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Hewlett-Packard’s Split: Margins and Bargaining Power

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Operating performance and margins

In fiscal 2Q15, Hewlett-Packard (HPQ) posted overall revenue of $25.45 billion—a decline of 7% on YoY (year-over-year) basis. As we saw previously in this series, all of Hewlett-Packard’s operating segments posted decreased revenue. The Enterprise Group had the lowest revenue decline of 1% on a YoY basis.

The company ended fiscal 2Q15 with an 8.6% operating margin. Printing and Software contributed significantly to the company’s margins. They ended the quarter with an 18.3% and 17.9% operating margin, respectively.

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Bargaining power and competitive edge

In its fiscal 2Q15 earnings presentation, Hewlett-Packard’s management updated the details about its split. It was first announced in October 2014. By splitting HP into two different business segments, it’s creating two different companies.

To learn more about Hewlett-Packard’s split, please read Why HP spins off to form two new companies.

As a whole, Hewlett-Packard had significant bargaining power with chip makers—like Intel (INTC). It remains to be seen how the split will impact its bargaining power. However, Hewlett-Packard’s management highlighted the fact that splitting the firm into two companies will make them more agile in their respective markets.

Cash, debt, and cash flows

As of April 30, 2015, Hewlett-Packard generated an OCF (operating cash flow) of $1.46 billion in fiscal 2Q15—compared to $3 billion in fiscal 2Q14. This was a decline of 50% on a YoY basis. The company holds cash reserves worth $15.1 billion. It has a total debt of $21.06 billion. For 2Q15, Hewlett-Packard announced dividends of $0.16 per share that led to cash usage of $291 million.

The company returned $950 million to shareholders in the form of share repurchases and dividends in 2Q15.

Allocation for R&D

Hewlett-Packard spent 10% of its revenue on R&D (research and development) in fiscal 2014—compared to 2.8% in fiscal 2013. However, for the six months ending in fiscal 2015, it only spent ~3% of its revenue on R&D. If we compare Hewlett-Packard’s spending on R&D to its peers like Microsoft (MSFT) and SAP AG (SAP), it’s very small. Microsoft and SAP spent ~13% of their revenue on R&D.

If you’re bullish about Hewlett-Packard, you might consider investing in the Technology Select Sector SPDR (XLK). XLK invests about 1.25% of its holdings in Hewlett-Packard.

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