Commentary & Analysis
FREE: Financial Results on Track and a “Wait and See” Conference Call Theme: Summary of HP's Q2 Earnings Call
Hewlett Packard (
By WhatTheyThink Staff
Published: May 26, 2004
Hewlett Packard (NYSE: HPQ) today announced second quarter revenues of $20.1 billion, a 12% increase over second quarter of 2003. On a non-GAAP basis, operating profit was $1.3 billion, a 17% increase year over year. In line with HP's guidance, non-GAAP earnings per share were $0.34 for the quarter as compared to $0.29 for the same period last year.
GAAP operating profit was $1.1 billion during the second quarter, a 77% year over year improvement over last year's $495 million. GAAP EPS was $0.29 per share.
Topics of this summary:
- Top Line Performance
- Segment Performance
- Q & A
Top Line Performance
Chairman and CEO, Carly Fiorina today reported that HP had solid revenue gains across its portfolio and across all regions. Although the company anticipates a continued improvement in corporate IT demand, pricing remains competitive throughout the market. Within the competitive environment, HP will continue to pursue its value proposition to customers of providing high technology and low cost and provide the best customer experience. Fiorina went on to explain HP's $70 million charge that has been included in today's results. Due to a settlement, HP will reimburse the Canadian government $146 million in Canadian dollars or $105 million U.S. dollars. The settlement had a $0.02 per share impact on second quarter earnings. HP intends to take legal action to recover the funds.
Revenues in the America's grew 4% during the quarter to $8.4 billion and 1% quarter over quarter. Revenues in Europe grew 17% to $8.3 billion; Asia Pacific grew 22% to $2.4 billion and Japan grew 21% to $967 million.
Headcount at the end of the second quarter was 145,600, up 3600 from the beginning of the quarter. Approximately 2500 of the new employees are from recent acquisitions.
- The Technology Solutions Group (made up of Enterprise Storage and Services, Software and HP Services) reported second quarter revenue of $7.7 billion, an 11% gain over the same period last year, and operating profit of $400 million.
- The Personal Systems Group recorded revenues for $6.0 billion up 17% year over year. PSG showed growth across all categories and regions.
- The Imaging and Printing Group also had increased revenues of $6.1 billion, an 11% increase year over year.
- Financial Services posted revenue of $469 million a 6% decrease on a year over year basis, but a 6% increase sequentially.
HP has raised its guidance for second half 2004 revenue to $39.7-$40.7 billion. Non-GAAP earnings per share are expected at $0.74.
Q & A
- HP's supplies business was strong during the second quarter showing an increase of $400 million sequentially. The increase was due to HP's investment in areas where supplies are strongly used such as color printing and digital imaging and digital photography that drive the use of supplies. There has been much discussion in the low-end of the market. Laser supplies has outstripped inkjet supplies.
- HP's margin on inkjet supplies is above the IPG average. GM on laser supplies is above the IPG average.
- Big Bang product roll-out will begin shipping in the third quarter.
- HP focus this year will be broad-based in the digital entertainment category.
- The company is comfortable with its current leverage position in its Enterprise business. HP anticipates that storage will improve in the third quarter, which will have a favorable impact. HP is still targeting an 8-10% operating margin in this sector.
- Approximately15% of the growth in the European market was due to currency exchange in the second quarter. If the Euro stays where it is currently, the figure should drop to 5 percentage points.
- HP has assumed that gross margins in the ESS business will decline due to pricing and some seasonality.
- The third quarter has traditionally never been a great quarter for gross margins. HP recommended analyst build in a modest deteriorization in GM's for Q3.
- In commenting on the European outlook for the third quarter, HP is pleased with its competitive position and with its growth in performance. HP is the number one technology vendor in Europe with revenues of $30 billion in the last four quarters. HP holds the leading share in X86 servers, the number one vendor in PC's in every category, and has over a 50% share in printers in the all in one category. Germany continues to pose a challenge, as it is not recovering economically as rapidly as elsewhere.
- HP stated less than 1% of revenue growth was from acquisitions during the quarter. There were no new acquisition charges during the quarter.
- Although there is much of rhetoric about the printer market with Dell entering the space, HP pointed out that it has had record profit, record revenue and is gaining share in this space. In the US single function inkjet market Dell hasn't made any impact where HP's share is up to 48% year over year. In the inkjet all in one market, Dell's share is up 14%, Lexmark declined 15 share points and HP's share is up 3%. In the US monolaser market Dell was up 5 points a share, Lexmark down 4 point of share and HP essentially flat. With these figures HP feels pretty good about the competitive dynamics of the market.
- No comment was made during today's call on changes in printing hardware pricing for the back-to-school market. On a broad basis, HP officials stated that new products in new categories would provide opportunities.
- There is room for margin improvement in the services segment, but HP is taking a wait and see approach.
- No specific dates were provided on the rollout of the HPod product.
- The double-digit growth in the IPG segment is at the high end of what the company expects for the year. Again, a wait and see approach was cited.
- HP reported no appetite for major acquisitions in the server business and growth in this segment will most likely be organic. Smaller and/or regional players are attractive over larger companies. The larger companies in the server business are considered by HP to have structural problems it does not want to take on.