A month has gone by since the last earnings report for HP (HPQ Quick QuoteHPQ - Free Report) . Shares have added about 7.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is HP due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

HP Q2 Earnings Beat, Revenues Lag Estimates

HP reported second-quarter fiscal 2019 non-GAAP earnings from continuing operations of 53 cents per share that beat the Zacks Consensus Estimate by couple of cents. The figure increased 10.4% on a year-over-year basis.

HP’s net revenues of $14.04 billion lagged the Zacks Consensus Estimate of $14.06 billion, but inched up 0.2% year over year. At constant currency (cc), revenues increased 2%.

Region wise, at cc, revenues from Americas (42% of net revenues) were down 1%. The same from Europe, the Middle East and Africa (EMEA) climbed 2%, and the Asia-Pacific and Japan (APJ) region improved 11% year over year. Non-U.S. revenues accounted for 67% of net revenues.

HP’s second-quarter results were negatively impacted by the CPU supply shortage, which is expected to continue. Moreover, macroeconomic, geopolitical and tariff related uncertainties are likely to negatively impact growth in the rest of the fiscal.

Quarter in Detail

Personal Systems (63.6% of net revenues) revenues were $8.92 billion, up 1.8% year over year. While commercial revenues increased 7%, consumer revenues were down 9%. Muted PC growth across the industry negatively impacted consumer revenues.
 
HP’s total units sold fell 1% from the year-ago quarter. While Notebooks registered a 5% dip, desktop units increased 6% year over year.

Desktop (33% of Personal Systems revenues) and workstation (6.4% of Personal Systems revenues) revenues increased 6.8% and 5.8%, respectively. However, revenues from Notebooks fell 1% in the reported quarter.

HP expanded its AMV portfolio, which is aimed at small and medium sized businesses, through the launch HP ProBooks. The company’s new EliteBook 800 is a premium offering and includes HP Sure Sense. This new software uses AI to detect and prevent malware threats.
 
The company also announced HP DaaS proactive security, an extension to its DaaS solution, which provides the most advanced Windows 10 Security service for files and browsing.

Moreover, HP Engage, the company’s retail point of sale solution, was selected by one of the world's largest office product retailers to power 2000 stores in the quarter.

Printing business revenues (36.4% of net revenues) were down 2.4% year over year to $5.12 billion.

HP’s total hardware units sold declined 4%. While Consumer Hardware unit fell 4%, Commercial Hardware unit declined 3% on a year-over-year basis.

Commercial Hardware revenues increased 3% year over year. However, revenues from Consumer Hardware and Supplies declined 8.5% and 3%, respectively.

HP launched a new generation of OfficeJet Pro products that provide improved security during the quarter. The printer is 39% smaller than the previous generation.

Moreover, HP won several large managed print service contracts, including a multi-million dollar deal with Petrobras to provide solutions and services like A3, DesignJet and page-wide products.

Further, with the launch of HP Stitch portfolio, the company has extended its footprint to digital textile printers’ space. The introduction of Jet Fusion 5200 also expanded the company’s 3D printing portfolio.

Operating Details

In second-quarter fiscal 2019 gross margin was 19.4%, up 10 basis points (bps) on a year-over-year.

Non-GAAP operating expenses increased 1.1% on a year-over-year basis to $1.69 billion due to 1.6% increase in selling, general and administrative (SG&A) expenses. Research & development (R&D) expenses declined 0.8%.

Segment wise, Personal Systems operating margin expanded 60 bps to 4.3%, driven by improved mix. Printing operating margin expanded 40 bps to 16.4%, driven by stringent cost control.

Non-GAAP operating margin from continuing operations of 7.4% was flat year over year.

Balance Sheet and Cash Flow

HP ended second-quarter fiscal 2019 with net debt (gross cash minus gross debt) of $1.5 billion, higher than $1.2 billion reported in the previous quarter.

The company generated cash flow of $861 million from operational activities and $747 million free cash flow during the quarter under review.

HP returned nearly $0.9 billion to shareholders in the form of stock repurchases ($691 million) and cash dividends ($245 million).

Guidance

For the third quarter of fiscal 2019, HP predicts non-GAAP earnings between 53 cents and 56 cents.

HP expects CPU shortage to continue to dent Personal Systems revenues.

Management expects supplies revenues to decline nearly 3% at cc for fiscal 2019. Further, currency headwinds are expected to aggravate in the second half of the fiscal.

Moreover, HP now expects non-GAAP earnings between $2.14 and $2.21 per share compared with the previous guidance of $2.12-$2.22.

HP still expects to return approximately 75% of free cash flow to shareholders in fiscal 2019.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

Currently, HP has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

HP has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.