HP Beats EPS, Misses Rev - Analyst Blog

Hewlett-Packard Company (HPQ) reported fourth quarter 2010 earnings per share (EPS) of $1.33, exceeding the Zacks Consensus Estimate of $1.26. However, revenue of $30.8 billion was below the Zacks Consensus Estimate of $32.7 billion.

Revenues

Revenues increased 8.0% from $30.8 billion reported in the year-ago quarter, which included a negative currency impact of about one percentage point.

Revenues increased across all business segments on a year-over-year basis. As per geographic regions, the Americas reported a 9% increase in revenue. Revenues increased 11% in Europe, the Middle East and Africa (EMEA) and 3% in the Asia Pacific region.International markets accounted for 64% of total revenue in the third quarter, with revenues in the BRIC countries (Brazil, Russia, India and China) accounting for 10% of total revenue and increasing 12% on a year-over-year basis.

Results and Analysis by Segments

The HP Enterprise Business (HEB) reported revenues of $15.2 billion, up 7.8% from $14.1 billion in the year-ago quarter. This includes Enterprise Storage and Servers (ESS) revenues, which increased 25.0% year over year, driven by the 32.0% year-over-year growth in Industry Standard Server revenues. This apart, Storage revenue increased 14.0%. Services revenues increased 0.4% on a year-over-year basis to $9.0 billion, attributable to the rise in Infrastructure Technology Outsourcing revenues. HP Software revenues increased 1.0% to $974.0 million.

Personal Systems Group (PSG) revenues were $10.3 billion, up 4.0% year over year, driven by a 2.0% year-over-year increase in unit shipments. The company maintained its global leadership position in the PC segment. Notebook revenues dropped 3.0%, while Desktop revenue climbed 13.0%.

Imaging and Printing Group (IPG)revenues were $7.0 billion, up 8.0% year over year. Commercial hardware revenue and Consumer hardware revenue were up 22% and down 2%, respectively. Moreover, Supplies revenues moved up by 6.0%. Printer unit shipments increased 14.0%, with Commercial printer hardware units shooting up 43% and Consumer printer hardware units climbing 7.0%.

HP Financial Services (HPFS) revenues were $809.0 million, up 11.0% year over year. Financing volumes increased 11.0%, while net portfolio assets increased 14.0%.

Operating Results

Gross margin in the quarter was 24.8%, up from 23.7% reported in the year-ago period and up 95 basis points sequentially. Operating expenses increased 18.9% from the year-ago quarter, pointing to the fact that the company accelerated investments to drive long-term growth, including increases in R&D and expansion in the Enterprise sales force. Operating margin on a GAAP basis was 9.9% in the quarter, down 30 basis points from the year-ago quarter, while non-GAAP operating margin of 12.0% was up 20 basis points from the year-ago quarter.

Diluted earnings per share on a GAAP basis were $1.10 in the fourth quarter, compared with $0.99 in the prior-year period. Financial information on a non-GAAP basis excludes after-tax costs related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges. Excluding the above mentioned items, non-GAAP EPS was $1.33, compared with $1.14 in the prior-year quarter.

Balance Sheet, Cash Flow & Stock Repurchase

Hewlett-Packard generated $3.1 billion of cash from operations versus $3.3 billion in the previous quarter. The company also utilized $4.0 billion of cash during the quarter to repurchase approximately 96 million shares of common stock in the open market.

The company ended the quarter with $10.9 billion in cash and short-term investments versus $14.7 billion in the previous quarter. It exited the quarter with a long-term debt balance of $15.2 billion.

Guidance

For the first quarter of fiscal 2011, HP estimates revenues of $32.8 billion to $33.0 billion, GAAP diluted EPS of $1.06 to $1.08 and non-GAAP diluted EPS of $1.28 to $1.30.

For fiscal 2011, the company expects revenues in the range of $132.0 billion to $133.5 billion. GAAP diluted EPS is expected to be in the range of $4.42 to $4.52, and non-GAAP diluted EPS is expected to be in the range of $5.16 to $5.26.

To Conclude

The company has a strong business model, and still rules the computing world, with a leadership position in both PC and Server segments. Hewlett-Packard is also well positioned to challenge networking leader Cisco Systems Inc. (CSCO), and gain share in the networking market. The company also expects to benefit substantially from a revival in the US economy.

Despite Hewlett-Packard's market position and compelling product line, we remain cautious about future growth, especially on the consumer side. We also see the departure of chief operating officer Mark Hurd as a negative, since we believe that retention of key personnel in the increasingly competitive market is imperative in the current market environment. We continue to believe in the growth story of the company, and believe that it will retain its leadership position in the days to come.

The company has a Zacks #3 Rank (short-term Hold recommendation).

 
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