(HPQ) HP Reports Quarterly Earnings In Line

Hewlett-Packard Company (HPQ) reported third quarter 2011 earnings per share (EPS) of $1.10, in line with the Zacks Consensus Estimate.

Revenues

Revenues increased 1.0% year over year to $31.2 billion but were down 2.0% on constant currency basis. The company reported revenue growth across some of its business segments, partially offset by declines in the Personal Systems Group (PSG) and Imaging and Printing Group (IPG).

Moreover, the company is undertaking several constructive steps to emerge as the leader in the evolving information economy. HP announced that its board of directors has authorized the exploration of strategic alternatives for the company’s Personal Systems Group. HP will also consider a broad range of options including full or partial separation of PSG from HP through a spin-off or other transaction.

On a geographical basis, revenues from the Americas and Europe, the Middle East and Africa (EMEA) were $14.1 billion and $11.0 billion, respectively. Revenue from the Asia-Pacific region was $6.1 billion, up 9.0% year over year. However, revenues dipped 2.0% in the Americas, 5.0% in EMEA and spiked 1.0% in Asia Pacific, after adjusting for currencies.

Revenue from outside of the United States accounted for 65.0% of the total revenue in the reported quarter. BRIC countries (Brazil, Russia, India and China) generated revenues of $3.7 billion, up 12.0% year over year and contributed 12.0% to the total revenue.

Segment Results

HP Enterprise Business (HEB) reported revenues of $15.3 billion, up 5.6% from $14.4 billion in the year-ago quarter. This includes Enterprise Storage and Server revenues, which increased 7.0% year over year. The company witnessed significant upside in HP Software revenue primarily driven by strong growth in licenses and services (up 29% and 30%, respectively).

Personal Systems Group (PSG) revenues were $9.6 billion, down 2.1% year over year, mainly attributable to lower consumer client revenue (down 23.0%) in the quarter.

Imaging and Printing Group (IPG) revenues were $6.1 billion, down 1.3% year over year. Consumer printer hardware revenue inched up 1% year over year based on a 7% unit growth. IPG continued to drive innovation and momentum with digital presses and web-connected printers.

HP Financial Services (HPFS) revenues were $932.0 million, up 21.9% year over year. Financial Services growth was driven by double-digit growth in lease volume and healthy improvement in portfolio assets.

Operating Results

Gross margin in the quarter was 23.3%, compared with 23.9% reported in the year-ago period. Gross margin also remained flat on the back of higher total cost of sales. Operating margin remained flat year over year at 8.0%. Operating cost also remained unchanged compared with the year-ago quarter.

Diluted earnings per share on a GAAP basis were 93 cents in the third quarter compared with 75 cents in the prior-year quarter. Non-GAAP earnings, however, include after-tax costs related primarily to the restructuring and acquisition-related charges. Excluding the above mentioned items, non-GAAP EPS stood at $1.10, compared with $1.08 in the prior-year quarter.

Balance Sheet, Cash Flow & Stock Repurchase

Hewlett-Packard generated $3.2 billion in cash from operations versus $4.0 billion in the previous quarter. The company ended the quarter with $12.9 billion in cash and cash equivalents versus $12.7 billion in the previous quarter. The company exited the quarter with a long-term debt balance of $19.0 billion.

Guidance

For the fourth quarter of fiscal 2011, HP estimates revenues in the range of $32.1 billion to $32.5 billion. Diluted EPS on a GAAP basis is expected in the range of 44 cents to 55 cents, while non-GAAP diluted EPS is projected between $1.12 and $1.16. Non-GAAP diluted EPS estimates for the fourth quarter of 2011 exclude after-tax costs of approximately 61 cents – 68 cents per share.

For fiscal 2011, the company expects revenues in the range $127.2 billion to $127.6 billion. GAAP diluted EPS is expected in the $3.59 to $3.70 range, while diluted EPS on a non-GAAP basis is estimated between $4.82 and $4.86.

Our Take

Hewlett-Packard reigns supreme in the computing world with its strong business model and leadership position in both PC and Server segments. The company is also well positioned to challenge Cisco Systems Inc. in the networking space and gain significant market share. Given its strong market position, HP should benefit substantially from the revival in the U.S economy, as well as growing Asian demand.

Despite the company’s market position and compelling product line, we remain cautious about future growth, especially as competition from other big technology players, such as Cisco Systems (CSCO), Apple (AAPL), Acer, Microsoft Corp (MSFT), and Dell Inc. (DELL) heats up. Moreover, the separation of PSG from HP through a spin-off or other transaction is expected to change the dynamics of the company’s business to a certain extent.

The company holds a Zacks #3 Rank, which implies a short-term Hold rating.

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