HP Lowers FY2012 Guidance Amid Slowing Sales

Hewlett-Packard just reported its third-quarter earnings, and they’re about as bad as expected.

Most of the negative news was already known. HP front-loaded a lot of the quarter’s dirty laundry in a pre-annoucement on Aug 9. Revenue, at $29.7 billion, was down 5 percent below the year-ago quarter and about $400 million below the $30.1 billion analysts had expected. Earnings on a per-share basis at $1 were exactly the minimum it said it expected and above the 94 cent to 97 cent range HP gave in guidance before that. As bright spots go, it will have to do.

In the statement, CEO Meg Whitman portrayed the results as an important step in the turnaround process to which she has committed herself: “HP is still in the early stages of a multi-year turnaround, and we’re making decent progress despite the headwinds,” Whitman said in the press release. “During the quarter we took important steps to focus on strategic priorities, manage costs, drive needed organizational change, and improve the balance sheet. We continue to deliver on what we say we will do.”

The outlook remains pretty grim. HP said it now figures to earn a per-share profit for its 2012 fiscal year in the range of $4.05 to $4.07, on a non-GAAP basis, which is in the low end of previously given guidance. On a GAAP basis, it expects a loss of $2.23 to $2.25. Ouch.

HP shares fell 73 cents, or more than 3.5 percent, to $19.20 during the regular trading session. After HP’s news hit the wires it fell initially in after-hours trading, but is now heading up by more than 2 percent to $19.66 as of 4:30 pm ET.

As feared, Dell’s results yesterday made for a painful segue into HP’s results today: PC sales were down 10 percent year on year, led by consumer sales, which fell by 12 percent. Even the recently stronger commercial PC segment saw sales fall by 9 percent.

Printer revenue fell 3 percent overall, but oh that consumer sales drop: 23 percent.

The enterprise business fell 4 percent. Within that, Business Critical Server revenue was down 16 percent. Industry standard servers fell 3 percent. Networking sales grew 6 percent.

I just got a quick reaction comment from analyst Patrick Moorhead of Moor Insights and Strategy. He says more or less that Whitman is cleaning up the mess left by former CEO Léo Apotheker: “Meg Whitman has spent the last 11 months cleaning up from prior regimes and reorganizing the troops to get the company aligned. While difficult, she needed to do this to position HP for growth. Now it’s time for her to clearly articulate HP’s unique enterprise value proposition. HP has some very valuable assets in big data, security and the cloud, and now HP must execute in these areas. As important, HP needs to show how the PC business and the future mobility business rationalize against the corporate goals.”

Update: I just got off the phone with HP CFO Cathie Lesjak. She tells me the number of employees expected to leave the company this year is now 11,500. This is from a combination of layoffs and voluntary retirements and is up from the 9,000 previously expected to go this year.

I also asked her to point out a few other bits of what HP sees as good news that I might have missed. She was happy to oblige:

• HP had $2.8 billion in operating cash flow, which led to $2.1 billion in free cash flow. That allowed HP to reduce its net debt by $1.5 billion. On top of that, $625 million was returned to shareholders via share repurchases and dividend — which, for the record, was 13.2 cents per share.
• Gross margins in the printer business are heading back up, which makes sense after that unit was combined with the PC business under executive vice president Todd Bradely earlier this year.
• Enterprise service margins at 11 percent were right on target with prior guidance of 10 percent to 12 percent. It’s another example, Lesjak said, of “doing what we say we’re going to do.”

HP’s announcement is below.

