HP reports Q3 earnings: revenue up over last year, weak 2011 guidance

HP reported its third quarter 2011 results on Wednesday, missing the Street’s estimates considerably. Net revenues of $31.2 billion were up from the 30.7 billion HP reported during the same quarter in 2010 and also up from the $31.6 billion the company reported during the second quarter. The figures are in line with HP’s guidance of $31.1 billion to $31.3 billion for the third quarter but below the Street’s consensus of $34 billion. EPS also missed; HP expects between $1.12 and $1.16 while the Street expected $1.31. The company confirmed that it will discontinue operations for its webOS devices, likely after a lukewarm reception to the TouchPad in the United States and abroad. Following the tablet’s launch the company quickly dropped its price by $100 and Best Buy’s sell-through rate was rumored to be below 10%. HP’s Pre3 smartphone, which is now on sale in Europe, has yet to make a debut in the United States and it’s unclear if it will ever launch here. HP said it estimates revenue of $32.1 billion to $32.5 billion for the fourth quarter. The company originally said it estimated its full year 2011 revenue to be $129 billion to $130 billion but now says revenues will likely fall between $127.2 billion and $127.6 billion. Read on for the full press release.

HP Reports Third Quarter 2011 Results and Initiates Company Transformation

  • Earnings highlights:
    • Third quarter net revenue of $31.2 billion, up 1% from the prior year quarter and down 2% when adjusted for the effects of currency
    • Third quarter GAAP diluted earnings per share up 24% with non-GAAP diluted earnings per share up 2% and cash flow from operations of $3.2 billion
    • Revising full year FY11 revenue estimates to $127.2 billion to $127.6 billion
    • Revising full year FY11 GAAP diluted earnings per share outlook down to between $3.59 and $3.70 and non-GAAP diluted earnings per share outlook down to between $4.82 and $4.86
  • Exploring strategic alternatives for Personal Systems Group; shutting down operations for webOS devices and exploring strategic alternatives for webOS software
  • Offer to acquire Autonomy, a global leader in infrastructure software for the enterprise, to accelerate expansion in rapidly growing enterprise information management market

PALO ALTO, Calif., Aug 18, 2011 (BUSINESS WIRE) –

HP (NYSE:HPQ) today announced financial results for its third fiscal quarter ended July 31, 2011, as well as the commencement of a company transformation described in detail in separate press releases issued today.

HP unveiled the details of a plan to accelerate the strategy introduced in March. The plan introduced today will:

  • Move HP into higher value, higher margin growth categories
  • Sharpen HP’s focus on its strategic priorities of cloud, solutions and software with an emphasis on enterprise, commercial and government markets
  • Increase investment in innovation to drive differentiation

As part of the transformation, HP announced that its board of directors has authorized the exploration of strategic alternatives for the company’s Personal Systems Group. HP will consider a broad range of options that may include, among others, a full or partial separation of PSG from HP through a spin-off or other transaction. (See accompanying press release.)

HP will discontinue operations for webOS devices, specifically the TouchPad and webOS phones. The devices have not met internal milestones and financial targets. HP will continue to explore options to optimize the value of webOS software going forward.

In addition, HP announced the terms of a recommended transaction for all of the outstanding shares of Autonomy Corporation plc for £25.50 ($42.11) per share in cash. Autonomy’s software powers a full spectrum of mission-critical enterprise applications, including pan-enterprise search, customer interaction solutions, information governance, end-to-end eDiscovery, records management, archiving, business process management, web content management, web optimization, rich media management and video and audio analysis. The addition of Autonomy will accelerate HP’s ability to deliver on its strategy to offer cloud-based solutions and software that best addresses the changing needs of businesses. (See accompanying press release.)

“We’re focused on improving performance across the business,” said Léo Apotheker, HP president and chief executive officer. “HP is taking bold, transformative steps to position the company as a leader in the evolving information economy. Today’s announced plan will allow HP to drive creation of long-term shareholder value through a focus on fewer fronts, thereby improving its ability to execute, invest in innovation and drive a higher-margin business mix.”

Earnings highlights

For the quarter, net revenue of $31.2 billion was up 1% from the prior-year period as reported and down 2% when adjusted for the effects of currency.

GAAP diluted earnings per share (EPS) was $0.93, up 24% from $0.75 in the prior-year period. Non-GAAP diluted EPS was $1.10, up 2% from $1.08 in the prior-year period. Non-GAAP financial information excludes after-tax costs of approximately $0.17 per share and $0.33 per share in the third quarter of fiscal 2011 and 2010, respectively, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges. Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.

Q3 FY11 Q3 FY10 Y/Y
Net revenue ($B) $31.2 $30.7 1%
GAAP operating margin 8.1% 7.6% 0.5 pts
GAAP net earnings ($B) $1.9 $1.8 9%
GAAP diluted EPS $0.93 $0.75 24%
Non-GAAP operating margin 9.8% 11.2% (1.4) pts
Non-GAAP net earnings ($B) $2.3 $2.6 (11.4%)
Non-GAAP diluted EPS $1.10 $1.08 2%

“Our outlook reflects the challenges that we face across our businesses,” said Cathie Lesjak, HP executive vice president and chief financial officer. “Dealing with these challenges will take time, but HP will navigate through the transformation to become a more focused, streamlined company.”

