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HP Inc. (HPQ) Q4 Earnings Match Estimates, Revenues Beat

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HP Inc. (HPQ - Free Report) released its fourth-quarter fiscal 2016 earnings yesterday, after its split from Hewlett-Packard Company. The company reported modest results for the fourth quarter, wherein its top line surpassed the Zacks Consensus Estimate and the bottom line matched the same.

The company reported non-GAAP earnings per share of 36 cents per share, which matched the Zacks Consensus Estimate. However, earnings declined from the year-ago figure of 93 cents per share.

 

 

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 specializes in commercial tech products.

Quarter in Detail

HP’s total revenue increased 2% year over year to $12.512 billion and came ahead of the Zacks Consensus Estimate of $11.874 billion. The better-than-expected top-line performance was driven mainly by strength in the Personal System segment and outperformance of newly launched products.

The Personal Systems segment garnered revenues of $8.018 billion compared with $7.694 billion reported in the year-ago quarter.  Commercial revenues increased 3%, while Consumer revenues increased 7%. The company witnessed a 5% rise in total shipments mainly driven by a 9% increase in Notebook unit shipment and a 1% increase in Desktops unit shipments.

Average selling price (ASP) was down marginally on a year-over-year basis mainly due to competitive pricing and low commercial ASPs. Consumer ASPs, on the other hand, increased on the back of a strong premium product mix.

As expected, Printing revenues were down 8% year over year to $4.558 billion, primarily due to a 12% plunge in supplies revenues. HP’s total hardware unit sales increased 1% primarily due to an increase of 10% in Commercial hardware units, which more than offset a 3% decline in Consumer hardware units.

Non-GAAP gross margin was down 100 basis points (bps) on a year-over-year basis to 18.3% primarily due to higher cost of sales. Total adjusted operating expenses decreased 8.4% year over year to $1.421 billion. Non-GAAP operating margin from continuing operations expanded 40 bps to 7% mainly supported by stringent operating cost management and lower operating expenses.

HP’s non-GAAP net income from continuing operations came in at $614 million or 36 cents per share, compared with $548 million or 30 cents per share reported a year ago.

Balance Sheet and Cash Flow

HP ended the fiscal fourth quarter with cash and cash equivalents of $6.288 billion compared with $5.636 billion in the previous quarter. The company had long-term debt of $6.758 billion, compared with $6.760 billion last quarter.

The company generated cash flow of $698 million from operational activities during the quarter. During the same period, the company repurchased $2 million shares and paid dividends worth $212 million.

Guidance

For fiscal first quarter, HP projects non-GAAP earnings in the range of 38 cents to 37 cents per share. The Zacks Consensus Estimate is pegged at 39 cents.

HP provided fiscal 2017 earnings guidance. The company anticipates non-GAAP earnings per share in the $1.55–$1.65 band (mid-point: $1.6). The Zacks Consensus Estimate stands at $1.61 per share.

HP INC Price, Consensus and EPS Surprise

Our Take

HP reported decent fourth-quarter fiscal 2016 results driven mainly by strength in Personal System and execution of restructuring actions and productivity initiatives.  However, the company provided a tepid 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 mainly due to growth in Commercial and Consumer revenues. The company also recorded robust improvement in operating margin due to better execution of restructuring and cost cutting initiatives undertaken at the beginning of 2016.

However, the persistent decline in PC shipments remains a material headwind for HP Inc. Given that the PC business generates majority of the company’s top line, the reduction in business volumes at the segment is concerning.

Therefore, the company is focusing on product innovations to give drive top-line growth and to lower costs through a restructuring plan, which includes measures like cutting jobs.

Recently, HP revealed that it is planning to trim its employee count by 3,000 to 4,000 across different levels over the next three years, that is, from fiscal 2017 through fiscal 2019. This announcement is likely a part of its ongoing restructuring plan.

It should be noted that the new job cuts are in addition to the company’s planned job cut of 3,000 employees by the end of fiscal 2016, which was announced this February. Currently, HP has approximately 50,000 employees.

We believe that the company’s ongoing restructuring initiatives will help trim costs, while enhancing both productivity and profitability.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from the likes of International Business Machines (IBM - Free Report) and Apple (AAPL - Free Report) add 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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