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Do HP financials indicate good prospects?

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HP’s operating performance and margins

HP’s (HPQ) Personal Systems revenue grew 4% on a year-over-year basis with a 4% operating margin. Printing and Enterprise Services revenue declined 5% and 7% on a year-over-year basis, respectively. The company ended the quarter with an 18.1% and 6.8% operating margin, respectively. Both Software and HP Financial Services revenue declined 1% on a year-over-year basis. The Software Services segment contributes the most to the company’s margins. The company ended the quarter with a 31.1% operating margin.

To find out more detail about HP’s margins, please read Must-know: Is HP financials a ray of hope for the company?

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Cash, debt and cash flows

As of October 30, 2014, HP generated a FCF (free cash flow) of $1.88 billion. The company holds cash reserves worth $15.13 billion and has a total debt of $16.04 billion. The company does not have any short-term debt. For 4Q14, HP announced dividends of 16 cents per share that led to cash usage of $309 million.

The company returned $1.1 billion in the form of share repurchases and dividends to shareholders in 4Q14. If HP performs well, it will benefit the PowerShares QQQ Trust ETF (QQQ) and the Technology Select Sector SPDR (XLK) that have significant exposure to the company.

Research and development

HP has finished the third year of its five-year restructuring plan. The company is trying to reduce costs to increase efficiency. This is evident because without any revenue increase, the company posted an increase in net income and EPS. Increased share buybacks also played a part in EPS increase.

Despite cost containment efforts, HP has increased its allocation for research and development (or R&D). In its 4Q14 earnings release, HP’s CEO Meg Whitman shared that owing to the cost efficiency the company achieved, allocation for R&D has increased by 10% in FY14 as compared to FY13. As the above chart shows, HP’s research and development allocation is still low compared to its peers like Microsoft (MSFT) and SAP AG (SAP) that spend ~13% of their revenue on R&D.

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