Hewlett-Packard Q2 Earnings In Line, Revs Lag

Zacks

Hewlett-Packard’s (HPQ) second-quarter non-GAAP earnings of 88 cents came in line with the Zacks Consensus Estimate and within management’s guidance range of 85 to 89 cents. Reported earnings increased 1.2% from the year-ago quarter primarily due to cost control measures and a lower share count.

Nonetheless, revenues of $27.3 billion were down 1% year over year and missed the Zacks Consensus Estimate of $27.4 billion.

Segmental Revenues

Personal Systems revenues increased 7.4% year over year to $8.17 billion, primarily due to a 12% increase in the commercial revenue, which more than offset a 2% decline in revenues from the consumer segment. The company also witnessed a 10% year-over-year increase in unit shipments.

Growth in commercial revenues was driven by robust performance of its commercial desktops and notebooks. The ongoing upgrade of H-P’s installed base and the expiration of the windows XP operating system is also expected to support H-P’s PC segment in the near term.

Revenues from notebooks were up 7% year over year, while unit sales increased 6% from the year-ago quarter. Desktop revenues increased 8% from the year-ago quarter while units sold were up 6% on a year-over-year basis. It is noteworthy that revenues from consumer notebooks witnessed marginal increase during the quarter — the first since the third-quarter of fiscal 2010.

Printing revenues were down 4.3% year over year to $5.83 billion, primarily due to lower supplies revenues (down 6% year over year). Despite the revenue decline, total hardware unit sales increased 1% year over year due to higher ink and laser hardware unit sales. The segment’s commercial hardware revenues were down 1% while consumer hardware revenues were up by a similar percentage.

Revenues from the Enterprise Group were down 2% from the year-ago quarter to $6.65 billion, primarily due to lower revenues from Storage, Technology Services and Business Critical Systems.

Industry Standard Server revenues increased 1%, while Networking revenues increased 6% year over year. Nonetheless, the company witnessed year-over-year revenue declines in Technology Services (5%) Business Critical Systems (14%) and Storage (6%).

Enterprise Services revenues were down 7% year over year to $5.70 billion, impacted by lower signings during the quarter. Revenues were impacted by an 8% decline in Application and Business Services revenues and 7% decline in IT Outsourcing revenues.

Software revenues increased a marginal 0.4% year over year to $971 million primarily due to an increase in License revenues (up 8% year over year) which more than offset a 4% decline in Support revenues. License revenues were buoyed by strong contributions from ArcSight, Fortify, Vertica and Autonomy. Strength in security and big data solutions aided Professional services revenues which increased 1% year over year, while SaaS revenues were up 6.0%. The company reported strong bookings in Autonomy and IT Management.

HP Financial Services revenues declined 2% year over year to $867.0 million primarily due to volume shortfalls from FY13. Nonetheless, new financing volume increased 12.0% year over year.

Operating Results

H-P’s gross margin was up 53 basis points (bps) on a year-over-year basis to 24.2% primarily favorable business mix and lower costs. H-P’s operating expenses were up 2.6% from the year-ago quarter to $4.26 billion primarily due to higher investments in research and development. As a percentage of revenues, expenses were up 54 bps. This impacted operating margin, which contracted 2 bps on a year-over-year basis to 8.6%.

H-P’s non-GAAP net income came in at $1.69 billion or 88 cents, compared with $1.69 billion or 87 cents reported in the year-ago quarter.

Balance Sheet and Cash Flow

The company ended the quarter with $15.09 billion in cash and cash equivalents versus $16.17 billion in the previous quarter. The company had long-term debt of $17.19 billion compared with $17.97 billion in the previous quarter.

H-P generated $2.99 billion in cash from operations. During the quarter, the company repurchased shares worth $831 million and paid dividends of $298.0 million.

Guidance

H-P expects its non-GAAP earnings for the third quarter of 2014 to range between 86 cents and 90 cents per share while the Zacks Consensus Estimate is pegged at 90 cents.

The company revised its fiscal 2014 earnings forecast from $3.60???$3.75 per share to $3.63???$3.75 per share. The Zacks Consensus Estimate is now pegged at $3.72 per share.

Moreover, H-P expects to expand ink, laser and graphics programs in the Printing segment while toner is expected to underperform in the third quarter as well. Higher component costs and tough year-over-year comparisons will also remain the headwinds for the Personal Systems segment as well.

H-P’s cost control measures are expected to positively impact the Enterprise Group and Enterprise Services segment. The company expects to gain traction in the big data and security areas, which is expected to aid the Software segment.

Most importantly, the company is expected to cut its workforce by roughly another 16,000, up from 34,000 originally planned in the 2012 restructuring initiative. The company now expects to trim its workforce by approximately 45,000???50,000 to streamline its costs and increase profitability. The company expects to save approximately $1 billion per year from fiscal 2016. Part of the savings will be reinvested in the business. These initiatives are expected to increase expenses by $500 million in fiscal 2014 due to the charges related to workforce reduction.

Summary

H-P’s cost cutting initiatives and improvement in the PC segment remain 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.

The company’s probable entry into the 3D printing market should be another growth catalyst given the rapid adoption of 3D technology across industries. 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 #2 (Buy). Investors can also look at Micron (MU), which has the same Zacks Rank as H-P.

Read the Full Research Report on HPQ
Read the Full Research Report on IBM
Read the Full Research Report on MU
Read the Full Research Report on ORCL


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