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HP (HPQ) Surpasses Q2 Earnings Estimates, Revenues Disappoint

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HP Inc. (HPQ - Free Report) posted the second quarterly earnings release yesterday post its split from Hewlett-Packard Company. The company reported mixed results for the second quarter of fiscal 2016, wherein its earnings surpassed the Zacks Consensus Estimate but revenues missed the same.

Notably, Hewlett-Packard Company split itself into two standalone companies — HP Inc. and Hewlett-Packard Enterprise (HPE - Free Report) — effective Nov 1, 2015. Post the split, its PC and printer business has been operating as HP Inc., while Hewlett-Packard Enterprise offers commercial tech products.

Quarter in Detail

HP’s total revenue of $11.588 billion fell short of the Zacks Consensus Estimate of $11.746 billion and declined 10.7% year over year. Revenues were weak primarily due to the persistent decline in PC shipments and tepid IT spending.

Segment-wise, Personal Systems revenues decreased 9.9% year over year to $6.990 billion. Commercial revenues were down 7%, while Consumer revenues slipped 16%. The company also recorded a 9% drop in total unit shipment.

Revenues from notebooks were down 8% year over year while unit sales fell 6%. Desktop revenues tanked 13% as units sold declined 10%.

Printing revenues were down 16% year over year to $4.637 billion, primarily due to a 16% decline in supplies revenues and a weak performance at the hardware segment. HP’s total hardware unit sales recorded tumbled 16% primarily due to a decline of 12% and 16% in Commercial hardware units and Consumer hardware units, respectively.

HP’s non-GAAP gross margin was down 30 basis points (bps) on a year-over-year basis to 19.4% primarily due to lower revenues. However, non-GAAP operating margin from continuing operations expanded 30 bps to 8.2% mainly supported by stringent operating cost management.

HP’s non-GAAP net income from continuing operation came in at $702 million or 41 cents per share, compared with $720 million or 39 cents per share reported a year ago. Moreover, non-GAAP earnings came ahead of the Zacks Consensus Estimate of 39 cents.

Balance Sheet and Cash Flow

HP ended the fiscal second quarter with cash and cash equivalents of$4.636 billion, compared with $3.688 billion in the previous quarter. The company had long-term debt of $6.708 billion, compared with $6.683 billion last quarter.

HP generated cash flow of $1.467 billion from operational activities during the first half of fiscal 2016. During the same period, the company repurchased $1.102 billion shares and paid dividends worth $434 million.

Guidance

HP lowered the high end of its fiscal 2016 guidance range for both GAAP and non-GAAP earnings. The company now anticipates non-GAAP earnings in the $1.59–$1.65 range (mid-point $1.62), compared with the previous guidance of $1.59 to $1.69 (mid-point $1.64). GAAP earnings per share are projected between $1.52 and $1.58 (mid-point $1.55), compared with its prior expectations of $1.52–$1.62 (mid-point $1.57). The Zacks Consensus Estimate stands at $1.59.

For fiscal third quarter, HP projects non-GAAP earnings in the range of 37 cents to 40 cents per share, while GAAP earnings are expected between 34 cents and 37 cents. The Zacks Consensus Estimate is pegged at 40 cents.

Our Take

HP reported mixed results for the second quarter of fiscal 2016, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same. Year-over-year top-line comparisons were unfavorable as well. HP’s top-line performance was hurt primarily by a persistent decline in PC shipments and tepid IT spending. Keeping these factors in mind, the company lowered the higher end earnings guidance range for fiscal 2016.

The persistent decline in PC shipments is a substantial headwind for HP. As the PC business generates over 60% of its total revenue, the reduction in business volume at the segment is concerning. The company is also witnessing a secular decline in this segment due to the ongoing shift toward tablets and smartphones, representing a space in which it is yet to gain foothold.

Moreover, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines (IBM - Free Report) and Accenture (ACN - Free Report) add to its woes.

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

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