Thursday, May 24, 2012

“HP Beats The Number!” Only In America…and North Korea, Come to Think of It.

HPQ prints a fairly strong quarter (PC driven, partially offset by declines in printing/Autonomy) on an improvement in margins across PC’s, printing and services. More importantly, management announced a $1.7B restructuring that’s expected to result in $3.0B - $3.5B in cost savings by FY’14 (which will be reinvested into new channels/R&D), and as a result, they raised the outlook on the fiscal year, as they’re now looking for $4.05 - $4.10 in earnings power (vs. $4.00 prior)…”
 That’s the summary of Wall Street’s “thinking,” such as it is, about last night’s Hewlett-Packard layoffs call—er, earnings call—and it contains so many remarkable statements you don’t know where to begin.
 The “declines in...Autonomy” comment, for example, refers to the first revenue drop at Autonomy in at least 32 quarters—which, considering HP bought Autonomy for $10 billion a mere 6 months ago (telling us, at the time, Autonomy would “accelerate” its “software business momentum”) is no easy feat.
 Then there’s the $1.7 billion restructuring “that’s expected to result in $3 - $3.5 billion in cost savings…which will be reinvested in new channels/R&D.”   Here’s what HP said about it last night:
“As a result of productivity gains from automation, in addition to streamlining the organization, HP expects to eliminate roughly 9,000 positions over a multi-year period.  The combination of these activities will allow HP to reinvest for further growth.  Investment areas will include private cloud infrastructures, application services and desktop as a service.  You’ll also see other new offerings…”
Oh, wait, that's what HP’s Ann Livermore said in June 2010 about another restructuring that was going to boost margins and business reinvestment...
Here’s what HP actually said about it last night:
“What we announced was that on a long-term basis, we see the savings opportunity to be roughly $1.8 billion on an annual run-rate basis.  And this is after we reinvest some of the head count savingings…”
 Oh, wait, that’s what HP’s CFO said in September 2008...
 You get our drift.  It’s like when one “Dear Leader” in North Korea gets replaced with another “Dear Leader” and nobody in North Korea remembers that the old “Dear Leader” promised everything the new “Dear Leader” is promising, mainly because they’re too busy digging for worms for their breakfast to care.

 The biggest howler in the HP layoff report, of course, is the new, “higher” earnings power as a result of this latest batch of layoffs.
 HP has trained the barking seals on Wall Street to focus strictly on non-GAAP earnings, which, as we have pointed out here before, means—literally—earnings not prepared in accordance with generally accepted accounting principles.
 Specifically, by leading off with non-GAAP earnings, HP shows the good stuff—revenue and gross profit, for example—from its many terrible acquisitions (Compaq and EDS, to name two) and excludes the bad stuff, such as amortization and restructuring costs associated with those businesses.
 Of course, without the bad stuff—the turnaround costs and the amortization from those acquisitions—HP wouldn’t have the good stuff (revenues and gross profits).  
 Don’t ask us how it gets to report numbers this way, but it does.
 In any event, last we checked, the actual GAAP number HP buried in last night’s release was cruising in at a cool $2.25 to $2.30 per share, or almost half the non-GAAP number...and down by one-third from the previous GAAP guidance of $3.20.
 And in case you are wondering about cash flow, from which all good things business-wise come, HP's second quarter cash flow from operations, according to our Bloomberg, declined almost 40%, from $3.9 billion to $2.5 billion, marking the lowest second fiscal quarter cash from operations since 2005, when revenues were one-third lower.
 Only in America!  And North Korea, come to think of it…

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at

© 2012 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Well, let's invert. If everyone focused strictly on GAAP numbers and didn't consider the inputs, there would be a great opportunity to pick apart the amortization and impairment charges and buy the companies whose true earnings power was being ignored. Some non-GAAP numbers are meant to mislead, and some are frankly useful despite the cautions that must be taken.

Anonymous said...

By the way Jeff, HP has nothing on Aon. Aon is the absolute king of non-GAAP earnings, consistently recurring "one-time non-recurring expenses," etc. Aon, on its calls and press releases, even calls out "one-time expenses" that they don't include in their "non-GAAP" earnings. In other words, there are two layers of expenses to exclude for you to really "understand" Aon - the restructuring and M&A expenses, which you subtract for non-GAAP earnings, and then the quarterly "non-recurring item" that's to blame for the "earnings miss." Like I said, Aon takes the cake on this sort of garbage...

But What do I Know? said...

Good stuff, Jeff--I love the block quotes from the past fitting right into the present. . .

Next thing you know, HPQ will announce a Five Year Plan which will produce a Great Leap Forward. . .

Anonymous said...

"Only in North America...and North Korea" - and Europe, Africa, Asia, South America, Australia ... am I wrong, and/or am I missing something?

It seems to be (part of) the human condition.

Anonymous said...

I thought the big story was Autonomy.
$10B spent at 10x sales, and now sales are declining.
On top of that we learn Mike Lynch is leaving, all his top team have left, and 20% of the entire staff have already left.

A large IT company like HP, that is too big to innovate itself, and cannot integrate purchases is not long for this world

Anonymous said...

AON? No way - NUAN.

NUAN F13 Adj EPS Cons: 1.85
NUAN F13 GAAP EPS Cons: .38

The adj # is up from about $1.70 a year ago. The GAAP # is down from .54 a year ago.

Jeff Matthews said...

We have a winner. Haven't seen anything that beats NUAN.


Anonymous said...

Nice article, Jeff. This is the kind of thing which has made your blog one of my all-time favourites.

Personally, I agree with you that non-GAAP numbers are garbage - I'd start with GAAP earnings (making sure that they include the effect of all restructuring provisions and other 'once offs') but I would adjust for certain non-cash charges (eg amortization / impairments of goodwill).

The only thing that irks me more than pro forma numbers is hearing bankers prattle on about EBITDA nonsense - don't get me started on that!