HP’s Q2 Earnings Beat Expectations on Weak Sales

Quarterly results from Hewlett-Packard just crossed the wires and they’re better than expected on the bottom line, but weaker on the top.

Per-share earnings were 87 cents, down 4.4 percent from a year ago on sales of $27.6 billion, which amounts to a decline of 11 percent from last year.

The results are better than the consensus view of analysts, which had called for EPS of 81 cents on revenue of $28.12 billion.

The company said it expects to earn between 84 cents and 87 cents per share in the current quarter and to earn between $3.50 and $3.60 per share for the full year.

As expected, PC sales were pretty bad, with sales down 20 percent and a decrease in volume of 21 percent, which was much worse than Dell’s results reported last week. The PC unit generated a 3.2 percent operating margin.

Printing revenue declined by 1 percent, though operating margins were up to nearly 16 percent. Sales of commercial units fell 5 percent year over year (I think that’s unit sales basis) and consumer units fell 13 percent.

Revenue in the enterprise group declined 10 percent. Networking grew 1 percent. Server sales were down 12 percent in the industry standard group, while business critical servers — the ones using Intel Itanium chips once so crucial to HP’s profit profile — were down 37 percent. Storage revenue fell 13 percent.

Enterprise Services fell 8 percent. Software sales were down 3 percent.

HP said it finished the quarter with $13.6 billion in cash, and had $3.6 billion in operating cash flow. It paid a dividend of 14.52 cents per share, up 10 percent from a year ago.

HP shares are rising in after-hours trading. As of 4:17 pm ET, they were at $23.78, up 12 percent from the close of today’s regular trading session.

Here’s HP’s original announcement.

PALO ALTO, CA–(Marketwired – May 22, 2013) – HP (NYSE: HPQ)
Second quarter non-GAAP diluted earnings per share of $0.87, down 11% from the prior year, above previously provided outlook of $0.80 to $0.82 per share
Second quarter GAAP diluted earnings per share of $0.55, down 31% from the prior year, above previously provided outlook of $0.38 to $0.40 per share
Second quarter net revenue of $27.6 billion, down 10% from the prior year and down 9% when adjusted for the effects of currency
Cash flow from operations of $3.6 billion, up 44% from the prior year
Returned $1.1 billion in cash to shareholders in the form of dividends and share repurchases
Improved operating company net debt position by $1.8 billion, the fifth consecutive quarterly reduction of over $1 billion
Declared a regular quarterly cash dividend of 14.52 cents per share on the company’s common stock

Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.

HP today announced financial results for its second fiscal quarter ended April 30, 2013. Second quarter GAAP diluted earnings per share (EPS) was $0.55, down from $0.80 in the prior-year period and above its previously provided outlook of $0.38 to $0.40 per share. Second quarter non-GAAP diluted EPS was $0.87, down from $0.98 in the prior-year period and above its previously provided outlook of $0.80 to $0.82 per share.

Second quarter non-GAAP earnings information excludes after-tax costs of $621 million, or $0.32 per diluted share, related to restructuring charges, amortization of purchased intangible assets and acquisition-related charges.

For the second quarter, net revenue of $27.6 billion was down 10% year over year and down 9% when adjusted for the effects of currency.

“We beat the upper end of our non-GAAP diluted EPS outlook for the quarter by $0.05 per share, driven by better than expected performance in Enterprise Services and Printing, coupled with the accelerated capture of restructuring savings and improvement in our operations,” said Meg Whitman, HP president and chief executive officer.

Outlook

For the third quarter of fiscal 2013, HP estimates non-GAAP diluted EPS to be in the range of $0.84 to $0.87 and GAAP diluted EPS to be in the range of $0.56 to $0.59. Third quarter fiscal 2013 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.28 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

For the full year fiscal 2013, HP estimates non-GAAP diluted EPS to be in the range of $3.50 to $3.60 and GAAP diluted EPS to be in the range of $2.50 to $2.60, in line with HP’s previously communicated outlook. Full year fiscal 2013 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.00 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

“I am encouraged by our performance in the second quarter, and I feel good about the rest of the year,” added Whitman. “As I have said many times before, this is a multi-year journey. We have a long way to go, but we are on track to deliver on our fiscal 2013 non-GAAP diluted earnings per share outlook.”

Asset Management

HP generated $3.6 billion in cash flow from operations in the second quarter, up 44% from the prior-year period. Inventory ended the quarter at $6.0 billion, down 2 days year over year to 26 days. Accounts receivable of $14.6 billion, down 1 day year over year to 48 days. Accounts payable ended the quarter at $12.3 billion, up 4 days year over year to 53 days. HP’s dividend payment of $0.132 per share in the second quarter resulted in cash usage of $283 million. HP also utilized $797 million of cash during the quarter to repurchase approximately 36.3 million shares of common stock in the open market. HP exited the quarter with $13.6 billion in gross cash.

“After returning more than a billion dollars to shareholders through share repurchases and dividends in the quarter, we improved our operating company net debt position for the fifth successive quarter,” said Whitman. “By the end of fiscal 2013, we expect our operating company net debt to be below pre-Autonomy levels and approaching our goal of approximately zero.”

Declaration of Dividend

HP also today announced that the HP board of directors has declared a regular cash dividend of 14.52 cents per share on the company’s common stock, which, as previously announced, reflects a 10% increase in amount compared to the previous quarterly dividend amount. The dividend, the third in HP’s fiscal year 2013, is payable on July 3, 2013, to stockholders of record as of the close of business on June 12, 2013.

Second Quarter Fiscal 2013 Segment Results

Personal Systems revenue was down 20% year over year with a 3.2% operating margin. Commercial revenue decreased 14%, and Consumer revenue declined 29%. Total units were down 21% with Desktops units down 18% and Notebooks units down 24%.

Printing revenue declined 1% year over year with a strong operating margin of 15.8%. Total hardware units were down 11% year over year. Commercial hardware units were down 5% year over year, and Consumer hardware units were down 13% year over year.

Enterprise Group revenue declined 10% year over year with a 15.9% operating margin. Networking revenue was up 1%, Industry Standard Servers revenue was down 12%, Business Critical Systems revenue was down 37%, Storage revenue was down 13% and Technology Services revenue was down 3% year over year.

Enterprise Services revenue declined 8% year over year with a 2.6% operating margin. Application and Business Services revenue was down 10% year over year, and IT Outsourcing revenue declined 6% year over year.

Software revenue was down 3% year over year with a 19.1% operating margin. Support revenue was up 12% while license revenue was down 23% and services revenue was down 5% year over year.

HP Financial Services revenue was down 9% year over year with a 3% decrease in net portfolio assets and a 24% decrease in financing volume. The business delivered an operating margin of 11.0%.

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

HP’s Q2 FY13 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2013Q2webcast.