Hewlett Packard Pre-releases Following Memo Leak, Outlook Worse Than Expected, Japan Earthquake Blamed

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Following the report of the leaked HP memo which indicated much more weakness in the current quarter than expected, the firm was forced to scramble and released earning early, with the full number coming out at 7:30 EDT. And neither the market, nor John Paulson who recently bought a $1 billion stake in the company, is happy with the disclosure. While the company beats on current quarter top line and EPS, ($31.63 billion vs $31.55 billion exp. revenue, $1.24 EPS vs $1.21 EPS expectation), it was all about the outlook. The firm said it is "revising full year GAAP diluted earnings per share outlook down to at least $4.27 and non-GAAP diluted earnings per share outlook down to at least $5.00." This is a problem as previously it had seen the full year EPS range at $5.25-$5.28, and the outlook was $5.24. It also said that for Q3 "HP estimates revenue of approximately $31.1 billion to $31.3 billion, GAAP diluted EPS of approximately $0.90, and non-GAAP diluted EPS of approximately $1.08." For the full year HP now expects revenue in the range of $129 billion to $130 billion. Previously this was $130-$131.5 billion. And for all those scratching their heads how long before the Japan get out of jail free card is used, here it is: "HP’s revised outlook for the third quarter and the full year fiscal 2011 reflects an expected near-term impact from the Japan earthquake and related events, continued softness in sales of consumer PCs, and reduced operating profit expectations for Services."

More from the Press Release:

HP (NYSE:HPQ - News) today announced financial results for its second fiscal
quarter ended April 30, 2011. Net revenue of $31.6 billion was up 3%
from the prior-year period as reported and up 1% when adjusted for the
effects of currency.

GAAP diluted earnings per share (EPS) was $1.05, up 15% from $0.91 in
the prior-year period. Non-GAAP diluted EPS was $1.24, up 14% from $1.09
in the prior-year period. Non-GAAP financial information excludes
after-tax costs of approximately $0.19 per share and $0.18 per share in
the second 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.

“HP executed well and delivered a solid quarter,” said Léo
Apotheker
, HP president and chief executive officer. “Our enterprise
strategy, with services at its core, is focused on higher value-added
solutions. Today we are accelerating our efforts to align our services
business model to our long-term strategy to deliver unprecedented value
to our customers and a better return for our shareholders.”

           
  Q2 FY11   Q2 FY10   Y/Y
Net revenue ($B) $31.6
$30.8
3%
GAAP operating margin 9.4% 9.3% 0.1 pts
GAAP net earnings ($B) $2.3
$2.2
5%
GAAP diluted EPS $1.05
$0.91
15%
Non-GAAP operating margin 11.3% 11.2% 0.1 pts
Non-GAAP net earnings ($B) $2.7
$2.6
3%
Non-GAAP diluted EPS $1.24  
$1.09
  14%
 

“In the second quarter, we saw continued strength in the enterprise with
combined revenue from our commercial businesses up 8% year over year,”
said Cathie
Lesjak
, HP executive vice president and chief financial officer. “We
again expanded our margins and increased both earnings per share and
cash flow from operations double digits year over year.”

Trends and regional performance

Results were largely driven by performance in the commercial sector as
businesses continued to spend on technology. HP experienced uneven
consumer performance across its product categories during the quarter
with continued softness in consumer PCs across all geographies.

Second quarter revenue was up 2% year over year in the Americas to $13.8
billion. Revenue was down 1% in Europe, the Middle East and Africa and
up 10% in Asia Pacific to $11.7 billion and $6.1 billion, respectively.
When adjusted for the effects of currency, revenue was up 1% in the
Americas, flat in Europe, the Middle East and Africa and up 4% in Asia
Pacific. Revenue from outside of the United States in the second quarter
accounted for 66% of total HP revenue. HP saw accelerated growth in BRIC
countries (Brazil, Russia, India and China) with revenue increasing 19%
while accounting for 12% of total HP revenue.

Business group highlights

  • Personal Systems Group (PSG) revenue declined 5% year over year
    with a 5.7% operating margin. PSG remains the PC market leader in
    terms of units, revenue and profit share. PSG maintained its market
    leadership position in Commercial PCs, with Commercial Client revenue
    growth of 13% outpacing Consumer Client revenue decline of 23% in the
    quarter.
  • Imaging and Printing Group (IPG) revenue grew 5% year over year
    with a 17.0% operating margin. IPG continued to deliver strong
    performance across the business with share gains in all printing
    categories and 41% year-over-year growth in commercial printer
    hardware units. IPG continued to drive innovation and momentum with
    the new ePrint platform, graphic arts and other commercial print
    solutions.
  • Services revenue grew 2% year over year with a 15.2% operating
    margin. To improve long-term performance, HP is accelerating alignment
    of the services business with the company’s overall strategy,
    including making investments to drive more value-added solutions and
    migration to the cloud.
  • Enterprise Servers, Storage and Networking (ESSN) revenue
    grew 15% year over year with a 13.8% operating margin. ESSN delivered
    a solid quarter with HP’s innovative converged infrastructure products
    winning in the data center. HP gained momentum in cloud with strong
    interest in and the successful launch of HP CloudSystem.
  • HP Software revenue grew 17% year over year with a 20.2%
    operating margin. HP Software revenue was driven by strong growth in
    licenses and services of 29% and 22%, respectively.
  • HP Financial Services revenue grew 17% 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 $4.0 billion in cash flow from operations in the second
quarter. Inventory ended the quarter at $6.8 billion, with days of
inventory up 1 day year over year at 26 days. Accounts receivable of
$18.6 billion was up 10 days year over year at 53 days. Accounts payable
ended the quarter at $14.2 billion, up 3 days from the prior-year
period. HP’s dividend payment in the second quarter resulted in cash
usage of $182 million. HP also utilized $2.7 billion of cash during the
quarter to repurchase approximately 64 million shares of common stock in
the open market. HP exited the quarter with $12.8 billion in gross cash.

Outlook

HP’s revised outlook for the third quarter and the full year fiscal 2011
reflects an expected near-term impact from the Japan earthquake and
related events, continued softness in sales of consumer PCs, and reduced
operating profit expectations for Services.

For the third quarter of fiscal 2011, HP estimates revenue of
approximately $31.1 billion to $31.3 billion, GAAP diluted EPS of
approximately $0.90, and non-GAAP diluted EPS of approximately $1.08.

Third quarter fiscal 2011 non-GAAP diluted EPS estimates exclude
after-tax costs of approximately $0.18 per share, related primarily to
the amortization of purchased intangibles, restructuring charges and
acquisition-related charges.

HP expects full year fiscal 2011 revenue in the range of $129 billion to
$130 billion, GAAP diluted EPS of at least $4.27, and non-GAAP diluted
EPS of at least $5.00.

Full year fiscal 2011 non-GAAP diluted EPS estimates exclude after-tax
costs of approximately $0.73 per share, related primarily to the
amortization 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 www.hp.com/investor/home.

HP’s Q2 FY11 earnings conference call is accessible via an audio webcast
at www.hp.com/investor/2011q2webcast.