Hewlett-Packard Company (HPQ) reported third quarter 2012 earnings per share (EPS) of $1.00, beating the Zacks Consensus Estimate by a penny. But revenue and earnings declined considerably compared to the prior year quarter.
Shares slumped following the announcement, reflecting a lowered fiscal 2012 outlook due to slowing PC market concerns and macroeconomic uncertainty in Europe & China.
Revenues
Revenues declined 5.0% year over year to $29.7 billion.
Region wise, revenue in the Americas was $13.4 billion, down 5.0% on a year-over-year basis. EMEA revenue declined 4.0% to $10.6 billion, while revenue from the Asia Pacific revenue declined 7.0% to $5.7 billion. Growth in Russia and Central & Eastern Europe was somewhat offset by the declines in business volume in Western Europe. Asia Pacific Japan (APJ) was down 6% in constant currency, largely driven by continued weakness in China.
Segment Results
Enterprise Servers, Storage & Networking (ESSN) reported revenue of $5.14 billion, down 3.8% from $5.40 billion in the year-ago quarter. A decline in BCS and softness in the EMEA market mainly affected the segment.
Personal Systems Group (PSG) revenue declined 10.0% to $8.60 billion. Total units shipped were down 10.0% year over year as the company witnessed some weakness in overall consumer demand and suffered softness across Asia Pacific and the Americas. Category wise, commercial revenue was down 9% and consumer revenue declined 12% year-over-year.
Imaging and Printing Group (IPG) revenue slipped 2.7% year over year to $6.0 billion. The company has gained market share in hardware and is also witnessing the benefits of shifting ink products into the commercial segment. Apart from this, the company believes that consumer demand is unfavorable.
HP Financial Services (HPFS) revenue remained flat with the year-ago quarter at $935.0 million. Financing volume was down 2%, and net portfolio assets increased 2%.
Operating Results
Gross margin in the quarter stood at 23.1% compared with 23.4% in the year-ago quarter. Gross margin was impacted by the improvements in IPG and Software margins, but were offset to a considerable extent by declines in PSG and Services.
Diluted GAAP loss per share was $4.49 compared with earnings per share of 80 cents in the prior-year quarter. This loss can be attributed to the write down in lieu of Electronic Data Storage (EDS). After adjusting for special items, non-GAAP net earnings per share were $1.00 compared with $1.10 in the prior-year quarter.
Balance Sheet, Cash Flow
Hewlett-Packard generated $2.8 billion in cash from operations versus $2.5 billion in the previous quarter. The company ended the quarter with $9.5 billion in cash and cash equivalents versus $8.3 billion. The company exited the quarter with a long-term debt balance of $24.0 billion, slightly up from $25.8 billion in the previous quarter.
Guidance
The company projects fiscal 2012 non-GAAP diluted EPS between $4.05 and $4.07. The current guidance was at the lower end of the previous outlook. Moreover, HP anticipates fiscal 2012 GAAP loss per share between $2.23 and $2.25.
Conclusion
Hewlett-Packard’s third quarter 2012 earnings per share exceeded the Zacks Consensus Estimate, but revenues declined compared with the year-ago period. Results were negatively impacted by macroeconomic factors, lower order renewal and low bookings. However, we believe that the restructuring initiatives taken up by the company is encouraging and should improve margins going forward.
During the quarter the company took some major steps to focus on strategic priorities, and is also taking innovative steps to manage costs, drive growth, and also to improve the health of its balance sheet.
On the other hand, the printer business looks challenging, with competitors such as Lexmark (LXK) and Canon (CAJ) regularly coming up with new products. In addition, growing availability of low-cost refilling options for toners and cartridges poses a threat for HP. Also, margins in the services business are likely to remain weak this year and the macroeconomic trends continue to work against it.
The company is a Zacks #3 Rank (Hold).
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