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HP (HPQ) Reports Stellar Earnings in Q2, Raises FY18 View

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HP Inc. (HPQ - Free Report) delivered another quarter of stellar performance wherein its revenues for the second quarter of fiscal 2018 surpassed the Zacks Consensus Estimate, while earnings matched the same. Moreover, the company’s revenues increased for the seventh consecutive quarter, out of which the last six recorded double-digit growth after a prolonged period of decline. Also, the Personal Systems and Print segments’ performance improved for the fifth 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 climbed 13% year over year to $14 billion and outpaced the Zacks Consensus Estimate of $13.6 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 in line with the Zacks Consensus Estimate, and came toward the higher-end of management’s guided range of 45-49 cents. On a year-over-year basis, non-GAAP earnings improved 20%. The robust bottom-line performance was mainly backed by higher revenues and lower share counts.

HP Inc. Price, Consensus and EPS Surprise

Quarter in Detail

The Personal Systems segment generated revenues of $8.8 billion, up 14% year over year, mainly driven by strong demand for high-end products and a 7% rise in prices.  While commercial revenues increased 16%, consumer revenues were up 10%.

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 paying off.

Notably, International Data Corporation (IDC), in its latest report on first-quarter 2018 PC shipment, stated that this quarter marked the eighth consecutive quarter of overall shipment growth for HP.

Coming to the Printing business, the segment’s revenues were up 11% year over year to $5.2 billion, primarily stemming from an 8% increase in supplies revenues and inclusion of the recently-acquired business of Samsung’s printing (S-Print) business. It should be noted that the buyout of S-Print has helped HP in the $55-billion high-end copy-machine market where Xerox Corporation (XRX - Free Report) is currently the leader.

HP’s total hardware unit sales grew 13%, backed by the Consumer hardware unit’s increase of 4% and the Commercial hardware unit’s year-over-year growth of 88%. The robust growth in Commercial hardware units chiefly stemmed from the recent inclusion of S-Print business.

Region wise, the company registered double-digit growth in every region it operates. Revenues from Americas were up 7% year over year. While revenues from Europe, the Middle East and Africa (EMEA) climbed 21%, the same from the Asia Pacific and Japan region jumped 13% year over year.

Gross margin expanded 10 basis points (bps) on a year-over-year basis to 19.3%. This was primarily supported by increased pricing and improved mix in the Personal Systems segment, which more than offset elevated component costs, particularly the NAND flash chips.

Non-GAAP operating expenses flared up 16% year over year to $1.7 billion. This was mainly due to the inclusion of the 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 benefit from improved gross margin was fully offset by elevated operating expenses as a percentage of revenues. HP’s non-GAAP net income from continuing operations came in at $798 million compared with $685 million reported a year ago.

Balance Sheet and Cash Flow

HP ended the fiscal second quarter with cash and cash equivalents of $4.2 billion compared with $5.5 billion recorded in the previous quarter. The company had long-term debt of $4.5 billion compared with $6.3 billion reported in the last reported quarter.

The company generated cash flow of $2 billion from operational activities during the first half of fiscal 2018. HP repurchased shares worth $1.3 billion and paid dividends worth $457 million, during the same time frame.

Guidance

Buoyed by 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 $1.97 and $2.02, up from the earlier guidance of $1.90 and $2.00. The Zacks Consensus Estimate is currently pegged at $1.93.

On the cost front, the company anticipates that overall component and logistic costs for Personal Systems will escalate throughout fiscal 2018. Moreover, from the beginning of the fiscal second quarter, the company has been witnessing rise in material costs in the Printing segment, which are expected to continue flaring up in the second half of the fiscal too.

Coming to the fiscal third quarter, HP projects non-GAAP earnings from continuing operations in the range of 49-52 cents per share. The Zacks Consensus Estimate is pegged at 49 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 indicates 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 commencement of the shipping of 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) is another key concern.

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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