HP: Does it need to go cloud shopping?

Summary:Analysts are digging HP's cost cutting and free cash flow improvement. Now they expect HP to add tuck-in purchases to become more of a cloud player.

Hewlett-Packard is increasingly garnering analyst attention as the company's cost cutting appears to have stabilized earnings and businesses such as printers are rebounding somewhat. As HP mends its balance sheet following the disastrous Autonomy acquisition, some expect the company and its better cash flow to ultimately go shopping for cloud plays.

The themes around HP don't necessarily revolve around growth, but focus on better execution and cost cutting. For instance, Citi analyst Jim Suva upgraded HP to a buy from a sell. Suva expects that HP's cost cutting will boost earnings in the second half and into 2014 and 2015. As a result, HP earnings will head higher.

Suva is certainly taking a few leaps. The biggest one is that HP's services business will rebound. Suva added that HP's struggling PC business won't hurt results that much.

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Barclays analyst Ben Reitzes hit a similar theme. Reitzes argued that HP can grow revenue in fiscal 2014, has an improved culture and is becoming more competitive. That latter point will require some more cloud products and services. Reitzes added:

We continue to believe HP is rapidly restoring its financial health after a very difficult couple of years. The company seems to be honing its long-term cash deployment strategy as well, which could be explained at an October analyst day. As HP has stated before, the company seems likely to favor buybacks and acquisitions over dividend growth. We believe HP needs to get back into M&A to be more relevant in cloud and SaaS, but we don't expect another "Autonomy" in terms of cash outlay.

How can HP go shopping? HP has had some tough quarters of late, but has been able to boost its cash flow from operations. Fiscal 2013 free cash flow should be $7.5 billion or so. More importantly, HP's net operating debt is now $2.9 billion, down from $4.7 billion as of Jan. 30. Reitzes also noted that HP should be operating debt-cash neutral by the end of the current fiscal year.

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Whitman improved HP's operations, but can the company grow sales.

In other words, HP should repair its balance sheet and have enough money to go shopping. You have to give HP CEO Meg Whitman a lot of balance sheet credit. HP in 2011 acquired Autonomy for $10.2 billion. A little more than a year later, HP wrote of $8.8 billion due to the Autonomy acquisition and claimed accounting improprieties. Autonomy CEO Mike Lynch disputes the claims.

The big question is what cloud purchases could HP make. HP has a few options despite the recent round of consolidation. HP could get into applications. HP could also focus more on cloud management tools. A more interesting alternative could be using cloud-first consulting groups to revamp its services unit. Think Appirio as a potential HP services unit.

However, there are challenges. For instance, HP has to navigate a declining PC industry, offset a slowdown in x86 servers with products such as Moonshot and manage its business as emerging markets are seeing slower economic growth.

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Topics: Cloud, Data Centers, Hardware, Hewlett-Packard, Servers

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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