U.S. Markets closed

HP Inc. (HPQ) Earnings & Revenues Surpass Estimates in Q1

Zacks Equity Research

HP Inc. HPQ released its first-quarter fiscal 2017 earnings yesterday, after its split from Hewlett-Packard Company. The company reported better-than-expected results for the first quarter, wherein both its top and bottom line surpassed the Zacks Consensus Estimate. Following the results, shares of the company went up more than 2% in after-hours trading yesterday.

The company reported non-GAAP earnings per share of 38 cents per share, which came ahead of the Zacks Consensus Estimate by a penny. Also, earnings increased from the year-ago figure of 36 cents per share.

Notably, Hewlett-Packard Company split itself into two standalone companies — HP Inc. and Hewlett-Packard Enterprise HPE — effective Nov 1, 2015. Post the split, its PC and printer business has been operating as HP Inc., while Hewlett-Packard Enterprise specializes in commercial tech products.

The stock has gained approximately 50.28% over the last one year, outperforming the Zacks categorized Computer-Mini Computers industry’s return of 41.27%.

Quarter in Detail

HP’s total revenue increased 3.6% year over year to $12.684 billion and came ahead of the Zacks Consensus Estimate of $11.774 billion. The better-than-expected top-line performance was driven mainly by strength in the Personal System segment and outperformance of newly launched products.

The Personal Systems segment garnered revenues of $8.224 billion compared with $7.476 billion reported in the year-ago quarter.  Commercial revenues increased 7%, while Consumer revenues increased 15%. The company witnessed an 8% rise in total shipments mainly driven by a 12% increase in Notebook unit shipment, while Desktops unit shipments were flat on a year-over-year basis.

As expected, Printing revenues were down 3% year over year to $4.483 billion, primarily due to a 3% plunge in supplies revenues. HP’s total hardware unit sales increased 6% primarily due to an increase of 2% in Commercial hardware units and a 7% increase in Consumer hardware units.

Non-GAAP gross margin was down 100 basis points (bps) on a year-over-year basis to 18.7% primarily due to higher cost of sales. Total adjusted operating expenses decreased 1.8% year over year to $1.345 billion. Non-GAAP operating margin from continuing operations contracted 40 bps to 7.1% mainly due to unfavorable foreign currency impact and higher marketing spending expenses for demand generation.

HP’s non-GAAP net income from continuing operations came in at $655 million or 38 cents per share, compared with $645 million or 36 cents per share reported a year ago.

Balance Sheet and Cash Flow

HP ended the fiscal first quarter with cash and cash equivalents of $6.331 billion compared with $6.288 billion in the previous quarter. The company had long-term debt of $6.688 billion, compared with $6.758 billion last quarter.

The company generated cash flow of $767 million from operational activities during the quarter. During the same period, the company repurchased 25.5 million shares and paid dividends worth $227 million.

Guidance

For fiscal second quarter, HP projects non-GAAP earnings in a range of 37 cents to 40 cents per share (mid-point: 38.5 cents). The Zacks Consensus Estimate is pegged at 39 cents.

HP reiterated the fiscal 2017 earnings guidance. The company continues to anticipate non-GAAP earnings per share in a band of $1.55–$1.65 (mid-point: $1.6). The Zacks Consensus Estimate stands at $1.60 per share.

Our Take

HP reported better-than-expected first-quarter fiscal 2017 results driven mainly by strength in Personal System and execution of restructuring actions and productivity initiatives.  However, the company provided not so encouraging forthcoming and fiscal 2017 earnings guidance.

We are impressed by the performance of HP Inc.’s PC segment, wherein the year-over-year increase was witnessed mainly due to growth in Commercial and Consumer revenues.

HP’s efforts to turn around the business have been commendable. The company is working on product innovation and differentiation as well as enhancing the capabilities of the printing business to stabilize the top line.

Furthermore, looking at the data compiled by two independent research firms – Gartner and International Data Corporation – we believe that the downtrend in PC shipments showed signs of stabilization in fourth-quarter 2016, compared with the previous quarters.

Notably, for HP, this was the third consecutive quarter of year-over-year shipment growth following five back-to-back quarters of underperformance. The company witnessed a 4.3% increase in PC shipments and raised its market share to 20.4% from 18.8% in the year-ago quarter. We believe that the company’s ongoing restructuring initiatives will result in lower costs, while enhancing both productivity and profitability.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from the likes of International Business Machines IBM and Apple AAPL add to its woes.

HP currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Zacks' Top 10 Stocks for 2017

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?

Who wouldn't? Last year's market-beating Top 10 portfolio produced 5 double-digit winners. For example, oil and natural gas giant Pioneer Natural Resources and First Republic Bank racked up stellar gains of +44.9% and +44.3% respectively. Now a brand-new list for 2017 has been hand-picked from 4,400 companies covered by the Zacks Rank.  See the 2017 Top 10 right now>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
HP Inc. (HPQ): Free Stock Analysis Report
 
International Business Machines Corporation (IBM): Free Stock Analysis Report
 
Apple Inc. (AAPL): Free Stock Analysis Report
 
Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report
 
To read this article on Zacks.com click here.