Hewlett-Packard President and CEO Mark Hurd held his first HP earnings call today. The news was primarily positive, although the stock will likely edge upward more on increased confidence in company leadership than projected profits. Revenue for the company was $21.6 million in the quarter, up 7% from $20.1 million in the same period last year. GAAP operating profit was $1.2 billion, or $0.33 per diluted share, up 14% from the $0.29 per share posted last year.
Topics of this Summary:
- Quarter Highlights
- Segment Performance
- Guidance
- Raine Radar
- Q & A
Quarter Highlights
- Mark Hurd leaves his post at NCR Corp to take over as President and CEO of Hewlett-Packard.
- Work force reduction costs were higher than anticipated during the second quarter, which had a negative impact on EPS of $0.01.
- The company had a favorable tax rate during the quarter of 12.8%, which was below the guidance of 20%, and added approximately $0.03 to EPS.
- Regional Growth, excluding the effects of foreign exchange: Americas grew 4%, EMEA grew 4%, and Asia-Pacific grew 6%.
Segment Performance
Imaging and Printing Group
IPG reported Q2 revenues of $6.39 billion, up 5% from the previous year. Consumer hardware grew 3% year over year and commercial hardware grew 8%, led by color laser and MFP. Supplies revenue grew 4% from last year, and the company believes the latest push in hardware will lead to a surge in supplies sales later. IPG posted an operating profit of $814 million, or 12.7% of revenue. Excluding the effect of charges related to workforce reductions, operating margins would have been 13.8%
Personal System Group
PSG reported Q2 revenues of $6.37 billion, up 6% from the previous year. Growth was especially strong in Asia-Pacific with shipments up almost 30%. Selling prices were down 6%, primarily in consumer. Consumer revenue increased 10%, and consumer client revenue increased 3%. The group reported an operating profit of $147 million, or 2.3% of revenue.
Enterprise Storage and Servers
The group posted $4.18 billion in revenue, up 6% from last year. Operating profit was $184 million, or 4.4% of revenue. This group saw a workforce reduction charge of 24 million during the quarter. Server performance was good, but storage was down 6% from last year.
HP Services
Services had sales of $3.98 billion, up 14% from last year. The group posted an operating profit of $292 million, or 7.3% of revenue. Profitability in the segment deteriorated due to acquisitions and workforce reductions.
Software
Software revenues were $277 million, up 23% from last year. The group posted an operating loss of $6 million, or -2.2% of revenue. Hurd believes the segment will be profitable by the fourth quarter.
Financial Services
HP Financial Services reported revenues of $544 million, up 16% from the same period last year. Operating profit was $58 million, or 10.7% of revenue.
Guidance
HP anticipates Q3 revenue to be between $20.3 - $20.7 billion, with non-GAAP earnings per share between $0.29 and $0.31. This is a decrease from the Q2 numbers, which HP blames on seasonality, an increasing tax rate, and continued costs from workforce reductions.
Raine Radar
What a difference three months can make. Mark Hurd seems to have really impressed the investor community as well as his own senior management team. Although the third quarter doesn’t look like it will be very impressive, many investors seem willing to ignore that based on the promises of some serious cost cutting and a focus on profitability. Although many are wondering what he plans to do with the PC business, during the call he said that it wasn’t his biggest worry. In order to keep the buzz building during a traditionally slow quarter, expect to see some announcements out of HP during the next 3 months. The rumors are also buzzing about HP’s voluntary termination plans and that several executives from the IPG group are slated to go let alone an organization shake-up. May HP employees are resigned to the fact that if the quota of terminations is not met, more RIF’s are inevitable. So while HP paralyzes from restructuring in the next quarter, watch for more aggressive Xerox moves to quickly try and grab market share.
Q & A
- HP is still targeting 13-15% operating profitability in IPG, but is lowering some prices to try to drive market share increases as well as future supplies sales.
- Hurd sees demand in the PC business being pretty steady, and is therefore focusing on reducing costs to achieve better profitability.
- Mark Hurd’s number one priority is to “simplify the company,” primarily by removing costs.
- HP does not plan on running IPG on a strategy of “cutting pricing relentlessly.”
- Corporate expenses spiked during the quarter due to compensation issues from the CEO transition and should start to normalize.
- Hurd declined to comment on acquisitions, other than to say they will pursue them as they “make sense.”
- Notebook sales performance has increased by 10%, as the “right notebook products” were put into place.
