HP Earnings: Another Upside Surprise?
By Marek Fuchs
Is Hewlett Packard (HPQ) one giant malfunction?
The media are certainly abuzz with brusque and condemning assessments of HP's second quarter, due to be reported after market close Wednesday. Forbes calls HP’s prospects “poor,” The Associated Press trots out the word “sag” and All Things D says that, strictly speaking, results are going to stink.
The live audio webcast of HP’s conference call hasn’t been declared dead on arrival – but you get the point.
Upside surprises
Here’s the deal, though. HP surprised to the upside last quarter. In fact, it has surprised to the upside the past three quarters. Their earnings and conference calls were – relative to the coverage going into the earnings – quite well received.
Should we expect the same contortion here?
Make no mistake about it: HP is not ascendant. FactSet is expecting 81 cents per share on revenue of $28 billion, both marked declines from last year’s second quarter. For congenitally troubled computer makers such as HP and Dell (DELL), salvation is a long way away.
But, considering the recent past, should we really swallow the disparaging earnings preview coverage of HP’s second quarter hook, line and sinker? To a point: yes. Saying that HP is, at root, adrift is hardly a miscalculation. But several factors are at play that have allowed the company to appear in slightly better stead than expected in their past few earnings reports and conference calls. These three points are worth keeping in mind as we bear down on the second quarter release:
1. Like many companies in a bad fix, HP benefits from the fact that – on a comparative basis – anything short of spontaneous combustion looks positive. There was, for one, the $8 billion write-down on its nearly $14 billion disaster of an EDS acquisition. Next up was an $8.8 billion write-down on its $11 billion Autonomy takeover, which is to say nothing of the accusations that Autonomy executives took $5 billion in false write-offs. And then there were the announcements of thousands upon thousand of layoffs – large chunks of the HP workforce. If it could have gone wrong at HP, it did.
That makes the absence of total disaster initially appear like the presence of something good. The media, accustomed to the ceiling falling, are relieved that only a chandelier fell. With all the more-positive coverage in the wake of HP’s first quarter earnings, it’s important to remember that they suffered declining sales in their signature computer and printer lines – in fact, falling sales in nearly all their business lines.
2. Meg sells Meg. Meg Whitman, president and CEO of HP, has an uncanny ability to live by her wits – or, at least, to tell you about her uncanny abilities. On her first earnings conference call a year ago, she referred to a prospective HP comeback and said, “I’ve done this a number of times in my career. It’s what great business leaders do.”
Perhaps greatness is in the eye of the beholder but the media tend to eat up such bumptiousness. Moreover, Whitman is still getting mileage out of trumpeting the fact that she is not Leo Apotheker, the former CEO who tried and failed to sell the company’s personal-computer division for parts. The media nodded approvingly after hearing from Whitman when reporting three months ago. Forbes, before saying how “poor” this quarter’s report would be, loved the last one.
Whitman’s mantra that it’s a “fix and rebuild year” also buys her forgiveness with the media, who tend to, after earnings reports, come around to the idea that cost cuts – which made up for a good portion of HP's beats – are indicative of a lasting turnaround. You can’t, however, cut your way back to prominence, even with the great Meg at the helm.
3. The company has a recent pattern of talking their new Moonshot server initiative up big. It’s not throwing off a thin dime and probably won’t for a long time, if ever. But Whitman will likely attempt to titillate the market with “early indications.”
In the final estimation, the media are close to bipolar when it comes to HP, predicting doom before then holding out hope for redemption afterwards. Don’t get caught up in the mood swings. It’s worth remembering that, all told, HP’s earnings beats were mostly technical. The core business is struggling, new initiatives define uncertainty and, despite the fast-rising stock market, HP’s stock, at around $21, is just where it was a year ago.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.
