Zacks_Analysts' Blog : Hewlett-Packard Beats - Analyst Blog

Hewlett-Packard (HPQ) reported second quarter 2010 EPS of $1.09, exceeding the Zacks Consensus estimate by 4 cents.

 

Revenue

 

Revenue for the quarter came in at $30.8 billion, an increase of 13.0% from $27.4 billion reported in the year-ago period including a favorable foreign currency impact of four percentage points.

 

Revenue increased across all businesses segments on a year-over-year basis. Per geographic regions, the Americas reported an 11.0% increase in revenue to $13.5 billion. Revenue increased 11.0% in Europe, the Middle East and Africa (EMEA) to $11.8 billion and 19.0% in the Asia Pacific region to $5.5 billion.

International markets accounted for 66% of total revenue in the second quarter, with revenue in the BRIC countries (Brazil, Russia, India and China) increasing 25.0% on a year-over-year basis comprising 10.0% of total HP revenue.

 

Results and Analysis by segment

 

The HP Enterprise Business (HEB) reported revenue of $14.1 billion, up 10.0% from $12.8 billion in the year-ago quarter. This includes Enterprise Storage and Servers (ESS) revenue, which increased 31.0% year over year, driven by the increase in Industry Standard Server revenue, which moved up 54% year over year.

This apart, Storage revenue increased 16.0% as the mid-range EVA product line was up 3%. Services revenue increased 2.0% on a year over year basis, attributable to the increase in the Infrastructure Technology Outsourcing revenue, while HP software revenue declined marginally.

 

Personal Systems Group (PSG) revenue was $9.95 billion, up 21.0% year over year, helped by a 20.0% year-over-year increase in unit shipments. The company maintained its global leadership position in the PC segment. Notebook revenue increased 17.0%, while Desktop revenue increased 27.0%. Commercial client revenue increased 19.0% and Consumer client revenue increased 25.0%.

 

Imaging and Printing Group (IPG) revenue was $6.4 billion, up 8.0% year over year. Ink supplies, commercial hardware and consumer hardware also reported a substantial increase. This segment continues to make significant progress in selling units, which are high in ink consumption, especially in the office, wireless and graphics segments.

These apart, managed print services had a good quarter. Printer unit shipments increased 9.0% for the period, with commercial printer hardware units down 8.0% and consumer printer hardware units up 15.0%.

 

HP Financial Services (HPFS) revenue was $755.0 million, up 18.0% year over year. Financing volumes increased 20.0%, while net portfolio assets increased 21.0%.

 

Operating Results

 

Gross margin for the quarter was 23.5%, flat compared to the year-ago quarter, while increasing 70 basis points sequentially. As a result of normal seasonal effect, there was no significant improvement in the gross margin. Operating expenses increased 5% compared to the year-ago quarter, pointing to the fact that the company has operating leverage.

The increase is the result of investments made to drive long-term growth, including enhancement of the enterprise sales force and additions to the product portfolio. Operating margin on a GAAP basis for the quarter was 9.3%, up from 8.4% reported in the year-ago quarter, while non-GAAP operating margin increased by 80 basis points.

 

Diluted earnings per share (EPS) on a GAAP basis in the second quarter were $0.91, compared with $0.71 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 abovementioned items, the non-GAAP EPS was $1.09, compared with $0.86 in the prior-year period.

 

Balance Sheet, Cash Flow & Stock Repurchase

 

Hewlett-Packard generated $3.1 billion of cash from operations versus $2.4 billion in the previous quarter. The company paid a dividend of $0.08 per share in the second quarter, which resulted in a cash outflow of $196 million. This apart, the company also utilized $1.8 billion of cash to repurchase approximately 35 million shares of common stock during the quarter.

 

The company ended the quarter with $14.5 billion in cash and short-term investments versus $13.6 billion in the previous quarter. The company exited the quarter with a long term debt balance of $13.7 billion.

 

Guidance

 

For the third quarter of fiscal 2010, HP estimates revenue of $29.7 billion to $30.0 billion, GAAP diluted EPS of $0.87 to $0.89 and non-GAAP diluted EPS of $1.05 to $1.07.

 

For fiscal 2010, the company expects revenue growth in the range of 8.0% to 9.0%. The GAAP diluted EPS is expected in the range of $3.76 to $3.81, and non-GAAP diluted EPS is expected in the range of $4.45 to $4.50, up from the previous estimate of $4.37 to $4.44.

 

The company has a strong business model, and still rules the computing world, with the largest market share of 19.7%. This apart, the company has completed the acquisition of networking major 3Com. HP will now be able to challenge networking leader Cisco Systems Inc. (CSCO), and can gain market share in the networking business.

 

This apart, the company is expected to benefit substantially from the increase in IT spending and has also projected an encouraging guidance for the fiscal year 2010. We completely believe in the growth story the company, but would want to see a better performance from its printing unit in the upcoming quarter.