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HP reports second quarter 2010 results


Johannesburg, 28 May 2010

* Second quarter net revenue of $30.8 billion, up 13%, or $3.5 billion, from a year earlier.
* Second quarter GAAP operating profit up 25% to $2.9 billion; GAAP diluted earnings per share of $0.91, up 28% from $0.71 a year earlier.
* Second quarter non-GAAP operating profit up 22% to $3.5 billion; non-GAAP diluted earnings per share of $1.09, up 27% from $0.86 a year earlier.
* Broad-based year-over-year growth driven by ESS at 31%, PSG at 21%, and IPG at 8%.
* Delivered 31% year-over-year organic growth in HP Networking.
* Double-digit year-over-year growth across all regions.
* Raises full-year outlook.

HP recently announced financial results for its second fiscal quarter ended 30 April 2010, with net revenue of $30.8 billion, up 13% from a year earlier, including a favourable currency benefit of four percentage points.

In the second quarter, GAAP diluted earnings per share (EPS) was $0.91, up from $0.71 in the prior-year period. Non-GAAP diluted EPS was $1.09, up from $0.86 in the prior-year period. Non-GAAP financial information excludes after-tax costs of approximately $0.18 per share and $0.15 per share in the second quarter of fiscal 2010 and 2009, respectively, related primarily to the amortisation of purchased intangibles, restructuring charges and acquisition-related charges.

HP had an exceptional quarter with strong performance across every region, said Mark Hurd, HP chairman and chief executive officer. We've built the best portfolio in the industry, and our customers are responding. We're winning in the marketplace, investing for the future and confident in the enormous opportunity that lies ahead.

Information about HP's use of non-GAAP financial information is provided under use of non-GAAP financial information below. Unless otherwise noted, all growth rates included in the narrative below reflect year-over-year comparisons.

Second quarter revenue was up 11% in the Americas to $13.5 billion. Revenue was up 11% in Europe, the Middle East and Africa and up 19% in Asia Pacific to $11.8 billion and $5.5 billion, respectively. When adjusted for the effects of currency, revenue was up 9% in the Americas, up 7% in Europe, the Middle East and Africa, and up 10% in Asia Pacific. Revenue from outside of the United States in the second quarter accounted for 66% of total HP revenue, with revenue in the BRIC countries (Brazil, Russia, India and China) increasing 25% while accounting for 10% of total HP revenue.

HP drove double-digit revenue growth and improving profit, contributing to our twentieth consecutive quarter of year-over-year operating margin expansion, said Cathie Lesjak, HP executive vice-president and chief financial officer. With the improving demand environment, we are accelerating investments for growth while raising our full-year outlook.

Services

Services revenue increased 2% to $8.7 billion. Infrastructure technology outsourcing revenue increased 6%, while revenue in technology services and business process outsourcing were roughly flat year-over-year.

Application services revenue was down 2% versus the prior-year period. Operating profit was $1.4 billion, or 15.9% of revenue, up from $1.2 billion, or 13.8% of revenue, in the prior-year period.

Enterprise storage, servers

Enterprise storage and servers (ESS) reported total revenue of $4.5 billion, up 31%. Industry standard server revenue increased 54%, while storage revenue increased 16% with the midrange EVA product line up 3%.

Business critical systems revenue declined 17%, while ESS blade revenue was up 45%. Operating profit was $571 million, or 12.6% of revenue, up from $250 million, or 7.2% of revenue, in the prior-year period.

HP Software

HP Software revenue declined 1% to $871 million. Business technology optimisation revenue increased 3%, and other software revenue decreased 8%. Operating profit was $162 million, or 18.6% of revenue, up from $157 million, or 17.8% of revenue, in the prior-year period.

Personal Systems Group

Personal Systems Group (PSG) posted a 20% increase in unit shipments and maintained the leading market share position in PCs worldwide. PSG revenue increased 21% to $10 billion. Notebook revenue for the quarter was up 17%, while desktop revenue increased 27%. Commercial client revenue was up 19%, while consumer client revenue increased 25%. Operating profit was $465 million, or 4.7% of revenue, up from $378 million, or 4.6% of revenue, in the prior-year period.

