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HP (HPQ) Q3 Earnings Beat, Supply Constraints Hurt Sales Growth

·5 min read
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HP Inc. HPQ reported solid bottom-line results for third-quarter fiscal 2021, wherein its non-GAAP earnings jumped more than two-fold to $1 per share from the 49 cents reported in the year-ago quarter. Moreover, quarterly earnings surpassed the Zacks Consensus Estimate of 84 cents per share as well as management’s guided range of 81-85 cents.

The significant year-over-year increase in earnings reflects benefits from higher revenues, favorable pricing of products, lower promotions and reductions in the previously-estimated sales and marketing incentives.

HP’s net revenues increased 7% year over year to $15.3 billion but missed the Zacks Consensus Estimate of $15.81 billion. In constant currency (cc), revenues grew 4.1%.

The lower-than-expected top-line performance reflects continued component supply-chain constraints, particularly low-cost components such as LCD drivers and WiFi controllers. The COVID-19 pandemic-related factory shutdowns across Southeast Asia, along with transportation disruptions and congested ports, also negatively impacted the company’s overall sales.

HP Inc. Price, Consensus and EPS Surprise

HP Inc. Price, Consensus and EPS Surprise
HP Inc. Price, Consensus and EPS Surprise

HP Inc. price-consensus-eps-surprise-chart | HP Inc. Quote

Quarter in Detail

Personal Systems revenues (68% of net revenues) came in at $10.4 billion, flat year on year (down3% in cc). Further, consumer revenues increased 3%, while commercial revenues decreased 1%.

HP’s total PC units sold were flat on a year-over-year basis. Notebooks registered an increase of 2%, while desktop units dropped 7%, year on year. Notebook revenues were flat, while desktop sales inched up 1%. Workstation sales were down 9%.

HP noted that demand for its products under the Personal Systems segment remained strong during the reported quarter with backlog increasing again on a quarter-over-quarter basis. However, continued supply-chain constraints dented this segment’s overall sales.

HP is witnessing a strong rebound in its Printing business, which was affected by office closures during the pandemic. Printing business revenues (32% of net revenues) went up 24% year over year (up 22% in CC) to $4.9 billion.

HP’s total hardware units sold decreased 4%. Consumer Hardware units declined 8%, while revenues grew 15%. Further, Commercial Hardware units and revenues increased 29% and 46%, respectively. Supplies revenues rose 20%.

Region wise, at cc, revenues from Americas (46% of net revenues) and Europe, Middle East and Africa (EMEA) (33%) climbed 12% and 1%, respectively. However, sales in the Asia-Pacific and Japan (APJ) (21%) region fell 6%.

Operating Results

Segment wise, Personal Systems operating margin expanded 290 basis points (bps) to 8.4%. In addition, printing operating margin expanded 540 bps to 17.6% on higher revenues.

Meanwhile, the company’s overall non-GAAP operating margin from continuing operations of 9.8% advanced 370 bps, year on year.

Balance Sheet and Cash Flow

HP ended the fiscal third quarter with cash and cash equivalents of $3.4 billion, flat sequentially.

During the reported quarter, the company generated operating cash flows of $1.1 billion and $1 billion in free cash flow. HP returned $1.7 billion to its shareholders in the form of stock repurchases ($1.5 billion) and cash dividends ($230 million) during the fiscal third quarter. In the fiscal second quarter, HP returned 178% of its free cash flows.

During the first nine months of fiscal 2021, the company generated operating cash flow of $3.56 billion. It bought back $4.5 billion worth of its common stocks and paid $719 million in cash dividends.

Guidance

Buoyed by a better-than-expected bottom-line performance, management raised the non-GAAP earnings forecast for fiscal 2021 to $3.69-$3.75 per share from the $3.40-$3.50 projected earlier. Also, the company estimates to generate at least $4 billion of free cash flow during the fiscal year.

During the earnings conference call, HP said that it expects to buyback at least $1.5 billion worth of its common stock during the fiscal fourth quarter.

For fourth-quarter fiscal 2021, HP estimates non-GAAP earnings between 84 cents and 90 cents. For the printing segment, HP projects robust demand for consumer printers, and continued improvement in commercial segment as offices reopen. HP anticipates solid demand for personal systems during the current quarter on the rising working-and-learning-from-home wave.

Nevertheless, the company expects that the industry-wide component supply constraints might affect its ability to meet demand. Moreover, resurgence in COVID-19 cases due to the emergence of the Delta variant is expected to cause some manufacturing, port and logistics disruptions during the fiscal fourth quarter. These factors are expected to curb the company’s revenue growth in the ongoing quarter.

Zacks Rank & Key Picks

Currently, HP carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include Microsoft MSFT, Cadence Design Systems CDNS and Texas Instruments TXN, all carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term earnings growth rate for Microsoft, Cadence Design and Texas Instruments is currently pegged at 11.1%, 11.7% and 9.3%, respectively.


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