Mixed 2Q Numbers for HP

Hewlett-Packard Company ( HPQ - Analyst Report ) reported second quarter 2012 earnings per share (EPS) of 98 cents, beating the Zacks Consensus Estimate of 91 cents. Also, the quarter’s result came above the company’s guidance range of 88 cents to 91 cents. Despite a weak year-over-year comparison, shares jumped roughly 11.0% in the after-hours. Apart from the guidance beat, the main driver of the shares remained the news of a major restructuring as announced by the H-P chief Meg Whitman. Per the announcement, H-P will reduce its headcount by 27,000 through 2014 and save costs of $3.0-$3.5 billion annually.

Revenues

Revenues declined 3.0% year over year to $30.7 billion, attributed mainly to lackluster performance from PSG, IPG and ESSN segments. Presently, the company is trying to normalize excess channel inventory in the PSG and ESSN segments that was piled up for a hard disk drive supply disruption.

Region wise, revenue in Americas was $13.8 billion, flat year over year. EMEA revenue declined 7.0% year over year to $10.9 billion, while revenue from the Asia Pacific revenue inched down 1.0% year over year to $6 billion. The company faces continued macroeconomic challenges in EMEA while the Chinese business improved compared to the year ago period.

Segment Results

Enterprise Servers, Storage & Networking(ESSN)reported revenues of $5.2 billion, down 5.5% from $5.5 billion in the year-ago quarter. The revenue of this segment was mainly affected by the hard disk drive shortages.

Personal Systems Group(PSG) revenues were $9.45 billion, down 0.4% year over year. Within this segment, the company witnessed a recovery in the desktop and the commercial segment, but consumer notebook demand remained typically soft.

Imaging and Printing Group (IPG) revenues were $6.1 billion, down 10.0% year over year. Commercial hardware revenue dipped 3.7% on a year-over-year basis. Consumer hardware revenue was down 14.7% from the year-ago quarter.

HP Financial Services(HPFS) revenues were $968.0 million, up 9.4% year over year. This was driven by an 8.0% increase in net portfolio assets and flat financing volume.

Operating Results

Gross margin in the quarter stood at 23.1% compared with 24.7% in the year-ago quarter. Gross margin was impacted by the strong yen, lower mix of supply, continued margin pressure in services and competitive pricing in its hardware businesses.

Diluted earnings per share on a GAAP basis were 80 cents in the reported quarter compared with $1.05 in the prior-year quarter. After adjusting for special items, non-GAAP net earnings per share were 98 cents compared with $1.24 in the prior-year quarter.

Balance Sheet, Cash Flow & Stock Repurchase

Hewlett-Packard generated $2.5 billion in cash from operations versus $1.2 billion in the previous quarter. The company ended the quarter with $8.3 billion in cash and cash equivalents versus $8.1 billion in the previous quarter. The company exited the quarter with a long-term debt balance of $25.8 billion, slightly up from $25.5 billion in the previous quarter.

Guidance

The company expects non-GAAP diluted EPS in the range of 94 cents to 97 cents, and GAAP diluted EPS in the range of break-even to 3 cents for the third quarter of 2012.

For full year 2012, HP estimates non-GAAP diluted EPS to be in the range of $4.05 to $4.10, while the GAAP diluted EPS to be in the range of $2.25 to $2.30.

Again, the cash generated by the restructuring mentioned above will be reinvested back into the company. This will help the company to investment in people, processes and technology, which is expected to help HP to accomplish the restructuring effort and to generate the savings.

Conclusion

Computing major Hewlett-Packard reported mixed second quarter 2012 results, with EPS exceeding our estimate, but revenue declining on a year-over-year basis. The company exhibited mediocre operating performance due to exchange rate fluctuations, greater mix of low margin products and competitive pricing in its hardware business.

Further, the company’s third quarter guidance is lower than the Zacks Consensus Estimate of 95 cents. Moreover, to bring down its cost, the company is laying off 27000 employees, which is around 8.0% of its workforce. The savings are expected to be invested in newer people, process and technology.

This apart, the company is facing significant competition in the printing space given the continuous roll out of printing devices at competitive prices by other technology giants like Samsung, Canon ( CAJ - Snapshot Report ) , Epson, and Lexmark ( LXK - Analyst Report ) . This has resulted in reduction of business volume and margin contraction.

Further, the company is trying to cope up with the worsening economic conditions in its international markets, including dull demand from Europe. Moreover, it will take some time for demand to pick up as the companies are delaying their decision to replace their old PCs.

The shares carry a Zacks #4 Rank, indicating a short-term Sell rating.