Hewlett-Packard (HPQ) Q3 Earnings in Line, Revenues Up Y/Y
Hewlett-Packard’s (HPQ) third-quarter non-GAAP earnings of 89 cents came in line with the Zacks Consensus Estimate. Reported earnings increased 3.5% from the year-ago quarter and were at the higher end of management’s guided range of 86 to 90 cents primarily due to cost control measures and a lower share count.
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Also, H-P reported revenues of $27.6 billion, which were up 1.3% year over year and beat the Zacks Consensus Estimate of $26.9 billion. Revenues compared favorably primarily due to higher sales in the personal computer (:PC) segment.
Segmental Revenues
Personal Systems revenues increased 11.9% year over year to $8.65 billion, primarily due to a 14% increase in commercial revenues and an 8% increase in revenues from the consumer segment. The company also witnessed a 13% year-over-year increase in unit shipments.
Growth in commercial revenues was driven by strong demand for commercial desktops and notebooks. The ongoing upgrade of H-P’s installed base and the expiration of the windows XP operating system also aided segment revenues. Consumer segment was positively impacted by higher sales in its Americas and EMEA regions, which offset the soft demand in Russia and China.
Revenues from notebooks were up 17% year over year, while unit sales increased 18% from the year-ago quarter aided by higher sales of EliteBook Series and x360 convertible notebooks. Desktop revenues increased 8% from the year-ago quarter while units sold were up 9% on a year-over-year basis.
Printing revenues were down 3.8% year over year to $5.59 billion, primarily due to a 5% decline in supplies revenues and a 6% decline in consumer hardware revenues. Commercial hardware revenues remained flat year over year. H-P’s total hardware unit sales were down 5% year over year due to year-over-year declines of 2% and 6% in commercial and consumer unit shipments, respectively. Although H-P’s Officejet Pro X and Officejet Pro X Enterprise products witnessed growth, the overall segment was impacted by lower sales of its old product range.
Revenues from the Enterprise Group were up 1.9% from the year-ago quarter to $6.89 billion, primarily due to higher revenues from Industry Standard Servers (up 9%) and Networking (up 4%) which more than offset the revenue declines in Storage (down 4%), Technology Services (down 3%) and Business Critical Systems (down 18%).
Enterprise Services revenues were down 6.4% year over year to $5.59 billion, impacted by lower contributions from EMEA and lower signings. Revenues were impacted by a 4% decline in Application and Business Services revenues and an 8% drop in business IT Outsourcing revenues.
Software revenues were down 5.1% year over year to $959 million primarily due to a decrease in License revenues (down 16% year over year) and Professional services revenues (down 3% year over year). Nonetheless, SaaS revenues were up 8%. The company reported strong bookings in IT Management.
HP Financial Services revenues declined 2.7% year over year to $855.0 million primarily due to adjustments in billings by certain customers. However, new financing volume increased 14% year over year.
Operating Results
H-P’s gross margin was up 58 basis points (bps) on a year-over-year basis to 23.9% primarily due to higher revenues. H-P’s non-GAAP operating expenses were up 5% from the year-ago quarter to $4.28 billion primarily due to higher investments in research and development. As a percentage of revenues, expenses were up 55 bps. Operating margins came in at 8.5% compared with 8.4% in the year-ago quarter.
H-P’s non-GAAP net income came in at $1.69 billion or 89 cents compared with $1.68 billion or 86 cents reported in the year-ago quarter.
Balance Sheet and Cash Flow
The company ended the quarter with $14.47 billion in cash and cash equivalents versus $15.09 billion in the previous quarter. The company had long-term debt of $17.13 billion compared with $17.19 billion in the previous quarter.
H-P generated $3.65 billion in cash from operations. During the quarter, the company repurchased shares worth $582 million and paid dividends of $299 million.
Guidance
H-P expects its non-GAAP earnings for the fourth quarter of 2014 to range between $1.03 and $1.07 per share while the Zacks Consensus Estimate is pegged at $1.05.
The company revised its fiscal 2014 earnings forecast from $3.63–$3.75 per share to $3.70–$3.74. The Zacks Consensus Estimate is now pegged at $3.71 per share.
Although H-P expects supplies revenues in the printing segment to decline, new programs are expected to gain traction. In the ISS segment, H-P expects tough year-over-year comparisons due to the Bing deal. Nonetheless, the company’s ongoing restructuring program remains on track.
By the end of the third quarter, H-P’s workforce was down by 36,000 positions. The company expects another 41,000 job cuts by fiscal 2014-end and 45,000 to 50,000 by the end of fiscal 2015.
Summary
H-P’s cost cutting initiatives and improvement in the PC segment were the positives for the quarter. The company’s traction in the cloud, security and Big Data segments are expected to be the growth catalysts, going forward. We believe that Hewlett-Packard’s strategic focus on the software business will help it to diversify its revenue source which is still predominantly dependent on PCs.
Nonetheless, macroeconomic challenges and tepid IT spending remain the near-term concerns. Competition from International Business Machines (IBM) and Oracle (ORCL) should also not be discounted.
Hewlett-Packard has a Zacks Rank #3 (Hold).
Investors may instead consider Stratasys (SSYS), which has a Zacks Rank #1 (Strong Buy).
Read the Full Research Report on SSYS
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Read the Full Research Report on IBM
Read the Full Research Report on ORCL
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