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HP (HPQ) Rallies on Stellar Q1 Earnings and Upbeat FY18 View

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HP Inc. (HPQ - Free Report) delivered another quarter of stellar performance. The company reported better-than-expected results for first-quarter fiscal 2018. Its revenues increased for the sixth consecutive quarter, of which the last five have recorded double-digit growth after an extended period of decline. Also, the Personal Systems and Print segments’ performance improved for the fourth straight quarter after 2010.

In fact, the company’s outstanding results for the last few quarters substantiate that the spin-off from Hewlett Packard Enterprise Company (HPE - Free Report) , along with its diligent restructuring initiatives, is finally paying off.

HP’s total revenues increased 15% year over year to $14.517 billion and outpaced the Zacks Consensus Estimate of $13.432 billion. The better-than-expected top-line performance was driven mainly by strength in the Personal System and Printing segments as well as successful product roll outs.

The company’s bottom-line results were also impressive, wherein its non-GAAP earnings from continuing operations of 48 cents per share came ahead of the Zacks Consensus Estimate of 42 cents as well as management’s earlier guidance range of 42-45 cents. On a year-over-year basis, non-GAAP earnings improved 26%.

Apart from higher revenues, the company’s bottom-line results benefited from lower effective tax rate due to the U.S. tax reform. HP noted that its fiscal first-quarter effective tax rate came in at 15% which is against its previous projection of 21-22%, resulting in a benefit of 4 cents per share.

HP’s shares are up nearly 6% in today’s pre-market trading session. The upswing stemmed from the company’s upbeat second-quarter and fiscal 2018 non-GAAP earnings guidance.

Notably, the stock has outperformed the industry in the last one year. While the stock has rallied 21.2%, the industry has recorded 15.8% growth.

Quarter in Detail

The Personal Systems segment generated revenues of $9.440 billion, up 15% year over year.  While commercial revenues increased 16%, consumer revenues were up 13%. We believe the spin-off from Hewlett Packard Enterprise Company, and restructuring initiatives, such as focus on product innovations, pricing, marketing and sales activities, are ultimately apparently paying off.

Notably, International Data Corporation (IDC), in its latest report on fourth-quarter 2017 PC shipment, stated that the quarter marked the seventh consecutive quarter of overall shipment growth for HP.

Talking about only the U.S. market, it is only HP which recorded growth in PC shipments as well as improvement in market share. According to data compiled by Gartner (IT - Free Report) , the quarter ended on Dec 31, 2017, was the fourth consecutive quarter of year-over-year shipment growth for the company in the U.S. market.

Coming to the Printing business, this segment’s revenues were up 14% year over year to $5.076 billion, primarily owing to a 10% increase in supplies revenues and inclusion of the first full quarter of the newly acquired business of Samsung’s printing (S-Print) business. HP expects that the acquisition of the S-Print business will bring in additional revenues of approximately $1.4 billion in fiscal 2018.

HP’s total hardware unit sales grew 14% backed by Consumer hardware units increase of 7% and Commercial hardware unit’s year-over-year growth of 73%. The robust growth in Commercial hardware units primarily stemmed from the recent inclusion of Samsung’s printing (S-Print) business.

Region wise, the company registered double-digit growth in every region it operates. Revenues from Americas were up 10% year over year. While revenues from Europe, the Middle East and Africa (EMEA) climbed 13%, the same from the Asia Pacific and Japan region jumped 18% year over year, all in constant currency.

Gross margin expanded 10 basis points (bps) on a year-over-year basis to 17.8%, primarily driven by better margin in the printing segment driven by improved productivity and higher supplies mix. This was partially offset by elevated commodity costs of Personal Systems.

Non-GAAP operating expenses flared up 17% year over year to $1.6 billion. This was mainly due to the inclusion of S-Print business, and increased investment in research and development as well as go-to-market sales strategies.

Non-GAAP operating margin from continuing operations remained flat year over year at 7% as the benefit from improved gross margin were fully offset by elevated operating expenses as a percentage of revenues. HP’s non-GAAP net income from continuing operations came in at $803 million compared with $646 million reported a year ago.

HP Inc. Price, Consensus and EPS Surprise

HP Inc. Price, Consensus and EPS Surprise | HP Inc. Quote

Balance Sheet and Cash Flow

HP ended the fiscal first quarter with cash and cash equivalents of $5.475 billion compared with $6.997 billion recorded in the previous quarter. The company had long-term debt of $6.340 billion compared with $6.747 billion reported in the last quarter.

The company generated cash flow of $996 million from operational activities during the quarter. HP repurchased shares worth $462 million and paid dividends worth $230 million during the same time frame.


The company, during its conference call, noted that due to implementation of the new tax code, its effective cost rate for fiscal 2018 is likely to be 16% (+/- 2%), much lower than the previous projection of 21-22%, thereby benefiting HP’s non-GAAP earnings per share by 13 cents. However, the company stated that “higher variable performance bonus opportunities for non-executives” will result in dilution of approximately 3 cents toward non-GAAP earnings.

Therefore, the net benefit from lower effective tax rate will be around 10 cents, of which it has already earned in the fiscal first quarter. So, the remaining three quarters are likely to see a tax benefit of 2 cents each.

Keeping the aforementioned factor, along with improving market share across the PC and Printer businesses, HP raised its non-GAAP earnings guidance for fiscal 2018. The company now estimates non-GAAP earnings to lie between $1.90 and $2.00 (mid-point $1.95), up from the earlier guidance range of $1.75-$1.85 (mid-point $1.80). The Zacks Consensus Estimate is currently pegged at $1.81.

For the fiscal second quarter, HP projects non-GAAP earnings from continuing operations in the range of 45-49 cents per share (mid-point: 47 cents). The Zacks Consensus Estimate is pegged at 43 cents.

Our Take

We are impressed by the performance of HP’s PC segment, wherein the year-over-year increase can be attributed to growth in Commercial and Consumer revenues. Additionally, the company’s efforts to turn around its business have been commendable. Meanwhile, it has been working on product innovation, differentiation and enhancing the capabilities of its printing business to stabilize the top line.

The latest PC shipment data by IDC depicts that HP’s restructuring initiatives, including focus on product innovations, pricing, marketing and sales activities, divestment of non-core assets and cutting jobs to lower costs, are paying off gradually. Per the data compiled by IDC, the company witnessed year-over-year shipment growth for the seventh quarter in a row, after witnessing declines for five consecutive quarters.

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

Nonetheless, prices of components such as DRAM and NAND are likely to remain high in 2018 which will continue to drag down the company’s margins. Although the company’s strategic efforts are driving top-line growth, those might not be enough to offset this incremental cost.

Moreover, competition from the likes of Lenovo, Dell and Apple (AAPL - Free Report) remains another key concern.

HP currently holds 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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