HP's Ongoing Layoffs Have Dragged Down Its Best Quarter In Three Years

HP reported Wednesday its first jump in year-over-year quarterly revenue in three years. You would think that investors would be thrilled. But the stock didn't soar in after-hours trading on Wednesday. It dropped a tiny bit.

Wall Street is wary 0f HP's ongoing, extended layoffs. And analysts aren't sure if this great quarter, driven by PC sales, isn't a one-hit wonder.

To recap: HP bested analysts sales expectations by $570 million, fueled by 12% growth in HP's PC business. It reported $27.6 billion in revenue, up 1% over the year-ago quarter. Analysts were expecting $27.01 billion in revenue, down by just under 1%.

"For the first time in three years, HP delivered year-over year, top-line revenue growth," CEO Meg Whitman said on the quarterly conference call.

The company also matched the street's non-GAAP EPS estimate of $0.89, which excludes items that are supposed to be unusual such as layoffs and acquisitions. HP had guided a range of $0.86 to $0.90 per share.

Things get murkier when adding in those costs. With them, HP posted a GAAP profit per share of $0.52 down 27% from the prior year, and far short of its guidance of $0.59 to $0.63.

Given that HP killed it in the revenue department, analysts wonder why the EPS wasn't higher.

"This was another great quarter of cash flow but we're not seeing the EPS upside that people are hoping for given higher revenue and greater restructuring savings," Morgan Stanley's Katy Huberty commented on the quarterly conference call.

The fact is, HP spent $649 million in the quarter on its layoff. That compares to $252 million spent last quarter and $81 million in the year-ago quarter. Of all the costs bundled into its non-GAAP EPS, the costs of the layoffs was the biggest, by far.

Most of the time, a layoff is a rare enough situation for a company to exclude it when reporting non-GAAP profits. Non-GAAP profits are suppose to show you how the company is doing without the influence of some unusual event.

But people are noticing that HP's layoff seems to be perpetual. The current one launched in 2012 and was supposed to be finished by the end of HP's fiscal 2014 and cover 27,000 employees. Then HP expanded it to 29,000, then to 34,000, and then, in May, to 45,000 - 50,000, spilling into 2015. After that, who knows?

HP has been in a near-constant state of restructuring for years before that. Since 2008 when it bought EDS for $13.9 billion (then-CEO Mark Hurd's signature deal), HP has spent more than $8 billion on restructuring charges.

In the current round, HP has trimmed 36,000 people from the company, CFO Cathie Lesjak said on Wednesday. It will trim another 5,000 next quarter, she says, and the remaining 4,000-9,000 employees in fiscal 2015.

And the company is still enormous, with over 325,000 employees worldwide.

Twitter user @WallStCynic said it best by tweeting, "$HPQ has had 20 quarters in a row with a 'restructuring' charge, averaging $291 mil/qtr. GAAP earnings are the real earnings here."

In the meantime, Wall Street also isn't yet banking on vibrant PCs business. HP's Whitman is hoping the company can keep its PC segment growing by stealing away market share but she also noted that much of these sales came from businesses forced to upgrade their XP machines to newer Windows 7 or Windows 8. That rush for new PCs probably won't continue.

Toni Sacconaghi, an analyst at Sanford C. Bernstein commented, "PCs grew at 12% but the rest of the company grew at minus 3% ... given that 12% may not be sustainable, is it really realistic to think that revenue growth can remain stable over the next year or two?"

There is a silver lining. HP's stock has gained back nearly all the value it lost during its most-troubled years. When Whitman took office in 2011, the stock was trading in the low $20s. Now it's at over $35.