Dull 1Q for HP, Despite Earnings Beat - Analyst Blog

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Hewlett-Packard Company ( HPQ ) reported first quarter 2012 earnings per share ( EPS ) of 92 cents, beating the Zacks Consensus Estimate of 87 cents. In the after market trade, the company's share price dipped 1.21% due to lackluster revenues and weak sequential outlook.

Revenues

Revenues declined 7.0% year over year to $30.0 billion. The year-over-year decline in revenue can be attributed to the hard disk drive shortages that impacted both Personal Systems Group and Enterprise Servers Storage & Networking .

Moreover, owing to the flooding in Thailand last year, supply of hard disk drives across the industry declined 30% in the last quarter of the calendar year. As a result of this shortage, the company decided to prioritize profitability, product performance and quality over shipment volume and market share. This primarily led to the downside in revenues during the reported quarter.

Region wise, the Americas generated revenue of $13.2 billion, down 9.0% year over year. Europe, the Middle East and Africa (EMEA) registered revenues of $11.7 billion, down 4.0% year over year.  Revenues from the Asia Pacific also declined 10.0% year over year to $5.2 billion.

Revenues from outside the United States in the reported quarter accounted for 66.0% of the total revenue. BRIC countries (Brazil, Russia, India and China) generated revenues of $3.1 billion, down 13.0% year over year and accounted for 10.0% of the total revenue.

Segment Results

Enterprise Servers, Storage & Networking (ESSN) reported revenues of $5.0 billion, down 10.4% from $5.6 billion in the year-ago quarter. Networking revenue remained flat, while Industry Standard Servers revenue plunged 11.0%. Business Critical Systems and Storage revenue were also down 27.0% and 6.0% year over year, respectively.

Personal Systems Group (PSG) revenues were $8.9 billion, down 15.1% year over year. Total units shipped in this segment plummeted 18.0% year over year. The shipment for the quarter was impacted by the hard disk drive shortages.

Moreover, both commercial client revenue and consumer client revenue declined 7.0% and 25.0% year over year, respectively. Workstation revenue was flat year over year. Desktop revenue declined 18.0%, and notebook revenue decreased 15.0% compared with the year-ago quarter.

Imaging and Printing Group ( IPG ) revenues were $6.3 billion, down 7.0% year over year. Commercial hardware revenue dipped 5.0% on a year-over-year basis with commercial printer falling 10.0%. Consumer hardware revenue was down 15.0% year over year along with a 15.0% decline in printer units.

HP Financial Services (HPFS) revenues were $950.0 million, up 14.9% year over year. This was driven by an 8% increase in net portfolio assets and flat financing volume.

Operating Results

Gross margin in the quarter stood at 22.4% compared with 24.5% in the year-ago quarter. Gross margin remains impacted by the strong yen, lower mix of ink supplies, competitive pricing for hardware products and continued margin pressure in Services.

Diluted earnings per share on a GAAP basis was 73 cents in the reported quarter compared with $1.17 in the prior-year quarter. After adjusting for special items, non-GAAP net earnings per share was 92 cents compared with $1.36 in the prior-year quarter.

Balance Sheet, Cash Flow & Stock Repurchase

Hewlett-Packard generated $1.2 billion in cash from operations versus $2.4 billion in the previous quarter. The company ended the quarter with $8.1 billion in cash and cash equivalents versus $8.0 billion in the previous quarter. The company exited the quarter with a long-term debt balance of $25.5 billion, up from $22.5 billion in the previous quarter.

Guidance

For the second quarter of fiscal 2012, HP estimates non-GAAP diluted EPS in the range of 88 cents to 91 cents and GAAP diluted EPS in the range of 68 cents to 71cents.

The company did not change its previously provided full year fiscal 2012 outlook of non-GAAP diluted EPS of at least $4.00 and GAAP diluted EPS of approximately $3.20.

Non-GAAP diluted EPS estimates for fiscal 2012 exclude after-tax costs of approximately 80 cents per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Conclusion

As expected, computing major Hewlett-Packard reported mediocre first quarter results, with revenue and earnings declining substantially on a year-over-year basis. However, reported earnings surpassed our estimate. The company's margins declined due to exchange rate fluctuations and a greater mix of low margin products along with a competitive pricing for high margin products.

Further, the company's second quarter guidance of 90-91 cents per share is lower than the Zacks Consensus Estimate of 95 cents. Also, the consumer client PC sales fell 25.0% in the quarter, and consumer printer sales were down 15.0%. Hence, the overall results of the company suffered despite the earnings beat.

We believe that CEO Meg Whitman has a tough job on her hands, especially as business growth of the company remains challenged due to the worsening external environment, including dull demand from Europe. Moreover, the company is implementing several strategies to improve volume in 2012 in order to drive revenues.

The company has a Zacks#3 Rank, indicating a short-term Hold rating.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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Referenced Stocks: EPS , HPQ , IPG

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