HP Inc. (HPQ Quick QuoteHPQ - Free Report) released its second-quarter fiscal 2017 earnings yesterday, after splitting from Hewlett-Packard Company. The company reported better-than-expected results for the second quarter. Its top and bottom lines surpassed the Zacks Consensus Estimate.

The company reported non-GAAP earnings of 40 cents per share, which came ahead of the Zacks Consensus Estimate by a penny. However, earnings decreased from the year-ago figure of 41 cents per share.

Hewlett-Packard Company split itself into two standalone companies — HP Inc. and Hewlett-Packard Enterprise (HPE Quick QuoteHPE - Free Report) — 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.

The stock has gained approximately 33.76% on a year-to-date basis, outperforming the Zacks categorized Computer-Mini Computers industry’s return of 32.17%.

Quarter in Detail

HP’s total revenue increased 6.9% year over year to $12.385 billion and outpaced the Zacks Consensus Estimate of $11.942 billion. The better-than-expected top-line performance was driven mainly by strength in the Personal System and Printing segments along with the successful launch of new products.

According to Dion Weisler, President and CEO, HP Inc., "This was a breakthrough quarter for HP, and marks the first time both Personal Systems and Print have grown in the same quarter since 2010."

The Personal Systems segment garnered revenues of $7.662 billion, up 10% year over year.  Commercial revenues increased 7%, while Consumer revenues went up by 16%. The company witnessed a 5% rise in total shipments driven by a 12% increase in Notebook unit shipment. Desktops unit shipments were down 6% on a year-over-year basis.

Printing revenues were up 2% year over year to $4.743 billion, primarily due to a 2% increase in supplies revenues. HP’s total hardware unit sales increased 4% owing to a rise of 6% in Commercial hardware units and a 3% increment in Consumer hardware units.

Revenues from the Americas contributed 45% of total revenue, up 5% on a y/y basis. EMEA revenues were up 7% on a y/y basis and contributed 34% of total revenue. Revenues from the Asia Pacific region increased 11% y/y, contributing 21% of total revenue.

Non-GAAP gross margin was down 20 basis points (bps) on a year-over-year basis to 19.2% due to higher cost of sales. Total adjusted operating expenses increased 6.9% year over year to $1.436 billion. Non-GAAP operating margin from continuing operations contracted by 20 bps to 7.6%. The contraction can be attributed to unfavorable foreign currency impact and higher operating expenses.

HP’s non-GAAP net income from continuing operations came in at $685 million or 40 cents per share compared with $702 million or 41 cents reported a year ago.

Balance Sheet and Cash Flow

HP ended the fiscal second quarter with cash and cash equivalents of $6.223 billion compared with $6.331 billion in the previous quarter. The company had long-term debt of $6.710 billion compared with $6.688 billion last quarter.

The company generated cash flow of $455 million from operational activities during the quarter. HP repurchased shares worth $223 million and paid dividends worth $224 million, in the same time frame.

Guidance

For fiscal third quarter, HP projects non-GAAP earnings in a range of 40 cents to 43 cents per share (mid-point: 41.5 cents). The Zacks Consensus Estimate is pegged at 41 cents.

HP raised its fiscal 2017 earnings guidance. The company anticipates non-GAAP earnings per share in the band of $1.59–$1.66 (previously $1.55–$1.65). The Zacks Consensus Estimate stands at $1.62 per share.

Our Take

HP reported stellar second-quarter fiscal 2017 results driven mainly by strength in Personal System and Printing segments. The company didn’t provide any encouraging forthcoming and fiscal 2017 earnings guidance.

We are impressed by the performance of HP Inc.’s PC segment, wherein the year-over-year increase was witnessed due to growth in Commercial and Consumer revenues.

HP’s efforts to turn around the business have been commendable. The company is working on product innovation, differentiation and enhancing the capabilities of its printing business to stabilize the top line.

The recently released PC shipment data by IDC depicts that HP’s restructuring initiatives such as focus on product innovations, pricing, marketing and sales activities, divestment of non-core assets and cutting jobs to lower costs, are paying off. HP, as per the data compiled by IDC, witnessed year-over-year shipment growth for the fourth quarter in a row after registering fall for consecutive five quarters.

With the start of shipping A3 multifunction printers to more than 80 countries, which covers all its key markets, HP can revive its printing business and grab a bigger share in the inkjet printer market. Also, the acquisition of Samsung’s printing business will support the development and manufacturing of printers.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from the likes of International Business Machines (IBM Quick QuoteIBM - Free Report) and Apple (AAPL Quick QuoteAAPL - Free Report) adds to its woes.

HP currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here . 

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