Hewlett-Packard Company (HPQ) reported first quarter 2011 earnings per share (EPS) of $1.36, exceeding the Zacks Consensus Estimate of $1.29. However, revenue of $32.3 billion fell slightly short of the Zacks Consensus Estimate of $32.9 billion.
Revenues increased 4.0% from $32.3 billion reported in the year-ago period, on a constant currency basis. The company reported broad-based revenue growth across all its segments. Moreover, the company saw sequential increases in every category; which includes consumer, commercial, desktop and notebook. HP continues to retain its number-one share in both desktops and notebooks.
Revenues increased across all business segments on a year-over-year basis. On a geographical basis, the Americas reported a 5% increase in revenue. Increases of 4% and 2% were also recorded in Europe and the Middle East and Africa, respectively. International markets accounted for 65% of total revenue in the fourth quarter, with revenues in the BRIC countries (Brazil, Russia, India and China) increasing 11% on a year-over-year basis and comprising 11% of total revenue.
Results and Analysis by Segments
HP Enterprise Business (HEB) reported revenues of $14.9 billion, up 6.2% from $14.0 billion in the year-ago quarter. This includes Enterprise Storage and Server revenues, which increased 22.2% year over year. The company delivered a good quarter, providing more value-added solutions to customers choosing to use more cloud-based applications through a converged infrastructure, including innovations in servers, storage and networking.
Personal Systems Group (PSG) revenues were $10.4 billion, down 1.3% year over year, due to softness in consumer markets and challenges in the China market, which were offset to a certain extent by the company’s strength in commercial markets.
Imaging and Printing Group (IPG) revenues were $6.6 billion, up 7.0% year over year. The increase was led by commercial revenue growth of 13.0%, as well as a 7.0% increase in supplies. Moreover, total printer unit shipments increased 13% with commercial and consumer printer units being up 33 and 7%, respectively. This apart, the company also gained market share across all its printing categories, with particular growth in the high-end segments.
HP Financial Services (HPFS) revenues were $827.0 million, up 15.0% year over year. Financial Services growth was driven by both double-digit growth in lease volume and a remarkable improvement in portfolio assets.
Operating Results
Gross margin in the quarter was 24.4%, up from 22.9% reported in the year-ago period. The increase is attributable to a favorable mix of HP networking & Personal Systems Group products along with a benign commodity pricing environment.
Operating expenses increased 8.5% from the year-ago quarter, due to investments in research and development and sales coverage and as a result of acquisitions. Operating margin on a GAAP basis was 10.5% in the quarter, up 90 basis points (bps) from the year-ago quarter, while non-GAAP operating margin of 12.4% was up 120 bps year over year.
Diluted earnings per share on a GAAP basis were $1.17 in the first quarter compared with 93 cents in the prior-year quarter. Financial information on a non-GAAP basis excludes after-tax costs related primarily to the amortization of purchased intangibles as well as restructuring and acquisition-related charges. Excluding the above mentioned items, the non-GAAP EPS was $1.36, compared to $1.07 in the prior-year quarter.
Balance Sheet, Cash Flow & Stock Repurchase
Hewlett-Packard generated $3.0 billion of cash from operations versus $3.1 billion in the previous quarter. HP also utilized $2.5 billion of cash during the quarter for share repurchases and dividend payments.
The company ended the quarter with $9.9 billion in cash and cash equivalents versus $10.9 billion in the previous quarter. The company exited the quarter with a long-term debt balance of $17.0 billion.
Guidance
For the second quarter of fiscal 2011, HP expects revenues of $31.4 billion to $31.6 billion, GAAP diluted EPS in the range of 99 cents to $1.01, and non-GAAP diluted EPS in the range of $1.19 to $1.21.
Management provided full-year fiscal 2011 guidance for revenue in the range $130.0 billion to $131.5 billion, GAAP diluted EPS in the range of $4.46 to $4.54, and non-GAAP diluted EPS in the range of $5.20 to $5.28.
To Conclude
The company has a strong business model, and still rules the computing world, retaining the leadership position in both PC and Server markets, although it faces tough competition from Dell Inc. (DELL) and Acer. Moreover, Hewlett-Packard anticipates substantial benefits from the revival in the U.S. economy.
Despite the company’s market position and compelling product line, we remain cautious about future growth across its business segments. We continue to believe in the growth story of the company and see it remaining an industry leader in the days to come.
The company has a Zacks #3 Rank (short-term Hold recommendation).
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