Trends and regional performance

HP’s Commercial businesses remain healthy with 5% revenue growth year over year. HP’s Consumer businesses, within PSG and IPG, were collectively down 15% year over year.

Third quarter revenue was flat year over year in the Americas as well as in Europe, the Middle East and Africa at $14.1 billion and $11.0 billion, respectively. Revenue in Asia Pacific was $6.1 billion, representing a 9% increase year over year. When adjusted for the effects of currency, revenue was down 2% in the Americas, down 5% in Europe, the Middle East and Africa and up 1% in Asia Pacific. Revenue from outside of the United States in the third quarter accounted for 65% of total HP revenue. BRIC countries (Brazil, Russia, India and China) generated revenue of $3.7 billion, up 12% over the year-ago period, accounting for 12% of total HP revenue.

Business group highlights

  • Services revenue grew 4% year over year with a 13.5% operating margin. HP also announced the appointment of John Visentin as the new executive vice president for Enterprise Services reporting to Apotheker.
  • Enterprise Servers, Storage and Networking (ESSN) revenue grew 7% year over year with a 13.0% operating margin. Networking was up 15%, Industry Standard Servers was up 9%, Business Critical Systems was down 9%, and HP Storage was up 8%. 3PAR revenue accelerated, with triple-digit year-over-year growth operationally.
  • HP Software revenue grew 20% year over year with a 19.4% operating margin. HP Software revenue was driven by strong growth in licenses and services of 29% and 30%, respectively.
  • Personal Systems Group (PSG) revenue declined 3% year over year with a 5.9% operating margin. PSG remains the PC market leader in terms of units, revenue and profit share. Commercial Client revenue grew 9% and Consumer Client revenue declined 17%.
  • Imaging and Printing Group (IPG) revenue declined 1% year over year with a 14.7% operating margin. Commercial revenue was down 7% year over year with commercial printer hardware units up 1%. Consumer printer hardware revenue was up 1% year over year on 7% unit growth. IPG continued to drive innovation and momentum with digital presses and web-connected printers.
  • Financial Services revenue grew 22% year over year with a 9.4% operating margin. Financial Services continued to see its strong performance driven by both double-digit growth in lease volume and a healthy improvement in portfolio assets.

Asset management

HP generated $3.2 billion in cash flow from operations in the third quarter. Inventory ended the quarter at $7.4 billion, with days of inventory flat year over year at 28 days. Accounts receivable of $18.1 billion was up 6 days year over year at 52 days. Accounts payable ended the quarter at $14.5 billion, down 3 days from the prior-year period. HP’s dividend payment of $0.12 per share in the third quarter resulted in cash usage of $248 million. HP also utilized $4.6 billion of cash during the quarter to repurchase approximately 128 million shares of common stock in the open market. HP exited the quarter with $13.0 billion in gross cash.

Outlook

For the fourth quarter of fiscal 2011, HP estimates revenue of approximately $32.1 billion to $32.5 billion, GAAP diluted EPS of approximately $0.44 to $0.55, and non-GAAP diluted EPS of approximately $1.12 to $1.16.

Fourth quarter fiscal 2011 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.61 to $0.68 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2011 revenue in the range $127.2 billion to $127.6 billion, GAAP diluted EPS of $3.59 to $3.70, and non-GAAP diluted EPS of $4.82 to $4.86.

Full year fiscal 2011 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.16 to $1.23 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

More information on HP’s quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP’s Investor Relations website at http://www.hp.com/investor/home.

HP’s Q3 FY11 earnings conference call is accessible via an audio webcast at http://www.hp.com/investor/2011q3webcast.

About HP

HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at http://www.hp.com.

Use of non-GAAP financial information

To supplement HP’s consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below. In addition, an explanation of the ways in which HP management uses these non-GAAP measures to evaluate its business, the substance behind HP management’s decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP management compensates for those limitations, and the substantive reasons why HP management believes that these non-GAAP measures provide useful information to investors is included under “Use of Non-GAAP Financial Measures” after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for operating profit, operating margin, net earnings, diluted earnings per share, or cash and cash equivalents prepared in accordance with GAAP.

Forward-looking statements

This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, the exploration of strategic options for HERMES and the execution of cost reduction programs and restructuring and integration plans; any statements concerning the expected development, performance or market share relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending business combination transactions; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic and geopolitical trends and events; the competitive pressures faced by HP’s businesses; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the protection of HP’s intellectual property assets, including intellectual property licensed from third parties; integration and other risks associated with business combination and investment transactions; the hiring and retention of key employees; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring and integration plans; the possibility that the expected benefits of pending business combination transactions may not materialize as expected or that the transactions may not be timely completed; the resolution of pending investigations, claims and disputes; and other risks that are described in HP’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010 and HP’s other filings with the Securities and Exchange Commission, including HP’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2011. As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be meaningful, these amounts could differ materially from actual reported amounts in HP’s Form 10-Q for the quarter ended July 31, 2011. In particular, determining HP’s actual tax balances and provisions as of July 31, 2011 requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities), which is being completed in the ordinary course of preparing HP’s Form 10-Q. HP assumes no obligation and does not intend to update these forward-looking statements.

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