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HP Inc.: The HP Split Worked

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Dana Blankenhorn
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A solid quarterly report has boosted HP Inc. (NYSE:HPQ), the computer and printer arm of the former Hewlett Packard, and reminded investors that the company’s 2015 break-up worked.

Since the split of HP Inc. from Hewlett Packard Enterprise Co. (NYSE:HPE) became final in November of that year, both stocks have done very well. HPE is up 42%. HPQ has done even better, up 67%. By way of comparison, the NASDAQ composite is up just 31%.

The strong performance will add patina to the legacy of Meg Whitman, who engineered the break-up as CEO of the combined company after losing her race to become California governor in 2010. Her skeptics, and I was among them, owe her an apology. Whitman has moved on to become CEO of NewTV, a mobile media start-up created by DreamWorks co-founder Jeffrey Katzenberg.

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The PC Comeback

HP has helped lead a big comeback for the U.S. PC industry, even if most manufacturing remains Chinese.

It’s not fast growth, but it’s growth nonetheless. HP did $52 billion in business during fiscal 2017, and after two quarters of its 2018 fiscal year is on pace to beat that handily. Year over year growth for the second quarter came in at 13%, free cash flow has more than doubled, and fully diluted earnings per share were up 94%. 

The result on May 30 was a quick 2.5% gain in the stock price, the reaction dampened somewhat by news that Cathie Lesjak, the chief financial officer who is credited with the improved results, announced her retirement. Lesjak had ridden through the decade of scandals and missteps under Mark Hurd and, briefly, Leo Apatheker, before taking the HP Inc. job.

HPE Stock Not Bad

Hewlett Packard Enterprise, which took the cloud and services businesses that were expected to do well after the split, has not done terribly either.

Its second-quarter revenue came in at $7.5 billion, up 10% year over year, and 6% in constant currency. Margins nearly doubled from a year earlier, and fully diluted earnings per share came in at 54 cents, compared with a loss in the previous year. The company also raised its guidance for the third quarter.

While the business of HP is easy to understand — printers and computers — the business of HPE is a little more difficult. It’s basically a mini-cloud “arms merchant,” selling systems and services to companies building “hybrid clouds” that connect older data centers to existing clouds.

Despite the earnings beat, shares fell on a warning from CEO Antonio Neri of a “challenging second half.” The challenge is finding new acquisitions like Cape Networks, a privately held company HPE bought recently as a plug-in to its Aruba Networks unit.

The Cape buy brought the company’s cash balance below $7 billion. It also has almost $10 billion in long-term debt. It could also use its stock to make deals, but the post-earnings sell-off made that stock less valuable, so it may have to back off for now.

The Bottom Line

HP’s fall from grace between 2010 and 2013 is now the stuff of business legend. A company that had been a doyen of Silicon Valley was laid low by a succession of bad managements.

Whitman came on board midway through that fall from grace, in September 2011, and took enormous heat for its continuing. But it turned out she did have a clue — to downsize the company, becoming a cloud supplier rather than a true cloud player, and to create two profitable companies out of one unprofitable one.

Those who stayed with her have prospered. Those who abandoned her, like me, have been proven wrong.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

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