) Android tablets, HP has been struggling to convince consumers to purchase traditional computers. To make matters worse, its primary rival Dell Inc. (NASDAQ:DELL), which is on the verge of going private, has been slashing its PC prices to steal market share from HP. Dell recently reported a 79% decline in first quarter profit.
HP’s server business, which comprises roughly 15% of the company’s sales, declined 12% due to aggressive eleventh hour price cuts by rival Dell. The segment showed mixed results, with its main data storage business declining 13%, but sales of more advanced data storage products rising 42%. Yet International Business Machines Corp. (NYSE:IBM)’s recent attempt to sell its server business to Lenovo, which hit a wall over pricing, suggests that there is far more to lose than gain in the hardware server business.
The silver lining
HP’s two bright spots were sales of its printing supplies, which rose 2%, and networking equipment, which gained 1%. In 2012, printers and printing supplies were responsible for 28.5% of the company’s annual revenue, while networking supplies only brought in 2%. However, that slight gain in networking equipment is encouraging, especially since the networking industry has recently reported mixed results due to increased pricing pressure from market leader Cisco and budget cuts in the public and private sectors.
HP also managed to generate $3.6 billion of operating cash flow, a 44% increase from a year earlier, which suggests that cost cutting initiatives implemented last year are having the desired effect. Last year, CEO Meg Whitman stated that she was eliminating 29,000 jobs by the end of fiscal 2014 to reduce costs by $3.5 billion. Although Whitman seems to have stopped HP’s immediate bleeding, the company is still hardly on the fast track to recovery.
Goodbye Wintel, Hello Googvidia?
Over the past year, HP has released new products that have decreased its dependence on the Wintel system ruled by Microsoft Corporation (NASDAQ:MSFT) Windows and powered by Intel Corporation (NASDAQ:INTC) chips. Out of all the leading PC manufacturers, HP has remained the most loyal to Microsoft Corporation (NASDAQ:MSFT), while its competitors Lenovo, Acer, Asus and even Dell have all started producing Android products. Unfortunately, that loyalty was ill-advised and caused HP products to lag behind in demand.
In February, HP finally launched two major Android products – a 14″ “Chromebook” (Chrome OS laptop) which runs on an Intel Corporation (NASDAQ:INTC) Celeron processor, and a 7″ Android tablet powered by a RockChip CPU.
The HP Pavilion Chromebook, which competes with similar products from Samsung and Acer, is a lightweight cloud-based experience, where Google’s ecosystem of apps can be accessed online and offline for a streamlined, no-frills Internet experience. The product is competitively priced at $330, which places it in the mid-range of its fairly small niche market.
The HP Slate 7 Android tablet, on the other hand, doesn’t really offer anything new to the market, and at $169, it costs only $30 less than Amazon.com, Inc. (NASDAQ:AMZN)’s Kindle Fire HD or Asus’ Nexus 7. Both the Kindle Fire HD and Nexus 7 have been met with better reviews than the Slate 7, which has been criticized for its poor quality screen and camera.
Recognizing the shortcomings of the HP Slate 7, HP is planning to release new 10.1″ Android tablet-laptop hybrid devices, the Split x2 and the SlateBook x2, which are similar to Asus’ Transformer devices. While HP’s form factor is nothing new, it’s notable that these new devices will be powered by NVIDIA Corporation (NASDAQ:NVDA)’s Tegra 4 mobile processors as well as Intel’s i3 CPUs. This represents a significant shift in its strategy of manufacturing traditional x86 devices powered by Intel and Advanced Micro Devices, Inc. (NYSE:AMD) chips.
Late to the party
It’s clear that HP realizes that the key to turning around its sluggish PC segment is to team up with Google and Android to decrease its dependence on Microsoft. But I believe that this may be too little, too late, considering how saturated the tablet and hybrid market is.
HP is several years late to this party. Chromebooks have been on the market since June 2011. Current generation tablets have been around since 2008. Asus Transformer hybrids were first released in March 2011. All three technologies were introduced to the market while HP was busy ousting its leaders and making poorly advised acquisitions.
If anything, HP’s “new” approach to PCs is just a testament to the rising significance of Google and NVIDIA Corporation (NASDAQ:NVDA), which could usher in a new age to succeed the Wintel era. For HP, it is a last ditch effort to make up for lost time.
The Foolish bottom line
Looking forward into the full year of 2013, HP expects to earn non-GAAP diluted EPS between $3.50 to $3.60, which tops the consensus estimate of $3.49. This indicates that HP is relatively positive about its ability to hold steady for the rest of the year. Whitman expects net debt to reach “pre-Autonomy” levels by the end of the year.
I believe that HP’s top priority now should be to avoid all the costly drama that kept it occupied over the past five years, which seriously handicapped its development. HP has to double up on its efforts to catch up to the evolved personal computing market. Chromebooks, tablets and hybrids are a good start and at least a divergence from its traditional Wintel business model.
Investors should keep an eye on how these new products fare over the next few quarters, as well as how price reductions from competitors are affecting its ability to profit from the PC and server businesses. If sales of those products improve, then HP could become a worthwhile investment again.
The article Is HP on the Path to Recovery or Ruin? originally appeared on Fool.com and is written by Leo Sun.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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