HP Earnings: Revenue Down, EPS In-Line

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 |  Includes: COMS, HPQ
by: Zacks Investment Research

Hewlett-Packard (NYSE:HPQ) reported fourth quarter EPS of $1.14, exceeding the Zacks Consensus Estimate by a penny.

Revenue

Revenue for the quarter came in at $30.8 billion, a decrease of 8.0% from the $33.6 billion reported in the year-ago period and down 5.0% on constant currency basis.

Revenue fell across all businesses, including servers and data storage systems, software, PCs and printers. The Americas reported a 3.0% decline in revenue to $13.6 billion. Revenue declined 17.0% in Europe, the Middle East and Africa (EMEA) to $11.7 billion and 1.0% in the Asia Pacific to $5.4 billion. Revenue from China increased more than 20% from the year-ago quarter.

International markets accounted for 64% of total revenue in the fourth quarter, with revenue in the BRIC countries (Brazil, Russia, India and China) declining 4.0% on a year-over-year basis and accounting for 10.0% of total HP revenue.

Results and Analysis by Segment

  • The Technology Solutions Group (TSG) was $14.1 billion down 2.6% year over year. Within TSG, Enterprise Storage and Servers (ESS) revenue declined 17.0% year over year, driven by declines across all three business units -- Industry Standard Servers, Business Critical Systems and Storage. Services revenue increased 8.0% year over year, mainly due to the addition of EDS’ revenue. EDS’ integration was ahead of the company’s plans. HP Software revenue fell 16.0% year over year with declines in both the Business Technology Optimization (BTO) portfolio and other software.
  • Personal Systems Group (PSG) revenue was $9.8 billion, which fell 12.0% year over year despite an 8% year-over-year increase in unit shipments. The company maintained its leading market position in PCs in every region. However, notebook revenue declined 8.0%, while Desktop revenue declined 16.0%. Commercial client revenue was down 15% and Consumer client revenue down 8.0%.
  • Imaging and Printing Group (IPG) continued to struggle as revenue was $6.4 billion, down 15.0% year over year. Ink supplies, commercial hardware and consumer hardware also reported substantial declines. We believe this segment has come under pressure due to strong competition from cheaper brands. Printer unit shipments decreased 20.0% from which period, with consumer and commercial printer hardware units down 14.0% and 138.0%, respectively. Consumer and commercial hardware revenue declined 17.0% and 32.0%, respectively.
  • HP Financial Services (HPFS) revenue was $0.7 billion, up 5.0% year over year. Financing volumes increased 6.0%, while in net portfolio assets increased 21.0%.


Operating Results

Gross margins for the quarter were 23.7%, up 60 basis points year over year. This increase in gross margin can be attributed to efficiency gains in services and increased supplies mix in IPG. The company continues to reduce cost; lowering operating expenses by 16.0% from the year-ago quarter. The lower costs are driven by structural changes that drive sustainable improvements. GAAP operating margin for the quarter was 10.2%, up from 8.2% reported in the year-ago quarter.

GAAP diluted net earnings per share (NYSEARCA:EPS) in the fourth quarter were $0.99, compared with $0.84 in the prior-year period. Non-GAAP financial information excludes after-tax costs related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges of approximately $0.15 per share and $0.19 per share in the fourth fiscal quarter of 2009 and 2008, respectively. Non-GAAP EPS were $1.14, compared with $1.03 in the prior-year period.

HP generated $3.4 billion in cash flow from operations versus $3.9 billion in the previous quarter. Free cash flow was $2.6 billion. The company exited the quarter with long-term debt balance of $13.9 billion, after repaying $1.5 billion of debt.

HP also returned $2.3 billion to shareholders in the form of share repurchases and dividends. The company ended the quarter with $13.3 billion in cash and short-term investments versus $13.7 billion in the previous quarter.

Guidance

For the first quarter of fiscal 2010, HP estimates revenue of approximately $29.6 billion to $29.9 billion, GAAP diluted EPS of $0.90 to $0.92 and non-GAAP diluted EPS of $1.03 to $1.05. Non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.13 per share, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

For the full-year 2009, the company expects revenue of approximately $118.0 billion to $119.0 billion, up from its previous estimate of $117.0 billion to $118.0 billion. The GAAP diluted EPS is expected to be in the range of $3.65 to $3.75, up from its previous estimate of $3.60 to $3.70, and non-GAAP diluted EPS is expected to be in the range of $4.25 to $4.35, up from its previous estimate of $4.20 to $4.30.

Non-GAAP diluted EPS estimates for fiscal year 2010 exclude after-tax costs of approximately $0.60 per share, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges. These estimates exclude the potential impact of the acquisition of 3Com Corporation (COMS) that the company announced in November 2009.