HP Reports Third Quarter 2012 Results

PALO ALTO, CA–(Marketwire -08/22/12)- HP (HPQ)

Third quarter non-GAAP diluted earnings per share of $1.00, above previously provided outlook of $0.94 to $0.97 per share and in line with pre-announcement
Third quarter GAAP loss per share of $4.49
Third quarter net revenue of $29.7 billion, down 5% from the prior-year period and down 2% when adjusted for the effects of currency
Returned $625 million in cash to shareholders in the form of dividends and share repurchases

HP third quarter fiscal 2012 financial performance

Q3 FY12 Q3 FY11 Y/Y
GAAP net revenue ($B) $29.7 $31.2 (5%)
GAAP operating margin (29.7%) 8.1% (37.8 pts.)
GAAP net (loss) earnings ($B) ($8.9) $1.9 (568%)
GAAP (loss) diluted EPS ($4.49) $0.93 (583%)
Non-GAAP operating margin 9.2% 9.8% (0.6 pts.)
Non-GAAP net earnings ($B) $2.0 $2.3 (14%)
Non-GAAP diluted EPS $1.00 $1.10 (9%)

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

HP (HPQ) today announced financial results for its third fiscal quarter ended July 31, 2012. For the quarter, net revenue of $29.7 billion was down 5% year over year and down 2% when adjusted for the effects of currency.

GAAP loss per share was $4.49, down from earnings per share (EPS) of $0.93 in the prior-year period. Non-GAAP diluted EPS was $1.00, down 9% from the prior-year period. Third quarter non-GAAP earnings information excludes after-tax costs of $10.8 billion, or $5.49 per diluted share, related to the amortization and impairment of purchased intangible assets, the impairment of goodwill, restructuring charges, acquisition-related charges and charges relating to the wind-down of certain retail publishing business activities, including the previously announced charges related to the impairment of goodwill within HP’s Services segment, the restructuring program announced in May 2012, and the impairment of the purchased intangible asset associated with the “Compaq” trade name.

“HP is still in the early stages of a multi-year turnaround, and we’re making decent progress despite the headwinds,” said Meg Whitman, HP president and chief executive officer. “During the quarter we took important steps to focus on strategic priorities, manage costs, drive needed organizational change, and improve the balance sheet. We continue to deliver on what we say we will do.”

Business Group Results

Personal Systems Group (PSG) revenue was down 10% year over year with a 4.7% operating margin. Commercial revenue decreased 9%, and Consumer revenue declined 12%. Desktop units were down 6%, notebook units were down 12% and total units were down 10%.
Imaging and Printing Group (IPG) revenue declined 3% year over year with a 15.8% operating margin. Commercial hardware revenue and units were up 4% year over year. Consumer hardware revenue was down 13% year over year with a 23% decline in printer units.
Services revenue declined 3% year over year with an 11.0% operating margin. Technology Services revenue was down 1% year over year, Application and Business Services revenue was flat, and IT Outsourcing revenue declined 6% year over year.
Enterprise Servers, Storage and Networking (ESSN) revenue declined 4% year over year with a 10.9% operating margin. Networking revenue was up 6%, Industry Standard Servers revenue was down 3%, Business Critical Systems revenue was down 16%, and Storage revenue was down 5% year over year.
Software revenue grew 18% year over year with an 18.0% operating margin, including the results of Autonomy. Software revenue was driven by 2% license growth, 16% support growth, and 65% growth in services.
HP Financial Services revenue was flat year over year as the 2% increase in net portfolio assets was offset by a 2% decrease in financing volume. The business delivered a 10.4% operating margin.

Asset Management
HP generated $2.8 billion in cash flow from operations in the third quarter. Inventory ended the quarter at $7.3 billion, with days of inventory up 1 day year over year to 29 days. Accounts receivable of $15.7 billion was down 4 days year over year to 48 days. Accounts payable ended the quarter at $12.6 billion, down 4 days from the prior-year period to 50 days. HP’s dividend payment of $0.132 per share in the third quarter resulted in cash usage of $260 million. HP also utilized $365 million of cash during the quarter to repurchase approximately 16.5 million shares of common stock in the open market. HP exited the quarter with $9.9 billion in gross cash.

Outlook
For fiscal 2012, HP now estimates non-GAAP diluted EPS to be in the range of $4.05 to $4.07, at the low end of the previously provided outlook.

HP now estimates its fiscal 2012 GAAP loss per share to be in the range of $2.23 to $2.25.
Full year fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $6.30 per share, related primarily to the amortization and impairment of purchased intangible assets, the impairment of goodwill, 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 www.hp.com/investor/home.

HP’s Q3 FY12 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2012q3webcast.