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HP Inc (HPQ) Tops Q3 Earnings & Revenues, Cuts 2016 View

HP Inc.HPQ released the third quarterly earnings result yesterday, post its split from Hewlett-Packard Company. The company reported better-than-expected results for the third quarter of fiscal 2016, wherein both its top line and bottom line surpassed the respective Zacks Consensus Estimate.

Results were mainly driven by strength in Personal System, outperformance of newly launched products, and execution of restructuring actions and productivity initiatives.

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.

Quarter in Detail

HP Inc.'s total revenue declined 3.8% year over year to $11.892 billion primarily due to a decline at the Printer segment. However, the figure came ahead of the Zacks Consensus Estimate of $11.397 billion. The better-than-expected top-line performance was driven mainly by strength in the Personal System segment and outperformance of newly launched products including x360, Spectre 13 and the new Omen gaming portfolio.

In particular, the quarter witnessed stabilization in the Personal Systems segment with slight year-over-year growth after several quarters. The segment garnered revenues of $7.512 billion, compared with $7.505 billion reported in the year-ago quarter. This proves that the company's restructuring actions and productivity initiatives have started paying off.

Commercial revenues declined 3%, while Consumer revenues climbed 8%. The company witnessed a 4% rise in total shipment mainly driven by a 12% increase in Notebook unit shipment, partially offset by a 6% decline in Desktops unit shipment.

Average selling price (ASP) was down in the low single digits on a year-over-year basis mainly due a decline in commercial ASPs. Consumer ASPs, on the other hand, increased on the back of a strong premium product mix.

As expected, Printing revenues were down 14% year over year to $4.432 billion primarily due to an 18% plunge in supplies revenues and a weak performance at the hardware segment. HP Inc.'s total hardware unit sales dropped 10% primarily due to a decline of 2% and 14% in Commercial hardware units and Consumer hardware units, respectively.

Non-GAAP gross margin was down 50 basis points (bps) on a year-over-year basis to 18.3% primarily due to lower revenues. However, non-GAAP operating margin from continuing operations expanded 200 bps to 9.4% mainly supported by stringent operating cost management.

HP Inc.'s non-GAAP net income from continuing operation came in at $826 million or 48 cents per share, compared with $646 million or 35 cents per share reported a year ago. Non-GAAP earnings were also above the Zacks Consensus Estimate of 45 cents.

HP INC Price, Consensus and EPS Surprise

HP INC Price, Consensus and EPS Surprise | HP INC Quote

Balance Sheet and Cash Flow

HP Inc. ended the fiscal third quarter with cash and cash equivalents of$5.636 billion, compared with $4.636 billion in the previous quarter. The company had long-term debt of $6.760 billion, compared with $6.708 billion last quarter.

The company generated cash flow of $2.532 billion from operational activities during the first three quarters of fiscal 2016. During the same period, the company repurchased $1.159 billion shares and paid dividends worth $646 million.

Guidance

HP lowered its fiscal 2016 guidance range for both GAAP and non-GAAP earnings. The company now anticipates non-GAAP earnings per share in the $1.59-$1.62 band (mid-point: $1.605), compared with the previous guidance of $1.59 to $1.65 (mid-point $1.62). GAAP earnings per share are projected between $1.46 and $1.49 (mid-point $1.475), compared with its prior expectations of $1.52-$1.58 (mid-point $1.55). The Zacks Consensus Estimate stands at $1.62.

For fiscal fourth quarter, HP projects non-GAAP earnings in the range of 34 cents to 37 cents per share, while GAAP earnings are expected to be between 22 cents and 25 cents. The Zacks Consensus Estimate is pegged at 41 cents.

Our Take

HP reported better-than-expected third-quarter fiscal 2016 results driven mainly by strength in Personal System, outperformance of newly launched products and execution of restructuring actions and productivity initiatives.

Despite bleak year-over-year top-line comparisons, we are impressed by the performance of HP Inc.'s PC segment, wherein a slight year-over-year increase was witnessed after several quarters of decline. The company also recorded a robust improvement in operating margin due to better execution of restructuring and cost cutting initiatives undertaken at the beginning of 2016.

However, the downbeat guidance for fiscal 2016 was somewhat disappointing.

Going forward, the persistent decline in PC shipments remains a material headwind for HP Inc. Given that the PC business generates majority of the company's top line, the reduction in business volumes at the segment is concerning.

Therefore, the company is focusing on product innovations to give drive top-line growth and to lower costs through a restructuring plan, which includes measures like cutting jobs. Post the split from its parent company, HP Inc. announced its decision to accelerate the restructuring plan by reducing the total workforce by 3,000 positions by the end of fiscal 2016 and streamlining processes.

We believe that the company's ongoing restructuring initiatives will help trim costs, while enhancing both productivity and profitability.

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

HP currently carries a Zacks Rank #3 (Hold).

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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 Nasdaq, Inc.


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

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