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue increased 8% to $6.4 billion. Supplies revenue was up 6%, while commercial hardware revenue and consumer hardware revenue increased 13% and 16%, respectively. Printer unit shipments increased 9%, with commercial printer hardware units down 8% and consumer printer hardware units up 15%. Operating profit was $1.1 billion, or 17.2% of revenue, versus $1.1 billion, or 18.2% of revenue, in the prior-year period.

Corporate investments

ProCurve revenue increased 31%, and HP Networking overall increased 58% year-over-year, including the impact of the 3Com acquisition.

HP Financial Services

HP Financial Services (HPFS) revenue increased 18% to $755 million. Financing volume increased 20%, and net portfolio assets increased 21%. Operating margin was 9.1%, up from 7.2% in the prior-year period.

Asset management

HP generated $3.1 billion in cash flow from operations for the second quarter. Inventory ended the quarter at $6.4 billion, flat year-over-year in days of inventory.

Accounts receivable of $14.8 billion was down five days year-over-year. Accounts payable ended the quarter at $13.4 billion, up two days over the prior-year period. HP's dividend payment of $0.08 per share in the second quarter resulted in cash usage of $196 million.

HP also utilised $1.8 billion of cash during the quarter to repurchase approximately 35 million shares of common stock in the open market. HP exited the quarter with $14.3 billion in gross cash.

Outlook

For the third quarter of fiscal 2010, HP estimates revenue of approximately $29.7 billion to $30 billion, GAAP diluted EPS in the range of $0.87 to $0.89, and non-GAAP diluted EPS in the range of $1.05 to $1.07. Third quarter fiscal 2010 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.18 per share, related primarily to the amortisation of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2010 revenue growth of approximately 8% to 9%. HP expects full year fiscal 2010 GAAP diluted EPS to be in the range of $3.76 to $3.81, down from its previous estimate of $3.79 to $3.86, and non-GAAP diluted EPS to be in the range of $4.45 to $4.50, up from its previous estimate of $4.37 to $4.44. Full year fiscal 2010 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.69 per share, related primarily to the amortisation of purchased intangibles, restructuring charges and acquisition-related charges.

The non-GAAP diluted EPS estimates for both the third quarter and the full year fiscal 2010 include the expected dilution associated with the proposed acquisition of Palm that HP announced on 28 April 2010. However, HP has not included any revenue associated with the Palm acquisition in its revenue outlook for either the third quarter or the full year fiscal 2010.

More information on HP's quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP's Investor Relations Web site at http://www.hp.com/investor/home.

HP's Q2 FY10 earnings conference call is accessible via an audio Web cast at http://www.hp.com/investor/2010q2webcast.

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Use of non-GAAP financial information\

To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below. In addition, an explanation of the ways in which HP management uses these non-GAAP measures to evaluate its business, the substance behind HP management's decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP management compensates for those limitations, and the substantive reasons why HP management believes that these non-GAAP measures provide useful information to investors is included under Use of Non-GAAP Financial Measures after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for operating profit, operating margin, net earnings, diluted earnings per share, or cash and cash equivalents prepared in accordance with GAAP.

Forward-looking statements

This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialise or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of cost reduction programs and restructuring plans; any statements concerning the expected development, performance or market share relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include macroeconomic and geopolitical trends and events; execution and performance of contracts by HP and its suppliers, customers and partners; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2009 and HP's other filings with the Securities and Exchange Commission, including HP's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2010. As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be meaningful, these amounts could differ materially from actual reported amounts in HP's Form 10-Q for the fiscal quarter ended April 30, 2010. In particular, determining HP's actual tax balances and provisions as of April 30, 2010 requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities), which is being completed in the ordinary course of preparing HP's Form 10-Q. HP assumes no obligation and does not intend to update these forward-looking statements.

This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of HP and its consolidated subsidiaries could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to statements of the plans, strategies and objectives of management for future operations; any statements concerning expected development, performance or market share relating to products and services; any statements regarding anticipated operational and financial results; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include macroeconomic and geopolitical trends and events; the execution and performance of contracts by HP and its clients, suppliers and partners; the achievement of expected operational and financial results; and other risks that are described in HP's filings with the Securities and Exchange Commission, including but not limited to HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2009. HP assumes no obligation and does not intend to update these forward-looking statements.

A(c) 2010 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.

The only warranties for HP products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be constructed as constructing an additional warranty. HP shall not be liable for technical or editorial errors or omissions contained herein.